International Business

International Business Syllabus
Unit-1: International Business- Introduction, Significance, Nature and Scope of

IB, Reasons to go for International Business, Modes of Global Business, Global
Business Environment- Social, Cultural, Economic, Political and Ecological
factors.
Unit-2: Theories of International Trade- Classical country-based theories:

Mercantilism, Absolute advantage theory, Comparative cost advantage theory;
Modern firm-based trade theories: Country similarity theory, Product life cycle
theory, Global strategic rivalry theory & Porter’s national competitive
advantage theory. International Trading Environment: Free Trade vs Protection,
Tariff and Non-tariff barriers, Commodity Agreements, Regional Economic
Integration, Cartels.
Unit-3: Balance of Payment: Concept, Components of BOP and Disequilibrium

in BOP- Causes for disequilibrium and Methods to correct Disequilibrium in
BOP. Foreign Exchange Market: Nature of transactions in foreign exchange
market and types of players. Foreign Direct Investment: Types, Reasons of
increased FDI inflow in developing economies, Impact of FDI in home and host
country.
Unit-4: International Financial Institutions and Liquidity- IMF, IBRD, IFC,

WTO- Objectives, Organizational Structure and Functioning, WTO and India.
International human resource management, International Marketing
Management; Future of International Business.
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INTERNATIONAL BUSINESS
UNIT-1
Business which is conducted internationally in more than one country is termed
as international business. International businesses are very large in size as they
are performed at global level. International business is a trade of goods &
services across national borders or at global level. In other words, transactions
of goods and services between two or more countries. To conduct business
overseas, multinational companies need to bridge separate national markets into
one global market place.
Definition:
“International business includes all commercial transactions private and
government between two or more countries, these transactions include sales,
investment & transportation. Private companies undertake such transactions for
profit whereas government agencies may or may not pursue the profitability
objective.”
Significance / Advantages
Various significance of or advantages of international business are:
1. High living standard: The standard of living of people is very high because
international business is only conducted in those countries where people
demand good quality goods and better services. International trade is mainly
conducted in developed countries.
2. Wider market: International business is conducted in various countries. The
reach of business increases because of the wider range. Business have a large
number of customers, resources, financers, business partners etc. the demand
and supply of the business increases at international level.
3. Reduced risk: One of the significance of international trade is market
diversification. This diversification helps in reducing the risk level of the
business as the business is less dependent on one market and more dependent on
various market.
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4. Large scale economies: Exporting is an excellent way to expand your
business with products that are more widely accepted around the world. In
many manufacturing industries, for example, internationalization can help
companies achieve greater scales of economy, especially for companies from
smaller domestic markets. In other cases, a company may seek to exploit a
unique and differentiating advantage (intellectual property), such as a brand,
service model, or patented product. The emphasis should be on “more of the
same,” with relatively little adjustment to local markets, which would
undermine scale economies.
5. Potential untapped market: By taking business at global level, business get
access to larger base of customers. The business starts expanding itself into an
untapped area or market which can be very beneficial fi the business and will
help it in growing. Globalization of business can take its revenue to new
heights.
6. Cultural transformation: Through globalization the culture of the people is
also transforming. Getting information about new place can help business more
well-rounded. It can also help in creating good relationships with international
customers.
7. Providing the opportunity for and challenge to domestic market:
8. Division of labour & specialization:
9. Economic growth of the world:
10. Optimum & proper utilization of world resources:
11. Increase social-economic welfare:
12. Reduced effect of business:
13. Knitting the world into a closely interactive traditional village:
Features / Nature
The following features of international business are:
1. Exchange of goods & services: In international business goods and services
are bought and sold in exchange of some consideration such as money. Goods
are imported and exported on international level. One country exports its goods
and another country imports the exported goods.
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2. Involvement of two countries: In international business trading is done
between two countries. One country exports the goods and other imports. In
this way the requirements of both the countries are fulfilled.
3. Foreign currency: International business are served as an important source
for earning foreign exchange. Foreign currencies of different countries are
involved in transactions of these businesses. This helps in getting enough
foreign exchange reserve for the country.
4. Restrictions: International business face large restrictions while carrying out
these operations in different countries. Sometimes they are not allowed to
inflow & outflow goods, technology and other resources. These are restricted by
the government of different countries to not enter into their countries. They face
various foreign exchange barriers, trade barriers and trade blocks which are
harmful for international business.
5. Lengthy procedure: International business cannot be set up easily, it is a
very lengthy procedure. Market potential is checked, customer purchasing
power is checked, policies of the government are checked, demand is measured
and a large amount of documentation is done to get the licence of international
business. Thus, it is a very lengthy procedure and cannot be easily done.
6. Language barrier: International business often face language barriers. These
are difficult to overcome and if not handled properly companies can lose their
opportunity to establish a credible brand image. Business owners need to adopt
an effective strategy for getting past the language barrier, to make most out of
their valuable partnership and future business opportunities.
7. Risk: The degree of risk associated with international business is very high.
These businesses require large amount of resources both in term of money and
manpower for carrying out its operations. These need to carry out trade in
different countries at large distances. Also, sometimes different economies face
unfavourable conditions which affect the business conditions. Thus,
international business is very risky.
Scope of International Business

International business is much broader than international trade. It includes not
only international trade (i.e., export and import of goods and services) but also a
wide variety of other ways in which the firms operate internationally.
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International Management professionals are familiar with the language, culture,
economic and political environment, and business practices of countries in
which multinational firms actively trade and invest.
1. Foreign Investments: Foreign investment is an important part of
international business. Foreign investment contains investments of funds from
the abroad in exchange for financial return. Foreign investment is done through
investment in foreign countries through international business. Foreign
investments are two types which are direct investment and portfolio investment.
2. Exports and Imports of Merchandise: Merchandise are the goods which
are tangible. (those goods which can be seen and touched.) As mentioned above
merchandise export means sending the home country’s goods to other countries
which are tangible and merchandise imports means bringing tangible goods to
the home country.
3. Licensing and Franchising: Franchising means giving permission to the
new party of the foreign country in order to produce and sell goods under your
trademarks, patents or copyrights in exchange of some fee is also the way to
enter into the international business. Licensing system refers to the companies
like Pepsi and Coca-Cola which are produced and sold by local bottlers in
foreign countries.
4. Service Exports and Imports: Services exports and imports consist of the
intangible items which cannot be seen and touched. The trade between the
countries of the services is also known as invisible trade. There is a variety of
services like tourism, travel, boarding, lodging, constructing, training,
educational, financial services etc. Tourism and travel are major components of
world trade in services.
5. Growth Opportunities: There are lots of growth opportunities for both of
the countries, developing and under-developing countries by trading with each
other at a global level. The imports and exports of the countries grow their
profits and help them to grow at a global level.
6. Benefiting from Currency Exchange: International business also plays an
important role while the currency exchange rate as one can take advantage of
the currency fluctuations. For example, when the U.S. dollar is down, you might
be able to export more as foreign customers benefit from the favourable
currency exchange rate.
7. Limitations of the Domestic Market: If the domestic market of a country is
small then the international business is a good option for the growth of the
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business in the host country. Depression of domestic market firms will
force to explore foreign markets.
Reasons to go for international business

Companies go international for a variety of reasons. In general, companies go
international because they want to grow or expand operations. More specific
motives include generating more revenue, competing for new sales,
investment opportunities, diversifying, reducing costs and recruiting new
talent. The following reasons to go for international business are:
1. Profit advantage: Domestic companies constantly look for opportunities to
add customers and revenue streams. Distributing products in additional
countries increases customer base. Doing business internationally may open up
new investment opportunities. Further, a lower cost of acquiring customers
may be another compelling reason to expand internationally.
2. Growth opportunities: Foreign markets both developed country and
developing country provide considerable expansion opportunities for the firms
from a developing country. MNCs are interested in no. of developing countries
due to initially increasing in their income and population of the predictable 1
billion increases in world population during 2000 to 2015; only about 3% will
be in the high-income countries, foreign markets, both developed and
developing countries after ample opportunities for developing country firms
also.
3. Domestic market constraints: Some demographic trends such as a
contraction in birth rate decline in domestic demand, fully tapped market
potential has adverse effects on some businesses. When the domestic market is
small, international business is the option for growth. Depression in the home
market drives companies to explore foreign markets.
4. Government policies & regulations: It is common for governments to
“incentivize” their country’s companies to export. This often results in many
companies entering markets they would otherwise not have tackled. The U.S.
government offers a wealth of help when a company decides to begin exporting.
Export assistance centres provide a one-stop resource and can be found in over
100 U.S. Cities. The Small Business Administration (SBA) offers Export
Working Capital Programs that include guaranteed loans of $50,000 to $
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5. Image building: Business that can go global and market their offerings to a
totally different population. It is not an easy feat to accomplish, meaning
prospects and potential business partners will instantly think more highly of
business which have international presence. This helps in creating a good image
in the mind of customers and potential business partners.
6. Increase sales: If your business is succeeding in the U.S., expanding globally
will likely improve overall revenue. Approximately 96% of the world’s
population lives outside of the U.S. and 90% of the world’s population does not
speak English – this suggests customers are global and that if your company
looks beyond the shores of the domestic market, you have some real upside
potential. If your company has a unique product or technological advantage not
available to international competitors then this advantage should result in major
business success abroad. For example, if you run a software company and add a
French and German language version, you are extending your total market by
nearly 200
7. Strategic vision: The urge to grow, need to become more competitive, the
need to diversify and to gain advantage of internationalization. Planning is done
considering the entire world as a single market.
8. Competition:
Difficulties in International Business

What make international business strategy different from the domestic are the
differences in the marketing environment. The important special problems in
international marketing are given below:
1. Political and Legal Differences: The political and legal environment of
foreign markets is different from that of the domestic. The complexity
generally increases as the number of countries in which a company does
business increases. It should also be noted that the political and legal
environment is not the same in all provinces of many home markets. For
example, the political and legal environment is not exactly the same in all the
states of India.
2. Cultural Differences: The cultural differences, is one of the most difficult
problems in international marketing. Many domestic markets, however, are
also not free from cultural diversity.
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3. Economic Differences: The economic environment may vary from country
to country. Each country has different economy. Different standard of living
and different rules, this affects the international business a lot as the business
have to work according to the economy of that country. Because it can also lead
to the failure or ban of the business in the country if it not works according the
economy and rules of that particular country.
4. Differences in the Currency Unit: The currency unit varies from nation to
nation. This may sometimes cause problems of currency convertibility, besides
the problems of exchange rate fluctuations. The monetary system and
regulations may also vary.
5. Differences in the Language: An international marketer often encounters
problems arising out of the differences in the language. Even when the same
language is used in different countries, the same words of terms may have
different meanings. The language problem, however, is not something peculiar
to the international marketing. For example: the multiplicity of languages in
India.
6. Differences in the Marketing Infrastructure: The availability and nature of
the marketing facilities available in different countries may vary widely. For
example, an advertising medium very effective in one market may not be
available or may be underdeveloped in another market.
7. Trade Restrictions: A trade restriction, particularly import controls, is a very
important problem, which an international marketer faces. There few things a
country cannot trade in another country as restrictions are imposed on those
things by the government of that country. This causes difficulties in
international business.
8. High Cost of Distance: When the markets are far removed by distance, the
transport cost becomes high and the time required for affecting the delivery
tends to become longer. Distance tends to increase certain other costs also. And
amount of risk is also increased as goods can be damaged or stolen. This is also
very great difficulty in the international business. Level of distance cost and risk
both are very high in international business as trading is done overseas.
9. Differences in Trade Practices: Trade practices and customs may differ
between two countries. This can create a lot of difficulties in international
business as one may not be fully able to follow the trade practices of the other
country.
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Modes for Entering Global Market
Import & Export
Licensing & Frenchising
Joint Venture
Strategic Alliance
Mergers & Aquaizations
Contract Manufacturing
Assembly Operations
Opening the Branch Abroad
Establishment of Plants
Turn Key Contracts
Exclusive Agents in Abroad
1. Import & Export: An import is a good brought into a jurisdiction, especially

across a national border, from an external source. The party that bringing in the
good is called importer. An import in the receiving country is an export in the
sending country. Import can be done by businessman as well as the government.
On the other hand, export is the process of sending the goods and services
produces in one country to another country. Exporting may be direct or indirect.
Under direct export company directly exports its goods and services to the
customers in another country instead of selling the goods to international
warehouses. And under indirect exporting, goods are exported through
domestically based export intermediaries. The exporters have no control over
his product in the foreign market.
2. Licensing & Franchising: Licensing is a method in which a firm gives
permission to a person to use its legally protected products or technology and to
do business in a particular manner, for an agreed period of time and within an
agreed territory. It is a very easy method to enter foreign market as less control
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and communication is involved. The financial risk is transferred to the licensee
and there is better utilization of resources.
On the other hand, franchising is a system in which semi-independent
business owners (franchisees) pay fees and royalty to a parent company
(franchiser) in return for the right to be identified by its trademark, to sell its
products & services, and often to use its business format or system.
3. Joint Venture: It is a strategy used by companies to enter into foreign
market by joining hands and sharing ownership & management with another
company. It is used when two or more companies want to achieve some
common objectives & expand international operations. It is useful to meet
shortage of financial, physical & managerial resources.
4. Strategic Alliance: It is a voluntary formal agreement between two
companies to pool their resources to achieve a common set of objectives while
remaining independent entities. It is mainly used to expand the production
capacity and increase market share for a product. Alliances helps in developing
new technologies, utilizing brand image and market knowledge of both the
companies.
5. Mergers & Acquisitions: A merger is a combination of two or more entities
into one, the desired effect of accumulation of assets and liabilities of distinct
entities and several other benefits such as, economies of scale. Tax benefits, fast
growth, synergy & diversification etc. the merging entities cease to be in
existence and merge into a single servicing entity.
Acquisition implies acquisition of controlling interest in a company by
another company. It does not lead to dissolution of company whose shares are
acquired. It may be a friendly or hostile acquisition or a bail out takeover.
6. Contract Manufacturing: When a foreign firm hires a local manufacturer to
produce their product or a part of their product it is known as contract
manufacturing. This method utilizes the skills of a local manufacturer and helps
in reducing cost of production. The marketing and selling of the product is the
responsibility of the international firm.
7. Assembly Operations: An assembly operation is a variation of the
subsidiary. A foreign production plan might be set up simply to assemble
components manufactured in the domestic market. The exporting company may
try to retain key component manufacture in the domestic plant, allowing
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development, production skill and investment to be concentrated, while
maintaining the benefit from economies of scale.
8. Opening the Branch Abroad: A foreign branch is a representation of a
company in a foreign country that usually can do commercial transactions on its
own. Depending on the law of the country, the branch office can or should be a
limited company, where the shares are held by the parent company abroad. In a
number of countries there is a list of activities that a company with foreign
ownership cannot be active in, depending on the percentage of shares.
9. Turn Key Contracts: It involves the delivery of operating industrial plant to
the client without any active participation. A company pays a contractor to
design and construct new facilities and train personnel to export its process and
technology to another country. Turn key projects may be of various types:
 BOD-Build, Owned & Develop
 BOLT-Build, Owned, Leased & Transferred
 BOOT- Build, Owned, Operate & Transfer
10. Exclusive Agents in Abroad: Exclusive agents are those persons or
agencies who sells the goods and services for another company or organization
in another country. These agents are responsible for selling the goods and
services of the company.
Global Business Environment

The global business environment can be defined as the environment in different
sovereign countries, with factors exogenous to the home environment of the
organization, influencing decision making on resource use and capabilities. The
global business environment can be classified into the external environment and
the internal environment. The external environment is further divided into two
parts micro environment and macro environment.
Micro
Environment
External
Environment
International Macro
Environment Environment
Internal
Environment
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1. Internal Environment: Internal business environment includes those factors
which are under the control of the business. Business can increase their
performance by managing all the internal factors in a proper manner. Various
internal factors are:
 Corporate culture
 Value system
 Mission & objective
 Human resources
 Unions
 Organization structure
 Physical resources
2. External business environment: External business environment includes
those factors which are beyond the control of the business and which can affect
the business both positively and negatively. These factors are divided inti two
parts i.e. macro and micro environment.
a. Micro environment: These are the factors in the firm’s immediate
environment which directly affect the firm’s decisions and operations. Various
micro environment factors are:
 International Suppliers
 International competitors
 International customers
 General public
 International market intermediaries
b. Macro environment: These are those factors which affects all the firms in a
positive or negative manner. These factors are at very large scale and can also
affect the firm’s micro factors. Various macro factors are:
i. International Economic Environment: International economic
environment basically includes nature of the economy, economic policies
& economic system. Nature of the economy includes level of income of
the people, structure of the economy like primary, secondary, territory,
various sectors in the economy. Economic policies mean various policies
of the country like trade policy, foreign exchange policy, fiscal policy &
monetary policy. Which type of policies country have which will help the
international business. Economic system means which kind of economy
a country has like capitalist economy, mixed economy & socialist
economy in what type of economic system a country works.
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ii. International Political Environment: The political environment
consists of factors related to the management of public affairs and their
impact on the business of an organization. Political environment has a
close relationship with the government regulations in host country,
political system and political institutions. These laws and policies of the
government regulate the conduct of the business. These laws cover such
as standard of product, ethical conduct of the business etc.
iii. International Cultural Environment: Culture is very complex and
critical component of international business environment. Proper
understanding of the cultural dimensions is very important for product
development, promotion, business negotiation and human resource
management. Different people have their own Religions, convictions,
beliefs, sentiments, customs, rituals, festivals etc. the cost of ignoring
certain religious aspects could be very high, sometimes even fatal (very
dangerous). Differences in Language is a very important problem is in
international business. Even some of the same words of the same
language have different meaning. Problem created by languages includes,
those related to brand name, other names and marketing communication.
Family system also affect the international business.
iv. International Technological Environment: The technological
environment consists of those factors related to knowledge applies and
technology on the production of goods & services. International
technological environment includes technology & economic
development, technology & investment (research & development),
scanning of environment, appropriate technology and transfer of
technology. This environment consists of those factors that involve any
type of technological advancement or lack of the same.
v. International Financial Environment: International financial
environment includes foreign exchange, currency convertibility,
international monetary system and international fiscal system. All these
factors are very important for every business as they are important for
easy payment and east cash transactions for the business.
vi. International Legal Environment: In many countries there are various
laws and regulations related to the use of media, disclosures, packaging &
labelling and regulation promotions. Packaging & labelling includes the
type of packaging material, method of packaging, packaging standards,
certain mandatory disclosures to be made and labelling in local language
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is compulsory in some countries. Regulation promotion, in most of the
countries product promotion is subject to various types of controls like
product comparison advt. are not permitted, some countries restricts the
use of photographs of women in advt. etc.
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UNIT-2
International Trade
The exchange of goods across national borders is termed as international trade.
Countries differ widely in terms of the products and services traded. Countries
rarely follow the trade structure of other nations; rather they evolve their own
product portfolios and trade patterns for exports and imports. Besides, nations
have marked differences in their vulnerabilities to the upheavals in exogenous
factors.
Trade is also called the exchange of goods economy, is to transfer of the

commodities from one person to another. Sometimes trade is also called in
simple terms as commerce or financial transaction of barter. Where the transfer
of the commodities between the persons took place is called a market.
Different Types of Trade

Trade is broadly divided between two types:
Trade
Home Foreign
Trade Trade
Wholesale Retail Import Export Enter pot

Trade Trade Trade Trade Trade
1. Internal Trade: Internal Trade is also known as Home Trade. It took place
within the political and geographical boundaries of a country. It can be at local
regional or national level like the trade between Delhi and Mumbai etc. The
internal trade can also be subdivided into two groups.
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 Wholesale Trade: In this type of trade the commodities are bought in
large quantities from the manufacture or the produce and then sold to the
retailers for resale to consumers.
 Retail Trade: In this trade the wholesaler is the chief distributer who
distributer the commodities in small amounts to the retailers and then
sellers sold the commodities to the persons for their personal use.
2. External Trade: External trade is also called foreign trade or international

trade. In this type of trade, the commodities are exchanged between two or more
than two countries e.g. if Mr. X who is a trade from one of the states of India,
Mumbai sells his goods to Mr. Y who is a trader of New York is one the state of
U.S.A. Thus, we can very easily understand the concept of international trade or
External Trade. It can also be further divided into three main groups:
 Export Trade: When the commodities are sold from home country to
another or foreign country is called export trade e.g. when we sell the
Indian goods to U.S.A in this case India is the home country or importer.
This is simply all about the export trade.
 Import Trade: In this case the home country purchase goods from the
foreign country and then the home country e.g. India in the importer and
foreign country e.g. U.S.A in the exporter. This is called the Import trade.
 Enter pot Trade: This is some kind of interesting type of trade. In this
trade the goods are imported from one country and then after doing some
modifications or after furnishing the goods and then again exported to the
country from where we have imported the commodities is called enter pot
trade.
Theories of International Trade

The exchange of goods across national borders is termed as international trade.
Countries differ widely in terms of the products and services traded. Countries
rarely follow the trade structure of other nations; rather they evolve their own
product portfolios an
d trade patterns for exports and imports. Besides, nations have marked
differences in their vulnerabilities to the upheavals in exogenous factors.
Trade theories also offer an insight, both descriptive and prescriptive, into
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the potential product portfolio and trade patterns. They also facilitate in
understanding the basic reasons behind the evolution of a country as a supply
base or market for specific products.
Classical Country Modern Firm

Based Theories Based Theories
Mercantilism Country Similarity

Theory Theory
Absolute
Product Life Cycle
Advantage
Theory
Theory
Comparative Cost
Global Strategic
Advantage
Rivalry Theory
Theory
Porter's National
Factor
Competetive
Endownment
Advantage
Theory
Theory
1. Classical Country Based Theories: Various classical country-based theories

are defined below in detail:
i. Theory of Mercantilism: The concept of mercantilism (a zero-sum game)

was popular from about 1500-1800; it purports that a country’s wealth is
measured by its holdings of treasure (usually gold). To amass
a surplus (a favourable balance of trade) a country must export more than it
imports and then collect gold and other forms of wealth from countries that run
a deficit (an unfavourable balance of trade). The theory of mercantilism
attributes and measures the wealth of a nation by the size of its accumulated
treasures. Accumulated wealth is traditionally measured in terms of gold, as
earlier gold and silver were considered the currency of international trade.
Nations should accumulate financial wealth in the form of gold by encouraging
exports and discouraging imports.
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ii. Theory of Absolute Advantage: In 1776 Adam Smith claimed the wealth of
a nation consisted of the goods and services available to its citizens. An absolute
advantage refers to the ability of a country to produce a good more efficiently
and cost-effectively than any other country. The theory of absolute advantage is
based on Adam Smith’s doctrine of laissez faire that means ‘let make freely’.
When specifically applied to international trade, it refers to ‘freedom of
enterprise’ and ‘freedom of commerce’. Therefore, a country should use
increased production to export and acquire more goods by way of imports,
which would in turn improve the living standards of its people. A country’s
advantage may be either natural or acquired.
 Natural Advantage: A country may have a natural advantage in the
production of particular products because of given climatic conditions,
access to certain natural resources, the availability of needed labour
forces, etc.
 Acquired Advantage: An acquired advantage represents a distinct
advantage in skills, technology and/or capital assets, thus yielding
differentiated product offerings and/or cost-competitive homogeneous
products.
 Resource Efficiency Example: Real income depends on the output of
goods as compared to the resources used to produce them.
The production possibilities curve shows that by specializing and
trading, two countries can have more than they would without trade, thus
optimizing global efficiency.
iii. Theory of Comparative Advantage: David Ricardo (1817) promulgated

the theory of comparative advantage, wherein a country benefits from
international trade even if it is less efficient than other nations in the production
of two commodities. Comparative advantage may be defined as the inability of
a nation to produce a good more efficiently than other nations, but its ability to
produce that good more efficiently compared to the other good. Thus, the
country may be at an absolute disadvantage with respect to both the
commodities but the absolute disadvantage is lower in one commodity than
another.
iv. Factor Endowment Theory: Heckscher (1919) and Bertel Ohm (1933)
developed a theory to explain the reasons for differences in relative commodity
prices and competitive advantage between two nations. According to this
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theory, a nation will export the commodity whose production requires intensive
use of the nation’s relatively abundant and cheap factors and import the
commodity whose production requires intensive use of the nation’s scarce and
expensive factors. Thus, a country with an abundance of cheap labour would
export labour-intensive products and import capital-intensive goods and vice
versa. It suggests that the patterns of trade are determined by factor endowment
rather than productivity. The theory suggests three types of relationships,
which are discussed here:
a. Land-Labour Relationship: A country would specialize in production
of labour intensive goods if the labour is in abundance (i.e., relatively
cheaper) as compared to the cost of land (i.e., relatively costly). This is
mainly due to the ability of a labour-abundant country to produce
something more cost-efficiently as compared to a country where labour is
scarcely available and therefore expensive.
b. Labour-Capital Relationship: In countries where the capital is
abundantly available and labour is relatively scarce (therefore most
costly), there would be a tendency to achieve competitiveness in the
production of goods requiring large capital investments.
c. Technological Complexities: As the same product can be produced by
adopting various methods or technologies of production, its cost
competitiveness would have great variations. In order to minimize the
cost of production and achieve cost competitiveness, one has to examine
the optimum way of production in view of technological capabilities and
constraints of a country.
2. Modern Firm Based Theories: Explore the firm’s role in promoting exports
and imports. These theories incorporate additional factors i.e., quality,
technology, brand names, customer loyalty, product life-cycles etc. into
explaining successor countries in selling products and services in international
markets as firms and not countries are the agents for international trade. Various
modern firm-based theories are:
i. Country Similarity Theory: The country similarity theory states that when a

firm develops a new product in response to observed conditions in the home
market, it is likely to turn to those foreign markets that are most similar to its
domestic market when commencing its initial international expansion activities.
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a. The Economic Similarity of Industrial Countries: So much trade takes

place among industrialized countries because of the growing importance
of acquired advantage (skills and technology). In addition, markets in
most industrialized countries are large enough to support new product
introductions and their subsequent variants across the life cycle.
b. The Similarity of Location: Countries that are near to each other enjoy
relatively lower transportation costs than those that are more distant.
While the disadvantages of distance may be overcome through innovative
technology and marketing methods, such gains are difficult to maintain in
the long run.
c. Cultural Similarity: Cultural similarity as expressed through language
and religion is a major facilitator of the international trade and investment
process.
d. The Similarity of Political and Economic Interests: Countries that
agree politically and are economically similar are likely to encourage
trade among themselves. In some circumstances at least, they may also
discourage trade among countries with whom they disagree.
ii. Product Life-Cycle Theory: This theory attempts to explain the impact of a
product’s life-cycle stage on flow of its trade (where a
product would be manufactured and where it would be in demand)
According to this theory shifts in manufacturing and trade flow of a product
goes through four phases which are in the following; The product life cycle is
further elaborated with the help of five stages.
a. New Product Stage: A product will be initially produced & sold mostly
in the country in which it is developed (nearby observed need & market).
For most advanced and technology products these will initially be
conceptualized in developed countries and sold in these markets.
b. Growth Stage: At the next stage, the market for the successful product
would start to rapidly grow. In this stage the product would be produced
in the innovating and other industrial countries – and sold in many
industrial countries.
c. Mature Stage: Reaching the maturity stage market for a product would
become competitive and buyer would become experienced. As the result
margins on the product would decline and competitive pressured would
require the manufacturers to seek lower production costs. At this stage
20
production of the products shifts from industrialized countries to

countries where costs are lower – the innovating country may stop
producing & start importing.
d. Decline Stage: At this stage demand for the product declines, especially
in advanced countries, as other more effective technologies and products
are introduced. At this stage production and market of the product is
mainly in less developed countries.
e. Exceptions: There are however, exceptions to the impact of the life-cycle
on a product’s manufacturing locations and trade. Products with very
short product-lifecycles, luxury products where cost are less important,
products requiring specialized skills, strategic products of a country,
differentiated products (i.e., differentiated on country of origin, such as
handmade Italian leather fashion products) will experience less, if any,
impact of a life-cycle stage.
iii. Global Strategic Rivalry Theory: This theory was forwarded in 1980 by
Paul Krugman. He studied firms that were successful in competing in
international markets and concluded that; Firms struggle to dominate world
markets by Owning intellectual property rights, investing in research &
development, achieving economies of scale & scope and Exploiting the
experience curve. Such firms that were innovative and could establish
competitive advantages by owning intellectual property rights to useful
technologies, that pursued research and development aggressively, that strived
to achieve economies of scale and scope and that were learning organization
and could become more efficient with time were able to succeed in international
competition.
iv. Porter’s Theory of National Competitive Advantage: Professor Michael

Porter combined the country specific and firm specific factors to explain how
firms and industries of certain countries are able to achieve success in
international markets. This theory was forwarded in 1990. According to Porter’s
Theory of National Competitive Advantage success in international trade comes
from the interaction of four country - and firm - specific elements;
a. Factor (Input) Conditions: Factor conditions refer to how well-endowed

a nation is as far as resources are concerned. These resources may be
created or inherited, which include human resources, capital resources,
physical infrastructure, administrative infrastructure, information
21
infrastructure, scientific and technological infrastructure, and natural

resources. The efficiency, quality, and specialization of underlying inputs
that firms draw while competing in international markets are influenced
by a country’s factor conditions.
b. Demand Conditions: Factor conditions refer to how well-endowed a
nation is as far as resources are concerned. These resources may be
created or inherited, which include human resources, capital resources,
physical infrastructure, administrative infrastructure, information
infrastructure, scientific and technological infrastructure, and natural
resources.
c. Related and Supporting Industries: The availability and quality of
local suppliers and related industries and the state of development of
clusters play an important role in determining the competitiveness of a
firm. These determine the cost-efficiency, quality, and speedy delivery of
inputs, which in turn influence a firm’s competitiveness.
d. Firm Strategy, Structure, and Rivalry: It refers to the extent of
corporate investment, the type of strategy, and the intensity of local
rivalry. Differences in management styles, organizational skills, and
strategic perspectives create advantages and disadvantages for firms
competing in different types of industries. Besides, the intensity of
domestic rivalry also affects a firm’s competitiveness.
e. Chance: The occurrences that are beyond the control of firms, industries,
and usually governments have been termed as chance, which plays a
critical role in determining competitiveness. It includes wars and their
aftermath, major technological breakthroughs, innovations, exchange
rates, shifts in factor or input costs (e.g., rise in petroleum prices), etc.
f. Government: The government has an important role to play in
influencing the determinants of a nation’s competitiveness. The
government’s role in formulating policies related to trade, foreign
exchange, infrastructure, labour, product standards, etc. influences the
determinants in the Porter’s diamond.
International Trading Environment

The international trading environment consists of trading strategies, trade
barriers, trade agreements, trading blocs, cartels and multinational trade
negotiations.
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Trade Strategies: The government’s approach towards international business

is called as trade strategies. It can be of two types:
a. Outward oriented trade strategy: It is a type of policy in which there in
no discrimination between domestic market and international market. It
assumes that purchase of domestic goods and foreign goods are one and
the same.
b. Inward oriented trade strategy: This is a type of policy which favours
domestic production against foreign trade. Protection of domestic
industries from foreign competition is an essential feature of the inward
oriented strategy. It encourages import of raw materials and is against
foreign trade.
Free Trade vs Protection

Free Trade: International trade that takes place without barriers such as tariff,
quotas and foreign exchange controls is called free trade. Thus, under free trade,
goods and services flow between countries freely. In other words, free trade
implies absence of governmental intervention on international exchange among
different countries of the world.
Arguments for Free Trade
1. Advantages of specialisation: Firstly, free trade secures all the advantages

of international division of labour. Each country will specialise in the
production of those goods in which it has a comparative advantage over its
trading partners. This will lead to the optimum and efficient utilisation of
resources and, hence, economy in production.
2. All-round prosperity: Secondly, because of unrestricted trade, global output
increases since specialisation, efficiency, etc. make production large scale. Free
trade enables countries to obtain goods at a cheaper price. This leads to a rise in
the standard of living of people of the world. Thus, free trade leads to higher
production, higher consumption and higher all-round international prosperity.
3. Competitive spirit prevails: Thirdly, free trade keeps the spirit of
competition of the economy. As there exists the possibility of intense foreign
competition under free trade, domestic producers do not want to lose their
23
grounds. Competition enhances efficiency. Moreover, it tends to prevent

domestic monopolies and free the consumers from exploitation.
4. Accessibility of domestically unavailable goods and raw materials:
Fourthly, free trade enables each country to get commodities which it cannot
produce at all or can only produce inefficiently. Commodities and raw materials
unavailable domestically can be procured through free movement even at a low
price.
5. Greater international cooperation: Fifthly, free trade safeguards against
discrimination. Under free trade, there is no scope for cornering raw materials
or commodities by any country. Free trade can, thus, promote international
peace and stability through economic and political cooperation.
6. Free from interference: Finally, free trade is free from bureaucratic
interferences. Bureaucracy and corruption are very much associated with
unrestricted trade.
In brief, restricted trade prevents a nation from reaping the benefits of

specialisation, forces it to adopt less efficient production techniques and forces
consumers to pay higher prices for the products of protected industries.
Arguments against Free Trade
Despite these virtues, several people justify trade restrictions. Following

arguments are often cited against free trade:
1. Advantageous not for LDCs: Firstly, free trade may be advantageous to

advanced countries and not to backward economies. Free trade has brought
enough misery to the poor, less developed countries, if past experience is any
guide. India was a classic example of colonial dependence of UK’s imperialistic
power prior to 1947. Free trade principles have brought colonial imperialism in
its wake.
2. Destruction of home industries/products: Secondly, it may ruin domestic
industries. Because of free trade, imported goods become available at a cheaper
price. Thus, an unfair and cut-throat competition develops between domestic
and foreign industries. In the process, domestic industries are wiped out. Indian
handicrafts industries suffered tremendously during the British regime.
3. Inefficient industries remain perpetually inefficient: Thirdly, free trade
cannot bring all-round development of industries. Comparative cost principle
states that a country specialises in the production of a few commodities. On the
24
other hand, inefficient industries remain neglected. Thus, under free trade, an
all-round development is ruled out.
4. Danger of overdependence: Fourthly, free trade brings in the danger of
dependence. A country may face economic depression if its international
trading partner suffers from it. The Great Depression that sparked off in 1929-
30 in the US economy swept all over the world and all countries suffered badly
even if their economies were not caught in the grip of depression. Such
overdependence following free trade becomes also catastrophic during war.
5. Penetration of harmful foreign commodities: Finally, a country may have
to change its consumption habits. Because of free trade, even harmful
commodities (like drugs, etc.) enter the domestic market. To prevent such,
restrictions on trade are required to be imposed.
In view of all these arguments against free trade, governments of less

developed countries in the post-Second World War period were encouraged to
resort to some kind of trade restrictions to safeguard national interest.
Protection
Protection refers to the measure taken by the government to protect domestic
industries from foreign. By protection we mean restricted trade. Foreign trade of
a country may be free or restricted. Free trade eliminates tariff while protective
trade imposes tariff or duty. When tariffs, duties and quotas are imposed to
restrict the inflow of imports then we have protected trade. This means that
government intervenes in trading activities.
Thus, protection is the anti-thesis of free trade or unrestricted trade.

Government imposes tariffs on ad valorem basis or imposes quota on the
volume of goods to be imported. Sometimes, export taxes and subsidies are
given to domestic goods to protect them from foreign competition. These are
the various forms of protection used by modern governments to restrict trade.
Objectives of Protection
Various objectives of protection are:
 To protect domestic industries from foreign competition

 To promote indigenous research and development.
 To conserve foreign exchange resources of the country.
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 To discriminate against certain countries.
Arguments for protection

There are a number of arguments put forward in favour of protection. They are
as follows
1. Fallacious Arguments: Fallacious arguments do not stand after scrutiny.
These arguments are dubious in nature in the sense that both are true. ‘To keep
money at home’ is one such fallacious argument. By restricting trade, a country
need not spend money to buy imported articles. If every nation pursues this
goal, ultimately global trade will squeeze.
2. Economic Arguments: Various economic arguments for protection of

international trade are:
a. Infant Industry: According to the infant industry argument, the infant
industry with potential comparative advantage may not get started in a
country unless it in given temporary protection against foreign competition.
b. Diversification: A strong economy usually has a very powerful diversified
industrial structure. An economy that depends on a very limited number of
industries is subjected to many risks. A depression or recession in these
industries will seriously affects the economy.
c. Improving the terms of trade: It is argued that the terms of trade can be
improved by imposing import duty or quota. By imposing tariff, the country
expects to obtain large quantities of imports for a given amount of exports.
d. Improving balance of payments: This is a very common ground for
protection. By restricting imports, a country may try to improve its balance
of payments position. It can generate more revenue on exports rather than
import of goods. This may put the country towards favourable balance of
payments.
e. Anti–Dumping: Protection is an important anti-dumping
measure. Dumping means selling the goods in foreign market at a rate
which is far less its original price. Dumping of goods is done by foreign
countries to run the domestic markets. Once the domestic market is
destroyed, the foreign firm will obtain monopoly powers and exploit the
home market. Sometimes, dumping represents a transmission of the
recession aboard to the home country. These factors point out the need to
protect the domestic industries against dumping.
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f. Employment: Protection has been allocated also as a measure to simulate

domestic economy and expand employment opportunities. Restriction of
imports will stimulate import competing industries and its spread effects will
help the growth of other industries these, naturally create more employment
opportunities.
g. Strategic trade advantage argument: It is argued that tariffs and other
import restrictions create a strategic advantage in producing some new
products having potential for generating some net profit. There are some
large firms who prevent entry of new firms because of the economies of
large scale production.
3. Non-Economic Arguments: Various non-economic arguments for protection

of international trade are:
a. National defence argument: There are some industries which may be
inefficient by birth or high cost due to many reasons and must be
protected. This logic may apply to the production of national defence
goods or necessary food items.
b. Miscellaneous arguments against protection: There are some good
‘side effects’ or ‘spill over effects’ of protection. This means that it
produces some undesirable effects on the economy and the basic
objective of protection can be attained rather in a costless manner by
other direct means other than protection. That is, protection is never more
than a second-best solution.
Trade Barrier
Trade barriers unjustifiably prevent the business succeeding in exporting.
Business may have different ways of describing them. They all mean the same
thing. Business are often called: red tape, roadblocks to export, price controls,
subsidies, government rules/procedures, arbitrary rules and decisions, goods
delayed at the border, hold-ups at Customs, container stuck on the wharf,
biosecurity rules, restrictions on repatriating profits, local ownership, rules a
cost of doing business.
Reasons for Imposing Trade Barriers

Barriers are imposed for various reasons such as:
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1. National Security: - countries enforce tariff and non-tariff barriers to protect

the security of the nation. Ex: - Defence sector in India
2. Retaliation: - Government of a country intervenes in the trade policies in
order to act as a bargaining tool. Retaliation agreements help countries to allow
free trade among them.
3. Protecting Jobs: Government aims to protect domestic employment.
Domestic employment is affected from foreign competitions as domestic
industries start to import services from abroad in order to keep up with the
competition.
4. Protecting infant industries: Competition from imported goods threatens
the infant industries of a country. In order to develop and grow certain
industries government may impose heavy tariffs on imported goods to increase
prices and help the infant industries.
5. Protecting Customers: Government may levy a heavy tax on goods which
are against the welfare of the country and its citizens.
Types of Trade Barriers

There are mainly two types of barriers:
Trade
Barriers
Tariff Non-Tariff
Barriers Barriers
1. Tariff barriers: Tariff is a custom, duty or a tax imposed on products that

move across borders. The words tariff/custom/duty are interchangeable. It is the
most common instrument used for controlling imports and exports. In other
words, it can include a customs levy or tariff on goods entering a country and
are imposed by a government. Free trade agreements seek to reduce tariff
barriers. Various tariff barriers include the following:
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i. Import tariff/duty: It is the custom duty imposed by the importing

country i.e. the tax imposed on goods imported. It is levied to raise
revenue and protect domestic industries.
ii. Export tariff: It is the duty imposed on goods by the exporting country
on its exports. Generally certain mineral and agricultural products are
taxed.
iii. Transit duties: It is levied on commodities that originate in one country,
cross another and are consigned to another. Transit duties are levied by
the country through which the goods pass. It results in increased cost of
products and reduction in number of commodities traded.
iv. Other Tariff barriers: Other tariff barriers include:

a. Specific duty: It is based on (specific attribute) physical characteristics of
goods. It is a fixed or specific amount of money that is levied as tax
keeping in view the weight(quantity)/measurement (volume) of the
commodity.
b. Ad valorem duty: These are duties that are imposed according to the
value of commodities traded between countries. It is generally a fixed
percentage of the invoice value of the goods traded.
c. Compound duty: It is a combination of specific duty and ad valorem
duty on a single product. It is partly based on quantity and partly on the
value of goods.
2. Non-tariff barriers: These are non-tax restrictions such as (a) government
regulation and policies (b) government procedures which effect the overseas
trade. It can be in form of quotas, subsidies, embargo etc. It can include
excessive red tape, onerous regulations, unfair rules or decisions, or anything
else that is stopping you from competing effectively. Non-tariff barriers can
affect all forms of goods and services exports from food and manufactured
products, through to digital services. Various non-tariff barriers include:
i. Quotas: It is a numerical limit on the quantity of goods that can be
imported or exported during a specified time period. The quantity may
be stated in the license of the firm. If the importer imports more than
specified amount, he has to pay a penalty or fine.
ii. VER (Voluntary Export Restraint): It is a quota on exports fixed by the
exporting country on the request of the importing country. The exporting
country fixes a quota regarding the maximum amount of quantity that
will be exported to the concerned nation.
iii. Subsidies: It is the payment made by the government to the domestic
producer so that they can compete against foreign goods. It can be a cash
grant, subsidized input prices, tax holiday, government equity
29
participation etc. It helps a local firm to reduce costs and gain control
over the market.
iv. Other barriers: Various non-tariff barriers include:
a. Administration dealings: These are regulatory controls and bureaucratic
rules and regulations which affect the flow of imports. It can be a delay
at custom offices, safety inspection, environment regulatory inspection
etc.
b. Local content requirement: Legal content requirement is a legal
regulation which states that a specified amount of commodity must be
supplied in the domestic market by the producer. It is used to help local
labour and domestic suppliers of goods. Government may state a – (a)
labour requirement (b) input requirement or (c) component required at a
local level.
c. Currency Control: Government may impose restrictions on currency
convertibility. In order to import goods countries, have to make payment
in foreign currency which is acceptable worldwide i.e. US dollar,
European Euro or Japanese Yen. The government can put a limit on the
amount of money that can be converted in foreign currency or ask a
company to apply for a license to obtain such currency.
d. Embargo: It means a complete ban on certain commodities. A country
may ban import and export of certain goods in order to achieve some
political or religious goals.
e. Product testing and standardization: Standards are set for health,
welfare, safety, quality, size and measurements which have to be
complied with in order to enter a foreign market. The products have to
meet international quality standards. All Products must meet the quality
standards of the domestic county before they are offered for trade.
Inspection is very extensive in case of electronic goods, vehicles and
machinery.
Commodity agreements
Commodity agreements are arrangements between producing and consuming
countries to stabilise markets and raise average prices. Such agreements are
common in many markets, including the market for coffee, tea, and sugar. It is
an understanding by a group of countries to stabilise trade, supplies and prices
of a commodity for the benefit of participating country.
Commodity agreement usually involves a consensus on quantities traded,

prices and stock management. It serves solely as forums for information
exchange analysis and policy discussion.
30
Definition:
“International Commodity Agreement which are inter-governmental

arrangements concerning the production of & trade in, certain primary products
with a view of stabilizing their prices.”
Objectives of Commodity Agreements

The basic objective is to stimulating a dynamic & steady growth & ensuring
reasonable predictability in the real export earnings of the developing countries
so as to provide:
 Expanding the resources for economic & social development.
 Consider the interest of the consumers in importing countries.
 Considering the remunerative, equitable & stable prices for primary
commodities.
 Considering the import purchasing power.
 Increased imports, consumption and also coordination of production &
marketing policies.
Forms of Commodity Agreements

Mainly there are three forms of commodity agreements which are defined
below:
Buffer Stock
Agreements
Quota Bilateral
Agreements Agreements
Forms
1. Quota Agreements: In international trade, a government-imposed limit on

the quantity of goods and services that may be imported or exported over a
specified period of time. This prevents a fall in commodity prices by regulating
their supply. In this type of agreement, allocation of export quotas to
participating countries according to a mutually agreed formula takes place.
31
They also restrict export or production by a certain percentage of basic quota

decided by Central Committee or Council.
Merit: Avoid accumulation of stocks.
Demerit: Misallocation of resources.
2. Buffer Stock Agreements: Buffer stock is a stockpile of commodities held

by an international organization that aims to stabilize world market price by
buying for and selling from its stockpile. They release stock of commodities
onto the market when prices rise to a certain level and build them up when they
fall. In other words, it is a practice in which a large investor, especially a
government, buys a large quantity of commodities during period pf high supply
and stores them so they do not trade or circulate. The investor then sells then
when price is low. This is done to stabilize the prices.
Merit: They stabilise price by balancing demand and supply.
Demerit: Not applicable to goods which is in danger of deterioration.
3. Bilateral Agreements: An agreement is entered between major exporter and

a major importer of a commodity. Two kinds of prices called upper price and
lower price is fixed. When the prices exist within this limit throughput the
period of agreements, the business is inoperative. If it raises than the upper
price, then the exporting country is expected to sell a specified quantity at upper
price fixes. On the other hand. If the prices fall below the lowest limit specifies,
the importer is obliged to purchase contracted quantity at fixes lower price.
Merit: Free market conditions are preserved.
Demerits: Creation of two price system.
Conditions to make an Agreement

There are various conditions to make a commodity between two countries
which are:
 Inelastic demand
 Reasonably stable market share
 Mixed producer-consumer interest
 Distress price level
 Equal representation for importing and exporting countries
 The assurance of increasing market outlets for suppliers originating in the
regions of most efficient production.
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Regional Economic Integration

Regional Economic Integration refer to agreement between groups of countries
in geographic region to reduce and ultimately remove tariff and non-tariff
barriers to the free flow of goods, service and factors of production between
each other countries. Regional trade agreement is designed to promote free
trade, but instead the word may be moving toward a situation in which a
number of regional trade blocks compete against each other.
Objectives of REI
Various objectives of regional economic integration are:
1. Increase of Trade: A simple constituent of economic integration policies is

elimination of the additional payments or tariffs, making trade low-priced and
giving exporters a superior incentive to do business with integrated economies.
2. Allowing Consumer to Spend More: Economic integration reduces or
eliminates customs duties, which in turn results in cheaper imported products
for consumer. This way the purchasing power of consumer grow, and with it,
activity in the market. The public can start buying more imported products or
spend former duty expenses on products or services. In addition, goods that are
not produced in sufficient quantities in one country can be imported and
distributed in the market at low cost.
3. Movement of Capital: The benefit of capital movement is the investment in
new markets, leading to their eventual development. Economic integration
removes barriers to foreign investors, minimizing or abolishing extra taxes,
while advanced integration policies, such as monetary union, can even eliminate
the cost of currency exchange.
4. Economic Cooperation: When economies within the integrated are
encounter problems, it is the duty of the other members to help, not only as
moral obligation, but because a failing economy can have serious effects on the
whole integration process. For this reason, European union countries have
offered to bail out the troubled economies of Greece, Ireland and Portugal.
Forms of REI
Regional economic integration can take several forms, these forms are diverse,
involving different levels of economic integration, which are:
33
PTA
Political
FTA
Union
Forms
Economic Customs
Union Union
Common
Market
1. Preferential Trade Agreement: A preferential trade agreement (also

preferential trade area PTA) is a training bloc that gives preferential access to
certain products from the participating countries. This is done by reducing
tariffs but not by abolishing them completely. A PTA can be established
through a trade pact. Example: Lomé’s convention, 1975 is a trade and aid
agreement between 71 African, Caribbean and Pacific (ACP) countries and the
European Community.
2. Free Trade Agreement: A free-trade area is the region encompassing a trade
bloc whose member countries have signed a free-trade agreement (FTA). Such
agreements involve cooperation between at least two countries to abolish or
reduce trade barriers-import quotas and tariffs- and to increase trade of goods &
services with each other. Example: Columbia\USA FTA
3. Customs Union: A custom union is a type of trade bloc which is composed
of a free trade area within a common external tariff. The tariffs are then shared
among members according to a prescribes formula. Example: The EU (1960-
1990).
4. Common Market: Members of a common market remove barriers to trade in
goods and services among themselves, establish a common trade policy with
respect to non-members (common external tariff) and remove restriction on the
moment of factors of production (labours, capital, land & entrepreneur) across
borders. Restrictions on immigration, emigration and cross-border investments
are abolished. Members cooperate closely on monetary, fiscal and employment
policies. Example: EU since 1990s.
5. Economic Union: Members of economic union remove barriers to trade in
goods & services among themselves; establish a common trade policy with
34
respect to non-members. Remove restrictions on the movement of factors of

production across borders and coordinate their economic policies (monetary,
fiscal, taxation and social welfare) so as to blend their economies into single
entity.
6. Political Union: Political union remove barriers to trade in goods & services
among themselves. Establish a common trade policy with respect to non-
members. Remove restrictions---------------------into a single entity. It involves
the unification of previously separate states.
Objectives of REI
Various objectives of REI are defined below:
1. Increase in Trade: A simple constituent of economic integration policies is
elimination of additional payments or tariffs, making trade low-priced and
giving exporters a superior incentive to do business with integrated economies.
2. Allowing Consumers to Spend More: Economic integration reduces or
eliminates customer duties which in turn results in cheaper imported products
for consumer. This way the purchasing power of consumer increases, and with-
it activity in the market. The public can start buying more products or spend
former duty expenses on other product or services.
3. Movement of Capital: The benefit of capital movement is the investment in
new markets, leading to their eventual development. Economic integration
removes barriers to foreign investors, minimizing or abolishing extra tax, while
advanced integration policies, such as a monetary union, can even eliminate the
cost of currency exchange.
4. Economic Cooperation: When economies within the integrated area
encounter problems, it is the duty of other members to help, not only as amoral
obligation, but because a failing economy can have serious effects on the whole
integration process.
UNIT-3
Balance of Payment
35
Balance of payment is defined as the collective conclusions made on the basis

of the account of tangible and in tangible goods which are imported and
exported by the nation. It helps in giving a complete report about the entire
trade with the foreign countries and depicts the real image of the standing
position of the nation in the international market. The true picture of the
financial feasibility, power and ability of the nation is revealed through balance
of payment, through assessing its imports and exports.
Definition:
According to Kindleberger, “Balance of payment is a systematic record of all
economic transactions between the residents of the reporting country and
residents of foreign countries during a given period of time.”
Components of BOP
The accounting contents or components of balance of payments are:
Current
Account
Other Items in Capital

BOP Account
Official
Reserve
Account
1. Current Account: Only current data is recorded under this category and
there is no place for future planning. The additional amount presents the money
acquired and the decrease stands for the expenses incurred. Following are the
three types of current account are:
a. Merchandise: The merchandise trade balance represents account
stability between the imported and exported concrete objects like
36
vehicles, PC, equipment’s etc. If exports are more than BOP is favourable
and if the imports are more than BOP is unfavourable.
b. Invisibles: The second type of current account includes the services in
form of shipping, interest payments, tourism, dividends, insurance charge
and expenses on security.
c. Unilateral Transfers: Unilateral transfers include grants-in-aid and
donations from the public as well as the private sector.
2. Capital Account: The capital account refers to a record of complete national
currency value related with monetary dealings for a given time period, between
the citizens of the country and those outside.
a. Direct Investment: Direct investment takes place at the time when the
shareholder buys the equity like stocks. The chances are that the gains
through the international trade exceeds that from the national trade on
account of little expenses on resources and production, supportive
funding’s, grants on investments, complete control over the native
market, etc.
b. Portfolio Investment: Portfolio investment stand for buying and selling
of international monetary resources like bonds and stocks which are free
from the factor like shifting the administration.
c. Capital Flows: Capital flows account stands for the investment which
would be fruitful within a year. Deposits in accounts, short-term
securities, short-term loans, investment in the stocks etc are the part of it.
3. Official Reserve Account: Official reserves refer to governmental resources.
It stands for buying and selling through the centrally recognised bank (RBI). In
case of arrears or excess in the BOP, there is a necessity to bring about the
associated variations in the official reserve.
4. Other Items in BOP: The other items in the BOP are the things which could
not be incorporated in any of the above types. In order to maintain the balance
in BOP they are added to it. These are:
a. Errors & Omissions: In this type, the errors in recording the data may
happen at the time of accounting. The reason behind these flaws could be
depicting the sample instead of the exact data of the dealings, illegal
transactions outside the country and so on.
b. Official Reserve Transactions: The remaining types are known as
‘autonomous transactions’ as they are carries out with autonomous
intentions. This implies these are carried out without the desire to bring
about the relative effect on the BOP or rate of exchange.
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Importance of BOP
BOP data may be important for any of the following reasons:
1. Prediction: The BOP predicts the business possibility of the nation,
particularly for a short span. The nation which is undergoing severe shortage of
BOP may not be able to import to the extend it would, if there were excess flow.
2. Display Pressure: The BOP displays the heavy loads on the rate of exchange
of the country, and hence also adversely affects the trading capacity of the
organization which wants to trade or invest in the country, which is undergoing
profit or loss in the exchange rate in the international market.
3. Indicator of Obligations: The varying BOP of the nation indicates the
obligation/elimination of international control related to the disbursement of the
interests and dividends, licensing expenses, royalty expenses or the other
payments to the international investors.
4. Evaluates the Constancy: It becomes quite simpler to access the steadiness
of the variation in the exchange rate with the help of BOP because the accounts
of deals occurring between countries aid in ascertaining the ones who wants to
keep the funds. It also become easier to evaluate the steadiness in the foreign
exchange rate.
Disequilibrium in BOP
The BOP of a nation is said to be stable when there is equality between the
demand and supply of the international exchange rate. Any disparity leads to
excess or shortage of BOP. The shortage in Bop indicates that the demand of
international exchange is more than its supply. Usually, the debit is more that
credit or credit is more than debit which leads to instability in BOP, this
condition is called disequilibrium of BOP. Such disequilibrium can occur in
shortage or access.
In case the funds received from the other nation is less than those paid in the
international market, this condition is known as ‘unfavourable balance’. Or on
the other hand, if the country receives more than what it paid in the international
market, this condition is called ‘favourable balance’.
Causes of Disequilibrium
38
Various causes of disequilibrium in BOP or adverse BOP are as follows:

1. Growth Plans: As the major amount is spent on growth plan, the developing
nations often face adversity of BOP. There is more inclusion towards importing
in developing countries in desire to acquire more funds for further
industrialization. However, these nations are not able to expand their exports as
they are conventionally primary producers. All these factors together result in
change of structure of BOP, which leads to instability of the structure.
2. Structure of Expenditure: Variations in the structure of expenditure of
exports adversely affect the export quality, resulting in instability in BOP.
Moreover, the BOP can also become unfavourable due to reduction in exports
on account of the price hike because of rise in salaries and rise in expenses on
primary resources.
3. Variation in International Exchange Rates: The instability of BOP also
springs from the variations in the international exchange rates. If the currency is
appreciated, there imports appears to be economical and exports seem to be less
profitable; this results in rise in imports and fall in exports which makes the
BOP unfavourable.
4. Decrease in the Demand of Exports: The demand of exports of primary
goods has drastically fallen on the underdeveloped nations because of the heavy
production of the primary resources. In the same manner developed nations are
also experiencing downfall in export demands as they have lost the conquered
markets. Yes, this shortage in BOP is more prominent in the underdeveloped
nations than in developed nations.
5. Demonstration Effect: The people in less developed countries tend to follow
the consumption pattern of developed countries. The demonstration effect
results in rise in imports by the underdeveloped nations and the resultant
instability in the BOP.
6. Taking & Giving Loans in the International Market: The give and take of
the loans to the other nations is another cause for the instability in BOP. The
countries which take the loans are likely to have unfavourable BOP and the
ones which give are likely to have favourable BOP.
7. Recurring Rise & Fall: There is recurrent ability in the BOP due to
recurrent rise and fall. At the time of recession, the earning of the natives of the
other countries decrease. Consequently, there is less exports from these nations,
resulting in instability of native BOP.
39
8. Recently Autonomous Nations: The nations which have become

independent in the recent past, invest heavy amounts on developing foreign
embassies, international houses etc., for strengthening their relationships with
other countries. As a result, BOP is adversely affected.
9. Uncontrolled Population: The uncontrolled rate of population growth is the
major reason behind the adversity of BOP. For example, countries such as India
experience population explosion which results in the need for imports and
diminishes the export capability.
10. Natural Disasters: The production capacity of a nation is also adversely
affected by the natural disasters, like droughts, floods, earthquakes etc.
consequently, there is decrease in exports and rise in imports resulting in
scarcity of BOP.
Methods of Correcting Disequilibrium in BOP

Methods used for correcting disequilibrium in BOP are as follows:
Methods
Depriciation of
Monetary Policy
Exchange
Devaluation Exchange Control
Fiscal Policy Import Quotas
Encouraging Exports
1. Monetary Policy: The correction in the shortage of the national BOP is

possible through the monetary policy. The reason behind the unfavourable BOP
are heavy imports and very low exports. In order to cure the condition, there is a
need to turn this trend around. Here the country can implement either dear
money policy or deflation policy. The deflation brings about reduction in the
40
prices and consequently exports seem to be lucrative and imports appear

comparatively expensive. This trend gives rise to lower imports and higher
exports.
2. Fiscal Policy: Another remedy for dealing with unfavourable BOP is fiscal
policy. The budgetary provisions involve levying of heavy import tax or duties;
this makes imports costlier and there is tendency to curb imports. Consequently,
there is downfall in imports and the BOP becomes favourable.
3. Encouraging Exports: The exports have to be raised to handle the instability
in the BOP. The promotional plans, such as lowering of taxes for the exporters,
subsidies, marketing services, motivations on exports might be implemented by
the government in this regard.
4. Depreciation of Exchange: Depreciation of exchange implies downfall in
the exchange rate of one nation in comparison to other nations. Foe example,
the exchange of Indian currency for 30% of American dollar. In this case India
is undergoing adverse BOP in relation to America, there will be rise in the value
of American currency in India.
5. Devaluation: It is another form of depreciation of exchange. It is the most
appropriate in the category of IMF scheme. Devaluation implies official
lowering of the external worth of a country in relation with goods or any
international currency or SDR.
6. Exchange Control: When the central bank of a country delimits the utility of
the international exchange, it is known as exchange control. The
implementation of exchange control means the exporters have to give up all the
money earned through the international trade to the central bank. It is one of the
direct method to keeping check on the imports.
7. Import Quotas: One of the best remedial measure for dealing with the
unfavourable BOP in import quotas. This involves fixation of the highest
amount or worth of a product for a given time span. The restriction on the
import quotas leads to the reduction or elimination in the shortage of BOP and
hence the BOP is made better.
Foreign Exchange Market

The foreign exchange market (also known as forex, FX or the currency market)
is an over-the-counter (OTC) global marketplace that determines the exchange
rate for currencies around the world. Participants are able to buy, sell, exchange
41
and speculate on currencies. Foreign exchange markets are made up of

banks, forex dealers, commercial companies, central banks, investment
management firms, hedge funds, retail forex dealers and investors.
Aside from providing a venue for the buying, selling, exchanging

and speculation of currencies, the forex market also enables currency
conversion for international trade settlements and investments. According to the
Bank for International Settlements (BIS), which is owned by central banks,
trading in foreign exchange markets averaged $5.1 trillion per day in April
2016.
Definition:
“Foreign Exchange Market is the market where the buyers and sellers are
involved in the buying and selling of foreign currencies. Simply, the market in
which the currencies of different countries are bought and sold is called as a
foreign exchange market.”
Nature of Foreign Exchange Market

1. Transfer of Purchasing Power: The Primary function of a foreign exchange
market is the transfer of purchasing power from one country to another and
from one currency to another. The international clearing function performed by
foreign exchange markets plays a very important role in facilitating
international trade and capital movement.
2. Credit for International Business: The credit function performed by foreign
exchange markets also plays a very important role in the growth of foreign
trade, for international trade depends to a great extent on credit facilities.
Exporters may get pre-shipment and post shipment credit. Credit facilities are
available also for importers. The Euro dollar market has emerged as a major
international credit market.
3. Minimizing Exchange Rate Risk: The other important of the foreign
exchange market is to provide hedging facilities. Hedging refers to covering of
foreign trade risks, and it provides a mechanism to exporters and importers to
guard themselves against losses arising from fluctuations in exchange rates.
Wide Spread Geographically:
All Time Operation:
Market Participants:
42
Size of the Market:
Participants in Foreign Exchange Market

Participants in Foreign exchange market can be categorized into five major
groups, viz.; commercial banks, Foreign exchange brokers, Central bank, MNCs
and Individuals and Small businesses.
Foreign Exchange Individual & Firms

Broker
Participants
Speculator & Central Bank &

Arbitrageurs Treasures
1. Commercial Banks: The major participants in the foreign exchange market

are the large Commercial banks who provide the core of market. As many as
100 to 200 banks across the globe actively “make the market” in the foreign
exchange. These banks serve their retail clients, the bank customers, in
conducting foreign commerce or making international investment in financial
assets that require foreign exchange.
2. Foreign Exchange Brokers: Foreign exchange brokers also operate in the

international currency market. They act as agents who facilitate trading between
dealers. Unlike the banks, brokers serve merely as matchmakers and do not put
their own money at risk. They actively and constantly monitor exchange rates
offered by the major international banks through computerized systems such as
Reuters and are able to find quickly an opposite party for a client without
revealing the identity of either party until a transaction has been agreed upon.
This is why inter-bank traders use a broker primarily to disseminate as quickly
as possible a currency quote to many other dealers.
43
3. Central banks: Another important player in the foreign market is Central

bank of the various countries. Central banks frequently intervene in the market
to maintain the exchange rates of their currencies within a desired range and to
smooth fluctuations within that range. The level of the bank’s intervention will
depend upon the exchange rate regime flowed by the given country’s Central
bank.
4. Individuals and Small Businesses: Individuals and small businesses also

use foreign exchange market to facilitate execution of commercial or investment
transactions. The foreign needs of these players are usually small and account
for only a fraction of all foreign exchange transactions. Even then they are very
important participants in the market. Some of these participants use the market
to hedge foreign exchange risk.
Foreign Direct Investment

A foreign direct investment (FDI) is an investment made by a firm or individual
in one country into business interests located in another country. Generally, FDI
takes place when an investor establishes foreign business operations or acquires
foreign business assets in a foreign company. However, FDIs are distinguished
from portfolio investments in which an investor merely purchases equities of
foreign-based companies.
Definition:
“Foreign direct investments (FDI) are investments made by one company into
another located in another country.”
Features of Foreign Direct Investment

The following features of FDI are:
 It is commonly made in open economies that offer a skilled workforce

and good growth prospects for the investors in comparison to tightly
regulated economies.
 It involves a long-term commitment as there is no intention to seek quick

capital gains.
44
 As per organization for economic cooperation & development (OECD),

investment of 10% or above from overseas is considered as FDI.
 Foreign direct investment not only requires capital investment but also
requires management as well as technology.
 It increases the productive capacity of the target company as it involves

creation of physical assets. This helps in generating employment
opportunities and fast economic growth in the host country.
 It establishes an effective control in the company in which the investment

is made.
 Investing company has a major influence on the decision-making process

of the company in which the investment is made.
Types Foreign Direct Investment

Typically, there are two main types of FDI:
Horizontal
FDI Vertical FDI
1. Horizontal: a business expands its domestic operations to a foreign country.

In this case, the business conducts the same activities but in a foreign country.
For example, McDonald’s opening restaurants in Japan would be considered
horizontal FDI.
2. Vertical: a business expands into a foreign country by moving to a different

level of the supply chain. In other words, a firm conducts different activities
abroad but these activities are still related to the main business. Using the same
45
example, McDonald’s could purchase a large-scale farm in Canada to produce

meat for their restaurants.
However, two other forms of FDI have also been observed: conglomerate and
platform FDI.
a. Conglomerate: a business acquires an unrelated business in a foreign

country. This is uncommon, as it requires overcoming two barriers to entry:
entering a foreign country and entering a new industry or market. An example
of this would be if Virgin Group, which is based in the United Kingdom,
acquired a clothing line in France.
b. Platform: a business expands into a foreign country but the output from the
foreign operations is exported to a third country. This is also referred to as
export-platform FDI. Platform FDI commonly happens in low-cost locations
inside free-trade areas. For example, if Ford purchased manufacturing plants in
Ireland with the primary purpose of exporting cars to other countries in the EU.
Reasons to Increase FDI Inflow

There are many ways in which FDI benefits the recipient nation:
1. Increased Employment and Economic Growth: Creation of jobs is the
most obvious advantage of FDI. It is also one of the most important reasons
why a nation, especially a developing one, looks to attract FDI. Increased FDI
boosts the manufacturing as well as the services sector. This in turn creates jobs
and helps reduce unemployment among the educated youth - as well as skilled
and unskilled labour - in the country. Increased employment translates to
increased incomes and equips the population with enhanced buying power. This
boosts the economy of the country.
2. Human Resource Development: This is one of the less obvious advantages
of FDI. Hence, it is often understated. Human Capital refers to the knowledge
and competence of the workforce. Skills gained and enhanced through training
and experience boost the education and human capital quotient of the country.
Once developed, human capital is mobile. It can train human resources in other
companies, thereby creating a ripple effect.
3. Development of Backward Areas: This is one of the most crucial benefits
of FDI for a developing country. FDI enables the transformation of backward
areas in a country into industrial centres. This in turn provides a boost to the
46
social economy of the area. The Hyundai unit at Sriperumbudur, Tamil Nadu in
India exemplifies this process.
4. Provision of Finance & Technology: Recipient businesses get access to
latest financing tools, technologies and operational practices from across the
world. Over time, the introduction of newer, enhanced technologies and
processes results in their diffusion into the local economy, resulting in enhanced
efficiency and effectiveness of the industry.
5. Increase in Exports: Not all goods produced through FDI are meant for
domestic consumption. Many of these products have global markets. The
creation of 100% Export Oriented Units and Economic Zones have further
assisted FDI investors in boosting their exports from other countries.
6. Exchange Rate Stability: The constant flow of FDI into a country translates
into a continuous flow of foreign exchange. This helps the country’s Central
Bank maintain a comfortable reserve of foreign exchange. This in turn ensures
stable exchange rates.
7. Stimulation of Economic Development: This is another very important
advantage of FDI. FDI is a source of external capital and higher revenues for a
country. When factories are constructed, at least some local labour, materials
and equipment are utilised. Once the construction is complete, the factory will
employ some local employees and further use local materials and services. The
people who are employed by such factories thus have more money to spend.
This creates more jobs. These factories will also create additional tax revenue
for the Government, that can be infused into creating and improving physical
and financial infrastructure.
8. Improved Capital Flow: Inflow of capital is particularly beneficial for
countries with limited domestic resources, as well as for nations with restricted
opportunities to raise funds in global capital markets.
9. Creation of a Competitive Market: By facilitating the entry of foreign
organisations into the domestic marketplace, FDI helps create a competitive
environment, as well as break domestic monopolies. A healthy competitive
environment pushes firms to continuously enhance their processes and product
offerings, thereby fostering innovation. Consumers also gain access to a wider
range of competitively priced products.
Impact of FDI on Home Country
47
There are both type of impacts of foreign direct investment on home country
positive impacts as well as negative impacts.
Positive Impacts:
Positive impacts of foreign direct investment on home country are:
Inflow of
Foreign
Exchange
Increase in Positive
Reverse
Export of Impacts of
Knowledge
Capital FDI on Home
Transfer
Goods Country
Increase in
Export of
Intermediate
Goods
1. Inflow of Foreign Exchange: When subsidiary unit is well established, the

parent company gets huge amount in form of repatriation of profit, royalty,
technical fees, interest on capital etc, this repatriation results in inflow of
foreign exchange in parent nation.
2. Increase in Export of Capital Goods & Intermediate Goods: The host
nation has to import matching capital goods & intermediate goods from the
parent nations of the MNCs. It leads to increase in exports of capital goods and
intermediate goods from parent nation.
3. Reverse Knowledge Transfer: When an MNC setup its subsidiary in host
nation, its expatriates interact with managers, technocrats of host nation and
learn new working style from them.
Negative Impacts:
Negative impacts of foreign direct investment on home country are:
48
Negative
Effect on BOP
Negative
Impacts of
FDI on Home
Country
Negative
Effect on
Employement
Generation
1. Negative Effect on BOP: Initial capital outflow from home nation to host
nation adversely affects the BOP position of home nation. Id FDI by home
nation has replaced the export mode, it adversely effects the exports of home
nation. If MNCs has set up its production base in the host nation because of its
cheaper labour cost and low input cost.
2. Negative Effect on Employment Generation: If FDI is replaced the trade
mode, then the goods which were earlier manufactured in home nation are now
manufactured in host nation. So, investment mode promotes unemployment in
home nation.
Impact of FDI on Host Country
There are various effects of FDI on host country both positive and negative
Positive Impact:
positive impacts of foreign direct investment on host country are:
49
Availability
of Capital
Availabilty
Reduction
of Modern
in Inflation
Technology
Positive
Impacts of
FDI on Host
Country
Increase in Availability
Employem of Risk
ent Capital
Optimum
Use of
Natural
Resources
1. Availability of Capital: Many nations suffer fro lack of capital. Since

savings do not increase in the same ratio as the income does, the gap is filled by
foreign capital.
2. Availability of Modern Technology: The use of modern technology could
become possible with foreign capital and aid. Modern technology enhances the
productivity of the economy of the host nation.
3. Optimum Utilization of Natural Resources: Due to lack of capital
resources have not been properly or optimally utilized. Foreign capital will help
to make proper and optimum utilization of natural resources.
4. Availability of Risk Capital: FDI serve as venture capital and thus makes up
this deficiency. As a result of foreign capital, development has taken place in
basic industries and risky ventures like iron, steel, coal, oil exploration etc.
5. Increase in Employment: Many industrial units have been set up with
foreign capital and by foreign collaboration. Many MNCs have also setup
branches in host nations. All this has created employment opportunities in host
nation.
6. Reduction in Inflation: Foreign capital has also made imports of essential
goods possible on large scale. It increases total availability of goods and reduces
the rate of inflation.
50
7. Promotes Competition & Economic Growth: FDI in the form of greenfield

investment increases the level of competition in a market, driving down prices
and improving the welfare of consumers. Increased competition can lead to
increased productivity growth, product and process innovation, and greater
economic growth.
Negative Impacts:
Negative impacts of foreign direct investment on host country are:
Uncertanity
Increase Harmful for
foreign domestic
dependency producers
Bad effect on Negative

Impacts of Imbalanced
domestic FDI on Host development
countries Country
1. Bad Effect on Domestic Industries: Domestic industries cannot face open

competition with these foreign companies who have technological superiority,
managerial expertise, huge financial base, well reputed global brands.
2. Increase in Foreign Dependence: The machines, raw material, technical
know-how etc, which are imported from abroad increase the dependence on
foreign company. And this adversely affect the economy of the host nation.
3. Uncertainty: It leads to shortage of capital in domestic economy, fall in
stock price and also in decline in the external value of domestic currency.
Which is not good for host country as it badly affects its economy and share
market.
4. Harmful for Domestic Producers: Because of increase in dependency of
host nation on foreign industries, the profit of domestic producers declines
because the demand of their product decreases in the host market and it affects
the business of domestic producers.
51
5. Imbalanced Development: As foreign capital is invested in high profit

industries; basic industries could not develop properly and imbalanced
development problem arise in the host nation.
UNIT-4
International Monetary Fund
The International Monetary Fund (IMF) is an organization of 189 countries,
working to foster global monetary cooperation, secure financial stability,
facilitate international trade, promote high employment and sustainable
economic growth, and reduce poverty around the world. Created in 1945, the
IMF is governed by and accountable to the 189 countries that make up its near-
global membership.
The IMF's primary purpose is to ensure the stability of the international

monetary system—the system of exchange rates and international payments that
enables countries (and their citizens) to transact with each other. The Fund's
mandate was updated in 2012 to include all macroeconomic and financial sector
issues that bear on global stability.
Objectives:
Article 1 of the Articles of Agreement (AGA) spell out 6 purposes for which the
IMF was set up. These are:
1. To Promote International Monetary Cooperation: To promote

international monetary cooperation through a permanent institution which
provides the machinery for consolation and collaboration on international
monetary problems.
2. To Facilitate Expansion & Balanced Growth of IT: To facilitate the

expansion and balanced growth of international trade, and to contribute thereby
to the promotion and maintenance of high levels of employment and real
income and to the development of the productive resources of all members as
primary objective of economic policy.
52
3. To Promote Exchange Stability: To promote exchange stability, to maintain

orderly exchange arrangements among members, and to avoid competitive
exchange depreciation.
4. To Assist in Establishment of Multilateral System: To assist in the

establishment of a multilateral system of payments in respect of current
transactions between members and in the elimination of foreign exchange
restrictions which hamper the growth of world trade.
5. To Maintain Members Confidence: To give confidence to members by

making the general resources of the Fund temporarily available to them under
adequate safeguards, thus providing them with the opportunity to correct
maladjustments in their balance of payments, without resorting to measures
destructive of national or international prosperity.
In accordance with the above, to shorten the duration and lessen the
degree of disequilibrium in the international balance of payments of members.
Functions of IMF
Following functions of IMF are as follows:
1. Exchange Stability: The first important function of IMF is to maintain

exchange stability and thereby to discourage any fluctuations in the rate of
exchange. The Found ensures such stability by making necessary arrangements
like—enforcing declaration of par value of currency of all members in terms of
gold or US dollar, enforcing devaluation criteria or by taking permission from
IMF respectively, forbidding members to go in for multiple exchange rates and
also to buy or sell gold at prices other than declared par value.
2. Eliminating BOP Disequilibrium: The Fund is helping the member
countries in eliminating or minimizing the short-period equilibrium of balance
of payments either by selling or lending foreign currencies to the members. The
Fund also helps its members towards removing the long period disequilibrium
in their balance of payments.
3. Determination of Par Value: IMF enforces the system of determination of
par values of the currencies of the members countries. As per the Original
53
Articles of Agreement of the IMF every member country must declare the par
value of its currency in terms of gold or US dollars.
4. Stabilize Economies: The IMF has an important function to advise the
member countries on various economic and monetary matters and thereby to
help stabilize their economies.
5. Credit Facilities: IMF is maintaining various borrowing and credit facilities
so as to help the member countries in correcting disequilibrium in their balance
of payments. These credit facilities include-basic credit facility, extended fund
facility for a period of 3 years, compensatory financing facility, supplementary
financing facility, special oil facility, trust fund, structural adjustment facility
etc. The Fund also charges interest from the borrowing countries on their credit.
6. Maintaining Balance Between Demand and Supply of Currencies: IMF is
also entrusted with important function to maintain balance between demand and
supply of various currencies. Accordingly, the fund can declare a currency as
scarce currency which is in great demand and can increase its supply by
borrowing it from the country concerned or by purchasing the same currency in
exchange of gold.
7. Maintenance of Liquidity: To maintain liquidity of its resources is another
important function of IMF. Accordingly, there is provision for the member
countries to borrow from IMF by surrendering their own currencies in
exchange. Again, for according accumulation of less demand currencies with
the Fund, the borrowing countries are directed to repurchase their own
currencies by repaying its loans in convertible currencies.
8. Technical Assistance: The IMF is also performing a useful function to
provide technical assistance to the member countries. Such technical assistance
in given in two ways, i.e., firstly by granting the members countries the services
of its specialists and experts and secondly by sending the outside experts.
9. Reducing Tariffs: The Fund also aims at reducing tariffs and other
restrictions imposed on international trade by the member countries so as to
cease restrictions of remittance of funds or to avoid discriminating practices.
10. General Watch: The IMF is also keeping a general watch on the monetary
and fiscal policies followed by the member countries to ensure no flouting of
the provisions of the charter.
Organizational Structure of IMF

The organization of the IMF has, at its top a board of governors and alternate
governors, who are usually the ministers of finance and heads of central banks
54
of each member country. The entire board of governors and alternate governors
meets once a year in Washington, D.C., to formally determine IMF policies.
During the rest of the year, a twenty-four-member executive board

composed of representatives or the total board of governors meets a number of
times each week to supervise the implementation of the policies adopted by the
board of governors. The IMF staff is headed by its managing director, who is
appointed by the executive board. The managing director chairs meetings of the
executive board. The managing director chairs meetings of the executive board
after appointment.
1. The Board of Governors: The board of governors are the highest decision-
making body of the IMF. It consists of one governor and one alternate governor
for each member country. The governor is appointed by the member country
and is usually the minister of finance or the governor of the central bank. All
powers of the IMF are vested in the board of governors. The board of governors
normally meets once a year.
2. Executive Board: The executive board shall be responsible for conducting

the business of the fund, and for this purpose shall exercise all the powers
delegated to it by the board of governors. The executive board shall consist of
executive directors with the managing director as the chairman of the executive
directors. The total number of board of director is 24 in which 5 shall be
appointed by the five-member countries having the largest quotas and 19 shall
55
be elected by other members. Each director shall appoint alternate director. The
board usually meets several times each week. It carries out it work largely on
the basis of papers prepared by IMF management and staff.
3. Managing Director: Chairman of the executive board and chief or operating

staff is selected by the executive board. Managing director conduct the ordinary
business of the IMF under the direction of the executive board. Subject to
general control of the executive board, responsible for organization,
appointment and dismissal of staff. Staff of the IMF are international civil
servants. The IMF staff is organized mainly into area; functional, information,
liaison & support responsibilities. Independent evaluation office conducts
objective and independent evaluations on issues relevant to the fund’s mandate.
International Bank for Reconstruction & Development
The International Bank of Reconstruction & Development (IBRD) is a

development bank administrated by the world bank. The IBRD offers financial
products and policy advice to the countries aiming to reduce poverty and
promotes sustainable development. The International Bank for Reconstruction
and Development (IBRD) is an international financial institution that
offers loans to middle-income developing countries.
The IBRD is the first of five member institutions that compose the World
Bank Group, and is headquartered in Washington, D.C. in the United States. It
was established in 1944 as the original institution of world bank group, IBRD is
owned and operated for the benefit of 188-member countries. The IBRD
provides commercial-grade or concessional financing to sovereign states to fund
projects that seek to improve transportation and infrastructure, education,
domestic policy, environmental consciousness, energy investments, healthcare,
access to food and potable water, and access to improved sanitation.
Functions of IBRD
The principal functions of the I.B.R.D are set forth in Article (1) of the
Agreement as follows.
 To assist in the reconstruction and development of the territories of its
members by facilitating the investment of capital for productive purposes.
56
 To promote private foreign investment by means of guarantee of

participation in loans and other investments made by private investors
and when private capital is not available on reasonable terms to make
loans for productive purposes out of its own resources from funds
borrowed by it.
 To promote the long-term balance growth of international trade and the
maintenance of equilibrium in balances of payments by encouraging
international investments for development of productive resources of
members.
 To arrange loans made guaranteed by it in relation to international loans
through other channels so that more useful projects, large and small alike,
will be dealt with first.
Objectives of IBRD
The objectives of I.B.R.D as incorporated in the Articles of Agreement are as

follows.
1. To help in Reconstruction & Development: To help in the reconstruction

and development of member countries by facilitating the investment of capital
for the productive purposes, including the restoration and reconstruction of
economies devastated by war.
2. To Encourage Productive Resources Development: To encourage the
development of productive resources in developing countries by supplying them
investment capital.
3. To Promote Private Foreign Investment: To promote private foreign
investment through guarantees and participation in loans and other investment
made by private investors.
4. To Supplement Private Foreign Investment: To supplement private foreign
investments by direct loans out of its own capital for productive purposes.
5. To Promote Balanced Growth of IT: To promote long term balances
growth of international trade and the maintenance of equilibrium in the balance
payments of member countries by encouraging long term international
investments.
6. To Maintain Peace: To bring about an easy transition from a war economy
to a peace time economy.
57
7. To Improvement: To help in raising productivity, the standard of living and

the conditions of labour in member countries.
The World Bank advances loans to member countries primarily to help

them lay down the foundation of sound economic growth. The loans made by
the Bank either directly or through guarantees are intended for certain specific
projects of reconstruction and development in the member countries.
Lending Procedure of IBRD

The I.B.R.D advances loans to member countries in the following three ways.
1. Loans out of its own Fund: As we know that the Bank collects capital
contributions from its members this results in the creation of a sizeable fund out
of which the Bank advances loans to the needy member countries.
2. Loans out of borrowed Capital: Sometimes the Bank does not grant loans
out of its own funds. It borrows funds from another member country for the
purpose of giving loans to the needy members. The Bank pays interest to the
member country from which it has borrowed funds for a specific period of time.
3. Loans through Bank’s guarantee: Sometimes the Bank encourages the
private investors of a country to lend their funds to another country by
guaranteeing the repayment of loans and interest there on. Ordinarily the Bank
does not lend to the member countries out of its own funds. The Bank lends out
of its funds only when private investors in member countries are not
forthcoming to make loans to the concerned country.
Organisation structure
Like the Fund, the Bank’s structure is organised on a three-tier basis; a Board of
Governors, Executive Directors and a President. Each one has their own
responsibility and work to do. All these manage the entire working of IBRD
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Board of
Governor
Executive
Director
President
1. Board of Governor: The Board of Governors is the supreme governing

authority. It consists of one governor (usually the Finance Minister) and one
alternate governor (usually the governor of a central bank), appointed for five
years by each member. The Board is required to meet once every year. It
reserves to itself the power to decide important matters such as new admissions,
changes in the bank’s stock of capital, ways and means of distributing the net
income, its ultimate liquidation, etc.
2. Executive Director: The executive director focuses on the day to day

operations of the bank. At present, the Executive Directors are 19 in number, of
which five are nominated by the five largest shareholders — the USA, the UK,
Germany, France and India. The rest are elected by the other members. For all
technical purposes, however, the Board delegates its powers to the Executive
Directors in the day-to-day administration.
3. President: The Executive Directors elect the President who becomes their
Ex-Officio Chairman holding office during their presence. He is the chief of the
operating staff of the Bank and is subject to the direction of the Executive
Directors on questions of policy and is responsible for the conduct of the
ordinary business of the Bank and its organisation.
International Finance Corporation

The International Finance Corporation (IFC) is an international financial
institution that offers investment, advisory, and asset-management services to
encourage private-sector development in less developed countries. The IFC is a
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member of the World Bank Group and is headquartered in Washington, D.C. in

the United States.
It was established in 1956, as the private-sector arm of the World Bank
Group, to advance economic development by investing in for-profit and
commercial projects for poverty reduction and promoting development. The
IFC's stated aim is to create opportunities for people to escape poverty and
achieve better living standards by mobilizing financial resources for private
enterprise, promoting accessible and competitive markets, supporting
businesses and other private-sector entities, and creating jobs and delivering
necessary services to those who are poverty stricken or otherwise vulnerable.
Definition:
“IFC is an organization that invests directly in private companies and makes
or guarantees loans to private investors. It is affiliated to the World Bank and is
part of the World Bank Group.”
Objectives of IFC
IFC provides equity and loan capital for private enterprises in association with
private investors and encourages the development of local capital markets and
stimulates the international flow of private capital. The principal objectives of
IFC are as follows.
1. It makes investments in productive private enterprises in association with

private investors. It concentrates on areas where sufficient private capital
is not forthcoming on reasonable terms and conditions.
2. It acts as a clearing house for bringing together investment opportunities,
private capital and the experienced management.
3. It stimulates the International flow of capital.
4. It assists the development of capital markets in less developed countries.
5. It encourages private sector activity in developing countries through three
types of activities; which are private sector project financing, helping
companies in the developing world to mobilize financing in the
international financial markets and providing guidance and technical
assistance to business and governments.
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Functions of IFC
The purpose of IFC is to further the economic development by encouraging
growth of private enterprise in member countries particularly in less-developed
areas, thus supplementing the activities of the IBRD the IFC, therefore,
1. Invests in private enterprises in member countries in association with

private investors and without government guarantee, in case where
sufficient private capital is not available on reasonable terms;
2. Seeks to bring together investment opportunities, private capital of both
foreign and domestic origin, and experienced management, and
3. Stimulates conditions conducive to the flow of private capital, domestic
and foreign, into productive investments in member-countries.
4. It particularly encourages joint ventures between developed and
developing countries, the technical skill available with the former
combining with the resources available with the latter.
World Trade Organization

The WTO is a large international organization to regulate trade between the
nations. The WTO was created on January 1, 1995; and its headquarter is in
Geneva, Switzerland. In WTO, agreements are made on trade between
countries. WTO replaced the General Agreement on Tariffs and Trade (GATT),
which was created in 1948. GATT primarily regulated the trade of goods; the
WTO regulates the trade of services and intellectual property as well. Currently,
WTO have 163-member countries and 23 observer nations.
In other words, the WTO establishes rates of trade among its member
nations. To this end, the WTO also handles trade disputes, monitors trade
policies, provide technical assistance for developing countries and cooperates
with other international trade organizations.
Definition:
“World Trade Organization is an intergovernmental organization that is

concerned with the regulation of international trade between nations.”
History of WTO
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The World Trade Organization came into being on January 1 st, 1995. it was the
outcome of lengthy process (1986-1994) Uruguay round of GATT negotiations.
The WTO was essentially an extension of GATT.
It extended GATT in two ways. First, GATT became only one of the
three major agreements that went into the WTO (the other two being general
agreement on trade in Services (GATS) and the agreement on trade related
aspects of intellectual property rights (TRIPS).
Second the WTO was put on a much sounder institutional footing than
GATT. With GATT the support service that helped maintain the agreement had
come into being in an ad hoc manner as the need arose. The WTO by contrast is
a fully-fledged institution.
Functions of WTO
The various functions of World Trade Organization are:
 Administering WTO trade agreements
 Forum for trade negotiations
 Handling trade disputes
 Monitoring national trade policies
 Technical assistance and training for developing countries
 Cooperation with other international organizations
Organizational Structure of WTO

The organizational structure of WTO is based on four hierarchical levels. The
hierarchies from top to bottom are as follows:
 Ministerial Conference
 General Council
 Councils
 Committees and Management Bodies

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1. Ministerial Conference: Ministerial conference is the highest hierarchical

level in the organizational structure. All the member countries of WTO are the
representatives of the ministerial conference. Ministerial conference has the
authority to take decisions on all matters relating to multinational trade
agreements. The ministerial conference meets at least once in two years. Thus,
the ministerial conference is the policy and strategy making body.
2. General Council: General council is the executive body of the WTO.

General council reports its decisions and activities to the ministerial conference.
All the members of WTP are also the representative in the general councils. The
general council has other forms like Dispute Settlement Body or Trade Policy
Review Body.
 Dispute settlement body supervises disputes settlement procedure. This

body is assisted by the dispute settlement panels and appellate body.
 Trade policy review body reviews trade policies of individual world

trade organization members regularly.
3. Councils: The third level in the hierarchy is councils. There are three
councils. Viz.,
a. Council for Trade in Goods: This council supervises the implementation

and functioning of all agreements relating to trade in goods.
b. Council for Trade in Service: This council overseas the implementation of

all the agreements relating to trade in services.
c. Council for Trade-related Aspects of Intellectual Property Rights: This

council overseas the implementation and functioning of all the agreements
relating to intellectual property rights.
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4. Committee & Management Bodies: the general council delegates powers,

responsibilities and authorities to these bodies. These committees and bodies
include:
a. Committees: Various councils specifies earlier, constitute committees for

administering the arrangement. Ministerial conference constitutes three
committees, viz.
 Committee on Trade & Development: This committee is concerned

with the issues concerning developing countries and particularly least
developed countries.
 Committee on Balance of Payment: Some WTO member countries

resort to trade restrictive measures with a view to cope with their balance
of payments problems. Consultations among such countries are arranged
by the committee on balance of payment.
 Committee on Budget, Finance & Administration: This committee

deals with the issues relating to the budget, finance and administration of
WTO.
b. Management Bodies: Plurilateral agreements of the WTO have their

management bodies. These management bodies report to the general council.
Some of the plurilateral agreements having management bodies include: civil
aircraft, government procurement, dairy products, bovine-meat, etc.
Difference between GATT & WTO

The basic difference between GATT & WTO is defined below:
GATT WTO
It is a set of rules and multilateral It is a permanent institution.
agreement.
It was designed with an attempt to It is established to serve its own
establish International Trade purpose.
Organization.
It was applied on a provisional basis. Its activities are full and permanent.
Its rules are applicable to trade in Its rules are applicable to trade in
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merchandise goods. merchandise and trade in services and

trade in related aspects of intellectual
property rights.
GATT was originally a multilateral Its agreements are almost multilateral.
instrument, but plurilateral
agreements were added at a large
scale.
Its dispute settlement system was not Its dispute settlement system is fast
faster and automatic. and automatic.
WTO and India
India, as a developing economy, has been benefited being a founding member
of world trade organization (WTO). The country at large has seen many
significant changes which have taken place after the formation of WTO. There
are some issues which are yet to be sorted but large things are falling in shape
for the Indian economy.
WTO and Indian Agriculture
After over seven years of negotiations the Uruguay round multilateral
trade negotiations were concluded on December 1993 and were formally
ratified in April 1994 at Marrakesh, Morocco.
The WTO agreement on agriculture was one of the main agreements which
were negotiated during the Uruguay round. The WTO agreement on agriculture
contains provision in three main areas of agriculture, these are:
Market Access
Domestic Support
Export Subsidies
1. Market Access: This includes tariff cation, tariff reduction and access
opportunities. Tariff cation means all non-tariff barriers such as:
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 Quotas
 Variable levies
 Minimum import price
 Discretionary licensing
 State trading measure
2. Domestic Support: It measures that have a minimum impact on the trade
also known as green box policies. It includes general government services like:
As in the area of research, disease control, infrastructure and food security. Also
includes direct payments to producers in form of income support etc.
3. Export Subsidies: The agreement contain provision regarding members
commitment to reduce export subsidies. Developed countries are required to
reduce their export subsidy expenditure by 36%. For developing countries, the
percentage cuts are26%.
International Human Resource Management

IHRM can be defined as set of activities aimed at managing organizational
human resources at international level to achieve organizational objectives and
achieve competitive advantage over competitors at national and international
level. IHRM include typical functions such as recruitment, selection, training &
development, performance appraisal and dismissal done at international level
and additional activities such as global skills management, expatriate
management and so on.
Definition:
“IHRM is concerned with human resource management issues that cross
national boundaries or are conducted in locations other than the home country
headquarters.”
International human resource management deals with at least three types of

employees based on their country of origin:
1. Parent-Country Nationals (PCNs) – Employees belonging to the country
where a company’s headquarters are located are called as parent-country
nationals or home country nationals.
2. Host-Country Nationals (HCNs) – Employees belonging to country where
the company has set up a subsidiary or a manufacturing facility are called host-
country nationals.
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3. Third-Country Nationals (TCNs) – Employees who work in the home or

host country facility of the company but are not nationals of either are called
third- country nationals.
International HRM also means dealing with issues related to different
countries, expatriation, repatriation, cross-cultural issues etc.
Objectives of IHRM
The following is the listing of these objectives:
1. Societal Objective: The HRM need be socially responsible to the needs and
challenges of society while minimizing the negative impact of such demands
upon the organization. The failure of organisations to use their resources for
society’s benefit may result in restrictions. For example, societies may pass
laws that limit human resource decisions.
2. Organisational Objective: Another objective of HRM is to recognize that
HRM exists to contribute to organisational effectiveness. HRM is not an end in
itself; it is only a means to assist the organisation with its primary objectives.
Simply stated, the HRM department exists to serve the rest of the organisation.
3. Functional Objective: HRM maintaining the department’s contribution at a
level appropriate to the organisation’s needs. Resources are wasted when HRM
is more or less sophisticated than the organisation demands. A department’s
level of service must be appropriate for the organisation it serves.
4. Personal Objective: HRM assist employees in achieving their personal
goals, at least insofar as these goals enhance the individual’s contribution to the
organisation. Personal objectives of employees must be met if workers are to be
maintained, retained and motivated. Otherwise, employee performance and
satisfaction may decline, and employees may leave the organisation.
Need of International Human Resource Management

There are four major contextual variables because of which IHRM activities in a
global firm differ from a domestic firm, hence the need for international HRM.
These are cultural diversity, workforce diversity, language diversity, and
economic diversity. Let us go through these variables and see how they affect
HRM practices.
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I. Cultural Diversity: Culture of a country is one of the key factors which

affect people-oriented processes, and HRM is a people-oriented process.
Therefore, culture of a country has very significant impact on HRM practices.
When we consider global perspective of HRM, we find cultural diversity along
the globe, that is, cultures of two countries are not alike. Cultural diversity
exists on five dimensions- individualism versus collectivism, power orientation,
uncertainty avoidance, masculinity versus femininity, and time orientation. Let
us see how these dimensions affect human behaviour and, consequent
II. Workforce Diversity: Workforce diversity is increasingly becoming
common for large organizations even for domestic ones. However, in a global
firm, additional workforce diversity emerges because of hiring personnel from
different countries. A typical global firm may draw its employees from three
types of countries — home country (PCNs), host country (HCNs), and third
country (TCNs). In a global firm, workforce diversity can also be seen in the
context of employee mobility from one country to another country for
performing jobs.
On this basis, an employee can be put in one of the following categories:
1. Expatriate — a parent country national sent on a long-term assignment to
the host country operations.
2. Inpatriate — a host country national or third country national assigned to the
home country of the company where it is headquartered.
3. Repatriate — an expatriate coming back to the home country at the end of a
foreign assignment.
Workforce diversity implies that various categories of employees not
only bring their skills and expertise but also their attitudes, motivation to work
or not to work, feelings, and other personal characteristics. Managing such
employees with pre-determined HRM practices may not be effective but
contingency approach has to be adopted so that HRM practices become tailor-
made.
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III. Language Diversity: Language is a medium of expression but employees

coming from different countries have different languages. Though English is a
very common language, it does not serve the purpose adequately as it does not
cover the entire world. While employees coming from different countries may
be encouraged to learn the language of the host country for better dissemination
of the information, it does not become feasible in many cases. An alternative to
this is to send multilingual communications. It implies that anything transmitted
to employees should appear in more than one language to help the message get
through. While there are no hard- and-fast rules in sending such messages, it
appears safe to say that such a message should be transmitted in the languages
the employees understand to ensure adequate coverage.
IV. Economic Diversity: Economic diversity is expressed in terms of per capita
income of different countries where a global company operates. Economic
diversity is directly related to compensation management, that is, paying
wages/salaries and other financial compensation to employees located in
different countries. One of the basic principles of paying to employees is that
“there should be equity in paying to employees.” However, putting this
principle in practice is difficult for a global company because its operations are
located in different countries having different economic status. In such a
situation, some kind of parity should be established based on the cost of living
of host countries. Diversity of various types in a global firm suggests that HRM
practices have to be tailor- made to suit the local conditions.
Difference between HRM and IHRM

There is huge difference between HRM and IHRM as HRM is done at national
level whereas IHRM is conducted in various nations and not in just one nation.
The difference between human resource management and international human
resource management is defied below:
IHRM HRM
IHRM is done at international level. HRM is done at national level
IHRM is concerned with managing HRM is concerned with managing

belonging to many nations. employees belonging to one nation.
IHRM has concerned with managing HRM is concerned with managing

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additional activities such as expatriate limited number of HRM activities.

management.
IHRM is very complicated as it is HRM is less complicated due to less

affected by external factors such as influence from external environment.
cultural differences and institutional
factors.
Human resource managers working in Human resource manager on

an international environment face the domestic environment administer HR
problems of addressing HR issues of programmes to employees belonging
employees belonging to more than to a single nationality.
one nationality.
IHRM has to deal with more external HRM has to deal with less external
factors than domestic HRM. factors than IHRM.
There is more risk involved in IHRM. There is less risk involved in HRM.
International Human Resource Management Activities

There are various activities and functions of international human resource
management. These functions and activities includes.
 Global Recruitment
 Global Selection Process
 Expatriates
 Performance Appraisal
 Training & Development
 Compensation and Benefits
 International Industrial Relations
Global Recruitment
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Recruitments means the searching for prospective candidates and stimulating

them to apply for jobs. Recruitments attracts a large number of qualified
applicants who desire to work in the company. The recruitment information
given by the global companies helps the qualified candidates. Recruitment helps
the global company in finding out the potential candidates for actual or
anticipated vacancies in the company.
Definition:
“Recruitment means the searching for prospective candidates and stimulating
them to apply for jobs.”
Sources of Global Recruitment

Sources of global recruitment includes:
Parent
Company
Nationals
Sources
of GR
Third Host
Country Country
Nationals Nationals
1. Parent Country Nationals: Parent country nationals are employees who are
citizen of the country where the company headquarters are located. Parent
country nationals in international business normally are managers, heads of
subsidiary companies, technicians, trouble-shooters and experts. They visit
subsidiary companies and operations:
 To help them in carry out their operations.
 To make sure that they run smoothly.
 To provide advice and control them.
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However, sending parent company nationals involves cost, causes ego

and cultural problems.
2. Host Country Nationals: Host country nationals are the employees of the
company’s subsidiary who are the citizens of the country where the subsidiary
is located. Employing host country nationals is advantage as:
 They are familiar with native culture.
 They are familiar with local business norms and practices.
 They manage and motivate local workers efficiently.
 They are familiar with local bureaucrats, market intermediaries and
suppliers of inputs.
 They are familiar with the taste and preferences of local customers.
However, there are certain disadvantages associated with host country
nationals:
 They are not familiar with the objective, goals and stratergies of the
parent company.
 They are unaware of the needs of the headquarters.
 They view company only from the local perspective rather than from the
global perspective.
 It would be difficult to train the host country nationals due to variation in
the views about achievements, equity, the work ethic and productivity of
the host country nationals from those of the parent country nationals.
3. Third Country Nationals: Third country national is an employee of a
company’s subsidiary located in a country, which is not his home country. The
software professionals of India who works in America subsidiaries located in
various countries of Europe are called third country nationals. The advantage
of employing third country nationals include:
 Less cost with required expertise, skill knowledge and foreign language
skills.
 Less risk of employing an third Indian national who speaks English
fluently.
 They have a cultural fit due to their work experience in multicultural
environment.
However, the local government may impose conditions and regulate in
employing third country nationals.
Global Selection Process
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Selection is the process of selecting the most suitable candidate for the vacant
position in the organization. In other words, selection means weeding out
unsuitable candidates/applicants and selecting those individuals with
prerequisite qualifications and capabilities to fill the jobs in the organization.
Definition:
“The process of picking the right candidate, who is most suitable for a vacant
job position in an organization”
Global business firms need people with higher order skills, balanced emotions,
ability to adjust to multicultural recruitment, etc. Hence, the selection process of
a global companies varies from that of a domestic company. Now, we study the
selection process of a global firm. Selection process includes election
procedure, selection approach and selection methods.
Global Selection Approach

Selection policy is vital in global business as it deals with various types of
people, jobs and placement. In fact, selection policy contributes for the
achievements of this strategic goal of global business i.e. ‘thinking globally and
acting locally’. There are three types of approaches followed in selection
policies in global business, viz,
The
Ethnocentric
The Approach
Polycentric
Approach
The
Geocentric
Approach
1. The Ethnocentric Approach: Under this approach, parent country nationals

are selected for all the key management jobs. This approach was widely
followed by Procter and gamble, Philips, Mutsuhito, Toyota etc. When Philips
filled the important vacancies by Dutch nationals, non-Dutch employees
referred to them as Dutch mafia. Some of the international firms follows this
approach due to these reasons:
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 Non-availability of qualified personnel in host countries particularly

developing countries.
 To maintain a unified corporate culture. Japanese firms mainly follow
this reason.
 To transfer the core competencies of the company when the core
competencies are held by the existing employees of parent country
nationals.
Though this approach claims the above discussed advantages, it suffers from the
following disadvantages:
 When the important positions of the subsidiaries are filled with the parent
country nationals, the staff of the host country feel frustrated resulting in
low productivity.
 The subsidiary may fail to understand and respond to the host country’s
culture due to ‘cultural myopia’
2. The Polycentric Approach: Under this approach, the positions including the
senior management positions of the subsidiaries are filled by the host country
nationals. The reasons for adopting this approach includes:
 Host country nationals are familiar with the culture of the country
including business culture.
 Level of job satisfaction of the employees of the subsidiaries can be
enhanced.
 It is less expensive as the salary level of the host country nationals is
lower than that of home country nationals in case of MNCs of advanced
countries.
 It reduces overall cost of staff subsidiaries.
Though is approach being a welcoming factor from the point of view of host
country, it suffers from the following limitations:
 This approach limits the mobility of employees among subsidiaries and
between subsidiaries and the headquarters.
 Organizational culture of the parent company cannot be completely
adopted I the subsidiaries.
 Culture of the subsidiaries and the headquarters cannot be exchanged as it
isolates the headquarter from the subsidiaries.
These limitations forced some organizations to employee the best candidate
from any part of the globe (referred as the geocentric approach).
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3. The Geocentric Approach: Under this approach, the most appropriate

candidates are selected for jobs from any part of the globe. Global firms follow
this approach due to the following reasons:
 To have the most appropriate human resource.
 To develop the people with multicultural and meet the challenges of
cultural diversity.
 To build multiskilling as a core competency and transfer it to all the
subsidiaries.
 To avert the problems of cultural myopia and enhance the local
responsiveness of the host country.
Though this approach seems to be superior to the other two approaches, it also
suffers from the following limitation:
 Most of the countries insist that MNCs should employ their own citizens.
MNCs are allowed to employ foreign nationals only in the rarest cases.
 Implementation of this policy takes time as the MNCs has to train and
develop the people in multicultural.
 Implementation of this policy is also expensive.
Selection Techniques for Global Jobs

Global companies require the human resources adaptable not only to the job and
organisational requirements, but also the emotions of the people of different
countries of the world. As such, the selection techniques for global jobs vary
from that of domestic jobs. Now, we shall discuss the selection techniques for
global jobs.
 Screening the applicant’s background.
 Conducting tests to determine the candidate’s suitability to the job norms.
 Conducting tests to evaluate the candidate’s suitability and adaptability to
the new culture and environment.
 Conducting test to evaluate the suitability and adaptability of “candidates,
spouse and family members” to the new culture and environment.
 Predicting the adjustment of the candidate, his spouse and family
members to the new job, culture of the company, country and the new
environment.
Selection Criteria for Overseas Employment
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Various research studies the following selection techniques for overseas

employment in order to minimise the rate of expatriate failure. They are:
 Self-orientation
 Orientation towards others
 Ability to perceive accurately
 Cultural variations
 Technical and managerial competence
 Adaptability
The company has to measure the candidate on various variables regarding
adjustment. The variables to be measured include:
1. The Individual Dimensions: The variables used to measure the candidate’s
suitability in this area include:
 Candidate’s self-efficiency
 Relational skills of the candidate
 Perception skills of the candidate
 Job skills
 Stress-reduction skills
2. The Non-Work Dimension: The variables to be measured in this dimension
include:
 Cultural novelty
 Host country’s religions, social, cultural, sociological, historical, political
and economic system- adjustment of the candidate, his spouse and family
members to this new environment.
3. The Job Dimension: The variables in this dimension include:
 Job duties, responsibilities, tasks etc.
 Technical competency
 Human relation skills at the workplace
4. Organisational Cultural Dimension: The variables in this dimension
include:
 Culture of candidate’s previous organisation in his home country.
 Candidate’s background of working in different organizations with
different cultures.
 Candidate’s ability to adapt to the new organizations, workplace, group
norms and expectations.
Expatriates
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Expatriates are those living or working in a foreign country. The parent country
nationals working in foreign subsidiary and third country nationals are
expatriates. Large number of expatriates normally has adjustment problems
with the working culture of the company, country’s culture, laws of the country
etc. Some expatriates adjust themselves easily, while some others face severe
problems of adjustments. Many Indian expatriate employees in Maldives could
not adjust to the culture and returned to India before their assignments were
completed. Thus, the major problem with expatriates is adjustment in the new
international environment.
International adjustment
The international adjustment is the degree to which the expatriate feels
comfortable living and working in the host culture. This significantly influences
job performance. The expatriate is completely new to the host country
environments, social rules, norms etc. The expatriates have a strong desire to
reduce psychological uncertainty in the new environment. Psychological
uncertainty is also called cultural shock. Nancy Adler defines cultural shock as,
“the frustration and confusion that result from being bombarded by
uninterruptable clues.”
For example, students in the USA drink beverages in the class-room,

students in African countries leave the class immediately after the close of the
lecture but before the teacher leaves the class, people in the USA wish you
immediately when there is eye-to-eye contact with you. These cultural
differences cause cultural shock to Indians. Researchers found that to a large
degree culture shock follows the general pattern of a U-shaped curve. This
pattern presents the relationship between culture shock and the length of time
the expatriate has been working in the host country’s culture. The ‘U’ is divided
into four stages, viz., honeymoon, culture shock, adjustment and mastery.
1. Honeymoon stage: like expatriate and his family members are fascinated by
the culture of the host country, the accommodation, the transportation facilities,
educational facilities to the children etc., during the early stage of arrival. This
stage lasts up to 2-3 months period.
2. Culture shock stage: The company takes care of the new arrivals and
completely neglects the previously arrived employee and his family after three
months. During this stage, the employee has to take care of himself and his
family members. Expatriate gets frustrated, confused and unhappy with living
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and working abroad. His social relations are disillusioned during this stage. He
gets the shock of the existing culture.
3. Adjustment stage: The expatriate slowly learns the values, norms,

behaviour, of the people, their culture etc. He slowly adjusts himself to the
culture of the foreign country.
4. Mastery stage: The expatriate after adjusting himself with the culture of the
foreign country, can concentrate on working efficiently. He learns and adopts to
the new environment completely and becomes like a citizen. He behaves and
functions like a citizen at this stage.
Dimensions of International Adjustment

International adjustment has three dimensions, viz., adjustment to the overseas
workplace, adjustment to interacting with the host nationals and adjustment to
the general environment. The research studies discovered certain skills which
would help both the individual expatriate and international organisations in
dealing with the adjustments. Figure below presents a framework of
international adjustment. There are four dimensions of adjustment, viz.,
individual, job, organisation culture, and non-work.
Non-work
-Culture novelty
-Family
-spouse adjustment
Organization Culture Degree of

Adjustment Individual
-Organization cluture -Self-efficiency
-Work adjustment
novelty
-Interaction -Relation skills
-Social support logistic adjustment
help -Perception skills
-General adjustment
job
-Role Clarity
-Role Description
-Role Novelty
-Role Conflict
Framework of international adjustment

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1. Individual Dimension: Individual dimension includes the skills and the

capabilities that the expatriate possesses. These skills include cross-cultural
skills. There are three sets of individual skills, viz., self-efficacy, relational and
perception skills. Now, we discuss these three types of skills.
i. Self-Efficacy Skills: The expatriate should have self-confidence, self-esteem

and mental hygiene. He should be able to keep mental and social health with a
feeling of being able to control or deal with surprises from the host cultural
environment. Areas of self-efficacy are: stress reduction, technical competence
and reinforcement substitution.
a. Stress Reduction: Stress reduction abilities include abilities to deal with

interpersonal conflict, financial difficulties, and variations in business
systems, social alienation, pressure to conform, loneliness, differences in
housing, climate etc. These factors affect the expatriate job performance.
Expatriates should have an on-going clear strategy to reduce the stress.
b. Technical Competence: Technical competence of the employee is an
important factor that determines the degree of employee adjustment in
the foreign country.
c. Reinforcement Substitution: This skill involves “replacing activities
that bring pleasure and happiness in the home culture with similar -’yet
different - activities that exist in the host culture.” The common interests
would be sports, music, art, dance, and social groups.
ii. Relational Skills: Relational skills include expatriate’s ability, desire and
tendency to interact, mix or involve and develop relationships with host
nationals. The skills in this regard include:
a. Finding Mentors: The expatriates find the host nationals, who have
similar interests and can guide them. My own personal experience, while
I was working in Eritrea, I found common interests in Dr. Tesfaye Yeses
Mehari and in myself. I also found guiding and mentoring skills in Dr.
Tesfaye Yeses Mehari and I accepted him as my mentor. He helped me
in building relations with other Eritreans and adjust to Eritrea with least
problems.
b. Willingness to Communicate: Fluency in the host country’s language is
not a pre-condition for building relations with the foreign nationals. What
is more important is making efforts to learn the language as a means for
familiarising with the foreign nationals and their culture. Strategically
using the proverbs, popular songs, famous incidents from the history,
jokes, information about religion, sports of the host country is called,
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“Conversational Currency.” Using these titbits fastens the process of

building the relations with the foreigners.
iii. Perception Skills: These skills include expatriate’s ability to understand the
behaviour of the host nationals, their practices, culture etc. These skills reduce
the degree of psychological uncertainties associated with cross-cultural
experiences. The expatriate should not view the host nationals as backward, or
stupid or unsophisticated.
2. Non-work Dimension: The non-work dimensions include culture novelty

and family/spouse adjustment.
i. Culture Novelty: Culture novelty includes differences in beliefs, values,

norms, religious faith, sex roles, etc. The degree of culture novelty is more, if
these factors of the host country vary much from those of the home country of
the expatriate. The results of the research study conducted by Ingemar Torbiorn
regarding host countries ranked according to expatriate satisfaction are
presented in Exhibit 6.4.
ii. Family-Spouse Adjustment: The employee may take a decision, to leave

the host country before the contract expires, if the employee’s spouse and
family members fail to adjust to the host country’s culture. Some of the Indian
housewives fail to adjust to foreign culture regarding sex and marriage system,
particularly when their female children enter the teenage and force the
husbands to leave the foreign job and country. However, the research studies
found that:
 The spouse was in favour of accepting the assignment from the

start.
 The spouse engaged in self-initiated, cross-cultural training.
 The spouse had a social support network of host country nationals
 The standard of living in the overseas assignment was acceptable
to the spouse.
 The firm sought the spouse’s opinion regarding the international
assignment from the beginning of the selection process.
 The spouse could adjust to the degree of culture novelty.
3. Job Dimension: It is needless to mention that the expatriate should have

required skills, knowledge and ability to carry out the job successfully in the
host country. However, certain factors help or hamper the expatriate adjustment
in the host country. These factors include:
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i. Role Clarity: Role clarity deals with the degree of clarity that the employee
understands the job duties, responsibilities, tasks, demands and roles. High
degree of clarity reduces uncertainties and helps the employee to adjust to the
new environment quickly. In contrast, a low degree of clarity hampers the
process of employee adjustment.
ii. Role Discretion: Role discretion is the degree of flexibility of workplace
rules, regulations, expectations, policies and procedures. The expatriate’s role
can be significant and can influence others, if there is flexibility at workplace.
Otherwise, the expatriate has to adapt himself to the rules at workplace. Most of
the Indians adapt themselves to workplace rules in various countries.
iii. Role Novelty: Role novelty refer to the degree of distinctiveness of the
duties, responsibilities, task, etc., of the new job compared to those of the old
job in the home country. The expatriate would feel it difficult and take more
tome, if the degree of distinctiveness is high. In contrast, the expatriate would
take less time and feel it easy to adjust to the new job if the degree of
distinctives in low.
iv. Role Conflict: Role conflict occurs when the expatriate starts receiving
conflicting signals regarding his role, duty, behaviour and performance level
from the people at workplace. These signals hinder the adjustment process of
the expatriate.
4. Organizational Culture Dimension: Organizational culture is ‘pattern of

basic assumptions-invented, discovered or developed by a given group as it
learns to cope with its problems of external adoption and internal integration
that had worked enough to be considered valuable, and, therefore, to be taught
new members as the correct way to perceive, think and feel in relation to those
problems”.
Every organization has its own culture with different rules, regulations,
customs, tradition, norms, expectations etc. The expatriate is informed of the
organizational culture. Similarly, the expatriate should also learn the culture of
new organization in foreign country.
Why Expatriates Fail?

There would be several reasons for the failure of the expatriates in the foreign
assignments. The board reasons include:
 Inability of the spouse to adjust in foreign environment.
 Inability of employees to adjust.
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 Other family problems.

 Employee’s personal or emotional maturity.
 Inability to cope up with larger overseas responsibilities.
 Difficulties with new environment.
 Absence of educational, health and recreational facilities in host
countries.
 Lack of technical and job-related competence.
 Unsafe living and working conditions in host countries.
Performance Appraisal
Performance appraisal is a method of evaluating employee behaviour relating to
expected work and behaviour, normally including ‘both the quantitative and
qualitative aspects of job performance. Performance refers to the degree of
accomplishment of the tasks that make up an individual’s job.
Appraising the employee performance on foreign jobs is a highly

complicated task as the expectations of global company are multifarious. In
addition, employees of various countries view the meaning of jargons quite
differently. Added to this, work related practices, organisational culture and job
dimensions vary from country to country. Hence, global company should take
due care in appraising the performance of employees.
Objectives
The objectives of performance appraisal are to create and maintain a
satisfactory level of performance, to contribute to the employee growth and
development through training and to guide the job changes with the help of
continuous ranking.
a. Appraisers: The appraiser may be any person who has a thorough

knowledge about the job content, content to be appraised: standards of content
and the one who observes the employee while performing a job. Typical
appraisers are:
 Supervisors
 Peers
 Subordinates
 Consultants
 Customers (internal and/or external) Users of services
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b. 3600 Performance Appraisal: 3600 performance appraisal refers to the

performance appraisal of an employee by his superiors, subordinates, peers,
customers, consultants and users of his services.
c. Methods of Performance Appraisal: A number of performance appraisal

techniques traditional methods include:
 Graphic Rating Scales

 Ranking Method
 Paired Comparison Method ‘- have been developed.
 The Forced Distribution Method
 Check List Method
 Essay or Free from Appraisal
 Group Appraisal
 Confidential Reports
Modern performance appraisal methods include:
 Behaviourally Anchored Rating Scales ·

 Assessment Centres
 Human Resource Accounting
 Management by Objectives
 Psychological Appraisal.
d. Performance Appraisal in Global Companies: Appraising the

performance of expatriate employees objectively is very difficult. Performance
appraisal of expatriate employees is done by both host nation managers and
home country managers. The host nation’s managers may be biased due to their
cultural frame and expectations. In order to reduce the problems of performance
appraisal, the US companies give more weightage to the self-appraisal done by
the foreign employee for himself rather than by the superiors.
Japanese companies introduced participative management in Indian

subsidiaries. Employees in Indian subsidiary felt that Japanese management
introduced participative management as Japanese managers are incompetent.
Indians view the superiors as experts, if the latter do not ask the subordinates
for details. Japanese managers’ performance was rated as negative by the host
country’s (India) superiors. Home country managers also rate the employees
with a bias due to lack of face-to-face interaction. Guidelines for Performance
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Appraisal: The following guidelines help to solve the problems of performance

appraisal of expatriate employees.
 More weight should be given to the rating of the on-site managers’

appraisal due to proximity.
 Host country managers should also give the weightage to the culture of
the expatriate employee.
 Due weight should also be given to self-appraisal.
System of Performance Appraisal in MNCs

Performance appraisal for international employees is a 12-step process, viz.,
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Establish Performance Standards
Communicate Standards
Deciding upon the Performance Appraisel Format
Measuring Actual Performance
Frequency Of Appraisel
Adjust Actual Performance due to Environmental Influence
Compare the Adjusted Performance with that of others and Previous
Compare the Actual Performance with Standards and find out Deviations,
if any
Feedback to the Appraise
Suggest Chnages in Job Analysis and Standards, if any
Consider the Appraisal result for Contract Renewal and Promotion
Plam for Employee Training and Development
1. Establish Performance Standards: Establish performance standards based

on job description, job specifications, cultural requirements and adaptability to
foreign environment, talents in enabling family members to adjust in foreign
environment. Separate performance standards should be established for each
category of employees of MNCs.
2. Communicate Standards: Communicate standards/expectations to
employees as well as evaluators.
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3. Deciding upon the Performance Appraisal Format: Different appraisal

formats are based on various appraisal techniques. Appraisal format covers the
areas based on the appraisal techniques adapted. Traditional techniques like
graphic rating scale, ranking method, etc., emphasises on traits. Thus, format
based on traditional methods contains traits. Modern techniques of appraisal
like critical incident method, assessment centres etc., by objective emphasises
on achievement of results. This, format of modern techniques contains
achievement of objectives. MNCs may use either standard format or customized
format for each subsidiary.
4. Measuring Actual Performance: Measuring actual performance by
following instructions given by the evaluators through observations, interviews,
records and reports.
5. Frequency of Appraisal: Normally, appraisals are conducted once a year or
in six months. Too frequent appraisals may not be appropriate for certain types
of foreign assessments like project assignments, consultancy assignments and
training assignments. These assignees expect feedback at the end of the total
activity. Frequent appraisal and feedback disturb the employee in his/her work
directions and programming. Therefore, appraisal to employee can be once a
year or in sex months or at the end or assignment whichever is less.
6. Adjust Actual Performance due to Environmental Influence: As
discussed earlier, environmental factor and particularly cultural factor affect the
actual performance. Therefore, the ratter has to adjust the performance
considering the nature and degree of environmental influences, had these factors
are not in built in the appraisal form and mechanism.
7. Compare the Adjusted Performance With that of others and Previous:
Comparing the adjusted performance with that of others as well as previous
gives an idea where the employee stands. If performance of all employers is
ranked either too high or too low, there would be something wrong with the
standards, job tasks and the ratter.
8. Compare the actual Performance with Standards and Find out
Deviations, if any: Deviations may be positive and negative. If the actual
performance is more than the actual standards, it is positive deviation and vice
versa is negative deviation. This exercise helps for adjustment of standards, if
necessary.
9. Feedback to the Appraise: Communicate the actual performance with the
employee concerned, listen to him/her with the regard to their reasoning and
adjust the performance rating either of the sides pf the scale, if employee’s
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reasoning provides additional input. Mutual discussion of the appraiser and

appraises makes the appraisal close to the perfectness and ratings.
10. Suggest Changes in Job Analysis and Standards, if any: Based on the
employee feedback and explanation to the rating, as well as considering the
cultural and environmental factors, to evaluator should suggest the changes in
job description, job specification and standards of appraisal.
11. Consider the Appraisal results for Contract Renewal and Promotion:
MNCs should consider performance appraisal ratings for contract renewal
employment, and also for promotion. In addition, MNCs can also plan
promotion as well as career planning and development.
12. Plan for Employee Training and Development: MNCs should consider
the performance appraisal information for employee training and development.
MNCs, in doing so should analyse the information very carefully as the
performance ratings, sometimes, keep the cultural and other issues outside the
preview of the ratings. Consequently, highly potential candidates may fail to
produce high performance results. MNCs should consider various issues like:
 Demonstrations of initiatives.
 Realization of potentiality.
 Presentation of commitment behaviour.
 Exhibiting interpersonal relations.
 Proof of intelligence.
 Showcasing distinctive capabilities and talents.
Training & Development

It is often said that a good selection process reduces the training effort. It might
be true in the case of domestic business. But, the global companies should have
enough training and development effort as the candidates are strangers not only
to the jobs, but also to the soil, climate, environment, people and culture of
foreign country where they are expected to work and live along with their
family members.
After the candidate is selected and placed on the job, he must be provided
with adequate training and developmental facilities. Training is the act of
increasing the knowledge and skill of an employee for doing a particular job.
Development is a systematic process of growth and by which the executives
develop their abilities to manage. In fact, executive development/education has
become global.
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Importance of Training and Development for Global Jobs

Even the most valuable employees in the global companies fail to work and
stay with the company due to poor training and developmental efforts. Global
companies should make not only the employee, but also his family members
more comfortable with the company, people and the country. Hence, training
and development assume greater significance in global companies.
Training and development are the most important techniques of human
resource development Training and development lead to:
 Improved job knowledge and skills at all levels of the organisation.
 Improved morale of the human resources.
 Improved profitability and/or more positive attitudes towards improved
relationship between boss and subordinate.
 Improved understanding of culture of various countries.
Need for Training & Development for Global Jobs

Training and development for global jobs are necessary due to the following
reasons:
 To match employee’s specifications with the job requirements and
organizational needs.
 To achieve organizational viability and the transformation process.
 To meet the challenges of technological advances.
 To understand the organizational complexity.
 To make the employee and his family members familiar with the
language, customs, traditions, etc., of the foreign country.
After the employee is inducted into the company, his skills, attitude and
knowledge are module and enveloped. Training is the organized procedure by
which people learn knowledge and skills for a definite purpose. Training
improves, changes and moulds the employee’s knowledge, skills, behaviour,
aptitude and attitude towards the job and organizational requirements.
In case of international business, training and development refer to the
development of the expatriate not towards job and organizational requirements,
but also towards the host country’s culture, environment and requirements.
Therefore, cross-cultural training assumes greater significance in international
business.
Cross- Cultural Training
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Cross-cultural training enables the expatriates to learn the cultural norms,

values, aptitudes, attitudes, beliefs, behaviours, practices of the host country.
The expatriate, after training can use this cross-cultural knowledge to
behave according to the cultural requirements of the host country. The adage
“Do in Rome as the Romans do” holds good here. The trainee expatriate can
transfer the knowledge gained in the training programme into new cognitive
and physical behaviour. This process gives the trainee more satisfaction in their
foreign assignment.
Procter and Gamble trained their selected candidates for their company in
Japan regarding the Japanese culture that Japanese like more of informality,
they hesitate to say no and they finalise more of their business dealings outside
the office and mostly in restaurants in the evenings. The employees transferred
this knowledge into their cognitive and physical behaviours and became
successful in dealing with the Japanese. Thus, they became efficient in doing
their jobs and interacting with the host country’s nationals.
However, some companies do not train their expatriates due to the
following reasons:
 Brief cross-cultural training programmes are ineffective.
 The failure of such dissatisfaction. programmes in the past resulted in
employee
 Lack of enough time between selection and departure
 High cost of training
Though the company cannot provide training before the departure of the
employee, it can plan to provide the same in the host country.
Content of Cross-Cultural Training

It is generally accepted that cross-culture training is effective. Landis and
Breslin suggest the following content to be included in the cross-cultural
training programmes. They categorised them as approaches to cross-cultural
training:
1. Information of Fact-oriented Training: The training programme provides
the expatriate trainee with the information and fact of the country like country’s
economy, resources, languages, social groups, currency, climatic conditions,
eating, dressing habit, housing, banking, insurance, medical facilities etc.
Training methods include lectures, video tapes, reading material, pamphlets, etc.
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2. Attribution Training: This training provides the reasons or causes for

behaviour of the people of the host country. For example, Japanese do not say
‘No’, because they want to respect the other’s feelings and do not want to hurt
the others. Similarly, Americans respond straight and do not hesitate to say
‘No’. this is because they want to communicate clearly. Goal of this training is
to understand the values, norms and perceptual maps. Once the culture and the
reasons for it is understood, the expatriates are encouraged to adapt their
behaviour to the norms of the host country.
3. Cultural Awareness Training: This training is to provide the common
values, attitudes and behaviour in the host country’s culture. This makes the
trainees to understand how culture affects the behaviour of the people of the
host country.
4. Cognitive-behaviour Modification Training: This training provides the
information regarding the behavioural practices which result in getting rewards
and punishments in the host country. Then the trainees compare the rewarding
and punishing practices in the home country, host country and formulate the
strategies for their behaviour in order to maximise rewards and avoid
punishments in the host country.
5. Experimental training: The expatriates in this programme are exposed to
real life situations through field visits, visits to the host country, complex role
plays and cross-cultural simulations. This gives the trainees the real-life
experiences.
6. Rigorous Training: Some training techniques like role plays, simulations
need rigorous training while other techniques need mere participations of the
trainee in the programmes.
Human resource manager in international business companies have the dilemma
in the decidable which programme requires rigorous training.
Compensation and Benefits

Compensation is the amount of remuneration paid by the employer to the
employees in return to their services and contributions to the company.
Compensation is the most important factor in the entire human resource
management process. Compensation includes the amount of salary, the different
kinds of fringe benefits and employee’s welfare benefits, bonus, profit sharing,
stock options and the like.
A number of factors affect the compensation policy of global companies.

The important among them are: compensation levels in comparable global
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companies, company’s ability to pay, cost of living in various countries,

employer productivity, trade union’s pressure and strategies.
Global companies give a number of benefits to its employees in addition

to the salary. These benefits include: air fare, paid leave, medical allowance,
conveyance allowance, educational allowance for employees’ children,
gratuity, resettlement allowance, profit sharing, employees stock options, etc.
Complexities in Global Compensation System

Compensation management function is more critical and complex over other
functions of HRM in MNCs. The factors responsible for the complexity are
discussed hereunder:
 The salary and benefits levels vary from country-to-country.
 Cost of living varies widely among countries, for example cost of living
in Tokyo (Japan) is three times higher that than in New Delhi (India).
 Varying requirements of providing houses, medical and health facilities
for employee family members and school facilities for employee children
in different countries.
 Varying salary levels of expatriates in their respective home countries.
These salary levels are viewed as opportunity costs by the expatriates
while accepting compensation package for their foreign assignments.
 Foreign exchange rates fluctuate widely.
 Varying tax rates.
 Varying rates of inflation and deflation among the developed and
 Country perspective.
 Consistency and equity.
 Expectations of different categories of employees.
Compensation in Global Companies
Compensation is the amount of remuneration paid to the employees. The two
issues involved in compensation management are: national economic
differences and payment practices. The second issue is the mode to payment to
expatriate managers. There are significant differences in the compensation
levels and structures among different countries. This is because, the firms pay
the executives of various countries based on the local compensation levels.
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1. Expatriate Pay: Expatriate pay is mostly based on the balance sheet

approach. Under the balance sheet approach, the compensation package enables
the expatriate employees in various countries to maintain the same standard of
living. This approach also provides for offsetting quantitative differences
among employment locations.
2. Gratuity: Expatriate employees are paid gratuity at a fixed rate for every
year of completion of service in the foreign country. Gratuity is the inducement
to the expatriates to work for quite longer period in the foreign country.
3. Allowances: Expatriate employees are paid car allowance, resettlement

allowance, housing allowance, cost-of-living allowance, education allowance,
etc. various allowances allowance, allowance, like hardship medical
4. Taxation: Some countries pay tax free salary and/or tax-free gratuity. Most
of the countries pay taxable salary and gratuity.
Compensation for overseas personnel include:
Compensation of
Overseas Personnel
Home Country
Host Country Costs Host Country
Salary
-Salary Equivalent
-Salary
-Income Tax -Purchasing Power
-Income Tax
Benefits -Premiums
Benefit
-Housing -Incentives
-Housing
-Goods & Services -Gratuity
-Goods & Services
-Reserves
-Reserves
Components/Structure of International Compensation

Package
Expatriates and other categories of employees of MNCs experience a variety of
problems and hardships and sacrifice a number of facilities, privileges and
relationships at their home country. In addition, they bear a range of risk and
undergo inconveniences in the host country. Therefore, MNCs design the
compensation structure for their employees in such a way that it meets the
financial needs of employees for various facilities, compensates the current and
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future inconveniences and insures a variety of risks. The components of

international compensation include the following:
 Pay or base salary
 Cost of living allowances
 Tax equalisation allowance
 International market allowance
 Housing allowance
 Educational allowance
 Medical allowance
 Insurance allowance
 Benefits
 Social security measures
Profit Sharing and ESOP

The multinational corporations in order to motivate the employees for higher
performance introduced a scheme of profit sharing. Under this scheme, workers
get a right to have a share in the net profit of the company if the profits cross a
certain limit. This provision motivates the employees to improve production,
sales and profits.
Multinational corporations also introduced another plan to motivate the
employees and to retain them. The expert and efficient employees go on
shifting to the other organisations which pay. Higher salary and offers better
facilities. This problem is more acute in software and information technology
firms. These companies introduced the ‘Employee Stock Ownership Plan’ in
order to reduce employee turnover and retain them in the company.
The Employee Stock Ownership Plan (ESOP) allows the employees to
purchase the share (or stock) of the company at a fixed and reduced price.
Employees are motivated when the company allows them to buy the shares at
concessional price. The stock ownership is viewed as performance-based
incentives. This plan is described as “golden hand-cuffs.” The advantages of
stock ownership include:
 This plan links compensation package closely to performance.
 The plan enables the MNCs to retain efficient employees with them.
 It encourages the employees to improve their performance.
 This scheme establishes significance of team effort among employees.
 It increases employee involvement and participation.
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ESOP is used by various companies in India, USA, France, Spain,

Sweden, Norway, the UK, etc.
International Industrial Relations

Industrial relation means the relationship between employees and management
in day-to-day working of industry. Industrial relations are a whole field of
relationship that exists because of the necessary collaboration of men and
women in the employment process of an industry. Industrial relation is the
complex relations among the following parties:
 Employees
 Employee’s unions
 Employer
 Employer’s associations
 Government
Industrial relations are the outcome of the practices of human resource
management. In fact, industrial relations outcome provides the basis for
reformulation of human resource management policies. The important areas of
industrial relations are:
 Trade unions
 Grievance procedure
 Collective bargaining
 Industrial conflicts including strikes and lockouts.
 Worker’s participant in management
 Quality circles
 Quality of work life
 Profit sharing and employee ownerships/employee stock option
Trade unions generally represent the workers’ problems in collective
bargaining. In most of the countries including India, USA, japan, etc., trade
unions negotiate with the management representatives in collective bargaining
in order to reach collective agreements and see that the management
implements the agreements. However, trade unions fail to influence
management for fair labour practices.
Industrial Relation Strategies of MNCs

Multinational corporations have to deal with employees of various countries
with varied cultural, social, political and religious environments. The industrial
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relation strategies of MNCs are mostly applied to the environment of only one
country and it has to formulate another strategy for another country.
MNCs decentralise their industrial relation policies and practices. MNCs
use the strategy of relegating the industrial relations problems like work
stoppages, strikes etc., to the specialists in various countries. Employees
working in various subsidiaries of MNCs formed international trade union.
Industrial relations of MNCs are undergoing through dramatic changes doe to
competition consequent upon paradigm shifts in globalisation and information
technology. The important among them are declining role of trade unions and
collective bargaining.
Concerns of Trade Union in MNCs

The significant concern of trade unions towards NCs is that the later can shift
the manufacturing and other business ventures to the other countries where the
influence of trade unions is either zero or relatively less. Therefore, trade unions
in MNCs deals with employees carefully and judiciously.
Some of the MNCs locate very crucial operations that require high skilled
human resources in its home country or in that country where such human
resources are available and locate other business operations in other countries
where the human resource cost is cheap or low. In fact, it offers relatively high
salary that that of domestic organizations, but significantly less than that of its
headquarter or high salary range countries. These practices reduce the
bargaining power of trade unions as well as reduce trade unions activities.
Influence of Trade Unions on Business Practices of MNCs

Trade unions in addition to influencing the human resource activities, influences
on business activities of MNCs that include business strategy implementations
like optimum size, location, shifting and closer of plants and joint ventures and
mergers.
1. Optimum Size: The organized labour can limit the economies that the MNCs
can avail in the process of location, expansion, diversification, mergers, joint
venture and take overs. In fact, organized labour could prevent general motors
in integrating and consolidating operations in most efficient manner. Thus,
labour unions influence not only human resource management decisions, but
also business decisions that affect human resources directly or indirectly.
2. Location and Shifting: MNCs prefer to locate various units of business in
different countries based on the availability of qualitative resources including
human resources at the least possible rates. In addition, MNCs shift the location
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of various units to other locations. Trade unions and employees oppose the idea
and practice of shifting the business units to other developing countries. In
addition, they influence the government of their home country to change labour
laws and/or impose regulations and prevent the MNCs from shifting their
business practices to developing countries.
3. Closer of Units: MNCs prefer to close the units of some countries where the
human resource conditions and trade unions influences are unfavourable. But
the trade unions lobby the national governments in order to introduce
redundancy legislation and regulatory measures. In fact, sometimes trade unions
demand MNCs to leave some countries. Thus, trade unions influence the MNCs
in their human resource activities as well as its business activities. MNCs in
order to protect themselves from the influence of trade unions formulate and
implement various counter strategies.
MNCs Strategies to Counter-Trade Unions Influence

MNCs through their strategies and activities control the influence of trade
unions. In all MNCs and MNCs in all incidents don’t implement anti-union
strategies. Kennedy suggests the following strategies normally adapted by
MNCs:
1. Offset the Losses in One Country with the Profits Earned in Other
Country: MNCs operate in several countries. If they incur losses in one country
due to any reason including that of trade unions’ influence and/or negotiations,
they offset such losses by the profit they earned from the operations in other
countries.
2. Alternate/Dual Sources: MNCs developed alternate or dual operations
simultaneously in two countries in order to have a back-up facility. This
strategy helps the MNCs to depend excessively on other sources, if any problem
crops up due to disputes with trade unions.
3. Develop the Ability to Shift Production Locations: MNCs locate
significant operations requiring high skilled employees in their home countries
and develop the abilities and skills of human resources in foreign country and
relocate the manufacturing and other facilities in developing countries that
require relatively lower level skills. This strategy enables the MNCs to reduce
the influence of trade unions of home country.
4. Development of Diversified Portfolios: MNCs diversify their activities into
number of business units and portfolios, which reduces the concentrations of
96
trade unions control and that enables the organizations to spread the risk of
trade unions.
5. Development of Superior Knowledge: In labour laws of the country, skills
of negotiations with trade unions on salary, recruitment and other human
resources.
6. No Additional Investment/Disinvestment: MNCs either stop investing
additional funds and/or disinvest in order to make the plant less competitive as
well as non-economical, so that trade unions can’t be any more demand oriented
and stop threatening the MNCs.
International Marketing Management

Marketing management is the process of planning and executing the conception,
pricing, promotion and distribution of ideas, goods and services to create
exchange that satisfy individual and organisational objectives. In simple words,
marketing activities conducted on international level are called as international
marketing management. Companies entering into international markets must
deal with varying economic, social, cultural, political and legal environments
and advertising media and distribution channels.
Environmental factors in different countries make the marketing different from
one country to another country. Domestic marketing managers mostly go for
standard products. But a standard product may not be acceptable to the
customers of foreign country. Hence, international marketing managers have a
dilemma whether ti standardise the product or to customise it.
Standardisation vs. Customisation
Standardisation means one size fits all. Standardized marketing mix attempts to
accomplish uniformity across the whole business process. It is assumed that
products successful in country would be effortlessly successful in another
nation. The objective of standardization is to create value by reducing price and
improving benefits.
On the other hand, customization or adoption of marketing mix refer to tailoring
the products and services according to the needs of individuals or groups of
individuals. Customization as a weapon has come into play for businesses and is
here to stay. Customization assumes that every customer is different, unque and
attempts to harness the psychology with their set of demands or needs.
Standardised International Marketing
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Advantages Disadvantages
1. Reduces marketing costs. 1. Ignores different conditions of

2. Facilitates centralised control of product use.
marketing. 2. Ignores local legal differences.
3. Promotes efficiency in R&D. 3. Ignores differences in buyer
4. Results in economies of scale in behaviour patterns.
production. 4. Inhibits local marketing initiates.
5. Reflects the trends towards a single 5. Ignores other differences in
global marketplace. individual markets.
Customised International Marketing
Advantages Disadvantages
1. Reflects different conditions of 1. Increases marketing costs.

product use. 2. Inhibits centralized control of
2. Acknowledges local legal marketing.
differences. 3. Creates inefficiency in R&D.
3. Accounts for differences in buyer 4. Reduces economies of scale in
behaviour patterns. production.
4. Promotes local marketing 5. Ignores the trend towards a single
initiatives. global marketplace.
5. Accounts for other differences in
individual markets.
International Marketing Mix

The international marketing mix consists of 4Ps, viz.,
 Product
 Price
 Place
 Promotion
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Product
-Product Development
-Product Life Cycle
-Branding Decision
-Packaging Decision
Price
-Pricing Decision
-Pricing Policies
-Factors Affecting International Pricing
-Price Quatations
-Dumping
-Counter-trade
Place
-Direct Selling
-Indirect Selling/Market Intermediaries
Promotion
-Advertising
-Personal Selling
-Sales Promotion
-Public Relations
Product Mix
A product is something both tangible and intangible. The tangible product can
be described in terms of physical attributes like shape, dimension, components,
form, colour, etc. The intangible products include various services like
99
merchant banking, mutual funds, insurance, consultancy, air travel etc.

However, sometimes both tangible and intangible are combined to give a total
product. The global markets must see the total products which includes tangible
and intangible. The study of products in international market includes:
 Product Development
 Product Life Cycle
 Branding Decision
 Packaging Decision
1. Product Development
Product development typically refers to all the stages involved in bringing a
product from concept or idea, through market release and beyond. In other
words, product development incorporates a product’s entire journey. The six
stages of product development are:
Idea
Generation
Screening of
Ideas
Business
Analysis
Product
Development
in Laboratory
Test
Marketing
Commercial
Production
i. Generation of Product Idea: The development of salt-cum-sweet biscuits

concepts in one biscuit company is developed by an accident of removing the
divider by an employee.
ii. The second stage involves the Screening of Ideas regarding their feasibility.
100
iii. The third stage involves Business Analysis to estimate the product features,
cost, demand and profit.
iv. The fourth stage involves Development of the Product by Laboratory,
technical, production, personnel.
v. The fifth stage involves Test Marketing.
vi. The sixth step is Realising the Product at full scale.
 Market Segmentation: American markets gives less importance to
market segmentation in the global business. The main purpose of market
segmentation is to satisfy the customer needs more precisely. Market
segmentation helps to enter the foreign market in a phased manner. The
success of Japanese in entering the US market is attributed to this
principle.
 Product Positioning: Product positioning attempts to occupy an
appealing space in a consumer’s mind in relation to space occupied by
other competitive products.
 Product Adoption: Product to be adopted in foreign market must
demonstrate five factors, they are:
 Relative advantage over existing alternatives.
 Product’s cleanliness and sanitisation accepted in foreign countries.
 Compatible with local customs and habits.
 Observism.
 Complexity.
2. Product Life Cycle
The concept of life cycle of a human being, a product or a business firm either
domestic or global is well established. The product life cycle concept generally
indicates, that a product starts with a beginning or a introduction stage and
passes through numerous stages and eventually disappears from the market in
its declining stage. The stages of product life cycle are:
Introduction Growth Maturity Extension Decline

Stage Stage Stage Stage Stage
Stages of international product life cycle

Various stages of international product life cycle are:
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Local Overseas Worldwide

Maturity Reversal
Innovation Innovation Imitation
1. Local Innovation: The product in this stage is a familiar product in the local
market. Product innovation take place mostly due to the changing wants of local
people.
2. Overseas Innovation: After a product is successful in domestic market, the
producer desires exporting it to the foreign markets due to excess production
compared to its demand in the domestic country.
3. Maturity: The development of the product reaches the peak stage even in
foreign markets. The producer modifies it and develops it based on the taste &
preferences of the customer on foreign markets. The producer exports the
products even to the less developed countries in this stage.
4. Worldwide Imitation: The local manufacturer in various countries starts to
imitate the popular products. They modify those products slightly based on the
local needs and starts to produce the same at less cost and starts selling them at
cheaper price.
5. Reversal: Competitive advantages of innovative or original manufacturer
disappear at this stage as producers in many foreign countries imitate the
product and develop it further and produce it at less cost. This stage also results
in product standardisation and competitive disadvantage.
3. Branding Decision
A brand is a company’s promise to deliver a specific set of features, benefits,
services and experiences consistently to buyer. However, a brand should rather
be understood as a set of perception a consumer has about a product of a
particular firm.
Branding consists of a set of complex branding decisions. Major brand strategy
involves brand positioning, brand name selection, brand sponsorship and brand
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development. These four branding decisions are also called brand strategy. All
branding decisions focuses on consumer.
a. Brand Positioning: A brand must be positioned clearly in target customers’

minds. Brand positioning can be done at any of three levels:
 on product attributes
 on benefits
 on beliefs and values.
At the lowest level, marketers can position a brand on product
attributes. Marketing for a car brand may focus on attributes such as large
engines, fancy colours and sportive design. However, attributes are generally
the least desirable level for brand positioning. The reason is that competitors
can easily copy these attributes, taking away the uniqueness of the brand. Also,
customers are not interested in attributes as such. Rather, they are interested in
what these attributes will do for them. A brand can be better positioned on basis
of a desirable benefit. The car brand could go beyond the technical product
attributes and promote the resulting benefits for the customer: quick
transportation, lifestyle and so further.
b. Brand Name Selection: When talking about branding decisions, the brand
name decision may be the most obvious one. The name of the brand is maybe
what you think of first when imagining a brand – it is the base of the brand.
Therefore, the brand name selection belongs to the most important branding
decisions. However, it is also quite a difficult task. Although finding the right
name for a brand can be a challenging task, there are some guidelines to make it
easier. Desirable qualities for a brand name include:
 It should suggest something about a product’s benefits and qualities.
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 It should be easy to pronounce, recognise, and remember.

 The brand name should be distinctive.
 It should also be extendable.
 The brand name should translate easily into foreign languages.
 It should be capable of registration and legal protection.
c. Brand Sponsorship: Branding decisions go beyond deciding upon brand

positioning and brand name. The third of our four branding decisions is the
brand sponsorship. A manufacturer has four brand sponsorship options. Brand
Sponsorship Options
 A product may be launched as a manufacturer’s brand. This is also
called national brand. Examples include Kellogg selling its output under
the own brand name (Kellog’s Frosties, for instance) or Sony (Sony
Bravia HDTV).
 The manufacturer could also sell to resellers who give the product
a private brand. This is also called a store brand, a distributor brand or
an own-label. Recent tougher economic times have created a real store-
brand boom. As consumers become more price-conscious, they also
become less brand-conscious, and are willing to choose private brands
instead of established and often more expensive manufacturer’s brands.
 Also, manufacturers can choose licensed brands. Instead of spending
millions to create own brand names, some companies license names or
symbols previously created by other manufacturers. This can also involve
names of well-known celebrities or characters from popular movies and
books. For a fee, they can provide an instant and proven brand name.
 Finally, two companies can join forces and co-brand a product. Co-
branding is the practice of using the established brand names of two
different companies on the same product. This can offer many
advantages, such as the fact that the combined brands create broader
consumer appeal and larger brand equity. For instance, Nestlé uses co-
branding for its Nespresso coffee machines, which carry the brand names
of well-known kitchen equipment manufacturers such as Krups,
DeLonghi and Siemens.
d. Brand Development: Branding decisions finally include brand development.

For developing brands, a company has four choices: line extensions, brand
extensions, multi-brand or new brands. Brand Development Options
 Line extension refers to extending an existing brand name to new forms,
sizes, colours, ingredients or flavours of an existing product category.
 Brand extension also assumes an existing brand name but combines it
with a new product category.
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 Multi-brands mean marketing many different brands in a given product

category. P&G (Procter & Gamble) and Unilever are the best examples
for this.
 New brands are needed when the power of existing brand names is
waning.
As you might have recognised, these four branding decisions are all
interrelated. In order to build strong brands, brand positioning, brand name,
brand sponsorship and brand development have to be in line with each other.
4. Packaging Decision
Packaging includes all the activities of designing and producing the container
for a product. Packaging is the use of containers and wrapping material plus
decorations and labelling’s to protect the product, to help and promote its sales,
and to make it convenient for the consumers to use the product. Purpose of
packaging is to:
 Product protection
 Product attractiveness
 Product identification
 Product convenience
 Effective sales tool
 Helps in segmentation
 Direct information
There are various packaging decisions, these decisions include:
 Product Differentiation
 Package Design
 Package Size
 Package Shape & Colour
 Package Cost
 Material Used
 Package Types to be used
 Packaging Style
Price Mix
There is no product without a price and there is no price without a product.
Thus, price is an integral part of the product. Price may be high from the point
of view of cost and low from demand point of view. Fair price reflects the
105
perceived value of the product in question. The study of international pricing

includes:
Factors
Pricing Pricing Affecting Price Counter-
Dumping
Decisions Policies International Quotations trade
Pricing
1. Pricing Decisions
Though the pricing is significant among the 4P’s, it receives the least attention
in international marketing. Pricing decisions can be studies from the following
approaches:
 Supply & Demand
 Cost
 Elasticity or Cross Elasticity of Demand
 Market Share
 Tariffs & Distribution Costs
 Culture purchasing Power
2. Pricing Policies
The pricing policies of international companies are:
 Standards price policy
 Two-tiered pricing
 Market pricing
a. Standard Price Policy: under the standard price policy, the international
company sells the product at the same price for the customers of any country or
nationality. Crude oil products like Kuwait oil, Aramco and Pemex sell their
products to all consumers at price determined by supply of and demand for
crude oil in the world crude oil market.
106
b. Two-tiered Pricing Policy: International company under this policy sells its
product at two prices, viz., one price for the domestic sales and other for the
foreign sales. This policy is adopted due to the involvement of shipping cost,
tariffs and foreign distribution cost.
c. Market Pricing Policy: International companies following this policy
customise their pricing on a market-by-market basis in order to maximize their
profit in every market. Japanese automobiles follow this policy in pricing their
cars.
d. Alternative Pricing Strategies: There are a number of alternative pricing
strategies in addition to the above-mentioned strategies. There include:
 Discounts (cash, quantity, functional. Etc.)
 Financing or credit terms
 Bundle or unbundle
3. Factors Affecting International Pricing
Pricing factors of international business varies from those of domestic business.
A number of factors affect the international pricing. The important among them
are:
a. Cost: Cost is the prime factor that affects the pricing in international
business. The costs include both manufacturing cost and marketing cost.
The exporters may fix the price below the cost in a short-run period and
recover the losses incurred in the long-run. But in the long-run, they fic
the price above the cost of production and cost of marketing.
b. Competition: The global company fixes the price not only based on the
cost but also on the price of the comparable competitors. The exporter
fixes the price in the short-run mostly based on the competitor’s price in
order to gain the market share.
c. Product Differentiation: The product differentiation provides a wider
choice to customer, who in turn pay higher price for it. Global company
uses the product differentiation in order to fix varying prices.
d. Exchange Rate: The exchange rate provides opportunities in fixing the
price for the products manufactured in developing countries and marketed
in advanced countries. In other words, such products can be priced high
due to the advantage of foreign exchange. The vice versa is true in the
case of products produced in advanced countries and marketed in
e. Economic Conditions of the Importing Countries: Many global
companies take the GDP, per capita income, disposed income, spending
107
pattern, ability to spend and such other factors of importing countries into
consideration while fixing the price for the products to be marketed in
that country.
4. Price Quotation
A quotation is a business offer made by a seller for the interested buyer who
wants to buy the certain goods at specific price and on certain terms and
conditions. The seller of the product always like to offer better opportunity for
the buyer. International price quotation includes the time of shipment and
specifies the term pf sale and payment.
5. Dumping
Dumping means selling the product at below the ongoing market price or at the
price below the cost of production. Haberler Defines dumping as, “the sale of
goods abroad at a price which is lower than the selling price of the same good at
the same time in the same circumstances at home, taking account of difference
in transport costs.”
Types of Dumping
Dumping is of three types, viz.,
a. Intermittent Dumping: When the production of a product is more than the
demand in the home country, the stocks piled up even after sales. In such a case
the producer sells the remaining stock in foreign countries at low price without
reducing the price of domestic countries.
b. Persistent Dumping: The monopolist sells the remaining production in the
foreign countries at a low price continuously. This type of dumping is called
persistent dumping.
c. Predatory Dumping: The monopolist sells the product in the foreign market
at a low price initially with a view to drive away the competitors and increase
price after the competitors leave the market. This type of dumping is called
predatory dumping.
Objectives of Dumping
The objectives of dumping include:
 To enter the foreign market
 To sell surplus production
 To develop trade relations
6. Counter-Trade
108
Counter-trade is an arrangement to pay for import of goods and services with

something other than cash. Thus, counter-trade is goods-for-goods trade/deal.
Reasons for counter-trade are:
 International debt and liquidity problems
 To provide access to the markets of developing countries
 To enable bilateral agreements between government
Types of Counter-trade
Types of counter-trade include:
a. Barter Counter-trade: This type of counter-trade involves simultaneous
exchange of products/services of equal value. For example, Chinese coal was
exchanged for the construction of a seaport by the Dutch in China.
b. Counter-purchase: Counter-purchase involves two separate cash
transactions which are equal in value. Money exchange takes place only in
books of accounts. Thus, money does not need to change hands. For example,
Brazil export vehicles, steel and farm products to oil producing countries and
buys oil in turn from them.
c. Compensation Trade: Under compensation trade, one country exports
machinery, builds factories in another country with an agreement to import the
goods produced in the factories built by them in the second country. A Japanese
company self-sewing machines to China and received payment in the form of
3,00,000 pairs of pyjamas.
d. Switch Trading: Switch trading involves a triangular trade agreement. When
the goods are not wanted by one country, a third party enters the agreement by
taking those goods and paying hard currency. For example, India exports
software to the USA but needs oil. Therefore, the USA pays US dollars to
United Arab Emirates and enables India to import oil without any cash
transactions between India and UAE.
Place Mix
International companies either sell directly or indirectly. Indirectly selling takes
place through domestic agents/domestic merchants. Detailed place
mix/distribution channels are defined below:
109
Direct Selling
Channels
Indirect Selling
1. Direct Selling
Foreign company develops its own overseas marketing department or foreign
marketing intermediaries and sells the product in international market.
2. Indirect Selling
Indirect selling is done through market intermediaries. Various types of market
intermediaries include:
a. Foreign Distributor: It is a foreign company having exclusive rights to
distribute the company’s product in a foreign country.
b. Foreign Retailer: It is a retailing company firm in a foreign country
engaged by the distributors of the foreign country concerned to deal in
and sell the products.
c. State Controlled Trading Company: It is a government company
authorised to deal in and sell the products/services of foreign companies.
d. Export Broker: It is a domestic company engaged in arranging for
export of goods of domestic companies by charging a fee.
e. Sales Representatives: It is a firm exclusively engaged to take up all
export activities of a domestic manufacturer. This agent works for
commission.
f. Export Management Company: This company manages the entire
export activities of a domestic company on contract.
g. Cooperative Exporter: Manufacturers of a particular product in the
domestic country form into a cooperative union to manage their export
activities. this cooperative union manages the export activities of its
members.
h. Export Distributor: Export distributor is granted exclusive rights to
represent the manufacturer in selling the product in foreign countries. He
operates either in his own name or manufacturer’s name.
i. Export Merchant: It is a firm engaged in buying the products in the
domestic country in order to export to foreign countries on its own.
Promotion Mix
Promotion plays a vital role in providing information of the product to the
foreign customer. It also creates the desirability of the product among foreign
110
potential buyers. Foreign companies desire to communicate with their

marketing intermediaries and potential buyer to ensure favourable sentiment
towards themselves and their products. Promotion is more culture bound than
other Ps. Hence, the foreign companies must take special care in promoting the
product in the host country. The promotion mix include:
 Advertising
 Personal selling
 Sales promotion
 Public relations
1. Advertising
Though advertising is not given due importance in developing countries, it plays
crucial role in international marketing and particularly for consumer goods and
consumer durables. The international firm while formulating advertising
strategy should consider:
 Message
 Medium
 Extent of Global Advertising Efforts
2. Personal Selling
The importance of personal selling varies from industrial products to consumer
durables and to consumer products. For industrial products, computers, etc.,
personal selling is essential to provide technical information of the product.
However, personal selling vital role in international marketing even for
consumer goods as the firm and its products are new to the foreign market. The
companies appoint the natives as sales personnel for their personal selling as
they are better aware of country’s culture and build the relationship between the
company and the customer.
3. Sales Promotion
Sales promotion includes specialised marketing efforts like coupons, in-store
promotions, sampling, direct mail campaigns, cooperative advertising and trade
fair attendance. International companies attend trade shows like Paris Air Show,
Tokyo Auto Mart, etc. Most of the airlines companies use sales promotion to
lure customers.
4. Public Relations
Public relations include efforts aimed at enhancing a firm’s reputation and
image with the general public. The consequence of general public relations is
111
that the firm is a ‘good corporate citizen’. This image in turn enhances company
sales. The US firms are particular to be a corporate philanthropic in order to
build good corporate image in the minds of the public. Toshiba is a good
corporate citizen.
Future of International Business

The unprecedented developments in information technology brought amazing
changes in the field of international business. These developments enabled the
international companies to source for all kind of inputs across the globe. In fact,
certain operations of software industries are conducted in an Indian subsidiary
and these semi-finished products are transferred to the parent company in the
USA through online computer systems. Computer aided production is another
online means which enables the production operations across the globe.
In addition, the business process re-engineering, enterprise resource
planning and supply chain management enabled the international business firms
to conduct their operations more efficiently in lesser time.
The domestic companies could enter global market very easily through
the help of electronic business, even without physically entering to any other
country. Thus, the concept of virtual international business emerged, the process
of virtual international business consists of two stages:
Front-end
Stages Back-end
Stages
Front-end Stages
Front-end stages of virtual international business consist of:
1. Attracting the customer: Customers are attracted from all the countries into
internet space either by company website or by general portals picketing off the
chain.
112
2. Customisation: Customer is encouraged to configurate his own products. For

example, a person can design his own shoe o internet depending on his taste and
preferences after customer configures the product, the configurator works out
the possible combinations and price.
3. Payment: Electronic funds transfer takes place if the buyer and seller have
the accounts with the same bank. Online credit payment can also be used for the
payment of money.
4. Delivery: Delivery system take over from this stage, they are being
increasingly outsourced today to specialized firms.
Back-end Stages
Back-end stages of virtual international business includes:
1. Fulfilment: After the initiation of customization process, the back-end
machinery starts to fulfil the customer needs.
2. Scheduling: Customization makes the production process highly complex.
Scheduling becomes the key factor in the production process.
3. Supplies: With the value chain transparent, vendors known the demand the
moment the customer logs in and they start delivering, according to the
production scheduling.
4. Manufacturing: The one tricks and motor process that skill cannot be
avoided, though increasingly this is being outpriced to others.
A number of companies across the globe have started carrying out their
business through e-business. The future state of international business would be
e-business.
In the business world, company demand is increasing for a new
trustworthy source of information on tan and regulatory change worldwide, to
drive strategic global decisions as well as tactical local ones.
The solution lies in developing a platform to help business interact with
multiple tarnation and regulatory bodies that provides, a unified and constantly
updated source of information. The platform needs to be designed in
response to several trends:
113
Customer
Co-creation
Experience
High
Flexibility,
Complexity
Fast
Adaption
Interoperabi
Compliance Treands -lity
1. Compliance: Governments, previously reluctant players in the digital

transformation gamer are catching up rapidly. New operational expenditure
purchasing pattern, a focus on transparency and an increasingly open stance
towards innovation and the clouds are shifting the tarnation and compliance
landscape.
2. Complexity: Organizations are increasingly challenged to keep track of
rapidly changing regulatory and tan requirements in many countries.
3. Customer Experience: This is becoming the drive factor for technology
selection as customer is treated as king.
4. Co-creation: Organizations are working even more closely with their
partners to co-create new services.
5. High Flexibility, Fast Adaptation: Rules change frequently so companies
require a solution that keeps them up to date.
6. Interoperability: This new architecture overcomes historical problems like
lack od interoperability between systems that handle tan calculations, tan
reporting, cash flow statements, payments and tan returns.
International business is slowly emerging as virtual international
business. The present developing countries are slowly acquiring competitive
strengths and they would become exporting countries in the near future.
114

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International Business Syllabus

Unit-1: International Business- Introduction, Significance, Nature and Scope of

Unit-2: Theories of International Trade- Classical country-based theories:

Unit-3: Balance of Payment: Concept, Components of BOP and Disequilibrium

Unit-4: International Financial Institutions and Liquidity- IMF, IBRD, IFC,

Scope of International Business

Reasons to go for international business

Difficulties in International Business

Import & Export

Licensing & Frenchising

Mergers & Aquaizations

Opening the Branch Abroad

Turn Key Contracts

Exclusive Agents in Abroad

1. Import & Export: An import is a good brought into a jurisdiction, especially

Global Business Environment

Trade is also called the exchange of goods economy, is to transfer of the

Different Types of Trade

Wholesale Retail Import Export Enter pot

2. External Trade: External trade is also called foreign trade or international

Theories of International Trade

Classical Country Modern Firm

Mercantilism Country Similarity

1. Classical Country Based Theories: Various classical country-based theories

i. Theory of Mercantilism: The concept of mercantilism (a zero-sum game)

iii. Theory of Comparative Advantage: David Ricardo (1817) promulgated

i. Country Similarity Theory: The country similarity theory states that when a

a. The Economic Similarity of Industrial Countries: So much trade takes

production of the products shifts from industrialized countries to

iv. Porter’s Theory of National Competitive Advantage: Professor Michael

a. Factor (Input) Conditions: Factor conditions refer to how well-endowed

infrastructure, scientific and technological infrastructure, and natural

International Trading Environment

Trade Strategies: The government’s approach towards international business

Free Trade vs Protection

Arguments for Free Trade

1. Advantages of specialisation: Firstly, free trade secures all the advantages

grounds. Competition enhances efficiency. Moreover, it tends to prevent

In brief, restricted trade prevents a nation from reaping the benefits of

Arguments against Free Trade

Despite these virtues, several people justify trade restrictions. Following

1. Advantageous not for LDCs: Firstly, free trade may be advantageous to

In view of all these arguments against free trade, governments of less

Thus, protection is the anti-thesis of free trade or unrestricted trade.

 To protect domestic industries from foreign competition

 To discriminate against certain countries.

Arguments for protection

2. Economic Arguments: Various economic arguments for protection of

f. Employment: Protection has been allocated also as a measure to simulate

3. Non-Economic Arguments: Various non-economic arguments for protection

Reasons for Imposing Trade Barriers

1. National Security: - countries enforce tariff and non-tariff barriers to protect

Types of Trade Barriers

1. Tariff barriers: Tariff is a custom, duty or a tax imposed on products that

i. Import tariff/duty: It is the custom duty imposed by the importing

iv. Other Tariff barriers: Other tariff barriers include:

Commodity agreement usually involves a consensus on quantities traded,

“International Commodity Agreement which are inter-governmental

Objectives of Commodity Agreements

Forms of Commodity Agreements

1. Quota Agreements: In international trade, a government-imposed limit on

They also restrict export or production by a certain percentage of basic quota

2. Buffer Stock Agreements: Buffer stock is a stockpile of commodities held

3. Bilateral Agreements: An agreement is entered between major exporter and