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Ans:- The comparative cost theory was first systematically formulated by the English economist David Ricardo in his Principles of Political Economy and Taxation, published in 1817.1 It was later refined by I.S. Mill, Marshall, Taussig and others. In a nutshell, the doctrine of comparative costs maintains that if trade is left free, each country, in the long run, tends to specialise in the production and export of those commodities in whose production it enjoys a comparative advantage in terms of real costs, and to obtain by importation those commodities which could be produced at home at a comparative disadvantage in terms of real costs, and that such specialisation is to the mutual advantage of the countries participating in it. The theory of comparative costs was developed on the basis of the labor theory of value, and all theorists who accepted it have indeed assumed that it rests also logically on the labor theory of value. For the authors who reject the labor theory of value, the theory of comparative costs foundes on the cliffs as the former, that is, on the fact that there simply exists no units of real cost, neither in the shape of days of labor nor in any other shape… Fortunately, however, is possible to reformulate the theory in such a way that its analytical value and all conclusions drawn from it are preserved, rendering it at the same time entirely independent of the labor theory of value. This may most readily be shown in a diagrammetic representation of our theorem. (Gottfried Haberler, 1930) It is well-known that the theory of comparative advantage, which trade economists proudly consider to be “the deepest and most beautiful result in all of economics” (Findlay, 1987, p. 514), orginated in David Ricardo’s famous passage of his Principles of Political Economy and Taxation.1 It is less known that a milestone in the development of the much admired depth and beauty of the theory was laid by Gottfried Haberler in a neglected 1930 article in the Weltwirtschaftliches Archiv.2 In that article Haberler freed the theory of comparative advantage from Ricardo’s labor value formulation, provided us with the modern opportunity cost formulation and laid the conceptual foundation of modern trade theory. Applying the theory of comparative costs in the real world has a few limitations. Firstly, the theory is based on an incorrect assumption that wages between industries do not vary. Construction and manufacturing workers are often paid much more than retail workers. Even workers with same skills may receive different wages in different sectors of the economy. For example, a secretary in a car manufacturing company will most likely earn more than one in a public school. So workers moving from high wage sector jobs to low wage sector jobs are hurt if an economy specializes in the latter. Secondly, the nature and structure of certain industries may be such that the benefits from trade may accrue only to very few workers (owners and managers of banana plantations) whereas the majority of workers (agricultural labourers) may actually be worse off despite aggregate gains from trade. The welfare consequences of trade for most of the people in such an economy will be negative.
Thirdly, different goods have different elasticities of demand. In tough economic times when global demand may be falling, an economy specializing in producing jewelry, for instance, may find it difficult to trade its products to raise enough money to import food. Some degree of selfreliance in producing essential commodities for the local economy may be preferable to free trade if maintaining economic security and stability is a policy preference. Q.2 What are the different market entry strategies for a company which is interested to enter International markets? Discuss briefly. Ans:- Companies enter international markets for varying reasons, and these different objectives at the time of entry should produce different strategies, performance goals, and even forms of market participation. Yet, companies frequently follow a standard market entry and development strategy. The most common, which will be described in the following section, is sometimes referred to as the “increasing commitment” pattern of market penetration, in which market entry is via an independent local distributor or partner with a later switch to a directly controlled subsidiary. This approach results from an objective of building a business in the country-market as quickly as possible but nevertheless with a degree of patience produced by the initial desire to minimize risk and by the need to learn about the country and market from a low base of knowledge. These might be described as straightforward financial objectives that are oriented around long-run profit maximization in the country, so this internationalization strategy could be described as the default option. The fundamental reason for entering a new market has to be potential demand, of course, but nevertheless it is common to observe other factors driving investment and performance measurement decisions, such as: Stages in the International Involvement of a Firm. We discussed several stages through which a firm may go as it becomes increasingly involved across borders. A purely domestic firm focuses only on its home market, has no current ambitions of expanding abroad, and does not perceive any significant competitive threat from abroad. Such a firm may eventually get some orders from abroad, which are seen either as an irritation (for small orders, there may be a great deal of effort and cost involved in obtaining relatively modest revenue) or as "icing on the cake." As the firm begins to export more, it enters the export stage, where little effort is made to market the product abroad, although an increasing number of foreign orders are filled. In the international stage, as certain country markets begin to appear especially attractive with more foreign orders originating there, the firm may go into countries on an ad hoc basis—that is, each country may be entered sequentially, but with relatively little learning and marketing efforts being shared across countries. In the multi-national stage, some efficiencies are pursued by standardizing across a region (e.g., Central America, West Africa, or Northern Europe). Finally, in the global stage, the focus centers on the entire World market, with decisions made optimize the product’s position across markets—the home country is no longer the center of the product. An example of a truly global company is Coca Cola. Note that these stages represent points on a continuum from a purely domestic orientation to a truly global one; companies may fall in between these discrete stages, and different parts of the firm may have characteristics of various stages—for example, the pickup truck division of an auto-manufacturer may be largely domestically focused, while the passenger car division is globally focused. Although a global focus is generally appropriate for most large firms, note that
it may not be ideal for all companies to pursue the global stage. For example, manufacturers of ice cubes may do well as domestic, or even locally centered, firms. Some forces in international trade. The text contains a rather long-winded appendix discussing some relatively simple ideas. Comparative advantage, discussed in more detail in the economics notes, suggests trade between countries is beneficial because these countries differ in their relative economic strengths—some have more advanced technology and some have lower costs. The International Product Life Cycle suggests that countries will differ in their timing of the demand for various products. Products tend to be adopted more quickly in the United States and Japan, for example, so once the demand for a product (say, VCRs) is in the decline in these markets, an increasing market potential might exist in other countries (e.g., Europe and the rest of Asia). Internalization/transaction costs refers to the fact that developing certain very large scale projects, such as an automobile intended for the World market, may entail such large costs that these must be spread over several countries. Learning in Lead Markets: In some circumstances, a company might undertake a foreign market entry not for solely financial reasons, but to learn. For example, the white goods division of Koc, the Turkish conglomerate, entered Germany, regarded as the world’s leading market for dishwashers, refrigerators, freezers, and washing machines both in terms of consumer sophistication and product specification. In doing so, it recognized that its unknown brand would struggle to gain much market share in this fiercely competitive market. However, Koc took the view that, as an aspiring global company, it would undoubtedly benefit from participating in the world’s lead market and that its own product design and marketing would improve and enable it to perform better around the world.4 In most sectors, participation in the “lead market” would be a prerequisite for qualifying as a global leader, even if profits in that lead market were low. The lead market will vary by sector: the United States for software, Japan for consumer electronics and telecommunications, France or Italy for fashion, and so on. The important point about such an objective for market entry is that it will change the calculus of the market entry mode decision. If a company is to maximize learning from a lead market, for example, it will need to participate with its own subsidiary and a cadre of its own executives. Learning indirectly, via a local distributor or other partner, is obviously less effective and will contribute less to the company’s development as a global player, even if short-term profitability is superior because of the lower investment required. Competitive Attack or Defense : In some situations, market entry is prompted not by some attractive characteristics of the country identified in a market assessment exercise, but as a reaction to a competitor’s move. The most common scenario is market entry as a follower move, when a company enters the market simply because a major competitor has done so. This is obviously driven by the belief that the competitor would gain a significant advantage if it were allowed to operate alone in that market, and so it is most common in concentrated or even duopolistic industries. Another frequent scenario is “offense as defense,” in which a company enters the home market of a competitor—usually in retaliation for an earlier entry into its own domestic market. In this case, the objective is also to force the competitor to allocate increased resources to an intensified level of competition. In both cases, a company will have to adapt its strategies to the particular strategic stakes: rather than focusing on market development, the firm will set market share objectives and be prepared to accept lower levels of profitability and higher levels of marketing expenditure. This requires different performance standards and budgets from
which may be to the government. Certainly.Multinational companies (MNCs) are not without benefits. This usually starts with market entry via an indirect distribution channel. such as joint ventures. In many manufacturing industries. Apart from these varied marketing objectives. internationalization can help the company achieve greater economies of scale. the emphasis is on “more of the same. either franchising or licensing are business models naturally suited for the rapid replication of businesses through expansion of units since both are centered on protected and predefined assets. In both cases. it is also common for governments to “incentivize” their country’s companies to export. for example. To achieve either of these objectives. given the rapid business evolution that has been identified as one of the distinctive characteristics of international markets. a company may seek to exploit a distinctive and differentiating asset (often protected as intellectual property). a. In summary. What are the benefits of MNC’s? Ans:. many of them have total sales well in excess of the GND of many of the world's nations.” with relatively little adaptation to local markets. and the people or even to itself. for most companies. The overriding competitive objective should also be taken into account when considering whether and how to participate in the market with a local distributor or partner. In particular. which would undermine scale economies or diminish the returns from replication of the winning model.the usual scenario of low-risk entry and long-run development. Q. usually a local independent distributor or agent. however. in turn. This. or patented product. the low-intensity entry modes. the economy. a company must retain some control. such as import agents and trading houses. companies have a template that is followed in almost all markets. international operations will consist of a patchwork of country-market operations that are pursuing different objectives at any one time. that large oil firms .” in which a company seeks a larger market arena in which to exploit an advantage. Cole also stated that World Bank statistics of comparison between multinational companies and national GNPs shows. so it may enter markets with relatively high-intensity modes. for example. would be inappropriate unless the local partner will accept the lower profit expectations. and the company’s control system must have sufficient flexibility to adapt to this. Cole (1996) stated that the size of multinational organization is enormous. Scale Economics or Marketing Leverage : A number of objectives result from internationalization undertaken as what is sometimes described as a “replication strategy. In other cases. particularly for companies from smaller domestic country-markets. would suggest that most companies would adopt different entry modes for different markets. in which case the company may enter markets it would otherwise not have tackled. it is reasonable to suppose that. More commonly. service model.3. such as a brand.
he gave some theories on the benefits/advantages of multinational. The country enjoys varieties of products. Australia and Argentina are substantially greater than nations such as Greece. Best utilization of the country's natural resources 3. Some of the benefits of multinational companies are: 1. Its founders were Venezuela. Bulgaria and Egypt. To Cole. There is significant injection into the local economy in respect to investment 2. The balance of payments of nations in trade are improved on In the words of Cole (1996). a few other major exporters of oil have been allowed to join the group.The Organization of Petroleum Exporting Countries (OPEC) was established on September 14. 1960. The living standard of the people is boosted 8. They are good source of technological expertise 5. Give a short note on OPEC. most of the effects are beneficial and include some of the above or all. The theory considers the benefits of MNCs from the point of view of those who maintain the importance of Foreign Direct Investment (FDI) as part of the engine necessary for growth. This will in turn help strengthen the economy of the nation 7. Ans: . The Electronic Library of Scientific Literature (1996) explained the benefits of MNCs under a theory known as 'The Theory of Externalities'. Ford and International Business Machine (IBM). They help in strengthening domestic competition 4. Iraq. it strengthen international relation 9.3. b. In the contribution of Davies (1989). Since then. There is creation of more jobs for the populace 4. services and facilities. Other large multinational companies include General Motors. Expansion of market in the host country AQ. at a conference in Baghdad.e. British Petroleum. Friendliness between and among nations in trade i. Davies (1989:260) tagged this 'Economic Theory' and the multinational where he took a comprehensive and critical look at the benefits of MNCs. Iran. . brought to their door steps 3. There is usually huge capital investment in major economic activities 2. The nation's pool of skills are best utilized and put to use effectively and efficiently 5.such as Exxon and Shell are large in economic terms that nations such as South Africa. he stated that the sheer size (and wealth) of multinationals means that they can have a significant effect on host country. More benefits came along with these people's theories and some are: 1. Iraq and Kuwait. There is advancement in technology as these companies bring in state-of-the-arttechnology for their businesses 6. The demand for training and retraining and advancement in the people's education becomes absolutely necessary.
the high price discouraged use of oil and increased the inclination of other countries to begin producing what oil they could. raising production levels to boost profits. the price rose to US$35 per barrel in 1981. taking advantage of the high price made possible by the sacrifices of OPEC member states. basically giving up.The OPEC Oil Ministers.The aspect of culture in the human society and business has a direct relationship with each other. Changes in prices. and all the members nations benefited. In addition. as well as wars and political issues. a. Restricting the quantity of output drives up the price. How will socio-cultural environment of a country have an impact on a multinational business? Explain with an example. OPEC's member countries currently hold about 2/3 of the known oil reserves in the world. OPEC has never included every oil-producing nation in the world. Maintaining a cartel is difficult because it is in the short-term interests of every member to cheat. motivated by the economic pain caused by oil prices and oil shocks. In 1973. OPEC is a cartel. By doing so. The purpose of OPEC is to restrict the amount of oil produced. In 1984 Saudi Arabia demanded its fellow members to quit cheating. and in December 1985. The other major problem faced by cartels such as OPEC is preventing non-members from entering the market. Q. allowing OPEC to set the quantity that maximizes its profits. creating major problems in economies worldwide. However. as members "cheat" by selling more than they are allowed to at the inflated price. the organization eliminated production restrictions. The high price also caused many OPEC nations to cheat. This meant that oil was suddenly unavailable. In economic terms. They both establish interesting conditions when they associate in a common platform . Ans:. Photo Credit: OPEC. Prices rose greatly. so there have always been countries that have sold as much as they have wanted. This means that its members come together to form an organization that is basically a monopoly. caused supply shocks in oil.4. research into renewable energy took off. It was too difficult to continue running OPEC though. Ultimately. OPEC can make sure that it receives a high price for its oil by only selling at the quantity where marginal cost equals marginal revenue. One major difficulty faced by all cartels is restricting production among members. OPEC began restricting oil production among its members. OPEC has been plagued by this historically.
people adopt different cultures based on their own understanding. In political life individuals relate to one another as citizens and the basic purpose is making collective decisions and rules. such as: • • Secularism—this refers to the increasing influence of rational and scientific thought. Cultural activities are used in almost every aspect of human living and for this matter. Culture is an attribute of groups. the social-cultural environment includes everything that is not included in the economy or the political system. some of the gestures used by people like laughter or uncomfortable smile. age. The economic and political systems together create the conditions—goods. consists of the whole range of behaviours and relationships in which individuals engage in their personal and private lives.which in my view is a good way to get used to challenging moments. national culture). . A sign to show good will in one country could be mean something very different from that in another. ervices and rules—which we all need in order to live the kinds of lives that we choose. it is a sign of disagreeing with some statements. Culture in international business therefore comprises of various practices. class) Walues and attitudes Lifestyles and relationships. in some areas they are a great influence to the businesses. then. In many parts of the world. including: • • • The characteristics of the population (e. could cost ones business loss of huge amounts of money when may be a deal is broken due to misunderstanding when certain gestures are used to mean some thing else which to them is positive and to the other partner could be irritating. it is quite common to speak of ‘western culture’. cultural influences and different ways in which people think. This attitude lies behind the belief that economic growth is always a good thing. A good life means having more ‘stuff ’. race or ethnicity. Some of the factors which influence international businesses based on different cultural practices are.g. Shaking of head to some people means that they are listening but to others. or even groups of societies and nations (trans-national culture). and this can mean society as a whole (e.g. groups within society (sub-cultures). the manner in which they engage in the business and also how they spend their The use of body language explains the mannerism in business which looks at how people use different gestures and the behaviors the gestures reflect to the other partner. This term implies that there are certain values and ways of life that western societies might be said to share. The socialcultural environment. Economic life is organized primarily through a market in which individuals relate to one another as buyers and sellers and the purpose is production. For example. sex. Consumerism or materialism—this refers to the view that achieving higher levels of consumption of goods and services leads to greater happiness. how various people do communicate when making business negotiations. so in case of business transaction such events could lead to misunderstanding In broad terms. and the decline of religion as a framework of understanding and guide to behaviour. Particularly in business. There are different ways in which people in different areas respond to certain gestures and signs.
working class culture) or age (e. Youth culture is.g. youth culture). Rather they are diverse and fluid or dynamic. and they also have their own distinctive cultural traits. partly reflecting lifestyle choices in relation to clothing and music. UK society is more secular than the United States). In analysing the social-cultural environment of business it is important to recognize that society and culture are not homogeneous or fixed. ‘Britishness’ might be said to include (among other traits): • • • An attitude of reserve (e. itself diverse. For example. This refers to the way in which.• Individualism—this usually refers to the idea that individuals make their own life-style choices and are motivated primarily by self-interest. Social and cultural change is a hallmark of modern societies (more than in the past). each generation tends to feel somewhat out of touch with (and even bewildered or shocked by) the attitudes and behaviours of the next. Stop and Think What do you see as the main aspects of the culture of your own society? Do you agree that the cultural traits listed above are characteristic of western / British society? Do you share all aspects of the culture of your society? Can you think of any aspects of the culture that relate to the role of business in society? Examples of social-cultural impacts on business . A game of cricket on the village green—is this the meaning of ‘Britishness’? The very idea of Britishness is contested by some on the grounds that British society contains a diverse range of cultures. eferring to the co-existence of different communities defined by their race.g.g. due to social and cultural change. ethnicity or faith. symbolized by the widely recognised phenomenon of a generation gap. Business needs to stay in touch with social and cultural shifts. Britain is often described as a ‘multicultural’ society. of course. For example. Sub-cultures can also be related to class membership (e. compared to American outspokenness) A sensitivity to class differences (as expressed by accent and manners) A sense of fair play.g. However these attitudes or values vary in strength between western societies (e. It can also involve the idea that individuals should strive to be self-reliant.
for example. This is a prime example of consumer behaviour. In other words. This religious belief encouraged the reinvestment of wealth in business rather than the pursuit of a life of luxury. Yet this view seems to be at odds with the growth of ‘ethical consumerism’ Here consumers are willing to trade-off their own interests against thos of others by. For example. The need for these laws reflects the way social attitudes permeate business. However there is not. An important process of social change in western societies has been the declining influence of racist and sexist attitudes and behaviours. paying more for fair trade products to ensure a better deal for producers in ‘Third World’ countries. sexism is bad for business). engineering and technology and a weak entrepreneurial culture. on the face of it. being shaped by shifts in the values of the wider society—in this case towards a greater concern for Third World poverty. a complete separation between ‘work’ and ‘life’. Other important areas of policy have included encouraging business start-ups and a stronger emphasis on vocational education. 2006: 103–4). • • • • It can be argued that capitalist business owes its historical origins and development in part to non-economic factors. give people a stake in business and foster a more positive attitude towards it. Since the 1980s both Conservative and Labour governments have attempted to make the wider culture and society of the UK more supportive of business. though these problems have not gone away. discrimination is irrational in terms of the ‘bottom line’. can be traced to religious belief—the ‘Protestant ethic’. in part. or ethos of capitalist business. Owning shares would. with its emphasis on accumulating wealth.Business is an activity undertaken by people whose values and attitudes are shaped by the culture and society of which they are a part. These laws prohibit discrimination in the offer of employment on grounds of the sex or race of the applicants. Max Weber argued that the ‘spirit of capitalism’. Some writers have argued that the UK’s relatively poor long-term economic performance has been due in part to wider cultural factors such as an emphasis on the arts rather than science. In economics textbooks consumers are often portrayed (like businesses) as ‘rational maximizers’. A version of this theory persists today in the idea that economic success depends on the prevalence of a ‘work ethic’ in society which sees work as a morally desirable activity. to create a ‘share-owning democracy’. of course. both reflected and promoted these shifting attitudes. thus fuelling economic growth and dynamism (Giddens. and therefore the behaviour of business in response. We carry values and attitudes shaped by the wider culture and society into our roles as managers. It can be argued . To some extent the roles we perform in business are quite discrete from other aspects of our lives and require that we adopt different behaviours and personas. In other words. meaning that they allocate their spending so as to maximize their personal self-interest. if sexist attitudes are prevalent in the wider society it is likely that they will also show up in the business arena. Equal opportunities legislation. it was thought. This influence is all the more striking since. the opportunity for members of the public to buy shares in privatized industries in the 1980s was intended. such as the Sex Discrimination and Race Relations Acts in the UK in the 1970s. The basic idea here is that societies that prize business and entrepreneurship are more likely to be economically successful. employees and consumers. We can perhaps see this reflected in the welfare-to-work initiatives of the Labour governments since 1997 with their emphasis on seeking and accepting employment as a moral responsibility.
it was decided by the 23 countries to establish an interim agreement. preparations for creating a new international economic order commenced. they agreed on a General Agreement on Tariffs and Trade that was based on the chapters on trade policy in the draft charter of the ITO. It was a provisional agreement without an institutional setup because it was envisaged that it would be taken over by the ITO. However. the UN Conference on Trade and Employment was held in Havana.1The results of tariff negotiations were inscribed in country schedules annexed to the text of the GATT and became an integral part of it.4 b. which contained theo bjectives. Soon after the war ended. some 23 members of the preparatory committee carried out negotiations for the reduction of tariffs. One of the important pillars of this new order. fairness. from November 1947 to March 1948. 1947 and entered into force on January 1. The United Nations Economic and Social Council decided in early 1946 to hold an international conference to draft the charter of the ITO. and the maximum predictable degree of freedom in international trade.The Origins of the WTO The underlying idea and the conceptual origin of the WTO goes back to World War II. Ans:.that the increasing emphasis on corporate social responsibility also reflects the way in which business leaders have been influenced by shifting social attitudes and values Q. The leaders of the allied powers were of the view that one of the main causes of the war was the failure of the open world trading system in the 1930s. the GATT ensured liberalization of world trade through the elimination or reduction of tariffs and other barriers to merchandise trade. It was responsible . Over the years. It established for that purpose a preparatory committee that held its first meeting in London in October of the same year. was the establishment of the International Trade Organization (ITO). The end result of this conference was the Havana Charter. embodied in the Bretton Woods Institutions. Accordingly. The General Agreement on Tariffs and Trade was signed by 23 countries on October 30. Thus. along with the International Monetary Fund. 1948. rules. equality. 1948 by representatives of 54 countries. and the International Bank for Reconstruction and Development (The World Bank). which at that time were the main obstacle to international trade. The Havana Charter never entered into force because it was not ratified by the US Congress. the GATT remained the only legal framework of rules for the conduct of world trade for almost half a century. In tandem with the preparations for the ITO charter. It did not cover services or investments. the GATT regulated only trade in goods. They agreed that the enduring peace and welfare of nations were inextricably connected with mutual friendly relations. Discuss the origin of WTO and its principles. principles. In order to implement and secure the results of tariff reductions in advance of the ITO. and institutional setup of an International Trade Organization. The Havana Charter was signed on March 24. After further preparatory meetings.
When the Uruguay Round negotiations started in 1986. which averted further 1930s-like economic depressions. However. a. services. 1995. It was formalized in the Marrakesh Agreement Establishing the World Trade Organization. and trade-related aspects of intellectual property rights. services and intellectual property. Non-discriminatoryory mostfavored. However. it was not envisaged that a new organization would be established to implement the results of the negotiations.Trade in services. What it means is simply that any advantage. to be legally precise. favor. The charter of the World Trade Organization was elaborated during the last several years of the Uruguay Round negotiations. most favored nation (MFN) treatment. 1994. as the negotiations developed and growth intwo new areas. became increasingly visible. or immunity granted by one WTO member to another has to be granted immediately and unconditionally to all other members. and to implement the 20 or so agreements and legal texts negotiated and accepted as a single undertaking. and its basic principles and some of its main rules were rendered largely inoperative in the case of textiles and clothing. These basic principles are discussed below. Initially. and have been the guiding light for the past 50 years and should continue to illuminate the path of the multilateral trading system well into the new millennium. signed in Marrakesh on April 15. privilege. they are far reaching in importance. Basic Principles of the WTO The basic principles of the WTO are built on those of the GATT.The GATT also lagged behind new developments in international trade. Relatively few and simple. GATT rules never fully applied to agriculture. It was agreed that an umbrella organization was needed to house the outcome of negotiations in goods. National treatment : The principle of national treatment implies that imported goods and services and foreign service suppliers will be given treatment that is no less favorable than that given to domestic goods and services and to domestic service suppliers. the countries taking part in the Uruguay Round started focusing on the need for establishing a permanent institutional setup to implement and jadminister the results of the negotiations. b. was not subject to GATT rules. its rules applied to trade in goods only. The principle is observed by giving either the same treatment or more favorable treatment to imported goods and services and to foreign service suppliers as that given to domestic goods and services and to domestic servicesuppliers. the GATT also had its failings. which had grown rapidly and had become an important and dynamic element of international trade.for the manifold expansion of international trade. . The greatest achievement of the GATT was establishing its role as a rules-based system for the conduct of trade relations among nations. After necessary ratification.nation treatment: The most important and fundamental principle of the WTO is non-discriminatory treatment or. the agreement entered into force on January 1.
and financial capital. Stable and predictable conditions of access to markets promote confidence because investors and traders can plan their investments secure in the knowledge that market access conditions will not change for the worse. typically the domestic currency for the country concerned. Trade liberalization : As mentioned earlier.c. The rules on MFN treatment and national treatment are designed to promote fair competition. are recorded as a negative or deficit item. but not least. Transparency is also ensured by requiring member countries to submit periodic notification to the WTO Secretariat on different aspects of the trade regime. Transparency : WTO rules oblige member countries to ensure transparency in their foreign trade regimes by requiring them to publish all laws. However. Fair competition: One of the basic principles of the WTO is fair competition in international trade. and administrative decisions affecting trade. g. such as for imports or to invest in foreign countries. Sources of funds for a nation. Q. it must sum to zero – there can be no overall surplus or deficit. are recorded as positive or surplus items. measures. such as dumping or subsidization that causes injury to domestic industries. 5 a. if a country is importing more than it . WTO rules also contain disincentives or remedies against unfair competition. exporters. the WTO is not an organization for free trade. For example. e. regulations. and is prepared in a single currency. This principle is rooted in the belief that the removal or reduction of trade barriers results in an expansion of international trade that is to the benefit of all countries.The publication of laws has to be done in a manner that allows importers. the WTO provides a forum for trade negotiations and a framework for implementing the results of such negotiations. Economic development: Last. When all components of the BOP sheet are included it must balance – that is. sinc it does allow protection. one of the principles of the WTO is progressive liberalization of trade in goods and services. Explain the merits and demerits of BoP theory? Ans:. consumers and investors to be aware of them.A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. There are many provisions in different WTO agreements designed to promote economic development of developing countries and to encourage economic reforms both in developing countries and in transition economies. These transactions include payments for the country's exports and imports of goods. f. usually a year. d. Stability and predictability: The stability and predictability of trading conditions is another basic principle of the WTO. The BOP summarises international transactions for a specific period. as well as financial transfers. is the principle of economic development of developing countries. services. Uses of funds. To achieve progressive liberalization. such as exports or the receipts of loans and investments. This is achieved through the binding of tariffs and conditions of market access for services.
with a fixed rate. while deficit nations become increasingly indebted. Merits • Automatic balance of payments adjustment . imbalances are possible on individual elements of the BOP. A fixed exchange rate would have caused major problems at this time as some countries would be uncompetitive given their inflation rate. The fact that. Lower foreign exchange reserves . Historically there have been different approaches to the question of how to correct imbalances and debate on whether they are something governments should be concerned about.exports. thus increasing demand for your goods abroad and reducing demand for foreign goods in your own country. if a country has a balance of payments deficit then the currency should depreciate. plans to address global imbalances are now high on the agenda of policy makers for 2010. The floating rate allows a country to re-adjust more flexibly to external shocks.The fact that a currency changes in value from day to day introduces instability or uncertainty into trade. Flexibility . This is because imports will be greater than exports meaning the supply of sterling on the foreign exchanges will be increasing as importers sell pounds to pay for the imports. Absence of crises .Post-1973 there were great changes in the pattern of world trade as well as a major change in world economics as a result of the OPEC oil shock. This can result in surplus countries accumulating hoards of wealth. While the overall BOP sheet will always balance when all types of payments are included. Sellers may be unsure of how much money they will • • • • Demerits • .With a floating exchange rate. balance of payments disequilibrium should be rectified by a change in the external price of the currency. therefore dealing with the balance of payments problem. However. Conversely. such changes are automatic should remove the element of crisis from international relations. curing a deficit could involve a general deflationary policy resulting in unpleasant consequences for the whole economy such as unemployment. but the shortfall will have to be counter balanced in other ways – such as by funds earned from its foreign investments. by running down reserves or by receiving loans from other countries. with a floating rate. With record imbalances held up as one of the contributing factors to the financial crisis of 2007–2010.Any balance of payments disequilibrium will tend to be rectified by a change in the exchange rate. This will drive the value of the pound down. Freeing internal policy . These reserves have an opportunity cost. Uncertainty . The effect of the depreciation should be to make your exports cheaper and imports more expensive. its trade balance will be in deficit. a balance of payments surplus should be eliminated by an appreciation of the currency.A country with a fixed rate usually has to hold large amounts of foreign currency in order to prepare for a time when they have to defend that fixed rate.Fixed rates are often characterised by crises as pressure mounts on a currency to devalue or revalue. such as the current account. For example. The floating rate allows governments freedom to pursue their own internal policy objectives such as growth and full employment without external constraints.
as the speculative flows may often differ from the underlying pattern of trade flows. Much depends on the price elasticity of demand for imports and exports. In a similar way importers never know how much it is going to cost them to import a given amount of foreign goods. Speculation . Lack of discipline in economic management . Broadly. • • Lack of investment . Distinguish between fixed and flexible exchange rates. Does a floating rate automatically remedy a deficit? . Apart from not punishing inflationary economies.The floating exchange rate can be inflationary. undoubtedly. 5 b. This is. exchange rate is also determined by free movement of demand and supply but the monetary authorities intervene at certain times to "manage" the exchange rate to prevent high volatilities. which.An exchange rate is the price at which one country's currency trades for another on the foreign exchange market There are 2 extreme regimes of exchange rates – floating exchange rate and fixed foreign exchange rate. the float can cause inflation by allowing import prices to rise as the exchange rate falls. The presence of an inflation target should help overcome this.As inflation is not punished there is a danger that governments will follow inflationary economic policies that then lead to a level of inflation that can cause problems for the economy. the case for countries such as UK where we are dependent on imports of food and raw materials • • • Q.The uncertainty can lead to a lack of investment internally as well as from abroad. Inflation .Speculation will tend to be an inherent part of a floating system and it can be damaging and destabilising for the economy. For managed floating system. the floating exchange rate regime consists of the independent floating system and the managed floating system. whereby the exchange rate is determined entirely by the free market forces of demand and supply of currencies with no government intervention whatsoever. The Marshall-Lerner condition says that a depreciation in the exchange rate will help improve the balance of payments if the sum of the price elasticities for imports and exports is greater than one.receive when they sell abroad or what their price actually is abroad. . in itself. This uncertainty can be reduced by hedging the foreign exchange risk on the forward market. Floating Exchange Rate : The floating exchange rate is a market-driven price for currency.UK experience indicates that a floating exchange rate probably does not automatically cure a balance of payments deficit. encourages inflation. Ans:. Of course the rate changing will affect price and thus sales. The former is where exchange rate is strictly determined by the free movement of demand and supply.
There are two methods which exchange rate could be applied to the price of currencies. Nonetheless. Secondly. the government is unwilling to let the country's currency float freely. speculation tends to be higher in the floating exchange rate regime. there are also specific concerns about the exchange rate being unstable and uncertain under the floating exchange rate regime.Pros & Cons of Floating Exchange Rate The floating exchange rate boasts various merits. a decrease in the exchange rate which is infrequent are called revaluations. Thirdly. The free movement of demand and supply helps to insulate the domestic economy from world economic fluctuations. Fixed Exchange Rate : For a fixed exchange rate. there is insulation from external economic events as the country's currency is not tied to a possibly high world inflation rate as is under a fixed exchange rate. there is automatic correction in the floating exchange rate as the country simply lets it move freely to the equilibrium of demand and supply. making a country's export less expensive for foreigners and also discourage import by making import products more expensive for domestic consumers. a fixed exchange rate and a pegged exchange rate. hence leading to more uncertainty especially for traders and investors. and they state a level at which the exchange rate will stay. The opposite happens in a revaluation Pros & Cons of Fixed Exchange Rate . Under the fixed exchange rate system. Also.. governments are free to choose their domestic policy as a floating exchange rate would allow for automatic correction of any balance of payment disequilibrium that might arise from the implementation of domestic policy. While an increase in the exchange rate are called devaluations. Firstly. The government takes whatever measures that are necessary to maintain the rate and prevent it from fluctuating. This will leads to an increase in trade surplus or a decrease in trade deficit. A devaluation in a fixed exchange rate will cause the current account balance to rise.
The human resource manager in a multinational company with divisions or subsidiaries in foreign countries has all the normal HR responsibilities plus a brace of additional tasks that are specific to offshore operations of his department. Human resources managers are a business organisations ‘people’ managers. These activities include determining the firm 's human resource strategy . legal systems . International human resource management functions cover many different activities related to a business organization’s employees and contractors. as we will see . a fixed exchange rate contradicts the objective of having free markets and it is not able to adjust to shocks swiftly like the floating exchange rate. The strategic role of HRM is complex enough in a purely domestic firm . performance evaluation . development . there is certainty in fixed exchange rate. international trade and investment becomes less risky. ensuring that they are performing at . quality . 6. Other functions include recruiting and training employees. HRM has an important strategic component . He is literally responsible for international human resource management.Human resource management refers to the activities an organization carries out to use its human resources effectively . management development . culture . economic systems . and productivity of the firm 's human resources . staffing . performance evaluation . Q. First. The first and most important is the staffing needs of the company whether staff members are company employees or outside contractors. but it is more complex in an international business . and labor relations . Through its influence on the character . and compensation activities are complicated by profound differences between countries in labor markets . management development . and the like . Discuss the need for HRM Strategies and International employee relations strategies in International business. there is little or no speculation on a fixed exchange rate. However. compensation . With it. the fixed exchange rate regime is still used for several reasons. responsible for managing a wide range of employee responsibilities. where staffing . None of these activities is performed in a vacuum all are related to the strategy of the firm because .Despite its rigidity. Ans:. the HRM function can help the firm achieve its primary strategic goals of reducing the costs of value creation and adding value by better serving customer needs . Second.
international human resource management is the fastest-growing subset of HR due to the growing trend for global business operations.com. The primary difference between domestic human resource management and international human resource management is the added knowledge and responsibilities required due to foreign operations. employee assistance. (hr-guide.org. 2007). ergonomics. The latter is targeted more specifically to developing personnel inside organisations through career development. In these efforts multiple sets of regulations must be used as guidelines. handling performance issues and making certain that personnel and management policies conform to laws and regulations. MBA . These typically include language (in non-English speaking offshore organisations). employee records and personnel policies and practices. the local and national regulations and laws governing business operations within a foreign country. IHR management is also involved in how the company manages employee compensation and benefits. (managementhelp.expected levels or better. organizational development and training activities. IHR management people must understand these differences clearly and stand ready to keep other company people informed of them to prevent embarrassing situations and unintentional ‘affronts’ from occurring Basic human resources are a management activity while human resources development is considered a profession. regulations and etiquettes. perhaps most important. currency exchange rates. Both functions have undergone very-significant evolutions during the past several decades so that they now play major roles in staffing. career outlooks. 2007). spirituality and diversity. Today. company benefits and incentives and. Still other international human resource management activities include ensuring workplace safety through dealing with drugs and drug problems. The ethics and etiquette expectations of foreign business contacts. The multi-national responsibilities of international human resource management require schooling in psychology as well as the culture and customs of business in offshore nations. those of the company and those arising from being in a foreign nation with different laws. managing and training people so that the will perform in an optimum manner for the organisation.
It is clear that IHRM is a growing field in multi-national business operations that will continue to offer excellent employment opportunities for people well versed in its international operations. Courses are also offered in international human resource management and development for the same purpose. .programs at more than seventy universities currently offer International MBA programs carefully tailored to match the needs of students who plan on careers with multi-national business organisations.
.. automobiles. it is important to examine through marketing research consumers’ true motives. and heavy construction equipment. PROMOTIONAL ISSUES . Branding. Thus. Consumers in different countries differ in the speed with which they adopt new products. While Americans seem to be comfortable with category specific brands. Note that expensive capital equipment may also cycle between countries—e. in part for economic reasons (fewer Malaysian than American consumers can afford to buy VCRs) and in part because of attitudes toward new products (pharmaceuticals upset the power afforded to traditional faith healers. they have found a market in developing countries. sells food. Note that Japanese keiretsus span and use their brand name across multiple industries—e. and expectations in buying a product.Q. airlines in economically developed countries will often buy the newest and most desired aircraft and sell off older ones to their counterparts in developing countries.g. among other things. while somewhere between one third and one half of American homes now contain a computer.g.g. this is not the case for Asian consumers.S. however. While in developed countries. We often take for granted the “obvious” need that products seem to fill in our own culture.S.. for example). which was required as a sign of quality. In the U. and thus cars there serve more of a role of being a status symbol or providing for individual indulgence. elsewhere. many computer manufacturers see greater growth potential there. when one market has been saturated. “three part” canning machines that solder on the bottom with lead are unacceptable for health reasons.. American firms observed that their products would be closely examined by Japanese consumers who could not find a major brand name on the packages. it may be possible. while cars have a large transportation role in the U. the corresponding figures for even Europe and Japan are much lower and thus. Ans:. electronics. they are impractical to drive in Japan. functions served may be very different in others—for example.1 Discuss the issues involved in international product policy and International branding with a few examples. fast food and instant drinks such as Tang are intended for convenience. desires. The International Product Life Cycle (PLC).Issues involved in international product policy and International branding Product Need Satisfaction. to continue growth in another market—e. Mitsubishi. they may represent more of a treat. Thus..
trial may be a more appropriate objective in this category). but something off-color in another. it is illegal to price discriminate between consumers. Note that since advertising and promotional stimuli are often afforded very little attention by consumers. and Europe has tried Coca Cola. In some European countries. in other languages. the next step is often to try get consumer to try the product at least once. sales are likely to move back down again (in developing countries. we nod to signify “yes” and shake our heads to signify “no. Language issues. but these are illegal in some countries and in some others. attitudes may be fairly well established and not subject to cost-effective change. since this has to be achieved through some intermediate outcome (such as increasing market share. This is often achieved through advertising. In some cultures. Other forms of promotion may also be banned or regulated. and British English are actually modest compared to differences between dialects of Spanish and German. in contrast. It should also be kept in mind that much information is carried in non-verbal communication. Legal issues. This objective is often achieved through advertising.. a large part of the population has not yet tried the product. fast food restaurants may run temporary price promotions to get people to eat out more or switch from competitors.g. For example. it may take a while before they get around to trying the product—especially when there are so many other products that compete for their attention and wallets. Attitude toward the product.. that it has a superior taste and is better than generics or store brands. Australian. Although Coca Cola is widely known in China. one word may mean one thing in one Latin American country. for example. Temporary sales increases. Thus. it may be more useful to work on getting temporary increases in sales (which are likely to go away the incentives are removed). Coupons are often an effective way of achieving trial. which in turn is achieved by some change in consumers which cause them to buy more). and Japan. Continued advertising and point-of-purchase displays may be effective.. baseball is a predominantly North and . For mature products and categories. Countries differ in their regulations of advertising. Many French consumers do not know that the Gap even exists. but when these promotions end. Thus. A high percentage of people in the U.g.S.S.” in other cultures. literally translated. Within the context of language: There are often large variations in regional dialects of a given language. clearing houses) does not exist. Promotional objectives involve the question of what the firm hopes to achieve with a campaign—“increasing profits” is too vague an objective. so a more reasonable objective is to get people to believe positive things about the product—e. Idioms involve “figures of speech” that may not be used. and thus coupons are banned and in some. In the U. The differences between U. Language is an important element of culture. For example. and some products are banned from advertising on certain media (large supermarket chains are not allowed to advertise on TV in France. but could also be achieved through favorable point-of-purchase displays. so they cannot decide to go shopping there. potential buyers may have to be exposed to the promotional stimulus numerous times before it “registers. for example). the practice is reversed. the infrastructure to readily accept coupons (e. Even when consumers know that a product exists and could possibly satisfy some of their desires. for example.S. Some common objectives that firms may hold: Awareness. it is illegal to offer products on sale outside a very narrow seasonal and percentage range.Promotional objectives.” Trial. with the hope that they will make repeat purchases. It should be realized that regional differences may be subtle.
for example. but for a different (usually larger) amount of money. Nowadays. There are often significant generation gaps in the use of slang. since consumers tend to have a good idea of prices and these products are quite visible.g. Reference prices are more likely to be more precise for frequently purchased and highly visible products. Another way to change terms is to do away with favorable financing terms. With the proliferation of computer technology. and can tell a bargain or a ripoff. the wholesale cost of chocolate increased dramatically. in the 1970s. will differs significantly between cultures.. Often. Reference Prices. Consumers often develop internal reference prices. Therefore. forking out the money for a large tube of toothpaste is no big deal for most American families. for cash flow reasons. Again. It is frequently tempting for foreign licensees of a major brand name to use inferior ingredients. giving the equation price = resources given up ——————————————— goods received This implies that there are several ways that the price can be changed: “Sticker” price changes—the most obvious way to change the price is the price tag— you get the same thing. Writing patterns. regional variations are common and not all people in a region where slang is used will necessarily understand this. but it introduces a greater strain on the budget of a family closer to the subsistence level). Note that. Slang exists within most languages.South American sport. In parts of the World where English is heavily studied in schools. Change terms.g. or the socially accepted ways of writing. is to be more expensive on products where price expectations are muddier. retailers very often promote soft drinks. In the old days. so neologisms have a wide potential not to be understood. Neologisms involve terms that have come into language relatively recently as technology or society involved. Pricing Issues in International Marketing Price can best be defined in ratio terms. based mostly on their experience. The trick. In a candy bar. Change quantity. and candy manufacturers responded by making smaller candy bars.. then. the emphasis is often on grammar and traditional language rather than on current terminology. Another way candy manufacturers have effectively increased prices is through a reduction in quality. and changes in quantity are sometimes noticed less—e. consumers respond unfavorably to an increased sticker price. It may take longer for such terms to “diffuse” into other regions of the world. Change quality. Most drivers with long commutes develop a good feeling of what gasoline should cost. so the notion of “in the ball park” makes sense here. or expectations about what something should cost. you either have to call a 900 number or have a credit card handy to get help from many software makers. but the term does not carry the same meaning in cultures where the sport is less popular. the idea of an “add-on” became widely known. most software manufacturers provided free support for their programs—it used to be possible to call the WordPerfect Corporation on an 800 number to get free help. the “gooey” stuff is much cheaper than chocolate. consumers in less affluent countries may need to buy smaller packages at any one time (e. .
certain products are put on sale so frequently that the “regular” price is meaningless.Marketers often try to influence people’s price perceptions through the use of external reference prices—indicators given to the consumer as to how much something should cost.” Thus. That is. literally means “The Middle Kingdom. On the other extreme. Knowledge and beliefs are important parts. we know and believe that a person who is skilled and works hard will get ahead. “WAS $10. now $6. culture represents influences that are imposed on the consumer by other individuals. Sears was reported to sell some 55% of its merchandise on sale. “Chunking. . The suggested retail prices in certain categories are deliberately set so high that even full service retailers can sell at a “discount. For example. art. The definition of culture offered one text is “That complex whole which includes knowledge.99. custom. We will consider the mechanics of learning later in the course.” is a system of interdependent components. For example. and any other capabilities and habits acquired by man person as a member of society. our price: $99. may be reflected in the rather arbitrary practice of wearing ties in some countries and wearing turbans in others.” the name for China in Chinese. Culture has several important characteristics: • • • Culture is comprehensive.00. but wearing anything from a suit and tie to shorts and a T-shirt would usually be acceptable. Examples include: Manufacturer’s Suggested Retail Price (MSRP). Art. ranging from being hauled off by the police for indecent exposure to being laughed at by others for wearing a suit at the beach.99 CULTURE OF INTERNATIONAL MARKETING Culture is part of the external influences that impact the consumer. women in some Arab countries are not even allowed to reveal their faces.” The belief among ancient Chinese that they were in the center of the universe greatly influenced their thinking. Regular Price $5.” “Sold elsewhere for $150. In the U. Culture is learned rather than being something we are born with.” For this strategy to be used legally in most countries. the claim must be true (consistency of enforcement in some countries is. of course. In the early 1990s. morals. In other countries. This is often pure fiction. “SALE! Now $2. Notice. by the way. However. we make the following observations: Culture. one cannot show up to class naked. that what at least some countries view as moral may in fact be highly immoral by the standards of another country.. in American society. although the consumer may contrast the offering price against the MSRP.99. Other issues are relevant.00. this latter figure is quite misleading. it may be believed that differences in outcome result more from luck.” From this definition. This means that all parts must fit together in some logical fashion.00. for example. belief. bowing and a strong desire to avoid the loss of face are unified in their manifestation of the importance of respect.S. In Japan. Culture is manifested within boundaries of acceptable behavior. another matter). Failure to behave within the prescribed norms may lead to sanctions. groups of men and women may take steam baths together without perceived as improper. as a “complex whole. on the other hand. Morality may be exhibited in the view in the United States that one should not be naked in public.
the terms and processes of quality control developed. to Frederick Taylor in the 1920s. continuous improvement. education. Japan to reconstruct its economy. covering manufacturing and service. Local product development is based on the needs of local customers. National Quality Week is an opportunity to reinforce these as the foundations of any organization and focus on the importance of Quality. Taylor is the “father of scientific management.2 a. the Government sector. between the 1920s and the 1950s.” As manufacturing moved into larger plants. After World War 11. For example. striving to promote quality. Cultures fall somewhere on a continuum between static and dynamic depending on how quickly they accept change. Sometimes companies buy firms in the foreign countries to take advantage of relationships. innovation and sustainability. storefronts. with its industries in ruin. and personnel already in place. Quality movement’s origins can be traced back to W. they sought the help of American advisors. language barriers. One American spy was intercepted by the Germans during World War II simply because of the way he held his knife and fork while eating. health. and voluntary organizations. while the culture of Saudi Arabia has changed much less. Juran and Philip B. Why do you think International quality standards are essential in International business? Ans:-Importance of quality and the need for continuous improvement in all sectors. During this time productivity was emphasized and quality was checked at the end of the line. Q. the non-profit sector of the various associations. and organizational excellence. factories. Edward Deming.• • Conscious awareness of cultural standards is limited. post-production checks became more difficult and statistical methods began to be used to control quality. and cultural ignorance are hindering the company’s competitiveness in the foreign market. Crosby. In a global economy where success depends on quality. then offices could be built in the foreign countries. and even further back. CONCLUSION If the exporting departments are becoming successful but the costs of doing business from headquarters plus time differences. the Japanese set out in earnest to improve quality and as a result in the year 1950. notably Drs Deming and Juran. Joseph M. As industrial plants became larger. American culture has changed a great deal since the 1950s. . These offices still report to headquarters in the home market but most of the marketing mix decisions are made in the individual countries since that staff is the most knowledgeable about the target markets. These marketers are considered polycentric because they acknowledge that each market/country has different needs. etc.
Japanese quality caught up with that of the West in the 1970s. The whole workforce from the CEO to the line worker must be involved in a shared commitment to improving quality of products or services of any organization. process therefore quality management emphasizes the ideas of working constantly toward improved quality. Managing “Quality” is not an easy task due to the diversity of customer needs and requirements taking place in the ever changing markets. thereby losing sales and having difficulty in building or recovering your brand image. In other words. As such organizations need to understand the basis of quality management. Quality is considered to be one of the management’s important priorities in any organization in view of the stiff competition taking place in the local and international markets. “Quality” is becoming increasingly important to all organizations as rapid evolution in markets is fueled by changing customer needs. The strategies used involved high-level managers as leaders. . This lesson has not gone unnoticed as United States and Western countries started to use “Quality” as part of their organizations and country’s top agenda. As a result of this approach. quality circles were used. or continuous. as improved Japanese products flooded the marketplace. In the future the customer and not the manufacturer would define quality. continuous progress was undertaken. it is an integration of all functions of a business to achieve high quality of products or service through continuous improvement efforts of all employees. including quality control and assurance. If your product and service quality is not consistent with the market requirements you may lose customers. and the entire workforce was enlisted. Achieving high quality is an ever changing. It involves every aspect of the company: processes. environment and people. all levels and functions were trained in managing for quality. in manufacturing and service businesses. With growing global competition. It took twenty years of concerted effort to revamp Japan’s industrial system. Quality revolves around the concept of meeting or exceeding customer expectation applied to the product and service.Japanese senior managers started to master total quality control and they began to integrate broader management principles of quality values throughout all business activities. Maintaining quality isn’t enough. It is an accepted fact that managing quality right throughout the organization is essential for any organization success and growth.
sub-assemblies and finished products . testing. Standards become a vehicle for sharing of knowledge. Since the approach of all above models is process-oriented management. But to apply sound quality management. societal needs and more equitable opportunities . The main features of standardization revolve round interchangeability. calibration. Standardization applies to: • Raw materials. an essential component of the worldwide industrial and post industrialist infrastructure. rules. parts and components. Over the years. and certification and accreditation. Six sigma. improved communication of technical criteria. variety reduction. technology and good practices. Total Quality Management (TQM). guidelines or characteristics for products or related processes and production methods. supporting economic activities. sustained development. it is worthwhile to indicate that if any of the above models are practiced in the right manner within any organization those organizations are in the direction of results-oriented management. In fact. that provides. Lean Manufacturing and Toyota Way and these concepts and tools are practiced by many organizations in Sri Lanka. and related management system practices with which compliance is not mandatory. to help the organizations to go in this direction many important concepts coupled with management have been introduced to world. the Sri Lanka Standards Institution has introduced the Sri Lanka National Quality Awards (SLNQA) in line with the Baldrige to pass the benefits to local organizations. for common and repeated use. However. the producer requires full support from many specialized fields such as standards. training. Standardization Standards are documents approved by a recognized body. Baldrige Award.in other words. Those well-known systems are ISO 9001. commonly agreed safety and performance parameters. the successful implementation of the above models relies on the Implementers’ knowledge and understanding of the concepts and the application of the concepts considering the unique situation of the organization.It is important to have a continuous quality improvement program integrated with the strategic business plan to make any organization a successful one.
Consumer . quality products. Standards provide many benefits to all sectors of the economy.” they imagine robots.2 b. Wodoslawsky says many of the lessons learned by automakers and suppliers can easily be applied to other industries and processes. high-volume assembly require flexible automation. Trade . It is important to note that the standards provide guidance to trade and therefore every organization that focuses at serious business to have its own set of standards that are perhaps more stringent than the national standards so as to gain competitive edge in the marketplace. “Automotive manufacturers are faced with producing a greater mix of vehicles in a shrinking number of plants. MI). Manufacturers need the ability to run different products on the same line. end-of-arm tooling and machine vision systems. Ans:.” adds Walter Saxe. Because of programmable controls.” claims Ted Wodoslawsky. automotive business development manager at Applied . vice president of marketing at ABB Robotics Inc. However. In other words standards impact the bottom line. for example: Society .Standards serve as protection for public health and safety.• • • • Processes Testing methods Calibration of instruments Sampling methods Business . Governments .Standards facilitate trade by making products competitive in markets. Q.Standards ensure that businesses become sustainable as standards help to ensure the efficiency and quality output. That’s much more difficult to do with hard automation. “Robotics is a key component of flexible manufacturing.” The automotive industry is still considered to be the role model for robotic flexibility.Standards enable Governments to implement technical guaranteeing international regulations. (Auburn Hills. the devices can perform a wide variety of repeatable tasks. “Any applications that involve high-mix.When most engineers think about “flexibility. Give a note on Robotics and flexible manufacturing.Standards offer protection and contribute positively to economic prosperity and growth.
tariffs. The larger entity can arrange the shipping through a discounted shipping plan that the smaller entity may not be able to access. or a rate that is reduced due to internal depreciation. “It can become a critical issue in places where you least expect it to happen. market manager at Staubli Robotics (Duncan. faster tool changeover and greater control of data to achieve maximum flexibility and exacting production details. plus additional charges to cover the cost of shipping. and is used by both the sender and the recipient to make appropriate posts in company accounting records. “[Manufacturing engineers should ensure their] controls platform has the ability to manage. many countries have . Q. NY). a process that greatly simplifies the process. which offers an extra degree of flexibility for critical applications such as powertrain assembly. In situations where the transportation of goods is involved in the transaction. manipulate and store all the data that is required with flexible implementation schemes. What is transfer pricing? Ans:. Today. and other documents that would normally apply to a new purchase using an outside vendor. the transfer pricing may include both a fixed price per unit transferred. state-of-the-art robots feature force control. SC). (Glenville. there are instances when this type of transaction can be abused. or between a parent company and a subsidiary. Normally.3 a.Robotics Inc. transfer pricing is a great way to move goods from one company division or department to another without generating a lot of postings on the Accounts Receivable and Accounts Payable books. The transfer pricing that is set for the exchange may be the original purchase price of the goods in question. When used properly. there is a simple form that accompanies the physical transfer of the goods. The value of the goods is simply moved from one division to the other. In addition.Transfer pricing is the rates or prices that are utilized when selling goods or services between company divisions and departments. “This practice is driving the need for higher payloads. While the main purpose of transfer pricing is to enhance the overall value of the corporate family of companies. This in turn is challenging the makers of robots and tools to stay ahead of the everincreasing market needs by advancing technologies before they are needed. transfer pricing can help to more efficiently manage profit and loss ratios within the company. Generally. This process eliminates the necessity for invoices.” says David Huffstetler. This model is especially helpful when the transfer takes place between a parent company and a subsidiary. This is especially true when transfers to international locations are conducted. transfer pricing is considered to be a relatively simple method of moving goods and services among the overall corporate family. Other new tools and features that make robots more suitable for flexible production applications include open architecture that allows easy integration with commonly used PLC platforms and offline simulation from desktop computers. The end result is that the transfer pricing makes it possible to move the goods with the smallest amount of expense to the company as a whole. internal bills of lading. ” For instance.
Like the bank check. Letters of credit A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. Q. The exact amount of the payment is specified. In situations where the bill of exchange is not honored. the holder of the document is free to take legal action against the debtor according to local laws. As an unconditional order to pay a fixed sum of money to a creditor. the bill of exchange can take on many different forms. or holder of the letter of credit. Ans:. This process is referred to as post dating a check. Letters of credit are often used for international transactions to ensure that payment will be received. drafts are normally set up with a fixed sum of payment. which is similar in many ways but not the same thing. with the order to pay the face value of the check to the order of the creditor. Considered to be a negotiable instrument. The bank also acts on behalf of the buyer. A bill of exchange will also require the authorized signature of the debtor in order to be considered legal and binding. since the creditor will physically receive the check at some time before it will be honored. the use of a bill of exchange is a common means of conducting business. the issuing bank and the advising bank. due to differing laws in each country and the difficulty of knowing each party personally. by ensuring that the supplier will not be paid until the bank receives confirmation that the goods have been shipped. One of the most common examples of the bill of exchange is the common bank check.Bills of Exchange Bills of exchange are financial documents that require the individual or business that is addressed in the document to pay a specified amount of money on a date that is cited within the text of the document. In many countries around the world. A check specifies who is to receive the funds. In the event that the buyer is unable to make payment on the purchase. The bill of exchange can be a very simplistic document. and with specific instructions of when to issue the payment to the creditor. and is also referred to as a documentary credit. or to sell the bill of exchange to a collector at a discounted rate of exchange. They have become an important aspect of international trade. a beneficiary who will receive the money. The date specified on the check is often the issue date for the check. the bank is required to cover the full or remaining amount of the purchase. A letter of credit is often confused with a bank guarantee. A letter of credit is often abbreviated as LOC or LC. The parties to a letter of credit are usually an applicant who wants to send money.3 b. and is often accompanied by an allonge.regulations to help prevent the use of transfer pricing as a means of evading taxes or similar unethical and illegal activities. Write a short note on Bills of Exchange and Letters of credit. but may also be the date that the bank is to honor the payment. or one that is very detailed. the date for the demand to pay generally ranges from the current date to a date within the next six calendar months. The main difference is the bank's position relative to the buyer and seller of a . It is also possible to establish a bill of exchange in the form of a bank draft.
research institutes and NGOs. It deals with research. It's an organization to ensure that the domestic policies and international actions are supportive for maintaining sustainable development. To name only a few of its significant achievements. the seller only faces the risk that the bank will be unable to pay. meaning that an exporter will get paid by redeeming the letter of credit. 5 a. Ans:. The letter of credit can also be the source of payment for a transaction. These have been well-documented in the relevant literature.good or service in the event of the buyer's default of payment. It simulated discussion in the World Bank on Supplementary Financing which had far-reaching implications for the . a formidable array of often trail blazing achievements. A letter of credit is less risky for the merchant. by linking it to the provision of additional resources for development. Functions of UNCTAD The secretariat of the United States work with the member Governments by interacting with the organizations of the United Nations system. UNCTAD prompted IMF to expand its compensatory financing facility. but even riskier for a bank. In the event of the borrower defaulting. which is unlikely. a seller may request that a buyer provide them with a letter obtained from a bank which substitutes the bank's credit for their client's. the bank must pay. This means that if the applicant obtaining the letter of credit fails to perform his or her obligations. Make a note of the functions and achievements of UNCTAD. UNCTAD has to its credit. Instead of the risk that the buyer will not pay. Helps to the developing nations of the world by providing technical assistance. policy and data collection. Achievements of UNCTAD During its 40 years of existence. the seller can go to the buyer's bank for the payment. The Important key functions of UNCTAD are as follows: • • • It aims at building consensus among the nations by exchanging experiences. Government Institutions. Q. The sole aim of the organization is to integrate the developing economies into the world economy.The United Nations Conference for Trade and Development was established in the year 1964. It helped in keeping alive the issue of creating additional liquidity under IMF. With a letter of credit.
According to a Northern commentator writing barely four years after the operationalization of UNCTAD. • The setting up of the Global System of Trade Preferences among Developing Countries (1989). while its work on external debt led to the creation of the Paris Club and measures to alleviate the debt burden. tin. and through its Integrated Programme for Commodities (IPC). including those for cocoa. If there is today a greater transparency in the world economic system. • Tthe adoption of the Set of Multilaterally Agreed Principles for the Control of Restrictive Business Practices (1980). it is in no small measure due to the relentless manner in which UNCTAD. . particularly in its initial years. Its decisions helped in operationalizing the ODA target.strategy the Bank subsequently adopted for supporting development in developing countries. technology transfer etc. it highlighted the inequities and anomalies prevailing in hitherto secluded and unexplored recesses of the world economy like insurance. Its studies documented declining terms of trade of the developing countries. Through its research and policy analysis work. jute and jute products. Through this work. It is a different matter that IPC never got going. tropical timber. under which over $70 billion worth of developing countries' exports receive preferential treatment in most developed country markets every year. for practically all the commodities of export interest to developing countries. sugar. UNCTAD became the breeding ground for new ideas. and the gap between the effective and nominal tariff rates. Its achievements have therefore been of different kinds and of varying impact. natural rubber. • Negotiations of International Commodity Agreements. the cost of tied aid for the beneficiary countries. shipping. has given impetus to new proposals and has stimulated other international agencies to re-examine and intensify their efforts”. went about exposing the unfairness of the system. it put in place the structure of an ambitious programme for negotiating and implementing such agreements. Among the most significant achievements reported to the Inspector by the UNCTAD secretariat could be included: • The agreement on the Generalized System of Preferences (GSP) (1971). olive oil and wheat. It provided a forum for negotiating some very significant international commodity agreements. The first ever generalised system of preferences (GSP) was negotiated in UNCTAD. the importance of non-tariff barriers. “UNCTAD has impressed the rich with the problems of the poor. including buffer stock financing.
set up to provide financial backing for the operation of international stocks and for research and development projects in the field of commodities. The negotiation of conventions in the area of maritime transport: United Nations Convention on a Code of Conduct for Linear Conferences (1974).5 billion. Q.. • The Agreement on a Special New Programme of Action for the Least Developed Countries (1981). tungsten. and which did not fulfil many expectations of the developing countries. President Obama also called for one set of standards . United Nations Convention on Maritime Liens and Mortgages (1993). • The establishment of guidelines for international action in the area of debt rescheduling (1980).000 companies in over 100 nations and is becoming the global standard for the preparation of financial statements of public companies throughout the world. 5 b. including those for iron ore. Ans: . • The negotiation of the Common Fund for Commodities (1989). • • The Programme of Action for the Least Developed Countries for the 1990s (1990).• The establishment of transparent market mechanisms in the form of intergovernmental commodity expert and study groups. GAAP (General Accepted Accounting Principles) is applied. United Nations Convention on Conditions for Registration of Ships (1986).IFRS has been adopted by more than 12. Give reasons for the slow growth towards achieving international accounting standards. • The adoption of the resolution on the retroactive adjustment of terms of Official Development Assistance (ODA) debt of low-income developing countries under which more than fifty of the poorer developing countries have benefited from debt relief of over $6. Recently. However. involving consumers and producers. the G20 leaders have called for significant progress towards moving to one set of high-quality global accounting standards.S. United Nations Convention on International Multimodal Transport of Goods (1980). copper and nickel. United Nations Convention on International Carriage of Goods by Sea (1978). in the U.
achieving enormous savings of capital in the longer term. There is really no one size fits all standards. A single set of accounting standards will provide comparability. they will save money in the long run. Over 100 countries have adopted or in the process of adopting IFRS. towards its adoption by all U. We need to be a leader and the driving force in establishing and adopting international standards. allowing easier cross-border investment with greater liquidity and low cost of capital.Many companies may soon be required to report in multiple accounting standards if the US does not either accept or move toward IFRS. It will also cut down the time and costs of preparing financial statements according to different standards and regulations.S. The added benefits of comparability versus cost to implement IFRS will not justify the adoption.S. thus better meet the demands of the marketplace. creativity and capitalism entrepreneurship. intolerance for unethical behavior. As more and more countries adopt IFRS. It increases transparency. There are advantages and disadvantages of converting to IFRS. Now SEC is working on an updated "roadmap" that will layout a schedule and major milestones for moving U. Competition between different sets of standards will offer the advantage of getting better information. Maintaining multiple standards reporting only increases accounting and auditing costs and provides no value to any country. with average one-time cost of $3. . Most of the U.S.S. This will create more auditing fees and possible errors. interests to apply the same accounting standards. the US has been a world leader for centuries.S. companies will benefit from one set of accounting standards since are multinational companies and they operating globally. A recent survey shows that to convert to IFRS. higher quality. By focusing on our differences. ingenuity. companies have to pay more than their European counterparts. and enable companies from different parts of the world to apply the same standards. Competition works and is a good thing because it will ensure better quality with lower price.S. IFRS will make it easier to control and monitor their subsidiaries in foreign countries and achieve cost savings from maintaining several accounting standards. it will hurt us in the long run. Since the financial reports were reduced from three to one. The differences between GAAP and other countries' standards can be very useful and provide insight into the reasons and values they conduct financial reporting in a particular way. and various arguments have made for and against its adoption. technological innovation. The uniform single accounting standard can stifle innovation.and substantial progress to be made in 2009. with the potential to compromise the quality of the IASB standards. economy. It is the time for us to get involved and play an important role in shaping the international standards. Otherwise. It can also help to eliminate potential financial misunderstandings and simplify investment decisions. competition. The adoption of IFRS and use of uniform accounting standards will also eliminate the possible different accounting results from applying different standards and help investors to pursue various strategies including global investment diversification. Delays in adopting IFRS by the US will make multi-national companies to report their primary reports in IFRS. Switching to IFSB will give IASB monopoly status. we will benefit from increased productivity. With its strong moral standard.24 million dollars for multinational corporations. The US should move towards the IFRS standards as a matter of urgency. U. The transition cost is estimated to be 8 billion dollars for the entire U. it is in the U. resulting in parallel reports in US GAAP. public companies. Its financial and accounting standards have been used by other countries as a yardstick to measure their economic and financial success until recently.
it will cost. Q. is the largest in the world and nobody knows exactly the scope and magnitude of applying IFRS to such a large economy. Ans:. Japan should incorporate Western management practices. From a cost benefit perspective. This seems to be a serious omission: such adoption processes are implemented by managers rather than academics. and it is surprising that little empirical research has been . Transition to IFRS itself can present be a lot of challenges.S. IFRS has not been tested in any country like the U. and on their views on crossnational adoption. convergence is obviously superior to adoption. especially the frauds such as Enron and Tyco International. In order to find answers to these questions we study Japanese HR managers intentions and practices at two levels: at headquarters (HQ) and at subsidiary level. Jackson and Miyajima (2007) and Schaede (2008) described irreversible tendencies toward an adaptation of Western management concepts. these same HRM practices are now being viewed by a series of authors as the root of the malaise. Yet despite this research focus.12% of revenues to implement the standards nationwide. Suggestions of how Western managers could learn from Japanese HRM practices were plentiful. While the U.S. Enforcement can also create some problems.S. The quality will suffer since compromises have to be made to achieve consensus due to various political pressures and economic interest. has effective enforcement. increased audit efficiency. Paradoxically. Only one decade later. GAAP coexist.Human resource management (HRM) has been perceived by many observers as a key ingredient accounting for the success of Japanese companies on world markets during the 1980s. will ultimately IFRS or have IFRS and U. The economy of the U. Give a note on the Japanese approach to HRM. however. As the ‘traditional’ Japanese HRM modelii is increasingly regarded to be in crisis and subject to major change (Dalton and Benson. is standing now for the last one and a half decades at the centre of Japanese management research. it is very challenging to implement stringent enforcement among those member countries due to the differences in economic and political system among the adopting nations and their financial reporting practices. 2002). Matanle (2003) noted a part convergence in the direction of Western management and Aoki. More specifically. Frenkel (1994) observed a convergence toward Western HRM practices. On the other hand.S. one can argue that the question of whether.S. this issue is of particular significance for Japanese companies.S.According to the SEC. This chapter investigates whether Japanese HR managers are now planning to learn from the West. It will drain on our slowly recovering economy. which means the cost can be as high as several billion dollars. U. or to what extent. adopting IFRS will provide comparability. GAAP has been evolving with various changes in the U. Indeed. Ornatowski (1998) even discussed the end of Japanese-style HRM. it explores whether Japanese HR managers are keen to learn from Western (in this case American and German) HRM and what they intend to adopt.S. The flip side is it will eliminate competition and incentives to innovate. In summary. 6 a. However many support for a move to a single set global accounting standards and it is believed that the U. Japan went into a recession from which it has not yet fully recovered. and stands the test of time. there is little empirical work on managers’ knowledge of practices elsewhere. reduced information misunderstanding and cost savings as more and more economic activities become globalized. The cost to achieve the additional comparability is not worth several billion dollars.
Jacoby. the USA became again the dominant role model (Edwards et al. Yamamura and Streeck. however.iii This viewpoint guides the empirical focus of the research. Since the implosion of the Japanese economy. this argument increasingly was applied to Japan (Mueller.done in order to understand better those perceptions and judgments upon which adoption decisions ultimately rely. which drove employees to work hard. the conventional wisdom over the last one and a half decades up to the current economic crisis has been that the American management model is particularly well suited to provide the necessary flexibility to cope with rapidly evolving economic and technological conditions. 2004. In that period. Thurow. Consequently. according to Smith & Meiksins (1995: 243) the USA. Garten. In addition.. The issue of how to manage their human resources in the global competition age is a salient challenge for Japanese management. Japanese firms are compelled to compete in global markets. the USA and Germany each embody the prime example of two of the three main varieties of market economies: the USA representing the free market economy of Anglo-Saxon countries and Germany the social market economy of continental Europe (with Japan embodying the third main variety of market economies. 2003. this high commitment led to more pay based on the good performances of firms. In the successful three decades. the domestic and foreign market had been continuously growing. Severe competition in the global markets means that participants are forced to accept the low market rate of returns and high risks of the markets’ growth. Therefore. this benevolent cycle. gaining application in many foreign countries. Pascha. the government-induced market economy of East-Asia). This selection has some merit. Japanese employers provided long term employment and paid employees on a seniority basis. these traditional HRM arrangements required transformation. 1993. From the late 1970s to the early 1990s. Japan and Germany are most frequently referred to as role models. One obvious difficulty we are presented with if we wish to answer the question what Japan can learn from ‘the West’ is the selection of countries that are representative of ‘the West’. In fact. As economic performance and growth paths vary over time the role of a ‘dominant’ economy also rotates among countries. these country models have been subject to numerous comparative analysis (Thurow. Consequently. in representing the largest and the third largest developed economies in the world (with Japan being the second largest economy).” Consequently. A demise of the steady growing market meant an exhaustion of the available funds for distribution. to Germany (Albert. 1960s and most of the 1970s the American management style clearly was dominant and a common expectation was that it would spread around the world. In the 1950s. “as they provide ‘best practice’ ideals from which other societies can borrow and learn. Growing markets enabled the employers to make a benevolent cycle in which increased pay based on good firm performance led to high commitment by employees. Furthermore. 1994). Japanese employers introduced the performance oriented HRM . and in turn. 1992. and to a lesser extent and limited to the European context. 2005). and with the advent of globalization. the stagnation of the German economy. with the collapse of the ‘bubble economy’ in the beginning of the 1990s. and the economically dominant nations of North America and Europe (with Japan being the leading economy in Asia). 1991. In this study we limit our empirical research to the inspirations Japan might receive from the USA and Germany. just depended on a continuous expansion of markets. 1992). 2005).
or they might be fired some day. would not take share of risk because a risk averter exerts less effort and performs less if risks are imposed on him or her (Milgrom & Roberts 1992). but most of them were not evaluated proficiently and not paid accordingly to their performance. The introduced performance oriented HRM system threatened employees into hard work with the exposure to the risks of unemployment and sudden reduction of salary. and other employers paid employees directly based on their contribution to the performance of firms. employees were exposed to two kinds of risks: the income variable risk and the unemployment risk. A system like this is unlikely to either promote the institutional cohesiveness of the group or develop organisational skills. The linkage between a firm’s performance and the employee’s wage meant that employees as well as stockholders and corporate managers had to take their share of risk of a company’s performance. However. The employees left in the firms who luckily survived downsizing could not help. many overworked Japanese employees are exhausted and hate the performance oriented HRM system. a majority of Japanese employees worked hard and performed their jobs well. some employers changed the proportion of excellent employees according to the firm’s performance. Some employers dismissed people based on their job performance. however. Many employers linked the funds to pay to employees as bonuses (lump sum payment) to the performance of the firms. who usually is risk averse. their decision to change the HRM system from people oriented to performance oriented was theoretically justified. Judging from the observations and analyses so far. but poorly operated. Employees were forced to work hard for the fear that they might be paid less next time. but undertake the work of others who quit their jobs. In other words. Additionally. Japanese employers adopted a new type of HR initiative with the expectation that these frameworks would lead to more favourable outcomes. As a result.system in which they paid more money to those who contributed more to the firms and paid less to those who did less. Nonetheless. a reasonable conclusion is that the Japanese employers embraced a system that did not realise their desired objectives. Two hypotheses are proposed. The relative evaluation for employees was certainly one of the factors that prevented the performance oriented HRM from creating another benevolent cycle. Their expectation. Currently. Indeed. Second. A performance oriented HRM system was less compatible with Japanese people or a Japanese organisation. the most important reason why the performance oriented HRM system had a functional failure was that the employers transferred market risk to the employees. because the number of the employees to be rated excellently was limited. The issue that they should have learnt from the previous fifteen years of workplace experience was not understood. As a result. First. Most workers cannot work comfortably. It follows that the Japanese firms are likely to consider changing the HRM . was completely unfounded. agency theory explains that an employee. In fact. The Japanese employers naively believed that the principle to pay more for a good job and less for a poor job should work well to motivate employees. the benevolent cycle in the past successful three decades turned into a vicious cycle in the following fifteen years. efficiently and effectively under the fear of unemployment and sudden reduction of wage. Japanese employers downsized surplus manpower concomitantly with introduction of a pay for performance scheme. most of employees lost their enthusiasm for their jobs and the company performance worsened.
especially younger employees who will forge the future of firms. They are: • A competitive market must be present in both the countries for the goods and services . Such organisational members long for a solid job through which they can develop themselves. there are reasons that are more positive. Such people are very happy to work enthusiastically if they can make themselves fulfilled through working even if their remuneration is small. it is just one necessary condition but it is not sufficient reason to make employees committed to their work. Q. although this change might be the result of elimination of an unpopular scheme. but they will not work just for money.Purchasing Power Parity Theory of Exchange Rate is a theory. in the current Japanese economic climate job security is highly valued. If the employers promise to secure employment. Ans:. In the absence of transportation and other similar expenses. PPP is based on the ‘Law of One Price’. While job security can be a great incentive to make majority of employees committed to their work. Moreover. the competitive market will equalize the price of an identical object in two countries when the prices are expressed by the same currency. The application of the Law of One Price is contingent upon certain conditions. Explain briefly the Purchasing power parity theory. If the inflation rate within a country’s economy increases then the value of the currency needs to depreciate to revive the PPP. The impending challenge for the Japanese manager is how to champion a balance of employer expectations with organisational exigencies. many Japanese people work to get an intrinsic value of work as well as money. However. Traditionally. most employees are likely to work very hard for the company. which establishes the fact that the exchange rates between currencies are in equilibrium in the event of equality in the purchasing power of each of the countries. 6 b. Many employees. This precisely means that the ratio of the price level of a fixed amount of goods and services of the two countries and the exchange rate between those two countries must be equivalent. Japanese employees now are frightened by exposure to HRM systems with a high risk of dismissal and avenues for payroll trimming. one has to be careful with the Law of one Price.from people oriented to job oriented in the future. Motivating employees is a major challenge for contemporary Japanese managers. the freedom or power to choose a job they want to do can be a greater incentive for those who perform an excellent job. A reason why Japanese management may inevitably change the HRM system to job oriented is that such an arrangement has the potential to provide fairer and clearer criterion to the management of human resources in the global labour market. Therefore. expect to get a feeling of accomplishment or fulfilment through jobs well done. Most employees need and appreciate money. what can be an incentive to motivate a few super performers? Although money can be an incentive.
22 in a U. the 1.S.13 USD/CND. the exchange rate adjusts in a way so that an identical good or a service in two different countries has the same price when expressed in the same currency. The purchasing power parity applies the same concept just on a higher level. They are: • Absolute Purchasing Power Parity that is based on the maintenance of equal prices in two concerned countries. .S. which is decided by calculating the difference between the exchange rates of two countries. on a single good level. Transport expenses and other transaction expenses must be checked since they are considered hindrances in trading.13 USD/CND is the purchasing power parity in this case. It is calculated as: cost of goods in currency 1 PPP = -------------------------------cost of goods in currency 2 where PPP represents the exchange rate of currency 1 to currency 2.• • The law is only applicable to the goods that can be traded between the countries.63 in Canada should cost US$3. Since exchange rates are volatile and influenced by many factors. Calculation of PPP The purchasing power parity (PPP) theory is based on an extension and variation of the law of one price as applied to the aggregate economy. is 1. that is on a representative basket of goods and services. • Relative PPP describes the inflation rate.13 USD/CND. city when the exchange rate between Canada and the U. If we look at this from another angle. This calculation is simplified to the Big Mac index level to illustrate the concept. This describes the appreciation rate of a currency. Types of PPP There are two types of PPP. the real market exchange rate can be higher or lower than the 1. In other words. a McDonald's Big Mac that sells for C$3. For example.
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