Balance of Payments and Organizations Control and Evaluation of

International Business

Introduction of Balance of Payment

Balance of Payment - is an accounting statement that summarizes the economic
transaction between a country and the rest of the world over a specific period, typically a year.
This record includes both visible and invisible transactions.

Types of Economic Transactions

• Consumer Transaction – transaction between individuals and businesses.
• Business Transaction – transaction between businesses.
• Government Transaction – transaction between the government and individual or
businesses.
• International Transaction – transaction between individuals, businesses, or governments of
different countries.
• Financial Transaction – transactions involving financial assets or liabilities.
• Real Estate Transaction – transactions involving the purchase or sale of real estate.
• Non-profit Transaction – transactions involving nonprofit organizations.

Importance of BOP
• Policymakers. It provides policymakers with a comprehensive view of a country's
economic transactions with the rest of the world.
• International investor and businesses. It allows them to assess the economic health of a
country and make informed decisions about where to invest their money.

DIFFERENCE BETWEEN BALANCE OF PAYMENT AND BALANCE OF TRADE

Balance of Trade Balance of Payment
Scope focuses only on the trade in covers all economic
goods between a country and transactions between a
its trading partners. country (trade in goods and
services, income flows, and
financial transactions).
Components only the balance of trade in includes the current account
goods (country's exports and (in goods and services,
imports of goods). income flows, and transfers).
 Measurement measured in terms of the value measured in terms of the value
of goods exported and of all economic transactions
imported
Significance important component of the broader measure of a country's
balance of payments, as it economic relationships with
reflects a country's the rest of the world, including
competitiveness in its external financing needs
international markets and its and its ability to repay its
dependence on imports. external debt.

Structure of Balance of Payment

The structure of the balance of payments statement is divided into three main accounts:
1. Current Account: This account records all transactions related to the trade of goods and
services, primary and secondary income, and transfers.

• The trade balance records the value of exports and imports of goods.
• The services balance records the value of exports and imports of services.
• The primary income records the income received or paid as a result of the use of a
country's primary factors of production (labor, capital).
• The secondary income records the transfers of funds without an exchange of goods or
services, such as foreign aid, remittances, and grants.

2. Capital Account: This account records all transactions related to the acquisition and
disposal of non-produced, non-financial assets.

3. Financial Account: This account records all transactions related to the purchase and sale
of financial assets, including direct investment, portfolio investment, and reserve assets.

• Direct investment refers to the acquisition or disposal of a lasting interest in an

enterprise in another country.
• Portfolio investment refers to the acquisition or disposal of equity and debt securities,
including stocks and bonds.
• Reserve assets refer to assets held by a country's central bank to finance international
transactions and support the value of the domestic currency.

Highlights of Balance of Payment

• Trade Balance: The trade balance records the difference between a country's exports and
imports of goods and services.
• Current Account Balance: The current account balance records all economic transactions
related to the trade of goods and services, primary and secondary income, and transfers.
 • Capital Account Balance: The capital account balance records all transactions related to
the acquisition and disposal of non-produced, non-financial assets.
• Financial Account Balance: The financial account balance records all transactions related
to the purchase and sale of financial assets, including direct investment, portfolio
investment, and reserve assets.
• Overall Balance: The overall balance of payments is the sum of the current account,
capital account, and financial account balances.

Disequilibrium and Measures of Current Balance of Payment

Disequilibrium refers to a situation where a country's current account balance is in deficit or
surplus, indicating that there is an imbalance in its international financial transactions.
There are several measures of current balance of payment, including:
• Merchandise Trade Balance: This measure calculates the difference between the value of
a country's exports and imports of goods.
• Services Balance: This measure calculates the difference between the value of a country's
exports and imports of services.
• Income Balance: This measure calculates the difference between a country's income
received from foreign sources and income paid to foreign sources.
• Current Account Balance: This measure calculates the difference between a country's
exports and imports of goods and services, as well as primary and secondary income and
transfers.
To address a disequilibrium in the balance of payments, a country can take various measures,
including:
• Devaluation of the Currency: This can make exports cheaper and imports more
expensive, reducing the trade deficit and contributing to a surplus in the current account.
• Import Controls: This can reduce the number of imports, contributing to a reduction in
the trade deficit and a potential improvement in the current account balance.
• Export Promotion: This can increase the demand for exports, contributing to an increase
in export earnings and a potential improvement in the current account balance.
• Fiscal and Monetary Policies: These can be used to manage aggregate demand and
encourage savings, contributing to a reduction in imports and potential improvement in the
current account balance.

Organizational Structure of International Business

- Organization is defined by the formal structure, coordination and control systems, and
the organization culture.
 - It's the formal arrangement of roles, responsibilities and relationships within an
organization in an international business.

Types of Organizational Structures

1. Functional Structure
• Specialized jobs are grouped according to
traditional business functions.
• Ideal for Co. having a narrow product line,
sharing similar technology.
• Helps maximize economies of scale
• Highly efficient
2. International Division Structure
• Grouping each international business activity into its own division.
• Creates a critical mass of
international expertise.
• Creates quick response to
environmental changes enabling
them to deal with different markets.
• Prevents duplication of activities.
• Often struggles to get resources
from domestic divisions.
• This structure is suited for multi-
domestic strategies that demand
little integration and standardization between domestic and foreign operations.
• Frustrates its ability to exploit economies of scale.
3. Product Division Structure
• These are popular among international
companies with diverse products.
• Similar products are grouped under one
product head.
• Suited for a global strategy
• There may be duplicate functions and
activities among divisions.
• No formal means by which one product
division can learn from another
international expertise.
 4. Geographic (Area) Division Structure
• These are used when foreign operations
are large and not dominated by a single
country or region.
• Useful when managers can gain
economies of scale on a regional rather
than on global basis.
• Drawback is the potential of duplication
of work among areas as the company
locates similar value activities in several
places rather than consolidating them in the most efficient place.
5. Matrix Division Structure
• This tries simultaneously to deal with competing
pressures for global integration and local
responsiveness.
• Institutes overlaps among functional and divisional
forms.
• Gives functional, product, and geographic groups a
common focus.
• It makes each group share responsibility for foreign
operations and enables each group exchange
information and resources more willingly.

Control of Multinational Corporation

A multinational corporation (MNC) is a company that has business operations in at least
one country other than its home country.
Generally, a multinational company has offices, factories, or other facilities in different
countries around the world as well as a centralized headquarters which coordinates global
management.
They set up their production jointly with some of the local companies. The MNCs select
those countries where the government look after their interest. Sometimes, MNCs buy local
companies and then expand their production. Large MNCs in developed countries place order for
production with small producers.
Executing management control across borders is crucial for multinational companies
(MNCs). Various management control mechanisms serve to align foreign subsidiaries with
corporate goals.