INTERNATIONAL BUSINESS

UGC NET MANAGEMENT Unit – 9

Important Highlights
By- Rohit Kumar
Foreign Direct Investment :
FDI is an investment from a party in one country
into a business or corporation in another country
with the intention of establishing a lasting interest.

Methods of FDI :
• Acquiring voting stock in a foreign company.
• Merger & acquisitions
• Joint ventures with foreign corporations
• Starting a subsidiary of a domestic firm in a
foreign country.
Benefits of FDI :
• Market diversification
• Tax incentives
• Lower labor cost
• Preferential tariffs
• Subsidiaries

Some benefits for the host country :

• Economic stimulation
• Development of human capital
• Increase in employment
• Access to management expertise , skills &
technology for business
Disadvantage of FDI:
• Displacement of local businesses
• Profit repatriation
FDI types (Key takeaways) :
Green field investment : A company will builds
its own brand new facilities from the ground
up.
Brown field investment : it happens when a
company purchases or leases an existing
facility.
Information technology in IB:
• MIS (Management information system) is a
management level system that are used by
middle managers to help ensure the smooth
running of the organization in the short to
medium term. The highly structured information
provided by these systems allows managers to
evaluates an organization performance by
comparing current with previous output.
Eg-Inventory control system
DSS (Decision support system) It facilitates the
creation of knowledge and allows its integration
into the organization .
EIS (Executive information system)
It is a executive level information system that are
found at the top of the pyramid.
AI (Artificial Intelligence)
It is a science & technology based disciplines
which is used to behave like a human through
specified instructions.
• Goals of AI :
To create expert systems
To implement human intelligence in machines
creating systems that understand, think, learn
and behave like humans.

Evolution of AI:
• In 1956 John McCarthy coined the term AI
• Firstly demonstrated at Carnegie Mellon
university
Machine learning :
ML coined by Arthur Samuel in 1959
Ability to learn without being explicitly
programmed
Big data : It describes the large volume of data
both structured and unstructured beyond the
ability of commonly used software tools to capture
accurate, manage & process data within a tolerable
elapsed time.
7 V’s of Big data
Knowledge Management :
Process of acquiring, generating, accumulating
and using knowledge for the benefit of the
organization.

Explicit Information : Visible information

available in literature, reports, patents, technical
specifications, communication with customer,
suppliers etc.
• Implicit knowledge : It is personal knowledge
residing in the minds of people as a result of
their personal beliefs, values, perspectives &
experience.
Evolution of Knowledge Management:
• 1938- H.G. wells coined the word ‘World
Brain’ which depicts an intellectual
organization the sum total of collective
knowledge.
• 1960 – Peter Drucker coined “Knowledge
Worker”
• 1986 – Dr. K. Wiig coined KM concept at UN
• 1990 – LEONARD –BARTON- well known case
study of “chaparral steel” , a company having
knowledge management strategy

Features of KM:
• It is a systematic & continuous process
• The essence of KM is to get right knowledge to
right people
Nonaka and Takeuchi introduced the SECI model
in 1996 :
They proposed 4 ways that knowledge types can
be combined & converted.
S= Socialization
E= Externalization
C= Combination
I= Internalization
WTO (World Trade Organization)
• Created on January 1995
• Deals with the trade rules between nations
• Forum for government to negotiate trade
agreements
• WTO’S current works comes from the 1986-94
negotiation called Uruguay round
• Earlier negotiation under GATT (General
agreement on tariffs & trade)
• WTO members expanded to 164, represnting
over 98% of international trade
• Usually meet at least once every two years
• Delegates meets regularly in Geneva.
• Highest body is the ministerial conference
• DG is responsible for supervising administrative
functions of WTO .
• DG is appointed by WTO members for a term of
four years.
• General council is WTO decision making body in
Geneva meeting regularly to carry out the
function of WTO.
WTO’s TPRM (Trade policy review mechanism) is a
part of WTO’s trade policy review mechanism that
aims to achieving greater transparency.

General council convenes as the disputes

settlement body (DSB)
Steps in disputes settlement
1. Consultation
2. Panel
3. Appeal
4. Result
MFN (Most favored nation principle) :
• Grant some country special favor
• Lower customs duty rate for one of their products

Major agreements of WTO:

Two categories of subsidies are prohibited
• Export subsidies
• Local content subsidies
• TRIPS set down minimum standards for many
forms of IP (Intellectual property)
Agreement on agriculture in WTO terminology,
subsidies in general are identified by boxes in colours
:-
• Green (Permitted)
• Amber (Slow down i.e be reduced)
• Red (forbidden)

Green Box
 Agriculture R&D , training programe, flood,
drought, relief to farmer etc.
 Subsidies that don’t disrupt trade balance or cause
minimum damage to trade balance.
 WTO limit nothing
Blue Box
• Amber type subsidies that aim to limit
production
• Subsidies that don’t increase with production
• WTO limit nothing

Amber Box
• Subsidies that disturb trade balance like
subsidies on fertilizers , seeds, power &
irrigation
• By this country’s product becomes cheaper than
others, in the international market
• WTO limit – de minimum limits – developed
(50%) , developing(10%), least developed
(exempted)

WTO special safeguard mechanism (SSM)

• SSM is a protection measure
• Allowed developing countries to take
contingency restrictions (imposition of tarriff)
At Doha ministrial conference , the developing
countries were given a concession to adopt a
special safeguard mechanism (SSM)

India WTO member since 1 Jan 1995 & GATT

since 8 July 1948
Bali package : 9th ministrial conference
agreement in Bali, Indonesia on 3-7 Dec 2013
• Conclude landmark trade facilitation
agreement (TFA)
• Following its reactifications by two-third of
WTO members
WTO flagship publication :
• Annual report
• World trade report
• World trade statistical review

Important theories of International Business :

Classical country based theories –
• Mercantilism
• Absolute advantage
• Comparative advantage
• Hecksher ohlin
Modern firm based theories :
• Country similarity
• Product life cycle
• Global strategic rivalry
• Porter’s national competitive advantage

Mercantilism : (by Jean Baptiste colbert)

Country wealth is determined by its gold and silver
holdings.
Absolute advantage :
In 1776 by Adam smith in ‘wealth of nation.’
Focused on the ability of a country to produce a
goods more efficiently than another nation.

Comparative advantage theory : (by David Ricardo)

“If country A has the absolute advantage in the
production of both products specialization and
trade could still occur between two countries.”
Theory of reciprocal demand :
By J.S. Mill
“To explain the actual determination of
equilibrium terms of trade.”

Opportunity cost : (by Gottfried Haberler)

Factor proportion theory (by Wasssily W.
Leontief)
Country similarity theory:
In 1961 by Steffan Linder
“Consumer in countries that are in the same or
similar stage of stage of development would
have similar preferences.”

Global strategic Rivalry Theory :

In 1980 by Paul Krugman and Kelvin Lancaster
“Focus on MNCs and their efforts to gain a
competitive advantage against other global firms
in their industry.”
National competitive advantage:
• 1990 by Michael Porter
4 determinants are :
I. Local market resources & capabilities
II. Local market demand condition
III. Local suppliers & complementary industries
IV. Local firm characteristics
IMF (International monetary fund) :
IMF & IBRD (international reconstruction &
development) were established in July 1944
together on the basis of Bretton Woods
Conference (US). Also referred as “Bretton woods
twins”

IMF primary purpose:

• To ensure the stability of the international
monetary system.
• HQ- Washington
• Formal existence in Dec 1945 with 29 founding
member countries.
• Started operation on 1 March 1947
• India is the founding member of IMF
• Through surveillance system IMF monitors
member country policies as well as national,
regional & global economic & financial
developments.
• Providing loans to member countries
• IMF provides technical assistance
• At the top of its organizational structure is the
board of governors.
Lending facilities of IMF :
• Low income countries may borrow on
concessional terms through facilities available
under the (PRGT-2010) Poverty reduction &
growth trust, currently at zero interest rate.
• SCF (Stability credit facility) for low income
countries.
• PRGF (Poverty Reduction growth facility)
provides funds to remove the chronic problems
of the poor country.
• CCFF (Compensator & contingency financial
facility)
• BSFF (Buffer stock financial facility)
• For emerging & advance market economies in
crises, stand-by arrangements (SBA) address
short term or potential balance of payment
• EEF (Extended fund facility – 1944) & ECF
(Extended credit facility) for low income
countries are funds main tools for medium term
support to countries facing protracted BOP
problems.
• RFI (Rapid financing instruments) and
corresponding Rapid credit facility (RCF) for low
income countries provide rapid assistance to
countries with urgent BOP needs.
Resources for IMF loans :
To their members on non-concessional terms are
provided by member countries, primarily through
payment of quotas .
• IMF is a quota based institution
• Each member of the IMF is assigned a quota
• Quotas are denominated in ‘Special drawing
rights’ (SDRs), the IMF unit of account.
• ESAF (Enchanced structure allowencement
facility)
• SAP (Structural adjustment policies)
• Any changes in quotas must be approved by an
85% majority of total voting power & members
own quota can’t be changed without its consent.

• A quota formula is used to help assess member :

Resource, voting, access, SDR contributions
power to finance allocations

• Reserve tranche : it is portion of the required

quota of currency that each IMF member
country must provide to the IMF that can be
utilized for its own purposes without a service
fee.
• India on several occasion got IMF support :
Post partition period
Indo pak conflict of 1965 & 1971
Worsening of BOP due to oil price escalation in
1973
Economic crisis in early 1990s

IMF’s governance is an area of contention :

It is almost impossible to make any reform in the
current quota system as more than 85% of total
votes are required to make it happen.
WORLD BANK
Bretton woods conference, officially known as the united
nations monetary and financial conference was a gathering
of delegates from 44 nations that met from July 1 to 22,
1944 in Bretton Woods, New Hampshire (USA)

HQ: Washington DC, United states

WB Group of 5 institutions:
1. IBRD (focus on lower middle county)
2. IDA (Focus to reduce poverty)
3. IFC (Focus on private sector in developing countries)
4. MIGA (Promote cross border investment)
5. ICSID (Settlement of investment disputes between states
& nationals of other states)
• India is not a member of ICSID
• Member countries are allocated votes
• Voting power is based on = Economic size +
International development association
contribution

Reports/Indices by WB
• Global economic prospects report
• Ease of doing business report
• World development report
• Logistics performance index
• By tradition, the bank president is a U.S National
and is nominated by the united states, the Banks
largest shareholders

• SAP (Structural adjustment programme)

Is a set of “free market ” economic policy reforms
imposed on developing countries by the world
bank as a condition for receipt of loans.

Indian trade policy (EXIM Policy)

• EXIM Policy (export import policy announced
under the foreign trade development and
regulations Act, 1992)
• EXIM policy announced for 5 years
• Announcing a policy on 31st March

Objectives of EXIM Policy :

• To facilitate sustained growth in exports to attain
a share of atleast 1% of global merchandise
trade.
• To stimulate sustained economic growth

Main functions of EXIM Banks in India:

• EXIM bank was set up on 1 Jan 1982
• Financing of export & import of goods &
services both in India & outside of India .
• Providing finance for joint ventures in foreign
countries.

Association of south east nation (ASEAN)

• Undertaking merchant banking function of
companies engaged in foreign trade.
• Providing technical & administrative assistance
to the parties engaged in export & import
business.
• Offering buyer’s credit
• Providing advance information & business
advisory
• During 1994-95, the EXIM bank introduced the
“Clusters of excellence”

To promote export EXIM bank has introduced the

following 3 schemes :
1. Production equipment finance programme
2. Export marketing finance
3. Export vendor development finance
BOP (Balance of payment)
BOP of a country can be defined as “Systematic
statement of all economic transactions of a
country with the rest of the world during a
specific period usually one year.”

• RBI has been compiling & publishing BOP data

for INDIA since 1948.
• Systematic accounting is done on the basis of
double entry book keeping (both side of
transaction credit & debit are included.)
• Errors & omissions : It reflects our inability to
record all international transactions accurately.

• The decrease in official reserves is called the

overall balance of payments deficit (surplus).

Current account deficit : it refers to a situation

when the value of goods & services imported by a
country exceeds the value of goods & services
exported by it.
• International economic transaction are called
autonomous.
• Accommodating transaction on the other
hand are determined by the net consequences
of the autonomous items i.e. whether the BOP
is in surplus or deficit.

• BOT (Balance of trade) is a part of BOP. BOT

just includes the balance between export &
import of goods.
• Types of disequilibrium in BOP :
Cyclical disequilibrium (fluctuations in
business cycle)
Secure disequilibrium (persistent, deep-rooted
dynamic changes)
Structural disequilibrium
Temporary disequilibrium
Fundamental disequilibrium
Solution to BOP disequilibrium :
• Monetary measures – deflation, exchange of
depreciation, devaluation, exchange of control
Non-Monetary measures :
Tarrifs, quotas, export promotion & import
substitution.
• 1991 BOP crisis in India

During BOP crisis :

• Convertibility of currency
• Current account convertibility
• Capital account convertibility
The rupee was made fully convertible on the
current account of the BOP in August 1994.
DATA WAREHOUSE
Coined first by Bill Inmon in 1990
It is a process used to integrate data from
multiple sources and combine into single
database.
Data warehouse is a subject oriented,
integrated, time variant and non volatile
collection of data .

Why data warehousing ?

• Integrates many sources of data
• More timely data access
• Consistent and quality data
• Improved performance & productivity
DATA MINING
It is looking for hidden, valid and potentially
useful patterns in huge data sets.

Insights extracted via Data mining can be used

for marketing, fraud detection and scientific
discovery etc.

Steps in data mining :

• Business understanding
• Data understanding
• Data preparation
• Marketing
• Evaluation
• Deployment

Informational technology :
Using a defined mechanism to store the
information usually in a computer system.
• EIS (executive information system)
• DSS (decision support system)
• MIS (Management information system)
• TPS (transaction processing system)
• Globalization (by- Peter sutherland)

International trade procedures:

• Shipping bill for export & bill of entry for
import
• Letter of credit
• Bill of lading – main procedure for shipping
• Certificate of origin (COO) is an instrument to
establish evidence on origin of goods
imported into any country.
• ICEGATE is a short form of “Indian customs
electronic commerce gateway”
• CBIC (Central board of indirect taxes &
customs) has launched E-sanchit , which
enables registered persons to file their
customs related documents online.
• DGFT (Directorate general of foreign trade)
provide 10-digits code import export (IE) code.

• Mandatory documents for export in India

Bill of ladding/ airway bill/ lorry receipt/
railway receipt/ postal receipt
Commercial invoice cum packing list, shipping
bill/ Bill of export
• Mandatory documents required for import of
goods into India :
Bill of lading/ Airway bill / lorry receipt /
railway receipt/ postal receipt
Commercial invoice cum packing list
Bill of entry

Two types of shipping :

• Linear shipping : it operate within a schedule
& has a fixed port rotation with published
dates of calls at the advertised ports.
• A tramp service or tramper : It has not fixed
routing or itinerary or schedule.

Forms of counter trade :

• Barter: it is the direct exchange of goods &
services with an equivalent value but with no
cash settlement. Eg- bag of nuts might be
exchanged for cofee beans or meat.
• Counter purchase : commitment of purchasing
goods or services from same company or
country.
• Offset : In this case the seller receives full
payment in cash for traded goods, eg- this
form is mostly applicable to trading of
aircrafts.

International economic organization :

1. UN Economic & social council :
Formation 1945
HQ New york, US
2. United nations economic & social commission
for Asia & the pacific (ESCAP)
• Member 53 from Asia & pacific regions mainly
• HQ – Bangkok , thailand
• India is a member

United nations conference on trade &

development (UNCTAD)
1964
Dealing with trade , investment &
development issues.
1995 member states
HQ – Geneva Switzerland
• UN department of economic & social affairs
(UN-DESA)
1948
HQ – NEW YORK CITY U.S.A

• BRICS
BRIC coined in 2001 by Gold man sachs asset
management , Jim o’Neil
Brazil, russia, India, China, South Africa
• New Development Bank (NDB)
HQ – Shanghai, china
Founded by Brics
Focus to finance infrastructure & sustainable
development in emerging market &
developing countries

• Asian development bank

1966 ,HQ – Manila, Philippines
• Asian infrastructure investment bank
HQ- beijing , operation started in 2016
Grown to 97 members worldwide
• World economic forum :
1971
Annual meeting Davos, Switzerland

India’s trade agreements :

• APTA (Asia pacific trade agreement)
• ASEAN (Comprehensive economic co-
operation agreement between India &
associations of southeast Asian nations.)
• PTA(Preferential trade agreement between
India & chile)
• CEPA (Comprehensive economic partnership
agreement between India & Japan)
• Agreement on south Asia free trade area (SAFTA)
• Agreement on SAARC preferential trading
arrangement (SAPTA)
• G7 : Canada, France, Germany, Italy, Japan, the
UK & The US
• G20 : After Asian financial crisis in 1997-1998
• Association of southeast Asian nation (ASEAN)
8 Aug 1967 , Bankok Thailand
Founding Indonesia, Malaysia, Philiphines,
Singapore, Thailand
• Asia pacific economic co-operation
 Regional forum for 21 pacific rim member.

• BIMSTEC (Bay of Bengal initiative for multi-

sectoral technical and economic co-operation)
 7 members
 Bangladesh, Bhutan, India, Nepal, Srilanka,
Maynmar, Thailand
• South Asian associations of regional co-operation
(SAARC)
 Established Dhaka 8 Dec 1985, Afghanistan,
Bangladesh,Bhutan,India,Maldives,Nepal,Pakista
n,Srilanka