01-International Business-1

International Business
UNIT - I
INTRODUCTION
The Commerce Ministry of the Government of India announces Export-Import
(EXIM) policy every five years, which governs laws related to the import and export of
items within that period. This chapter provides a brief overview of the changes in the
Trade policy of India in the context of the latest policy changes. This focus is on the
EXIM policy changes in the comparison to the announcements in the EXIM policy
1997-2002, to analyze the features, various measures and schemes. It is also worth
nothing that the Government has changed the name of EXIM policy to ‘Foreign Trade
Policy’
TRADE AND INVESTMENT
Foreign trade and foreign direct investment (FDI) are mutually influential. FDI
in the natural resource sectors, including plantations, in developing countries increase
trade. FDIs in several other sectors also increase international trade.
While on the one hand investment increase trade, as stated above, on the other,
foreign production by FDI substitutes foreign trade in many cases. Due to factors like
foreign exchange problems, desire to industrialize fast, etc., the policies of many
developing countries prefer foreign investment (for import substitution) to imports. The
sales of firms established by trade and a part of this generates trade about one-third of
the world trade in manufactures is intra-company trade.
Due to the protectionism and some other factors, large amounts of FDI have
been taking place in the developed countries leading to substitution of foreign
production for foreign trade. The regional integration schemes also tend to increase
such investments to substitute production for trade. For example, many foreign
companies have setting up manufacturing and assembly facilities in the European
Community to overcome the fortress EC-92.
It may also be pointed out that, to a considerable extent, such investments are
made possible by the past trade; the funds generated by trade ploughed back to
investment in the foreign markets. The massive foreign investments made by the
Japanese companies since the mid-1980s deserve a special mention in this context.
While the international investment replaces international trade in certain
products, it may generate trade in some other products. Drucker, who observes that
although traditionally investment has followed trade, trade is increasingly becoming
dependent on investment, points out that US exports in the years of the over-valued
dollar would have been even lower had the European subsidiaries of American joint
ventures in Japan not continued to buy machinery, chemicals, and parts from the US.
Similarly, the foreign subsidiaries of America’s financial institutions, such as
the major banks accounted for something like one half of US service income during
those dismal years. Foreign investment has been significantly contributing to the export
performance of some countries. The case of China deserves a special mention here.
THEORIES OF INTERNATIONAL TRADE

Theory of mercantilism
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The doctrine of mercantilism propagates in the 16th and 17th centuries,

advocated that countries should simultaneously encourage exports and discourage
imports. Mercantilism was premised on the notion that exports are per se good because
they earn a country gold, while imports are per se bad because they result in an outflow
of gold. (In those days, gold was the currency normally used to finance trade).
Consequently, a country should strive to reduce its dependence on imports by
producing as much as it could itself. In practical terms, it suggested that the government
policy should seek to reduce imports by imposing duties on imports and restricting the
amount of foreign goods that are allowed into the country. At the same time, every
effort should be made to boost exports by whatever means. If one country succeeds in
achieving a large export surplus, it can only do so if other countries run an equivalent
trade deficit. It follows that, if all countries pursue such a policy, the result will be
conflict among them. Either one country will succeed at the expense of the rest or else
all will fail to achieve their objective.
Theory of Absolute Advantage
This theory propounded by Adam Smith in 1776, states that a country has an
absolute advantage in the production of an item when it is more efficient than any other
country in producing it.
Absolute advantage may come due to factors of climate, quality of land and
natural resource endowments or difference in labor, capital, technology and
entrepreneurship. Some nations have oil and some don’t have.
Theory of Comparative Advantage
Trade based on absolute advantage is easy to understand. But what happens
when on country can produce all products with an absolute advantage? Would trade
occur? Can trade still be mutually advantageous to the trading partners?
Here we encounter the doctrine of comparative advantage first introducing
David Ricardo in the early 19th century. The doctrine emphasizes relative rather than
absolute cost differences. The doctrine demonstrates that mutually advantageous trade
can occur even when one trading partner has an absolute advantage. It makes sense for
a country to specialize in the production of those goods that it produces less efficiently
from other countries. This theory stresses that comparative advantage arises from
differences in productivity. Ricardo focused on labor productivity and argued that
differences in labor productivity between nations underline the notion of comparative
advantage. Thus, whether French is more efficient than British in the production of
wine depends on how productively it uses its resources.
Heckscher-Ohlin Theory (Modern Theory of International Trade)
Swedish economists Eli Heckscher (in 1919) and Bertil Ohlin (in 1933) put
forward theory of comparative advantage. According to their theory, the comparative
advantage of a country arises from differences in national factor endowments. Factors
of endowment mean the extent to which a country is endowed with resources like land,
labor and capital . Nations have various factors of endowment and different factors of
endowment explain difference in factor of cost. Heckscher-Ohlin theory predicts that
countries will export those goods that make intensive use of factors that are locally
abundant, while importing goods that make use of factors that are locally scarce.
The Product Life Cycle Theory
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Raymond Vernon proposed the product life cycle theory in the mid 1960s. His
observation was that large proportions of the new products were developed by US firms
and sold in US market, e.g. Televisions, instant cameras, photocopies, personal
computers, etc., Vernon argued that most new products were initially produced in the
United States. Apparently the pioneering firms believed that it is better to keep
production facilities close to the market and the firm’s centre of decision making, given
the risk inherent in introducing new products. Also, the demand for most new products
tends to be based on non price factors.
Vernon argued that early in the life cycle of typical new product, while demand
is starting to grow in the early in the United States, demand in other advanced countries
is limited to the high income groups. Therefore, the limited initial demand does not
necessitate the country to start producing the product but it is required to be exported
from the United States.
Over time, the demand for the product increases. As it does, it becomes
worthwhile for the country to start producing the product. In addition, US might set up
their Consequently, the production within other advanced countries begins to limit the
potential for exports from the United States. As the market for the product matures in
other advanced countries and the United States, the product becomes more standardize,
and price becomes the main competitive weapon.
Producers based in other countries, where labor cost is low, might now be able
to export the product to the United States.
If the cost pressure becomes intense, the process might not stop here. The cycle
by which United States lost its advantage to other advanced countries may be repeated
once more, as developing countries begin to acquire a production advantage over the
advanced countries. Thus, the locus of global production initially switches from the
United States to other advanced countries and then from those countries to developing
countries.
The consequences of these trends for the pattern of world trade is that overtime
the United States switches from being an exporter to an importer of the product as
production gets concentrated in the lower cost foreign locations.
Product Life Cycle theory can be demonstrated in cycles as follows:
Cycle 1 Cycle 2 Cycle 3 Cycle 4 Cycle 5 Cycle 6
New product Sale in own Limited Regular Production Reverse exports
development country sales in exports in foreign to parent country
countries from parent country from foreign
country country
National Competitive Advantage: Porte’s Diamond Model
Michael Porter is a famous Harvard business professor. He conducted a
comprehensive study of 100 industries in 10 nations to learn why do some nations
succeed in international competition? Porter introduced this model in his book. The
Competitive Advantage of Nations. He sought to explain why a nation achieves success
in a particular industry. Why Indians did well in the software industry why are Japanese
doing well in the automobile industry? Both Heckscher-Ohlin theory and Theory of
Comparative Advantage is only partly able to explain.
According to Porter, a nation attains a competitive advantage if its firms are
competitive. Firms become competitive through innovation. Innovation can include
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technical improvements to the product or to the production process. Porter

hypothesizes that four broad attributes of a nation that (Figure 10.10) shape the
environment in which local firms compete. The quality of this competition promotes or
impedes the creation of global competitive advantage. These four attributes constitute
“Diamond”. They are:
Government Firm strategy,
structure and rivalry
Factor conditions Demand

conditions
Related and
supporting industries
FIGURE 1.1 Porter Diamond Model for the Competitive Advantage of Nations.
a) Factor conditions (i.e., the nation’s endowments in factors of production such
as skilled labor and infrastructure necessary to compete in a given industry).
b) Demand conditions (i.e., sophisticated customers in home market)
c) Related and supporting industries (which are internationally competitive)
d) Firm strategy, structure and rivalry (i.e., conditions governing creation,
organization, management of companies, and the nature of domestic rivalry).
Implications of Trade Theories
All these trade theories have implications on the business. The implications
can be explained as follows:
Strategy for locations.

Most of the trade theories emphasize that due to different factors of production
different countries have advantages in different productive activities. Hence it makes
sense for the firm to disperse the production activities is used by the firms while going
in for. Globalizations to get the competitive edge. Hence if design can be located there.
Similarly, if the manufacturing is done most cheaply in India then the manufacturing
facility should be located there. If the firm does not do it then it may find itself at
competitive disadvantage relative to firm that do.
Policy implementations.
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The firms are major players on the International trade scene since they do both
import and export. The firms may tend to lobby to increase trade restriction or promote
trade. However the International trade theories claim that free trade is good for the
interest of country, although it may or may not be in the best interest of that particular
firm.
TYPES OF INTERNATIONAL BUSINESS
International business encompasses activities of different nature. Some of the
important activities are described here.
Trading
Import and export of goods and services have been growing very fast, as
pointed out elsewhere in this book. In countries like Japan, there are international
trading houses which transact enormous volume of business. The Export Houses, Star
Trading Houses, and Super Star Trading Houses of India are merchant exporters – they
buy and resell goods. They are comparatively small in size compared to the giant
trading houses of Japan.
Manufacturing and Marketing
The manufacturer exporters are those who export goods manufactured by them.
Many MNCs and other firms, small and big , do manufacturing and marketing.
Sourcing and Marketing

There are many MNCs and other firms which outsouce the products which they
market at home and/or abroad.
Global Sourcing for Production
There are many firms which source globally their raw materials, intermediates,
etc. required for their manufacturing.
Market Entry and Operation Forms
With reference to the foreign market entry and operating strategies, the
following types (Figure) of international business may be distinguished. These are
explained in chapter on Market Entry Strategies.
Foreign Market Entry and Operation Strategies
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Exporting Contractual Production/Assembly

 Direct arrangements facility in foreign
exporting market
 Indirect  Licensing/Fran
exporting chising  Assembly
(From operations
homecountr  Strategic  Wholly owned
y/third alliance manufacturing
country) facility
 Joint venture
 Contract
manufacturing
Figure : 1.2 Foreign market Entry and Operating Forms
TRADE POLICY
The focus of trade policy reforms in India has been on liberalization, openness
and globalization with a basic thrust on outward oriented export promotion activity,
removal of quantitative restrictions, and improving competitiveness of the Indian
industry to meet global market requirements. Although the Foreign Trade Policy of
India is primarily a 5-year policy, keeping in mind the latest national and international
developments, the Commerce Ministry announces appropriate amendments every
year. This is usually done on the 31March every year. The EXIM policy announced in
March 1997 on 31 March 2002 will hold for the period 2002-2007.
The new policy is designed to achieve the export growth rate of 12% per year
over the next five years. It attempts to build on what has already been announced
earlier, but in many cases, only partially accomplished. A case in point is the
provision of additional sops to Special Economic Zones (SEZ), like setting up of
Overseas Banking Units that are free from Statutory Liquidity Ration (SRL) and CRR
(Cash Reserve Ratio) requirements. There is a special emphasis on certain areas like the
industrial clusters, agri-export zones, gems and jewellery, hardware , etc.
EXIM POLICY UPDATES
Since 1993, tariff reform has brought the simple average of tariff rates down to a
level lower than 35%. Tariff reform and reduction is an ongoing process, which has
been pursued by various governments. However, the structure of the traffic remains
complex, and in a large number of bands; in several industries, notably in paper and
paper products, printing and publishing, wood and wood products, and fool, beverages
and tobacco, tariff escalation remains high.
Reform to the system of restrictive import licensing has moved ahead steadily,
but further steps remain to be taken and are encouraged. In general, products are first
moved to a Special Import Licence (SIL) list, with producers being exposed to limited
foreign competition, before the product is moved to the list of freely importable goods.
The list of freely importable goods currently covers some 68% of tariff lines: remaining
restrictions cover mainly consumer goods. However, India continues to use state
trading monopolies to retain some control over exports and Imports of certain products
through canalization. Also, India maintains a large number of incentive programmes
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for exports. These include income tax exemptions, subsidized credit, export insurance
and guarantees, export marketing assistance schemes, and access to some imports that
are normally subject to restrictive licensing. The overall scope of such incentives has
been enhanced, turning India’s overall policy stance more explicity export-oriented.
With increased liberalization and globalization of trade, India’s focus is on areas of her
strength and advantage to meet global competition, as also areas having trade potential.
This is the rationale that has given the impetus for shortening of the Negative List of
Imports considerably and for expanding the Freely Importable List. As per India’s
commitment to WTO, it has done away with the quantitative restrictions on imports of
1429 items in two stages by 1 April 2001.
In 1991, India initiated a wide-ranging programme of trade liberalization and
economic deregulation, with the objective of integrating the India economy more
closely with the economy. The objectives of India’s trade policy defined in the Export
Policy for 1997-2002 are*.
1. Accelerate the country’s transition to a globally oriented, vibrant economy, with
a view to deriving maximum benefits from expanding global market
opportunities.
2. Stimulate sustained economic growth by giving access to essential raw materials,
intermediates, components, consumer goods, and capital goods required for
augmenting production.
3. Enhance the technological strength and efficiency of India agriculture, industry
and services, thereby improving their competitive strength, while generating new
employment opportunities.
4. Encourage the attainment of internationally accepted standards of quality.
5. Provide consumers with good quality products at reasonable prices.
New Features in the 2002-2007 Policy
The EXIM for 2002-2007 was described as pro-growth and positive with certain
concrete measures. The most welcome initiative of the latest EXIM policy is the
removal of quantitative restrictions on agricultural exports and setting up of 20 Agri-
export Zones in 12 different states, a concept that was introduced in 2001. The policy
also aims at making the Special Economic Zones (SEZs) more attractive for the units
located in them by providing them with income tax benefits and by allowing off-shore
banking units to be setup in these zones. In addition to converting four existing EPZs
into SEZs, approval has been given to 13 more SEZs. Other commendable steps are:
1. The move to allow the setting up of OBUs (Overseas Banking Units) in the
special economic zones is specially appreciable and would lead the SEZs to
have access to money at internationally competitive rates, thereby reducing the
cost of capital.
2. The continuation of all the existing export promotion and duty neutralization
schemes has been welcomed. The continuation DEPB scheme with further
simplification is especially appreciated.
3. The relaxation of minute verification of technical characteristics and
specification of inputs would make the duty replenishment certificate scheme
more attractive.
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4. The reduction in interest rate from 24% to 15% in the case of non-fulfilment of
export obligation by exporters under the various schemes would be a very
lucrative for the exporters.
5. Sectoral focus on leather, textiles, electronics, and gems and jewellery will tap
the immense untapped export potential that would get a boost.
6. The focus on Africa and CIS countries would open avenues for exports.
7. Adoption of a new classification for commodities for imports and exports,
redemption on the basis of shipping bills and bank certificates, extension of
export obligation fulfillment period from 8 to 12 years, with a five-year
moratorium period and offshore facility in Special Export Processing Zones.
8. The move to continue with the advance license, Duty Entitlement Pass Book
and ECGC schemes with further improvements for the next five years.
9. More freedom to bring in foreign exchange remittances within 360 days instead
of the earlier limit of 180
10. Permission to exporters, to keep 100% export proceeds in EEFC Account.
Issues Ignored
1. No scheme has been announced for remission of indirect taxes, the exporters
are subject to at present. Hazy tax issues dull the diamond dollar accounts
also.
2. Involvement of the States in export promotion activities will help in
infrastructure development. However, the fund allocated could have been
much more for the States to meaningfully address infrastructure and other
constraints.
3. Even the allocation for market access initiative programme of Rs.42 crores for
2002-2003 could have been enhanced to at least Rs.100 crores.
4. The Cluster Development issue needs to be looked at in greater detail as most
of the clusters lack basic infrastructural facilities necessary for exports. Fund
allocation needs to be enhanced and the employment of funds streamlined.
HIGLIGHTS OF POLICY AMENDMENT – 2003
The highlights from the amendment on EXIM policy, made on 31st March,
2003 are given now.
1. Service Exports
Duty-free import facility for service sector having a minimum foreign exchange
earning of Rs. 10 lakhs. The duty-free entitlement shall be 10 % of the average foreign
exchange earned in the preceding three licensing years. However, for hotels, the same
shall be 5% of the average foreign exchange earned in the preceding three licensing
years. Imports of agriculture and dairy products shall not be allowed for imports against
the entitlement.
2. Agro Exports
Corporate sector with proven credentials will be encouraged to sponsor
Agri-Export Zones for boosting agro exports. The corporate to provide services such as
provision of pre/post harvest treatment and operations, plant protection, processing,
packaging, storage and related R&D.
3. Status Holders
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Duty-free entitlement for status holders incremental growth of more than 25%
in FOB value of exports (in free foreign exchange). This facility is available to status
holders having a minimum export turnover of Rs. 25 Crores (in free foreign exchange).
The duty-free entitlement shall be 10% of the incremental growth in exports and can be
used for import of capital goods, office equipment and inputs for their own factory or
the factory of the associate/ supporting manufacturer/job worker. The
entitlement/goods shall not be transferable. This facility is available on the exports
made from 1April 2003.
4. Hardware/Software
Hardware shall be admissible for duty-free import for testing and development
purposes to promote growth of exports in embedded software. Hardware up to a value
of US $ 10, 000 shall be allowed to be disposed off subject to STPI certification.
5. Gems and Jewellery Sector
 Diamond and jewellery dollar account for exporters dealing in
purchase/sale of diamonds and diamond studded jewellery. Decision to
accept payment in dollars for cost of import of precious metals from EEFC
account of exporter.
 Gems and jewellery units in SEZ and EOUs can receive precious metal i.e.,
gold/silver/platinum prior to exports or post exports equivalent to value of
the jewellery exported.
6. Export Clusters
Upgradation of infrastructure in existing clusters/industrial locations under
the Department of Industrial Policy and Promotion (DIPP) scheme increase overall
competitiveness of the export clusters.
7. Removal of Quantitative Restrictions
 Import of 69 items covering animal products, vegetables and spices,
antibiotics and films removed from restricted list.
 Export of five items, namely, paddy export basmati, cotton linters, rare
earth, silk cocoons, and family planning devices except condoms, removed
from the restricted list.
8. EOU Scheme
 Agriculture/Horticulture processing EOUs will now be allowed to provide
inputs and equipment to contract farmers in DTA to promote production of
goods as per the requirement of importing countries. This is expected to
integrate the production and processing and help in promoting agro exports.
 EOUs are now required to be only net positive foreign exchange earner.
And there will be no more export performance requirement.
 Foreign bound passengers will now be allowed to take goods from EOUs to
promote trade, tourism and exports.
 Gems and jewellery EOUs are now being permitted sub-contracting DTA.
 Wastage for Sub-contracting/exchange by gems and jewellery units in
transactions between EOUs and DTA will now be allowed as per norms.
 Export/import of all products through post-parcel/courier-by EOUs will
now be allowed.
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 EOUs will now be a allowed to sell all products including gems and
jewellery through exhibitions and duty-free shops or shops set up abroad.
 Gems and jewellery EOUs will now be entitled to advance domestic sales.
9. EPCG Scheme
 The scheme shall now allow import to capital for pre-production and
post-production facilities also.
 The export obligation under the scheme shall now be linked to the duty
saved and shall be 8 times the duty saved.
 To facilitate upgradation of existing plant and machinery, import of spares
shall be allowed under the scheme.
10. DEPB Scheme
 Facility of provisional DEPB rate introduced to encourage diversification
and promote export of new product.
 DEPB rates rationalized in line with general reduction in customs duty.
11. Advance Licence
 Standard input-output norms for 403 new products notified.
 Value addition under DFRC scheme reduced from
33% to 25%.
12. DFRC Scheme
 Duty-Free Replenishment Certificate Scheme extended to deemed exports
to provide a boost to domestic manufactures.
 Value addition under DFRC scheme reduced from 33% to 25%
The Road Ahead
The Government of India must foresee the creation of a critical mass in India,
i.e., a self economy, which would spear-head its own growth. Once a critical mass is
created, a self-sustained system is born. It is possible that this would be achieved in the
next 5 to 10 years after which the system would not require any external support. If this
is achieved, India, like USA, might not need an EXIM policy at all in future. The
encouraging signs of achieving this critical mass are self-evident. One, India has come
out relatively unscathed by the happenings in the world, be it the Asian crisis or the
9-11attacks on USA. Second, the exporting community has shown a lot of potential in
quality and technological parameters in line with international standards. Production
essentially only for the export markets, is taking root in India. However, considering
the problems in the external sector like debt, balance of trade deficit, India has to go a
long way to achieve its targets and survive in the long run. Removal of restrictions on
imports has created a threat to the small-scale industries in India and many of them are
on the verge of collapse. Even to achieve 10% annual export growth rate. India has to
rely on small scale industries. The EXIM policy, though proactive, could have taken
bolder steps to encourage the export of the products of small industrial units.
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FEATURES OF FOREIGN TRADE POLICY 2004-2009

The Government of India’s new Foreign Trade Policy was announced in 2004
by the Union Commerce Minister. With a view to doubling percentage share of global
trade within five years and expanding employment opportunities, especially in
semi-urban and rural areas, certain special focus initiatives have been identified for the
agriculture, handicraft, gems and jewellery, and leather sectors.
The Government shall make concerted efforts to promote exports in these
sectors by specific sectoral strategies which will be notified from time to time. Further,
Sectoral initiatives in other sector will also be announced from time to time. The thrust
sectors inidicated below shall be extended to the following facilities.
Agriculture
1. A new scheme called the Vishesh Krishi Upaj Yojana (Special
Agricultural Produce Scheme) for promoting the export of fruits,
vegetables, flowers, minor forest produce, and their value added products
has been introduced.
2. Funds shall be earmarked for development of Agri Export Zones (AEZs).
3. import of capital goods shall be permitted duty free under the EPCG
scheme.
4. Units in AEZ shall be exempt from Bank Guarantee under the EPCG
scheme.
5. Capital goods imported under EPCG shall be permitted to be installed
anywhere in the AEZ.
6. Import of restricted items such as panels shall be allowed under the various
export promotion schemes.
7. Import of inputs such as pesticides shall be permitted under the Advance
Licence for agro exports.
8. New towns of export excellence with a threshold limit of Rs. 250 crores
shall be notified.
Handlooms
1. Specific funds would be earmarked under MAI Scheme for promoting
handloom exports
2. Duty-free import entitlement of specified trimmings and embellishments
shall be 5% of FOB value of exports during the previous financial year.
3. Duty-free import entitlement of hand knotted carpet samples shall be 1% of
FOB value of exports during the previous financial year.
4. Duty-free import of old pieces of hand knotted carpets on consignment
basis for re-export after repair shall be permitted.
5. New towns of export excellence with a threshold limit of Rs. 250 crores
shall be notified
Handicrafts
1. New handicraft SEZs shall be established, which would procure products
from the cottage sector and do the finishing for exports.
2. Duty-free import entitlement of trimmings and embellishments shall be 5%
of the FOB value of exports during the previous financial year. The
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entitlement is broadbanded, and shall extend also to merchant exporters

tied up with supporting manufactures.
3. The Handicraft Export Promotion Council shall be authorized to import
trimmings, embellishments and consumables on behalf of those
exporters for whom directly importing may not be viable.
4. Specific funds would be earmarked under MAI Schemes for promoting
handicraft exports.
5. CVD is exempted on duty-free import of trimmings, embellishments and
consumables.
6. New towns of export excellence with a reduced threshold limit of Rs.250
crores shall be notified.
Gems and Jewellery
1. Import of gold of 18 carat and above shall be allowed under the
replenishment scheme.
2. Duty-free import entitlement of consumables for metals other than gold,
platinum shall be 2% of FOB value of exports during the previous
financial year.
3. Duty-free import entitlement of commercial samples shall be Rs.100,000.
4. Duty-free re-import entitlement for rejected jewellery shall be 2% of the
FOB value of exports.
5. Cutting and polishing of gems and jewellery shall be treated as
manufacturing for the purposes of exemption under Section 10A of the
Income Tax Act.
Leather and Footwear
1. Duty-free import entitlement of specified items shall be 5% of FOB value
of exports during the preceding financial year.
2. The duty-free entitlement for the import of trimmings, embellishments
and footwear components for footwear (leather as well as
synthetic),gloves, travel bags and handbags shall be 3% of FOB value of
exports of the previous financial year. The entitlement shall be also cover
packing material, such as printed and non-printed shoeboxes, small
cartons made of wood, tin or plastic materials for packing footwear.
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EXPORT-IMPORT PROCEDURES
INTRODUCTION
Like any decision in business, a person must take the decision to go for
exporting or importing to get the comparative advantage and to achieve international
competitiveness. The most important thing is to take a decision to export and import
and reap the benefits of international trade.
IMPORTER-EXPORTER CODE NUMBER
Importer-Exporter Code (IEC) number is the most important registration
required by an exporter/importer. No export or import shall be made by any person
without an IEC number unless specifically exempted. An IEC number can be obtained
on application to the competent authority, e.g., Director General of Foreign Trade
(DGFT) offices in India.
An application for the grant of an IEC number can be made by the
Registered/Head Office of the applicant to the licensing authority, regional office of
the Director General of Foreign Trade in the concerned format, and shall be
accompanied by documents.
The list of documents required for making an IEC application is as follows.
1. Application form (in duplicate)
2. Company profile (in duplicate)
3. True copy of Income Tax PAN
4. True copy of Sales Tax Certificate, if any
5. Government fees
6. Bank Certificates as per format.
7. Full address of branches in India and abroad (if any)
8. Three passport size photographs duly signed on the reverse.
9. SSI registration copy duly certified, if any
10. Declarations in duplicate.
11. Any other documents if required.
Validity and Features of IEC No.
An IEC number allotted to an applicant shall be valid for all its
branches/divisions/units/factories as indicated on IEC number.
1. IEC No. is the first, and must for exporters and importers.
2. It is a permanent number and has no expiry date.
3. It is valid both for imports and exports.
4. It is valid for all products.
5. IEC is of 10 digits.
REGISTRATION WITH EXPORT PROMOTION COUNCILS
The basic objective of Export Promotion Councils (EPCs) is to promote and
develop the exports of the country. Each Council is responsible for the promotion of a
particular group of products, projects and services. The EPCs shall keep abreast of the
trends and opportunities in international markets for goods and services, and assist their
members in taking advantage of such opportunities in order to expand and diversify
exports.
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Major Functions of the EPCs

The major functions of export promotion councils are:
1. Providing commercially useful information and assistance to their members in
developing and increasing their exports
2. Offering professional advice to their members in areas such astechnology
upgradation, quality and design improvement, standards and specifications,
product development, and innovation
3. Organizing visits of delegations of its members abroad to explore overseas
market opportunities.
4. Ensuring participation in trade fairs, exhibitions and buyer-seller meets
5. Promoting interaction between the exporting community and the Government,
both at the Central and State levels.
Non-Profit, Autonomous and Professional Bodies
The EPCs are non-profit organizations registered under the Companies Act or
the Societies Registration Act, as the case may be.
The Ministry of Commerce and Industry/Ministry of Textiles of the
Government of India, as the case may be, will interact with the for approving their
annual plans and budget and again for an mid-year appraisal and review of their
performance.
Registration-Cum- Membership
An exporter may, on application, register and become a member of an Export
Promotion Council. On being admitted to membership, the applicant shall be granted
forthwith Registration-Cum-Membership Certificate (RCMC) of the EPC concerned,
subject to such terms and conditions as may be specified in this behalf.
Prospective/potential exporters may also, on application, register and become
an associate members of an Export Promotion Council.
List of Export Promotion Councils
Name of Export Promotion Council
1. Agricultural and Processed Food Products Export Development Authority
(APEDA)
2. Apparel Export Promotion Council
3. Basic Chemicals, Pharmaceuticals and Cosmetics Export Promotion
Council
4. The Cashew Export Promotion Council of India
5. Carpet Export Promotion Council
6. Chemicals and Allied Products Export Promotion Council (CAPEXIL)
7. The Coffee Board
8. The Coir Board
9. The Cotton Textiles Export Promotion Council
10. Electronic and Computer Software Export Promotion Council (ESC)
11. Engineering Export Promotion Council
12. Federation of India Export Organizations (FIEO)
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13. The Gems and Jewellery Export Promotion Council

14. Export Promotion Council for Handicrafts
15. The Handloom Export Promotion Council
16. The Indian Silk Export Promotion Council
17. Council for Leather Exports
18. The Marine Products Export Development Authority
19. Overseas Construction Council of India
20. The Plastics and Linoleums Export Promotion Council
21. The Rubber Board
22. Shellac Export Promotion Council
23. The Sorts Goods Export Promotion Council
24. The Tea Board
25. The Synthetics and Rayon Textiles Export Promotion Council
26. The Tea Board
27. The Tobacco Board
28. Wool and Woolens Export Promotion Council
29. The Powerloom Development and Export Promotion Council
(PDEXCIL)
30. Jute Manufactures Development Council
EXPORT- IMPORT DOCUMENTS
An export trade transaction is distinct from a domestic trade transaction in more
than one way. One of the significant variations between the two arises on account of
the much heavier documentation work which is characteristics of an export transaction.
Proforma Invoice
Proforma Invoice, as the name suggests, is a proforma of the invoice. It is
prepared by an exporter and sent to the importer for necessary acceptance. When the
buyer is ready to purchase the goods, he will request for a proforma invoiced a
document which gives an idea to a buyer that if he places the order and goods are
supplied to him, what will be the invoice.
15
Invoice
An invoice is a fundamental and basic document. It contains the name of the
exporter, importer, consignee, and description of goods. It is required to be signed by an
exporter or his agent. This invoice is normally prepared first and several other
documents are prepared by deriving information from this invoice.
The invoice prepared by an exporter is required to be presented before different
authorities for different purposes.
Certificate of Origin
Certificate of Origin is one of the useful documents in import-export trade. This
certificate indicates that the goods which are being exported are actually manufactured
in a specific country mentioned therein. The certificate is sent by the exporter to the
importer. It is useful for clearance of the goods from the customs authority of the
importing country.
This Certificate of Origin is normally issued by the Chamber of Commerce.
Indian Merchant’s Chambers. Indo-Arab Chamber of Commerce, Memon Chamber of
Commerce, Bombay Chamber of Commerce and Maharashtra Chamber of Commerce
are some of the chambers regularly approached by the exporters for Certificate of
Origin.
Generalized System of Preference (GSP)
When imports from certain countries are favourably treated in the matter of levy
of import duties, the Custom Authorities of the concerned country insist upon some
proof of the fact that the goods are genuine products of such countries. For
this, a special type of certificate of origin (GSP) is sent to the importer by the exporter.
As the name indicates, GSP is a certificate indicating the fact that the goods
which are being exported have originated/manufactured in a particular country. It is
mainly useful for taking advantage of a preferential duty, if available.
Products will be considered to have originated in India if they have been either
wholly produced in India or produced there wholly or partly from imported materials
which have undergone sufficient working or processing in India to be regarded as
originating there.
In India, GSP is issued by the following agencies:
1. Directorate General of Foreign Trade (DGFT) and its regional offices
2. All Development Commissioners
3. All Export Promotion Councils
4. Export Inspection Councils (and their field offices called Export Inspection
Agencies)
5. Textile Committee, Bombay and its field offices
6. Central Silk Board
7. Development Commissioner(Handicrafts).
This certificate is also known as Form A.
Shipping Bill
The shipping bill is a document required to seek the permission of customs to
export goods by Sea/Air. It contains a description of export goods, number and kind of
16
packages, shipping marks and numbers, value of goods, name of the vessel, country of
destination, etc.
ARE 1
This form (earlier known as AR4 and AR4A) is an application for removal of
excisable goods from the factory premises for export purposes, i.e., If you are
exporting ball pens or magazines on which there is no excise applicable, you do not
require to fill up this form.
ARE 1 form has multiple copies and these are distributed by different
authorities including Customs, Range office of Excise, Refund office of Excise, etc.,
Mate’s Receipt
After the cargo is cleared by custom’s examination and after other formalities
are over, the cargo is handed over to the shipping company for loading on the board of
the ship. Mate’s receipt is issued by the captain of the ship. It contains the name of the
vessel, shipping line,, port of loading, port of discharge, shipping marks and numbers,
packing details, description of goods, gross weight, container number, and seal number.
The mate receipt is exchanged for taking Bills of Lading.
GR/SDF Form
One of the main functions of the Reserve Bank of India (RBI) is to control and
monitor foreign exchange reserves of the country. Since exports directly relate to
country’s foreign exchange earnings, it becomes essential for RBI to regulate an export
transaction.
The Reserve Bank of India has prescribed GR form (SDF), PP form, and
SOFTEX forms to regulate exports transactions. The GR form contains the following:
1. Name and address of the exporter and description of goods
2. Name and address of the authorized dealer through whom proceeds of exports
have been or will be realized
3. Details of commission and discount due to foreign agent or buyer
4. An analysis of the4 full export value, giving breakup of FOB,
Freight, Insurance, Discount, Commission, etc.
Distribution/Disposal of Copies of GR Form
1. GR forms covering export of goods should be completed by the exporter in
duplicate and both copies should be submitted to customs at the time of
shipment.
2. Customs will verify all particulars of goods and their value as declared in the
GR form.
3. After the shipment is over, the original of GR from will be retained by the
customs for onward submission to the Reserve Bank of India.
4. Duplicate copy of the GR will be returned to the exporter through his clearing
agent.
5. An exporter is under obligation to submit this duplicate copy of GR as soon as
possible, but not later than 21 days from the date of shipment, to his
authorized dealer (Banker).
SDF
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Some of the departments in customs are now computerized. To meet with the
requirements of EDI System, the GR form is replaced by a new form known as
Statutory Declaration Form (SDF). This is prepared in duplicate and submitted to
customs at the shipment. The SDF bears cross reference of the shipping bill number.
Over a period, it is estimated that the GR that the GR form will be replaced by SDF.
PP Form
When goods are exported by post, instead of the GR form, the exporter has to
fill up a Post Parcel (PP) form in triplicate. This PP form needs to be signed by the
banker on the original copy of the form. Therefore, an exporter has to first submit the
form to his banker for the necessary counter signature. The bank will return the original
form to the exporter for submitting it to the post office along with the parcel.
The concerned post office shall forward the PP form to the office of the Reserve
Bank of India after the goods have been dispatched. The duplicate copy of the PP form
will be kept by the authorized dealer to whom the exporter should submit relevant
documents for collection/negotiation. The time limit prescribed is 21 days.
SOFTEX Form
The declaration in form SOFTEX in respect of export of computer software
and audio/video/television software shall be submitted in triplicate to the designated
official of Department of Electronics, Government of India at the Software Technology
Parks of India (STPI) or at the Free Trade Zones (FTZs) or Export Processing Zones.
After certifying all three copies of the SOFTEX form, the said designated
official shall forward the original directly to the nearest office of the Reserve Bank and
return the duplicate to the exporter. The triplicate shall be retained by the designated
official for record.
Bill of Exchange
Bill of Exchange is commonly known as draft. It is “as instrument in writing,
containing an order, signed by the maker, directing a certain person to pay a certain sum
of money only to the order of a person to the bearer of the instrument”. It is in the form
of a Demand Bill of Exchange and is an negotiable instrument as per Section 5 of the
Negotiable Instruments Act, 1881. The Demand Bill of Exchange is of two types, viz.
Sight Draft and Usance Draft.
a). Sight Draft: When the drawer, namely exporter, expect the drawee, viz.,
importer, to make the payment immediately upon the draft being presented to
him, it is called Sight Draft. The buyer cannot take delivery of goods/documents
without making payment. The corresponding terms of payment are referred as
D/p
b). Usance Draft: Where the exporter ha agreed to give credit to the foreign buyer,
he draws Usance Bills of exchange, and draft, if drawn for payment at a date
later than the date of presentation. A draft may be drawn according to the period
of credit. Viz., 30 days or 60 days after it is presented to the drawee (importer)
who will retire the documents by accepting the draft by putting his signature and
date.
On the due date the importer will make the payment to the bank. The bank will
forward the money to the exporters bank, as payment of the bill.
In case full payment is received in advance, no Bill of Exchange is required to
be drawn.
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Bill of Lading
The Bill of Lading is a document issued by the shipping company or its agent. It
acknowledges the receipt of the goods mentioned in the bill for shipment on board of
the vessel. It is also an undertaking to deliver the goods in the like order and condition
as received, to the consignee or his order provided the freight and other charges
specified in the bills of lading have been duly paid. The Bill of Lading is issued in the
standardized, aligned document format.
The Bill of Lading is generally made out in sets of three originals. All originals
are duly signed by the master of the ship or the agent of the shipping company and all
the originals are equally valid for taking the delivery of the goods. Once any one
original is used, the other originals become null and void.
Utmost care is required to be exercised to ensure that the full set of original B/L
is obtained by the exporter from the Shipping Company and no original copy goes in
the wrong hand. Extra copies of B/L marked as ‘Non NEGOTIABLE COPY’ are also
issued for record purpose. These copies cannot be used for taking delivery of goods.
The Bill of Lading is the legal document to be referred in case of any dispute
over shipment. It contains the following information:
 Shipping company’s name and address
 Consignee’s name and address
 Port of loading and port of discharge
 Shipping marks and particulars
 Number of packages
 Shipped on board with date and rubber stamp
 Description of packages and the goods
 Gross weight and net weight
 Freight details and name of the vessel
 Signature of the shipping company’s agent.
Airway Bill
The receipt issued by an airlines company or its agent for carriage of goods is
called Airway Bill.
The first digits of the airway bill number normally represent the code which
identified the carries.
074 KLM Royal Dutch Airline
176 Emirates Airline
072 Gulf Airline
The airway bill should indicate freight prepaid or freight to collect. Other
charges related to shipment are also mentioned on the airway bill.
Consular Invoice
The Consular Invoice is a document required by certain countries. This invoice
is an important document which needs to be submitted for certification to the Embassy
of the country concerned.
19
A commercial invoice and sometimes a Certificate of Origin are required to be

signed/certified by the consular of the importing country located in the country of
export. The main purpose of a consular invoice is to enable the importer’s country to
collect accurate and authenticated information about the value, volume, quantity,
source, etc., of the import for assessing import duties and for other statistical purposes.
It helps the importer to get the goods cleared through the customs without any undue
delay.
STEPS FOR SUCCESSFUL EXPORTING
GETTING STARTED
Step 1
Those who are interested in Export-Import business need to apply to the

S
Director General Foreign Trade regional office for getting Importer-Exporter
tep 2
Code Number. This is true for any individual or company willing to undertake
export or import in many countries.
One has to register with the concerned export promotion council. For
example, in the case of garments, it is essential to obtain
registration-cum-membership certificate (RCMC) from the Apparel Export
Council. Registration is essential for obtaining various permissible benefits
given by the government.
Step 3
With the completion of these formalities, the exporters can go in for procuring
their export orders.
Step 4
With export orders in hand they start manufacturing or buy the goods from
manufactures.
Step 5
Once manufacturing is over, the exporters make arrangements for quality
control and obtain a certificate from the inspector of quality control, confirming
their quality.
Step 6
Exportable are then dispatched to ports/airports for transit.
Step 7
With dispatch of goods, the export firm has to apply to an insurance company
20
for marine/air insurance cover.

Step 8
After completion of these formalities, the exporters contact the clearing

and forwarding agent for storing the goods in warehouses. The
forwarding agent comes out with a document called shipping bill,
required for allowing shipment by the Custom Authority.
Step 9
Clearing and forwarding (C and F) agent submits the shipping bill in the custom
house for verification. The appraiser examines the documentation.
Step 10
The C and F agent also submits a copy of the ‘verified shipping bill to the
shed superintendent and carting order for exports.
Step 11
Thereafter, for loading exports into ships or aircraft, the C and F agent presents
the shipping bill to the preventive officers who oversee the transit procedure.
Step 12
After loading goods into the ship, the captain of the ship issues a receipt known
as ‘mate’s receipt’ to the ship superintendent of the port. The superintendent
calculates port charges and bills for it.
Step 13
When port payments are made, the C and F agent takes delivery of mate’s
receipt and request port or airport authority to prepare bill of lading or airway
bill.
Step 14
After obtaining bill of lading, the C and F agent sends these documents to the
respective exporters.
Step 15
On receipt of the documents, the exporter makes an application to the relevant
chamber of commerce for getting certificates of origin, stating that the goods
originated from India.
Step 16
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Exporters also send shipping documents to the importers stating date of shipment, name
of vessel, etc. Moreover, it is essential to send certain other documents like bill of
lading, custom invoice and packing list, to their foreign counterparts.
Step 17
The exporter now presents all important documents at his bank. The bank
scrutinized these documents against the original letter of credit/purchase order.
The bank has to follow UCPDC/URC Guidelines.
Step 18
The exporter’s bank sends all important documents to the foreign importer’s
bank, which presents the documents to the importer. Then the importer accepts
the bill if it is a usance bill and pays before the due date.
Step 19
After receiving the requisite documents, the importer makes the payment
through the bank. The money then gets credited in the name of the exporter
here. Simultaneously, a document called the GR form is sent to Reserve Bank of
India, as evidence of realization of export proceeds; SDF is used instead of GR
Form if the exporter has used Electronic Data Interchange System.
Step 20
As a last step, exporters apply for benefit from various duty drawback schemes
which subsequently get credited in their account.
FOREIGN EXCHANGE MARKET
There are different interpretations of the term foreign exchange, of which the
following two are most important and common:
1. Foreign exchange is the system or process of converting one national
currency into another, and of transferring money from to another (Dr.
Paul Einzig).
2. Secondly, the term exchange is used to refer to foreign currencies. For
example, the Foreign Exchange Regulation Act, 1973 (FERA) defines
foreign exchange as foreign currency and includes all deposits, credits
and balance payable in any foreign currency and any drafts, traveler’s
cheques, letters of credits and bills of exchange, expressed or drawn in
Indian currency, but payable in any foreign currency.
Functions of Foreign Exchange Market
The foreign exchange market is a market in which foreign exchange
transactions take place. In other words, it is a market in which national currencies are
bought and sold against one another.
A foreign exchange market performs three important functions:
22
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 movements.
2. Provision of Credit:
The credit function performed by foreign exchange markets also plays a very
important role in the growth of foreign trade, for international trade post-shipment
credit. Credit facilities are available also for importers. The Euro-dollar market has
emerged as a major international credit market.
23
3. Provision of Hedging Facilities:

The other important function of the foreign exchange market is to provide
hedging facilities. Hedging refers to covering of export risks, and it provides a
mechanism to exporters and importers to guard themselves against losses arising from
fluctuations in exchange rates.
DETERMINATION OF EXCHANGE RATES
How are exchange rates between different currencies determined under the
paper currency standard? There are two important theories which attempt to explain the
mechanism of exchange rate determination, namely, the purchasing power parity
theory and the balance of payments or the demand and supply theory.
Purchasing power parity theory
According to the purchasing power parity theory, put forward by Gustav Cassel
in the years following the First World War, when the exchange rates are free to
fluctuate, the rate of exchange between two currencies in the long run will be
determined by their respective purchasing powers. In the words of Cassel, “the rate of
exchange between two currencies must stand essentially on the quotient of the internal
purchasing powers of these currencies.”
The essence of the theory is clearly expressed by Professor S.E. Thomas as
follows: “while the value of the unit of one currency in terms of another currency is
determined at any particular time by the market conditions of demand and supply, in the
long run, that value is determined by the relative values of the two currencies as
indicated by their relative purchasing power over goods and services (in their
respective countries. In other words, the rate of exchange tends to rest at that point
which expresses equality between the respective purchasing powers of the two
currencies. This point is called the purchasing power parity.”
Thus, according to the purchasing power parity theory, the exchange rate
between one currency and another is in equilibrium when their domestic purchasing
powers at that rate of exchange are equivalent. For example, assume that a particular
bundle of goods in India costs Rs.48.00 and the same in USA costs $ 1. Then the
exchange rate will be in equilibrium if the exchange rate is $1 =Rs.48.00. Once the
equilibrium is established, the market forces will operate to restore the equilibrium if
there are some deviations. For example, if the exchange rate changes to $1 =Rs.50
when the purchasing powers of these currencies remain stable, dollar holder will
convert dollars into rupees because, by doing so, they can save Rs.2 when they
purchase a commodity worth $. This will increase in the foreign exchange market and
ultimately, the supply rate of exchange will be re-established.
A change in the purchasing power of currencies will be reflected in their
exchange rates. The index number of prices may be made use of to determine the
purchasing power parity. If there is a change in prices (i.e., purchasing power of the
currencies), the equilibrium rate of exchange can be found out by the following
formula).
Where
ER- Equilibrium exchange rate
Er- Exchange rate in the reference period
Pd –Domestic price index
24
Pf - Foreign country’s price index

Evaluation
The purchasing power parity theory is subject to the following criticisms:
1. The theory makes use of the price index number to measure the changes in
the equilibrium rate of exchange and hence the theory suffers from the
various limitations of the price index number.
2. The composition of the national income varies in different countries and
hence the types of goods and services included in the index number may
vary from country to country, rendering comparisons on the basis of such
index number unrealistic.
3. The quality of goods and services may vary from country to country.
Comparison of prices without regard to the quality is unrealistic.
4. The price index number includes the price of all commodities and
services, including those which are not internationally trade and hence the
rate of exchange calculated on the basis of such price indices cannot be
realistic.
5. The theory is rendered further unrealistic by ignoring the cost of transport
in international trade.
6. Another very unrealistic assumption made by the theory is that
international trade is free from all barriers.
7. The purchasing power parity (PPP) theory ignores the effects of
international capital movements on the foreign exchange market.
International capital movements may cause changes in the exchange rate.
For example, if there is capital inflow to India from USA, the supply of the
dollar and the demand for rupees increases in the foreign exchange
market, causing an appreciation in the value of the rupee and depreciation
in the value of the dollar.
8. Another defect of the theory is that it ignores the impact of changes in the
exchange rates on the prices. For example, if, as a result of large capital
inflows to India, Indian currency appreciates in terms of foreign
currencies, Indian exports may decline and as a result, the supply of goods
in India may exceed the demand and may cause a fall in prices.
9. The theory does not explain the demand for supply of foreign exchange.
When the exchange rate is determined largely by demand and supply
conditions, any theory that does not pay adequate attention to these
aspects proves to be unsatisfactory.
10. The purchasing power parity theory starts with a given rate of exchange,
but fails to explain how that particular rate of exchange is arrived at. Thus,
the theory only tells us how, with a given rate of exchange, change in the
purchasing powers of two currencies affect the exchange rate.
11. The theory is based on the wrong assumption that the elasticity of demand
for exports and imports is equal to unity, i.e., this theory is valid only if the
exports and imports change in the same proportion as the change in prices.
But this is a very rare occurrence
25
12. No satisfactory explanation of short-term changes in exchange rates is

provided by the theory.
13. Lastly, the purchasing power parity theory goes contrary to general
experience. Critics point out that has hardly been any case when the rate of
exchange between two currencies has been equivalent to the ratio of their
purchasing powers.
Despite its many defects and deficiencies, the purchasing power parity theory
exposes some very important aspects of exchange rate determination.
1. It indicates the relationship between the internal price level and exchange
rates.
2. It explains the state of the trade of a country as well as the nature of its
balance of payments at a particular time.
3. Further, the theory is applicable, to some extent, to all sorts of monetary
standards.
Balance of Payments Theory
The balance of payments theory, also known as the Demand and Supply Theory
and the General Equilibrium Theory of exchange rate, holds that the foreign exchange
rate, under free market conditions, is determined by the conditions of market. Thus,
according to this theory, the price of a currency, i.e., the exchange rate, is determined
just like the price of any commodity is determined by the free play of the forces of
demand and supply.
The value of a currency appreciates when the demand for it increases and
depreciates when the demand falls, in relation to its supply in the foreign exchange
market.
The extent of the demand for any supply of a country’s currency in the foreign
exchange market depends on its balance of payments position. When the balance of
payments is in equilibrium, the supply of and demand for the currency are equal. But
when there is a deficit in the balance of payments, supply of the currency exceeds its
demand and causes a fall in the external value of the currency; when there is a surplus,
demand exceeds supply and cause a rise in the external value of the currency.
Evaluation
The balance of payments theory provides a fairly satisfactory explanation of the
determination of the rate of exchange. This theory has the following merits:
1. Unlike the purchasing power theory, the balance of payments theory
recognizes the importance of all the items in the balance of payments, in
determining the exchange rate.
2. This demand supply theory is in conformity with the General theory of
value like the price of any commodity in a free market, the rate of exchange
is determined by the forces of demand and supply.
3. This theory brings the determination of the rate of exchange within
The purview of the General equilibrium theory. That is why is this theory is
also called the general equilibrium theory of exchange rate determination.
4. It also indicates that balance of payments disequilibrium can be corrected by
adjustments in the exchange rate (i.e., by devaluation or revaluation), rather
than by internal deflation or inflation.
26
The main defect of the theory is that it does not recognizes the fact that the rate
of exchange may influence the balance of payments.
EXCHANGE RATE CLASSIFICATION
Different types of exchange rate regimes and how they work are discussed here.
Single currency peg The country pegs to a major currency- usually the US
dollar or the French franc-with infrequent adjustment of the parity. (About a number of
developing countries have single currency pegs).
Composite currency peg The country pegs to a basket of currencies of major
trading partners to make the pegged currency more stable than if a single currency peg
were used. The weights assigned to the currencies in the basket may reflect the
geographical distribution of trade, services, or capital flows. They may also be
standardized, as in the SDR and the European Currency Unit.
Limited flexibility vis-à-vis a single currency
The value of the currency is maintained within certain margins of the peg (this
system applies to four Middle East countries).
Limited flexibility through cooperative arrangements
This applied to countries in the exchange rate mechanism of the European
Monetary System (EMS) and was a cross between a peg of individual EMS currencies
to each other and a float of all these currencies jointly vis-à-vis non-EMS currencies.
Greater flexibility through adjustment to an indicator
The currency is adjusted more or less automatically to changes in selected
indicators. A common indicator is the real effective exchange rate, which reflects
inflation-adjusted changes in the currency vis-à-vis major trading partners.
Greater flexibility through a managed float
The Central Bank sets the rate but varies it frequently. Indicators for adjusting
the rate include, for example, the balance of payments position, reserves, and parallel
market developments. Adjustments are not automatic.
Full flexibility through an independent float
Rates are determined by market forces. Some industrial countries have
floats-except for the EU countries-but the number of developing countries in this
category has been increasing in recent years.
CURRENCY EXCHANGE RISKS AND THEIR MANAGEMENT
One of the important problems a firm with international business may encounter
is the currency exchange rate risk.
Fluctuations in exchange rates may cause a loss or profit to a firm. Suppose an
Indian exporter has invoiced the exporter has invoiced the exports in dollar and gets
paid three month after the date. If the dollar appreciates during this period, the rupee
equivalent of his receipts increases, i.e., his profit goes up. For illustration, assume that
the exchange rate between the dollar changes from$1=Rs.48&50. If the export value
was $1 million, now the exporter can get Rs.50 million instead of Rs.48 million. A
depreciation of the dollar will have the opposite effect. Appreciation of the foreign
currency will adversely affect the importer. For example, an importer who had
contracted for $ 1million worth of imports will have to pay Rs.2 million more, if the
exchange rate has moved as indicated above. Box 6.1 shows fluctuations in the
exchange rates.
27
Types of Foreign Exchange Risks

There are two types of foreign economic factors through economic factors
through economic transactions and other economic activities.
The economic exposure focuses on the impact of an exchange rate change on
future cash flows; that is, economic exposure is based on the extent to which the value
of the firm-as measured by the present value of its expected future cash flows-will
change when exchange rates change. Specifically, if PV is the present value of a firm,
then that firm is exposed to currency risk if is not equal to zero, where is the change
in the firm’s present value associated with an exchange rate change. Exchange
risk, in turn, is defined as the variability in the firm’s value that is caused by uncertain
exchange rate changes. Thus, exchange risk is viewed as the possibility that currency
fluctuations can alter the expected amounts or variability of the firm’s future cash
flows.
The economic exposure may be divided into its two component parts:
transaction exposure and real operating exposure.
Transaction exposure Transaction exposure arises out of the various types of
transaction (Such as international trade, borrowing and leading in foreign currencies,
and the local purchasing and sales activities of foreign subsidiaries) that require
settlement in a foreign currency.
Operating exposure Operating exposure arises because currency fluctuations
can alter a company’s future revenues and costs-that is, its operating cash flows.
Consequently measuring a firm’s operating exposure requires a longer-term
perspective, viewing the firm as an ongoing concern with operations whose cost and
price competitiveness could be affected by exchange rate changes.
Thus, the firm faces operating exposure the moment it invests in servicing a
market subject to foreign competition or in sourcing goods or inputs abroad. This
investment includes new-product development, a distribution network, foreign supply
contracts, or production facilities. Transaction exposure arises later on, and only if the
company’s commitments lead it to engage in foreign-currency-denominated sales or
purchases.
To illustrate, assume that a multinational has concentrated its production in one
country and sells the output across the world. If the currency of this particular country
appreciates considerably, the products form this country will be costly in terms of the
currencies which have depreciated vis-à-vis that country’s currency, making its goods
costly in foreign markets. The international operations management, explained in
Chapter 9, will have to consider this aspect also. It may be noted that many
multinationals, like several Japanese ones, have shifted production bases to overseas
locations to guard against the adverse impact of the currency appreciation.
Accounting exposure (translation exposure)
Accounting exposure arises from the need, for purposes of reporting and
consolidation, to convert the financial statements of foreign operations from the local
currencies (LC) involved to the home currency (HC).
Companies with international operations will have
foreign-currency-denominated assets and liabilities, revenues, and expenses. However,
because home-country investors and the entire financial community are interested in
home-currency values, the foreign currency balance-sheet accounts and income
28
statement must be assigned HC values. In particular, the financial statements of an

MNC’s overseas subsidiaries must be translated from local currency to home currency
prior to consolidation with the parent’s financial statements.
If currency values change, foreign exchange translation gains or losses may
result. Assets and liabilities that are translated at the current (post change) exchange
rate are considered to be exposed; those translated at a historical (perchance) exchange
rate will maintain their historic HC values and, hence, are regarded as not exposed.
Translation exposure is simply the difference between exposed assets and exposed
liabilities. The controversies among accountants centre on which assets and liabilities
are exposed and on when accounting-derived foreign exchange gains and losses should
be recognized (reported on the income statements).
If exchange rates have changed since the previous reporting period, this
translation, or restatement, of those assets, liabilities, revenues, expenses, gains, and
losses that are denominated in foreign currencies will result in foreign exchange gains
or losses. The possible extent of these gains or losses is measured by the translation
exposure figures. The rules that govern translation are devised by an accounting
association such as the Financial Accounting Standards Board (FASB) in the United
States, the parent firm’s government, or the firm itself.
Strategies for Managing Exchange Rate
A firm needs to develop strategies for managing currency exchange rate risk
because it is often impossible to pass along exchange rate increase in the form of higher
prices.
What are the measures an importer can take to overcome the effects of an
appreciation of the foreign currency in which the imports are invoiced or an
international firm having foreign exchange exposure? The important alternatives
available are as follows.
1. Negotiate a lower price with the foreign supplier. The extent to which this can
be done with depend upon the relative bargaining positions of the buyer and
seller and the profit margin which the seller enjoys.
2. Absorb the price increase by the buyer to the extent possible and pass on the rest
to the consumers. The extent to which this can be done will upon the profit
margin the buyer enjoys and the competitive and demand conditions prevailing
in his market.
3. A third, and complementary, approach is to take steps to minimize exchange
risk. The four most common ways of doing this are exchange risk avoidance,
changing sourcing, exchange risk adaptation, and currency diversification. Of
these four approaches, exchange risk adaptation is most commonly used.
Exchange risk avoidance
Exchange risk avoidance is the elimination of exchange risk by doing business
locally. The adverse effects of a devaluation of the domestic currency can be mitigated
by procuring the item domestically if devaluation has made the domestic goods cheaper
than the foreign goods. Alternatively, the firm may explore the feasibility to
domestically manufacturing the item. Devaluation often encourages import
substitution/indigenization. As a matter of fact, many foreign firms in India have gone
in for progressive indigenization, either by local sourcing or manufacturing of parts and
29
components. To avoid the additional costs resulting from exchange rate fluctuations.
This is true of many Indian firm too.
Change/Diversify sourcing
Another strategy is to change the source of purchasing. For example, if the US
goods become costlier because of dollar appreciation, change the source of purchase
from the US to countries where the product is cheaper, either because of depreciation of
their currencies or other reasons. A number of companies have diversified the countries
of sourcing to spread and minimize the risks of exchange rate fluctuations.
Currency risk adaptation
Exchange risk adaptation is the use of hedging to provide protection against
exchange rate fluctuations.
Hedging
Hedging refers to covering of export risks, and it provides a mechanism to
exporters and importers to guard themselves against losses arising from fluctuations in
exchange rates. In other words, hedging a particular currency exposure means
establishing an offsetting currently position such that whatever is lost or gained on the
original currency exposure is exactly offset by a corresponding foreign exchange gain
or loss on the currency hedge. Regardless of what happens to the future exchange rate,
therefore, hedging locks in a dollar (home currency) value for the currency exposure. In
this way, hedging can protect a firm from unforeseen currency movements.
One of the most common methods of hedging is the purchase of a forward
contract, described earlier in the chapter.
Hedging foreign exchange risk entails taking all the necessary actions that will
ensure
That risk of loss from currency fluctuations is minimized. Giddy identifies three
situations when hedging may be used.
1. Hedging transaction exposure This entails buying or selling foreign
exchange for future delivery to much a known foreign currency payment or
receipt. This is usually known as monetary or contractual hedging.
2. Hedging balance-sheet exposure This means using short-term forward
contracts to offset ‘paper’ gains and losses on the long-term assets and
liabilities of foreign subsidiaries.
3. Hedging economic exposure This entails neither immediate transactions
nor the accounting exposure but rather the effect of an exchange rate
change on the firm’s overall profitability.
Another method of exchange risk adaptation is to negotiable a fixed price in
domestic currency terms for a period of time, say one year.
Forward Contracts, Futures and Currency Options have been outlined
elsewhere in this chapter.
Money market hedge
Money market hedge is a technique by which transaction exposure may be
hedged by borrowing and lending in the domestic and foreign money markets. A firm
may borrow (lend) in foreign currency to hedge its foreign currency receivables. For
example, an American firm which has receivables in pounds may borrow the required
amount in pound for a period which equals the receivables, convert them into dollars
30
and invest them. The pound loan can be paid off when the pound receivables are
realized.
Hedging by lead and lag
Leading and legging the foreign currency receipts and payments is another
techniques for reducing the transaction exposure. To lead to pay or collect early and to
lag means the opposite. A firm may soft currency (i.e., relatively weak currency, prone
to depreciation) payments and lag hard currency (strong currency which is likely to
appreciate) receivables to avoid the loss from depreciation of the soft currency and to
gain from the appreciation of the hard currency. For the same reason, the firm will be
promoted to lead hard currency payments and lag soft receivables. A problem,
however, is that the counterpart would try to do the opposite.
Exposure netting
When a firm has a portfolio of currency positions, i.e., both receivables and
payments different currencies, it is unnecessary to hedge every position if the adverse
effects of exchange rate movements in some cases are likely to be offset by the
favorable movements in other cases.
Exposure netting involves offsetting exposures in one currency with exposures
in the same or another currency, where exchange rates are expected to move in such
way that losses (gains) on the first exposed position should be offset by gains (losses)
on the second currency exposure. This portfolio approach to hedging recognizes that
the total variability or risk of a currency exposure portfolio should be less than the sum
of the individual variability of each currency exposure considered in isolation. The
assumption underlying exposure netting is that that the net gain or loss on the entire
currency exposure portfolio is what matters, rather than the gain or loss on any
individual monetary unit.
In practice, exposure netting involves one of the three possibilities.
1. A firm can offset a long position in a currency with a short position in that
same currency.
2. If she exchange rate movements of two currencies are positively correlated (for
example, the Swiss franc and Deutsche mark), then the firm can offset a long
position in one currency with a short position in the other.
3. If the currency movements are negatively correlated, then short (or long)
positions can be used to offset each other.
SUMMARY
Broadly, there are two types of foreign investment: (1) Foreign direct
investment (FDI). Where the investor has control over/ participation in the
management of the firm; (2) Portfolio investment, where the investor has only a sort of
property interest in investing the capital in buying equities, bonds, or other securities
abroad.
There are three broad economic motives of FDI, viz., resources seeking (i.e.,
exploiting the natural resources of the host country); market seeking (i.e., to exploit the
market opportunities of the host countries); and efficiency seeking (like low cost of
production deriving from cheap labour). The presence of any (or even all) of these
determinants alone need not attract FDI. Several other factors such as political
environment government policies, bureaucratic culture, social climate, infrastructural
facilities, etc. are also important determinants of FDI.
31
There have been several attempts to provide theoretical explanation for foreign
investment.
Encouraged by the favorable business environment, fostered by the global
liberalization, the international private capital flows have been increasing rapidly, with
periodic downturns. Cross-border M&As have been the major driver of the recent surge
in FDI.
Although foreign capital has many beneficial effects, it also has several
limitations and can have adverse effects too. However, foreign capital now contributes
a significant share of the domestic investment, employment generation, industrial
production and exports in a number of economies.
Although the international capital flows to the developing countries have
increased substantially in the last one decade or so, the FDI flow is still predominant
between the developed countries, a small number of countries account for the lion’s
share of the international capital inflows to the developing world. There has also been a
significant increase in FDI flows between the developing economies. Although India
has substantially liberalized its foreign investment policy, FDI inflows have been much
below the targets.
32
UNIT - II
INTERNATIONAL ENVIRONMENT OF BUSINESS
International business is influenced by forces that are quite similar to those
environment factors discussed in chapter 3. The critical difference is that these factors
vary dramatically from one country to another.
ECONOMIC ENVIRONMENT OF INTERNATIONAL BUSINESS
Every country has a unique and complex economic environment. The
international company can expect to be confronted with a wide range of different
economic conditions.
Economic Development
The global firm will be doing business in countries that have differing
monetary systems and which are in varying stages of economic development or which
have widely differing economic systems. For business purposes, t he countries of the
world can be divided into (1) developing countries and (2) developed countries.
Developing countries are usually called less-developed countries (LDCs), because they
have low per capita incomes. Most global business organizations are headquartered in
developed countries with high per capita incomes.
Resource Allocation
There are two recognized methods for resource allocation: (1) the market
economy: and (2) the command economy. In a pure market economy, the critical
distinction is freedom of choice. Business are free to decide what products and services
to provide, and consumers are free choice, the natural forces of supply and demand
determine what types of business will succeed, what products and services will be
available, and what the associated prices will be.
In a pure command society, the government decides what shall be produced,
where it shall be sold, and what the associated prices shall be. The belief is that the
government can take a broad view of the economy and decide what is best for the
country. Actually, there are few pure market economies and few pure command
economies in the world, but there are countries with varying degrees of these two
characteristics. For example, the global enterprise will probably operate in the
capitalistic environment of the U.S. or Canada, the moderate form of socialism in Great
Britain, the capitalistic socialism in France, Perestroika in Russia, and revised
communism in China.
Property Ownership
Countries also vary with respect to their philosophy about the ownership of
property. Again, there are two contrasting pure types: (1) private ownership and (2)
public ownership. In nations that support private ownership, property is owned by
individuals and by business. In nations that support public ownership, government
owns the property and the organizations that product goods and services. Few nations
hold to either a pure private or public ownership policy and most have q mix of the two
extremes.
One significant development in the world of business is the trend toward
privatization, by which countries like Great Britain and France are turning huge
government-operated businesses back into the hands of private ownership. There are
33
several reasons for this trend, including the need for the companies to be more
innovative, competitive, and more efficient in the use of valuable resources.
Resource and Product Markets
The multinational enterprise (MNE) must evaluate the market demand for its
product before entering a new foreign market. When market demand is perceived to be
high, the MNE may choose to export products to this market through newly established
sales and distribution facilities. However, before establishing manufacturing facilities
in a foreign market, the MNE must be assured of an available supply of raw materials.
A case in point is Japan, which has almost no raw materials and is forced to
import virtually all the oil and natural resources that it needs for the production of its
goods. On the other hand, nations like the United States and Russia have the advantage
of enormous supplies of natural resources.
Infrastructure
A nations’s infrastructure is composed of its power plants, railroads,
highways, airfields, ports, distribution systems, communication systems and so on.
Infrastructures tend to be highly developed in industrialized nations. Such as the United
States, and less than adequate in less-developed countries. If the MNE is planning to
bring key personnel to the foreign location, such infrastructure as hospital schools,
housing, and recreation facilities become extremely important.
Exchange Rates
The exchange rate is the rate at which the currency of one nation is exchanged
for that of another nation. Typically, the exchange rate is the function of the nation’s
monetary policies and the international supply and demand of its currency. Certainly,
shifts in the exchange rates can have significant implications for the profitability of the
MNE. Assume that the U.S. dollar can be exchanged for four British pounds. If the
value of the dollar goes up in value to six pounds. U.S. goods in Great Britain will
become more expensive, because it will take more pounds to buy a dollar. Thus, it will
be more difficult to sell U.S. goods in Great Britain. On the other hand, when the dollar
falls in value with respect to the pound, U.S. goods will be easier to sell in Great Britain
because they will sell for less.
LEGAL-POLITICAL ENVIRONMENT OF INTERNATIONAL BUSINESS
When operating overseas, the MNE is forced to deal with legal and political
systems with which it may not be familiar, Often, host country officials are suspicious
of the “outsider” MNE and can cause it considerable problems. The major
legal-political concerns of the MNE are political risk, laws and regulations, and
political instability.
Political Risk
Political risk may be defined as the MNE’s risk of loss of managerial control,
assets, or earning power due to the politically-based actions of the host government.
One critical political risk involves violence against the MNE or its people. Because
such acts are quite common, the MNE must have contingency plans for dealing with the
unfortunate threat.
Another critical legal-political risk is the potential takeover of the facilities by
the host government. In too may countries, foreign business are nationalized taken over
by the host government-without warning.
34
Laws and Regulations

The laws and regulations of nations vary widely from one country to the next, so
the MNE must be certain that it understands these laws and regulations prior to making
a business commitment. Host that deal with wages, safety, employment, pricing,
information, labeling, consumer protection, libel, and so on. Not only must the MNE
understand these statute and regulations, but it must be committed to compliance.
Often, these laws are very restrictive to the MNE, because they may have been
drafted by a less-developed country which fears that the MNE, unless carefully
regulated. Will inflict considerable harm on the host country. Foremost among host
company concerns are fears that the MNE is apt to:
 Extract excessive profits.
 Dominate the local economy.
 Interfere with the local government.
 Interfere with the local government.
 Fall to help domestic firms develop.
 Diver the most talented of local personnel from domestic enterprises.
 Fall to transfer advanced technologies and know-how into local hands.
 Fall to respect local customs, needs, and government objectives (Mason, 1974).
Political risk analysis is the act of forecasting the probability of various events
that threaten the security of a foreign investment. Typically, the major factors to be
considered in a political risk analysis for doing business in a particular foreign country
would include (Haendel, 1979)
1. Social instability. Or the potential for local terrorism, riots, strikes,
subversion, revolution, and spontaneous violence.
2. Foreign Conflict. Or the potential for t he host government to become
involved in either armed or political conflict with other countries.
3. Governmental System. Or the potential for the nation’s government system to
shift from one extreme to another. Or dramatically alter its policies towards foreign
investors or other nations.
4. Economic Climate, or the potential for the local economy to slump or grow.
Some host country laws and regulations have an even more direct bearing on the
conduct of intentional business. Sometimes called the “barriers” to international trade,
these laws and regulations include tariffs, quotes, export restraint agreements, and
“buy national” laws.
A tariff is a direct tax levied on goods transported across national borders.
Import tariffs are often imposed to protect local producers from foreign competition. In
less developed countries, import tarrifs are used to raise money for the host
government.
A quota is a limit on the amount of goods that can be traded. Typically, import
quotas are used to guarantee a minimum market share for local producers.
Export trade agreements are meant to encourage other governments to
voluntarily limit the amount of goods exported to another country. Such agreements
are, in effect, export quotes.
“Buy national” legislation extends preference to domestic producers through
content or price restrictions. For example, Brazil requires Brazilian companies to buy
only Brazilian-manufactured in Mexico before it can be sold in Mexico.
35
Some host countries create a positive atmosphere that provides many incentives to
attract MNE investment. Governments have been known to provide free land, free
facilities, free infrastructure, tax incentives, and so on to attract foreign business.
SOCIO-CULTURAL ENVIRONMENT OF INTERNATIONAL BUSINESS
A nation’s culture is defined as its shared knowledge, beliefs, values, and modes
of thought and behavior. According to Hofstede (1984), the international manager must
understand the following aspects of national culture:
1. It changes slowly, if at all.
2. It is difficult to change.
3. It exists in the minds of people.
4. It is shared by a number of people.
5. It is present in a society’s institutions.
6. It represents the national character.
Differences in Values
There are major values differences across cultures with respect to managerial
behavior. First of all, with respect to authority, managers in Italy, Japan, and
Indonesia believe that the principal purpose of an organizational structure is to make
sure everyone knows who his or her boss is. On the other hand, managers in Germany,
Great Britain, and the United States perceive organizational structure as a means to
coordinate group effort.
Subordinates may raise a about their work”. The results show that managers in
Japan strongly agree and place significant importance on expertise and experience. By
contrast, Swedish managers have the lowest concern for having all the answers and see
themselves as problem solver and facilitators who make no claim of perfection.
According to Geert Hofstede (1985), there are four dimensions to national values
that distinguish one country from all other:
1. Power distance Some societies are unrequal, and some are more unequal than
others. Power distance is the degree to which the less powerful individual in
a society accepts inequality in power and accept it as normal.
2. Individualism versus collectivism This dichotomy deals with whether the
individual or the group (community) bears responsibility for the welfare of the
individual. In some countries, the extent of social integration is relatively low.
3. Masculinity versus femininity Masculine cultures develop distinct social roles for
men and women, by which the latter tend to care for children, home, roles the
spouse. In feminine cultures, social roles tend to overlap, and material success
and assertiveness are not so dominant.
4. Uncertainty avoidance This concept deals with the tendency for a national
culture to avoid uncertainty and unpredictability through such devices as strict
moral and social codes. Cultures that have a weak uncertainty avoidance are more
tolerant, more accepting of personal risk, and more unemotional.
The following shows how national cultures are clustered along some of
Hofstede’s dimensions. For instance, the United States, Canada, Great Britain, New
Zealand, and the Netherlands comprise a cluster with a small power distance and a high
degree of individualism. On the other hand, countries such as South Korea, Panama,
Guatemala, and Taiwan form a cluster with a large power distance and a low degree of
individualism.
36
HIGH HIGH
HIGH POWER HIGH HIGH
UNCERTAINTY CONFUCIAN
DISTANCE INDIVIDUALISM MASCULINITY
AVOIDANCE DYNAMISM
Philippines U.S. Japan Japan Hong Kong
India Singapore Australia Great Korea Taiwan
Brazil Britain Netherlands Brazil Japan
Hong Kong Canada Pakistan Korea
New Zealand Taiwan
Sweden Germany
Still another cluster of countries with a moderately low level of individualism
and a moderately high level of power distance includes India. Japan, Brazil, and the
Arab nations.
Countries weak in avoidance of uncertainty includes Singapore, Denmark,
Great Britain, and the United States. Strong avoidance of uncertainty is found in
Greece. Japan and France. The more masculine countries are Japan, Austria, and Italy.
The more feminine countries are Sweden. Norway, and Switzerland.
37
Difference in Language
Another factor accounts for great differences across cultures is the difference
in language. Differences in language are compounded by the fact that the same word
can mean different things in different cultures. As an example, General Motors
produced a car called the Nova. Which didn’t sell well in Italy where “no va” means
“doesn’t go”. In Chinese, Coca-Cola means “Bite the head of a dead tadpole”!
SOURCE OF EXAMPLES
PROBLEM
Language One firm, trying to find a name for a new soap powder, tested the
chosen name in 50 languages. In English, it meant “dainty”.
Translation into other languages meant “song” (Gaelic), “aloof”
(Flemish), “hors” (Africa), “hazy or Dimwitted”(Persia), “crazy”
(Korean); and the name was Obscene in several Slavic languages.
Chevy’s “Nova” was no va in Italian, which means
“doesn’t Go”.
Coca- cola in Chinese became “Bite the head of a dead Tadpole”.
Idioms cannot be translated literally: “to murder the
King’s
English” become “to speak French like a Spanish Cow” In
French.
Nonverbal signs Shaking your head up and down in Greece means no, and Swinging it
from side to side means yes.
In most European countries, it is considered impolite not to
Have both hands on the table.
The American sign for OK is an obscenity in Spain.
Colours Green: popular in Moslem countries
Suggests disease in jungle-covered countries
Suggests cosmetics in France, Sweden, Netherlands
Red : Blasphemous in African countries
Stands for wealth and masculinity in Great Britain
Product Campbell Soup Company was unsuccessful in Britain until the Added
water to its condensed soup so the cans would be the Same size as the
cans of soup the Britain were used to Purchasing. Long-life packaging,
which is used commonly for milk in Europe, allows milk to be stored
for months at room
Temperature if it is unopened. Americans are still
Wary of it. Coke had to alter the taste of its soft drink in
China when the Chinese described it as “tasting like medicine”.
These and other communication problems facing international business are

summarized above. Other communication problems include nonverbal signs the
American sign for OK is an obscenity in Spain. Colours can also be a source of cultural
conflict, as green is popular in Moslem countries but not in jungle covered countries.
Red represents wealth and masculinity in Great Britain, but it is blasphemous in
African nations.
World Trade Organisation (WTO)
38
The roots of the World Trade Organization (WTO) lie in the General
Agreement on Tariffs and Trade (GATT) which was established in 1948 by 23 original
founders, India being one of them. The 8th round of talks under GATT (1986-1994),
known as the Uruguay Round, led to the birth of the WTO on 1st January 1995. In the
Uruguay Round, new agreements such as the General Agreement on Trade in
Services (GATS) and the Agreement on Trade Related Aspects of Intellectual Property
Rights (TRIPS) and Trade Related Investment Management System (TRIMS) were
negotiated. All the three major agreements along with their associate agreements now
rest umbrella organization, namely the WTO.
The WTO, which has its headquarters in Geneva, Switzerland, has a membership
of 145 countries, including India.
As the only regulatory body of world trade, the WTO’s objective is to ensure a
freer, more transparent and more predictable trading regime in the world. The WTO is
based on a sound legal system and its agreements are ratified by the parliaments of
member countries. No one country the WTO; the top decision makers are the
designated ministers of member countries.
The WTO agreements cover:
 Goods, e.g., all industrial products, FMCGs etc.
 Services, e.g., banking, insurance, consultancy etc.
 Intellectual property, e.g., patents, copyrights, trademarks etc.
Two important principles that underline most agreements are:
a) Most Favored Nation clause: No discrimination among member countries.
b) National Treatment clause: Equal treatment to imported and domestic
products.
The agreements broadly address three concerns:
Same rule for all: it restricts governments or organizations from ‘distorting’
normal trade by way of subsidizing, dumping or discriminatory licensing policies.
Government policies are framed to eliminate effects. The WTO allows exports to be
relieved of all indirect taxes such as excise. Sales tax etc. since they have a cascading
effect on the cost of the product.
Administration of agreements: it has detailed guidelines as to how the agreements
should be administered at a level. These apply to anti-dumping proceedings,
standardization, sanitary and phytosanitary measures. Or settlement of disputes.
Fair deal to businesses: it ensures rights for the business community e.g., the
right to information, the right to present evidence etc. For example, the Agreement on
Customs Valuation allows the importer to justify the value of imported goods or
requires the customs to give written reasons for rejecting the value disclosed.
39
DIFFERENCE BETWEEN GATT AND THE WTO

 GATT signifies two aspects –GATT as a body and GATT as a formulator of
agreements.
 GATT- the body no longer exists, it was merged with the WTO on 1st Jan.,
1995.
 GATT – the agreements rests in the WTO along with other agreements.
 The WTO now includes GATT, GATS, TRIPS and the Dispute Settlement
body. GATT covered trade in goods only, whereas the WTO covers trade in
goods services, and intellectual property rights as well.
 Throughout its duration, from 1948 to 1994, GATT was hoc and provisional;
WTO and its agreements are permanent.
 GATT had contracting parties, whereas the WTO has member nations.
 The WTO is an inherently superior system as compared to GATT, as it has a
sound legal basis; even its agreements are ratified in the members’ parliament.
 WTO has two significant functions, which GATT did not have. These are: (1)
Trade Policy Review Mechanism-a periodic process to examine a country’s
trade policies and to note changes, and (2) an in-built mechanism to settle
disputes, which cannot be overlooked by anyone.
 The WTO is more democratic in character. If decisions cannot be reached by
consensus, the matter is decided by putting it to vote; each WTO member
having one vote. In the case of GATT, it was controlled by a power lobby.
WTO: THE ORGANISATION
The World Trade Organization (WTO) monitors global trade. Its decisions are
absolute and every member must abide by its rulings. Extra powers given to the WTO
are supposed to ensure that disputes are settled in harmony with international trade
principles. It is located in Geneva, Switzerland. At its head is the Director General, who
serves a term of four years. Its staff is made up of 500 persons of varying nationalities.
The Decision Making Process
The Ministerial Conference, comprising designated ministers of the member
nations is the supreme decision making forum. The ministers meet at least once in two
years. The Ministerial Conference can take decisions on ‘all matters’ under any of the
multilateral agreements.
Second level
The day-today work is handled by the General Council, which also acts as The
Dispute Settlement Body and The Trade Policy Review Body. The General Council
acts on behalf of the Ministerial Conference and meets under these three different terms
of reference.
Third level
Three more councils, each handling a different broad area of trade, report to the
General Council: the Council for Trade in Goods, the Council for Services and the
Council for TRIPS
Fourth level
40
Each of the higher-level councils has subsidiary bodies. The Council for Trade
in Goods, for example, has 11 committees dealing with specific subjects such as
agriculture, subsidies etc.
Four Principles
The WTO has 145 member and makes decisions on a basis of unanimity. No
country has a power of Veto.
The four principles which members abide by are:
1. Extending trade concessions equally to all WTO members.
2. Aiming for a freer global trade with lower tariffs everywhere .
3. Making trade more predictable through the use of rules.
4. Bringing about more competition by cutting subsidies.
The definition of ‘trade’ has steadily and now includes intellectual protection,
investment, trade in services and agriculture as well as trade in manufactured.
In its short life the WTO has already become the focus of intense controversy.
Heralded by the richer nations as the ticket to world prosperity, to many others it’s
looking more like another Trojan horse in the citadel of international development.
‘Freeing up’ trade – GATT’s Uruguay Round, Concluded at the end of 1993,
basically ‘free up’ world trade. This meant doing away with barriers which had
prevented developing countries from exporting their goods to the richer countries of the
North. It also opened up all countries to foreign penetration in completely new areas,
such as service industries and intellectual property rights. This offered richer nations
and multinational corporations a golden opportunity to take over new sectors in
countries that were previously able to protect their own smaller industries.
The WTO has the task of policing this new world order, and is beginning to
make its presence felt. Fairer trading provisions, which guarantee protection to
producers in the developing world, have already come under fire. The USA, on behalf
of the American MNC Chiquita, has challenged arrangements whereby benanas from
the Windward Islands are marketed in European under the protection of the European
Union’s Lome Treaty. Dismantling such arrangements would bring Chiquita greater
profits, but would prove disastrous to the US complaint.
It was perceived that the WTO is controlled by the industrial nations, just as they
control the World Bank and the IMF. At the conference held in Singapore in December
1996, delegates from developing countries complained at being excluded from
‘behind the scenes’ discussions. The charges was accepted by Renato Ruggier , who
was the WTO’s Director General at that time. While the WTO claims that its
rules-based system is a means of protecting smaller nations from the larger trading
powers, many of those smaller nations have complained of being bulled by the very
countries, which set the rules in the first place.
International resistance – while some developing countries, particularly Latin
America and East Asia and East Asia, may be able to compete in the world trade, the
world’s least developed countries, are predicted to lose out. Even in richer countries,
the expansion of MNCs has a negative impact on smaller business, labour standards
against the WTO and its expanding ‘free trade’ agenda. Multilateral negotiations,
known as ‘round’, held in Seattle and Doha, Qatar made the representation of
developing countries stronger than before especially regarding issues related to
agricultural subsidies and labour legislation. In many ways the advanced countries
41
appear to have double standards. This approach has been challenged and the influence
of the advanced countries in the WTO is gradually diminishing.
Developments
 The agenda of the WTO, the implementation of its agreements, and the
much-praised dispute settlement system all serve to advance interests of
developed countries, sidelining those of the developing countries.
 The Least Developed Countries (LDCs) are marginalized in the world trade
system, and their products continue to face tariff escalations.
 Rules uniformly applied to WTO members have brought about inequalities
because each member each member has different economic circumstances.
Compared to GATT, the WTO is much more powerful because of its institutional
foundation and its dispute settlement system. Countries that do not abide by its trade
rules are taken to court.
Historically, GATT enforced phased-in tariff reductions worldwide. Until the
Uruguay Round, which ended in 1994, the trade negotiations focused on
nonagricultural goods, mainly because the U.S. wanted to protect its farm sector. Over
the years, as the corporate interests of the developed countries expanded, they also
lobbied for more issues to be incorporated into the WTO.
Changes in rules come about mainly through multilateral negotiations or
“rounds”. Each round offers a package approach to trade negotiations, in which many
issues are negotiated together and trade-offs between different issues are made.
Between the rounds, negotiations on single issues takes place.
Dispute settlement
The dispute settlement understanding (DSU) is the legal text that spells out the
rules and procedures for settling dispute member countries. It contains 27 articles. It is a
legally binding agreement among all the member countries, and is the ultimate means
of enforcing the trade rules.
The WTO also involves itself in settling disputes relating to dumping and granting
of subsides. But there is a technical problem. Since dumping is resorted to by a firm but
not by a country, the WTO cannot punish the country in which the offending firm is
located. Rather, it can only respond to the step taken by the country that retaliates
against the firm. The WTO allows a nation to retaliate against dumping if it can show
that dumping is actually occurring, can calculate the damage to its own firms, and can
show that the damage is substantial. The normal way a country retaliates is by charging
an antidumping duty – an additional traffic placed on an imported product that a nation
believes is being dumped on its market. But such measures must cease within five years
of initiation unless a country can show that conditions necessitates their continued
existence
Countries also retaliate when the competitiveness of their business is threatened by
a subsidy that another country pays to its own producers. Like antidumping measures,
nations can retaliate against products receiving an unfair subsidy by charging a
countervailing duty – an additional tariff imposed on an imported product that a country
believes is receiving an unfair subsidy. Unlike dumping, the WTO regulates the actions
of both the government that pays the subsidy(since payment of subsidy is an action by a
country) as well as the government that reacts to the subsidy.
Other issues
42
The WTO reached at an Information Technology Agreement (ITA) in the

mid-December 1996 meeting at Singapore. It seeks to eliminate tariffs to zero level by
the year 2000 on the rapidly growing $600 million world market in a computer – related
products.
Other issues on which the deliberation are being carried out at WTO are:
 Multilateral Agreement on Investment(MAI): the MAI aims to give MNC’s the
right to establish any business in any country without being discriminated
against by virtue of being foreign MNC’s. it would also give member states the
right to settle any dispute raising out of non-compliance with the MAI at the
WTO.
 Core labor standards; these provide that standardized international labor wages
and working conditions must prevail.(These have since been dropped, and shall
be addressed only by the ILO.)
 Trade and environment.
 Government procurement policies that should aim at weeding out corruption at
government level. These issues were originally discussed at the Uruguay
Round. But these were given up in face of strong opposition from the
underdeveloped countries, including India, and have since been revived.
43
IMPLICATION OF INDIA
India was one of the 76 governments that became a member of the WTO on its first
day. Divergent views have been expressed in support and against India becoming a
member of the WTO.
Arguments for joining WTO
1. India is one the few developing countries which has succeeded in implementation
liberation programmes. Over three – quarters of WTO members are developing
countries in the process of economic reform from non-market systems. These
countries have been chosen to join WTO after careful deliberations in their
respective countries. Obviously, they have perceived economic gains for themselves
by becoming members. India should not be an exception(See also opening case to
this chapter). The criticism that the WTO exists only for industrialized countries is
not all that valid. During the seven-year course of the Uruguay Round – between
1986 and 1993, over 60 developing countries implemented trade liberalization
programmes. Some did so as part of their accession negotiations to GATT while
others acted on an autonomous basis. At the same time, developing countries and
transition economies took a much more active and influential role in the Uruguay
Round, developing countries showed themselves prepares to take on most of the
obligations that are required of developed countries. They were, however, given
transition periods to adjust to the more unfamiliar and difficult WTO provisions –
particularly the poorest, ‘least – developed’ countries. In addition, a ministerial
decision on measures in favour of least – developed countries, gives extra flexibility
to those countries in implementing WTO agreements; calls for an acceleration in the
implementation of market access concessions, affecting goods of export interest to
pursuing open market policies, based on WTO principles, is widely recognized and
is appreciated. So is the need for some flexibility with respect to the speed at which
these policies are pursued.
2. The real importance of the WTO to India lies in the role that a dynamic export
industry can play in the country’s development. Both in terms of job creation, skill
developing, and technological evolution, an opening up to the outside world is
essential. The semi – autarkic earlier syatem resulted in a major leap forward in the
development of indigenous industry and agriculture. But it lacked an internal
dynamic impetus. There were no incentives to improve technology and productivity.
In short, it was a closed system that left no room for evolution it is only by forcing
industries to sell outside the country and compete for export markets that they will
have an incentive to evolve. There is another reason why India needs to search for
external markets – the crucial dependence on imports for survival. The country has
for long believed that it is a self – sufficient, independent economy. But, in fact,
from petroleum and fertilizers to capital goods, raw material and life saving drugs,
the Indian economy is vitally dependent on imports. As long as it is dependent on
imports, it needs to export to pay for these imports. As long as India needs to export
and import, it makes far more sense to be part of the multilateral trading system than
stay out of it. That is why even a country like china, despite its fiercely – guarded
sovereignty and its status as the world’s last major socialist power, has sought and
succeeded in the WTO.
3. By being a matter of the WTO, India can benefit from the international Trade Centre
jointly operated by the WTO and the United Nations, the later action through
UNCTAD(the UN Conference on Trade and Developing). The international Trade
44
centre was earlier set up by GATT in 1964 at the request of the developing countries
to help them promote their exports.
The centre responds to request from developing countries for assistance in
formulating and implementing export promotion programmes as well as import
operation and techniques. It provides information and advice on export markets and
marketing techniques, and assists in establishing export promotion and marketing
services and training personnel required for these services. The Centre’s help is freely
available to the least – developed countries.
4. Estimate have been made by the World Bank,OECD, and the GATT secretariat,
which shows that the income effects of the implementation of the Uruguay Round
package will add between 213 to 274 billion US dollars annually to world income.
The GATT secretariat’s estimate of the overall trade impact is that the level of
merchandise trade in goods will be higher by 745 billion US dollars in the year 2005.
Than it would otherwise have been. The GATT Secretariat further projects that the
largest increases will be in the areas of clothing (60%), agriculture, forestry, and
fishery products (20%) and processed food and beverage (19%). Since India’s
existing and potential export competitiveness lies in these product, groups, it is
logical to believe that India will obtain large gains in these sectors. Assuming that
India’s market share in world export improves from 0.5% to 1% and that we are able
to take advantage of the opportunities that are created, the trade gains may
conservatively be place at 2.7 billion US dollars extra exports per year. A more
generous estimate will range from 3.5 to 7 billion US dollars worth of extra exports.
5. Another advantage of WTO membership stems from the fact that India (any member
country for that matter) is saved from entering into multiple bilateral trade
negotiations with other countries. In the absence of WTO, India, for example, would
be required to enter into as many bilateral agreements as the country desires to have
trade links. With the WTO membership, India has the advantage of having trade
links with all other member countries without the need for bilateral agreements. The
role of WTO is like that of a telephone exchange in this context.
6. WTO provides for a multilateral set of rules, which are beneficial to a country like
India. Such rules provide greater protection against bilateral pressures or against the
trade restrictions that cannot be justified under a multilaterally agreed framework.
Further, the system of multilateral rules impacts greater predictability and stability
to the international trading system. If the system of rules is not followed, the
ensuring chaos and uncertainty will result in a trading system dominated by might
rather than right.
7. There are several areas in the Uruguay Round package that relate to market access.
The more important ones are tariffs, textiles, and agriculture. India’s position in all
these sectors is advantageous to her and the provisions are favorable to the country.
Arguments Against Membership
Arguments against India’s membership in WTO are equally strong. The major
ones are stated below:
1. The claim that world trade would increase substantially and that India’s exports will
expand considerably is not acceptable to many. The estimates relating to world trade
may prove to be suspect. Flow of goods and services across the globe depends not
much on trade restriction but on factors like infrastructure, political environment,
technology, assured supply of exportable goods, and quality consciousness of
producing countries. It may be observed that India is short, to some extent, in all
45
these requisites. Removal of trade barriers will not guarantee expansion in world
trade.
2. India and other developing countries have blindly walked into the trap laid by the
developed countries. WTO, along with IMF, and World Bank, represents the
interests of developed countries. Rhetoric and platitudes notwithstanding. WTO will
not ensure open trade for goods produced by developing countries. It ensure
necessary climate for domination and hegemonisation by the consortium of the
capitalist countries. In fact, the Uruguay Round negotiations were motivated by the
needs of the United states and Western Europe to discover new markets for their
industries, especially in sectors like service and finance.
3. It is claimed that there are several areas in the Uruguay Round package that relate to
market access and India would, therefore, gain substantially in the long run because
of the market access. Figures demonstration the gains from market access are no
doubt praiseworthy. But the gains , if any, in tariff concessions or removal of quotas
could easily be lost because of the new rules and discipline and potential for trade
harassment.
4. The worst fears expressed about the WTO agreement relate to the steep hike in
prices of drugs and agriculture inputs.
INDIA’S COMMITMENT TO WTO
1. As a member of the WTO, India has bound about 67% of its tariff lines whereas
prior to the Uruguay Round, only 6% of the tariff lines were bound. For non –
agricultural goods, with a few exception, celling, buildings of 40% ad valorem on
finished goods and 25% on intermediate goods, machinery and equipment have been
undertaken. The phased reduction to these bound levels is being undertaken over the
period March 1995 to the year 2005. In textiles, where reduction will be achieved
over the period of 10 years, India has reserved the right to revert to duty levels
prevailing in 1990, if the integration process, envisaged under the agreement on
Textiles and Clothing, does not materialize in full or is delayed. Under the
Agreement on Agriculture, except for a few items, India’s bound rate ranges from
100% to 300% and no commitments have been made regarding market access,
reduction of subsides or tariffs.
2. Quantitative Restrictions (QRs) on imports are currently being maintained on
Balance of Payments (BOP) grounds for about 2,300 tariff lines at the eight digit
level. In view of the important in the BOP, the Committed on BOP restrictions has
asked India for a phase out plane for the QRs. Based on presentations before this
Committee and subsequent consultations with trading partners, an agreement was
reached with these countries, except USA, to phase out the QRs over a period of six
years beginning 1997.
3. The government of India is committed to amend the patents Act for meeting its
obligation under the TRIPs Agreement. The ruling of the WTO Dispute settlement
Panels following the complaints under Article 70.8(requiring the setting up of the
Mail Box System) and Article 70.9 (granting of Exclusive Marketing Rights) made
it obligatory for the government of India to make appropriate amendments to the
patents Act 1970 by April 19, 1999. Accordingly, the government introduced a Bill
to amendments to the patents Act during the 1998 winter sessions of parliament,
which was passed by the Rajya Sabha on December 23, 1998. This was followed up
by a presidential Ordinance on January 8, 1999, bringing the domestic legislation in
conformity with India’s obligations under Articles 70.8 and 70.9 of the TRIPs
46
Agreement. The patents (Amendment) Bill was finally approved by the Parliament
on March 13,1999.
4. Under TRIMs , India has already notified the TRIMs maintained by it. These have to
be eliminate by January 1, 2000. Under the Information Technology Agreement
(ITA), tariffs have to be brought down to zero on 95 lines by the year 2000, on 4
tariff lines by 2003, on 2 tariff lines by 2004 and on the balance 116 tariff lines by
the year 2005. India is also committed, under the Agreement on Technical Barriers
to Trade and Sanitary and Phytosanitary Measures, to establish and administer
national standards and Technical regulations, keeping in view the basic precepts of
MFN, National Treatment and Transparency.
5. Under the General Agreement on Trade in service (GATs), India has made
commitments in 33 activities. Foreign services providers will be allowed to enter
into these activities. According to the government, the choice of the activities has
been guided by consideration of national benefit(namely, the impact on capital
inflows, technology, and employment).
6. India’s legislation on Customs Valuation Rules 1998, has been amended to bring it
into conformity with the provision of the WTO Agreement on implementation of
Articles VII of GATT 1994 and the Customs Valuation Agreement.
TRADE BLOCS
An economic integration scheme is conceived as a building block of economic
development of the member countries. It, however, may sometimes become a
stumbling blocks for firm located outside the bloc. Besides the integration schemes,
there have been efforts to foster economic cooperation between countries.
Growing Regionalism and Intra – Regional Trade
Indeed, the global trading system has been witnessing a proliferation of regional
economic integration scheme or trade blocs (also known as Regional Integration
Agreement/ Arrangement – RIA-or Regional Trade Agreement- RTA), designed to
achieve various economic, social and political purposes. The increase in the number of
RTAs has been very rapid particularly since the early 1990s.
There has been a significantly increase in the number of regional economic
integration schemes. A total of 265 RTAs had been notified to the GATT/WTO until
May 2003, although only less than 180 RTAs were in force then. A large additional
number of RTAs have been expected to become operation and substantial number of
RTA proposals have been under negotiation. A number of countries which traditionally
remained outside regional agreements have joined or have been negotiation to join
RTAs.
In fact, many countries belong to more than one RIA. Mexico, an interesting
example, in early 2003 was a participant in 13 FTAs, ten of which contained provisions
on trade in services, and was engaged in negotiations with a number of other countries.
Mexico was deriving over 80 per cent of its total imports from preferential partners,
giving it one of the world’s highest ratio.
More than half of world trade now occurs within actual or prospective trading
blocs. More than one-third of world trade already takes place within the existing RIAs.
The motivation to from trading blocs may vary from region to region and from
country to country. Nevertheless, as Shiells suggests, the following
motivation seem to play a key role in the formation of trading blocs.
47
1. To obtain economic benefits from achieving a more efficient production structure

by exploiting economies of scale through spreading fixed costs over large regional
market, increased economic growth from foreign direct investment, learning from
experience, etc.
2. To pursue non – economic objectives such as strengthening political ties and
managing migration flows.
3. To ensure increased security of market access for smaller countries by forming
regional trading blocs with large countries.
4. To improve members bargaining strength in multilateral trade negotiations or to
protest against the slow pace of trade negotiations.
5. To promote regional infant industries which cannot be viable without a protected
regional market.
6. Finally, to prevent further damage to their trading strength due to further trade
diversion from third countries.
48
Regional integration scheme tend to increase intra – regional trade. There has,
in fact, been a fast growth of the intra – regional trade. Some people view world trade as
consisting broadly of intra – regional trade and inter – regional. There has also been
talks of regionalization versus globalization of world trade.
FORMS OF INTEGRATION
The term economic integration has been interpreted in different ways. Some
authors include social integration in this concept, others subsume different forms of
international cooperation under this heading, and the argument has also been advanced
that the mere existence of trade relations between independent national economies is a
sign of economic integration.
However, the term is commonly used to refer to the type of arrangement that removes
artificial trade barriers, like tariffs and quantitative restrictions, between the integrating
economies.
Balassa has drawn a distinction between integration and cooperation. The
difference is qualitative as well as quantitative. Whereas cooperation includes actions
aimed at lessening discrimination, the process of economic integration comprises
measures that entail the suppression of some forms of discrimination. For example,
international agreements on trade barriers are an act of economic integration. The main
characteristic of economic integration is, thus, the abolition of discrimination within an
area. The characteristic of integration scheme are shown in the following figure.
Free trade Free trade

area among
members
Custom Free trade Common

union among external
members commercial
policy
Common Free trade Common Free factor
market among external mobility
members commercial within the
policy market
Economic Free trade Common Free factor Harmonized
union among external mobility economic
members commercial within the policy
policy market
Economic Free trade Common Free factor Harmonized Supernational
integration among external mobility economic organizational
members commercial within the policy structure
policy market
Characteristics of Integration Schemed

There are different degrees or levels of economic integration. The important
forms of integration are outlined below.
Free trade area
49
A free trade is a grouping of countries to bring about free trade between them.
The free trade area abolishes all restrictions on trade among the members but each
member is left free to determine its own commercial policy with non- members.
Customs union
A customs union is a more advanced level of economic integration than the free
trade area. It not only eliminates all restrictions on trade among members but also adopt
a uniform commercial policy against the non – members.
Common market
The common market is a step ahead of the custom union. A common market
allows free movement of labour and capital within the common market, besides having
the two characteristics of customs union, namely, free trade among members ad
uniform tariff policy towards outsiders.
Economic union
A still more advanced level of integration is the economic union. Apart from
satisfying the conditions of the common market mentioned above, the economic union
achieves some degree of harmonization of national economic policies, through a
common central bank, unified monetary and fiscal policy, etc. Example: the European
Union(EU).
Economic integration
The ultimate form is full economic integration characterized by the completion
of the removal of all barriers to intra – bloc movement of goods and factors, unification
of social as well as economic policies and all the members bound by decisions of a
super national authority consisting of executive, judicial and legislative branches.
MAJOR REGIONAL TRADING GROUPS
In recent years, a large number of trading blocs have emerged. These exist in all
parts of the world. The number of regional trade agreements rose from under 25 in 1990
to over 90 in 1998. These range from huge regional trading blocs like APEC or the EU
to lose agreements between groups of small countries, some major blocks are discussed
here.
The European Union
The European Economic Community (now called the European Union or EU) was
formally established by the Treaty of Rome in 1957. But the efforts in this direction go
back to 1951 when the European Coal and Steel Community Agreement was signed in
Paris. As of now, EU has 25 members and some more are expected to join.
The EU has 450 million consumers and at 10 trillion euros, will account for a fourth of
the world`s GNP. Besides, the 25 nation EU has a huge territory of 3.9 million square
kilometers.
The objectives of the EU are:
1. Elimination of customs duties among member states.
2. Elimination of obstacles to the free flow of import and / or export of goods and
services among member nations.
3. Establishment of common customs duties and united industrial / commercial
policies regarding countries outside the community.
4. Free movement of capital and people within the block
50
5. Acceptance of common agricultural policies, transport policies, technical

standards, health and safety regulations, and educational degree.
6. Common measures for consumer protection.
7. Common laws to maintain competition throughout the community and to fight
monopolies or illegal cartels,
8. Regional funds to encourage the economic development of certain countries /
regions.
9. Greater monetary and fiscal coordination among member states and certain
common monetary / fiscal policies.
Since the signing of the EU`s founding treaty, the EU has been
Since the morning of the EU`s founding treaty, the EU has been engaged in deeper
integration as well as enlargement. After initially creating a customs union, the EU has
now achieved something approaching a common or single market among all its
members and beyond, and has recently introduced a fledgling monetary union between
eleven of its members. The EU has also been establishing formal links with countries
and trading blocs beyond its borders.
The EU is not aiming at mere economic integration. From the very beginning,
economic integration was seen as a means to achieving political union.
Though attaining political integration remains the ultimate goal of the EU, the
economic benefits from this huge trading block are substantial. First, there will be gains
from eliminating the transaction costs associated with border patrols, customs
procedures and the like, secondly economic growth will be spurred by the economics of
scale that will be achieved when production facilities become more concentrated.
Thirdly there will now be subject to competition form firms in other EU countries.
There will be substantial benefits for firms operating in Europe. These firms will
gain because their operations in one country can now be freely expanded into others.
And their products may be sold freely across borders. In addition, the free movement of
capital allows these firms to sell securities, raise capital and recruit labour throughout
Europe. Substantial economics of scale in production and marketing will also result.
Perhaps the most interesting development for companies operating in the EU is the
dynamic potential of the single market and economic and monetary union. A large
competitive market of this kind should act as a spur to efficiency and innovation
prompting reorganization of companies, industries, and markets. There has already
been a wave of merger activity and alliance forming in the EU since the 1980s,
reflecting not only global trends but also restricting of the European industry.
Firms from non-member countries to gain from the EU. Well established US based
MNCs such as H J Heinz will be able to take advantage of the new economics of scale.
For example, 3M plants earlier turned out different versions of its products for various
markets. Now the 3M plant in Wales makes videotapes and emerging situation; that is
they are standardizing their products and processes to the greatest extent possible
without compromising local input and implementation.
The increased membership is expected to strengthen the EU`s role in the world
affairs, foreign security, trade policies and other fields of global governance. The
addition of ten more members will boost economic growth and create jobs in both the
old and new member states. It is also hoped that the quality of life will improve as the
new members adopt the old and new members states. If is also hoped that the quality of
life will improve as the new members adopt EU policies on environmental protection
51
and the campaign against crime, drugs and illegal immigration. The EU too will be
enriched through increased cultural diversity, interchange of ideas, and improved
understanding of other people.
India`s stakes with the EU are high. The country enjoys a multidimensional
relationship with the EU, its largest trading partner, accounting for a quarter of its
overseas trade. The EU is also the foremost investor in India, and is a major destination
for service providers, a vital technology vendor, and a major contributor of
development aid.
However, there are apprehensions expressed about the mighty EU. One of the
main concerns of the US and Asian countries is that the EU will at some point impose
new barriers on exports into the EU from non-members. There are already indications
where the EU has adopted protectionist policies towards external trade. One instance
relates to agriculture where the EU limits many food imports from the US. In autos, the
EU reached an agreement with the Japanese to limit the Japanese market share of the
EU auto market. Between 1993 and 1998, those countries that had quotes on Japanese
car imports lifted them gradually until the end of 1998, when they were abolished.
Meanwhile Japanese producers committed themselves to voluntarily restraining sales
so that by the end of the century they hold no more than 17 percent of the European
market. After that all restrictions are to be abolished. The US firms describe the EU as
Fortress Europe. They have reasons to entertain the doubt. Besides banning import of
food grains for example the EU has called on members to limit the number to limit the
number of American television programmes broadcast in Europe.
Many US firms are also concerned about the relatively strict domestic-content
rules recently passed by the EU. These require certain products sold in Europe to be
manufactured with European inputs
These examples of protectionism do not constitute a norm and the EU countries
generally have adopted a relatively free trade policy with regard to non – members.
Two forces will push the EU ahead. The first comes from business leaders who are
adapting to globalization y treating Europe as one giant area, a single market. The
second force is the single European currency, the euro, together with the European
Central Bank.
Some statistics are worth mentioning in this context.
 EU directives have superseded 15 sets of national rules, they have harmonized
100000 national standards, labeling laws, testing procedures, and consumer
protection measures covering everything from toys to food, to stock broking to
teaching.
 As many as 60 millions customs and tax formalities at frontiers were scrapped.
 Thanks to single-market measures, Europe`s GDP is now 1 to 1.5 percent higher
than it would otherwise have been.
 Europe has 300000 to 900000 more jobs, and average inflation is 1 to 1.5 points
below what it would have been without EU single market measures.
The developing countries are benefiting from the EU. With regard to the less
developed countries, the EU covers trade as well as aid. The EU and its member states
contribute between 45 and 50 percent of world public development aid. Much of this
aid goes to Sub-Saharan Africa, South America, and Southern Asia. It helps provide
food, medicine, and other humanitarian aid and also promotes agricultural and rural
52
development project. Much of the EU`s development aid is channeled through the
European Development Fund, which is made up of direct contributions from individual
member states and is additional to the EU budget. In the early years, EU development
assistance was mainly used to help former colonies of EU member states. But now
increasing assistance is given to developing countries in general with less regard for
political or strategic ties. Priority is given to countries that are engaged in economic and
political reform, however, EU firms benefit from contracts relating to project
assistance.
The Euro
As stated earlier, one of the major achievements of the EU has been the
introduction of a single currency for all the member countries. The single currency did
come into effect from 1998, but except in three countries-Britain, Denmark, and
Sweden. During the last six years, the euro has been abolished thus facilitating
cross-border trade and investment. Similarly the GDP of poorer countries has risen by
3.5 percent annum on an average and inflation has been stabilized.
North American Free Trade Agreement (NAFTA)
NAFTA came into being on January, 1, 1994 comprising United States, Canada,
and Mexico. NAFTA is an American counterpart to the EU, but the latter aims at
economic and political integration whereas in the American integration the objective is
purely economic. NAFTA is more important because it encompasses the whole of
North America and is the largest regional economic grouping in the world. The
formation of NAFTA has also been quite controversial, especially in the USA.
Controversies notwithstanding, NAFTA has a logical rationale, in terms of both
geographic location and trading importance. Although Canadian-Mexican trade was
not considerable when the agreement was signed, but it was significant between US and
the other two member countries. The US is the largest trading partner of both Canada
and Mexico, and Canada and Mexico are the first and the third most important trading
partners with the US.
NAFTA is expected to provide the dynamic effects of economics integration
discussed earlier in this chapter. For example, Canadian and US consumers are
expected to benefit from low cost agricultural products and also can count on the
benefit from the large and growing Mexican market, which has a huge appetite for US
products.
NAFTA is a good example of trade diversion too. Many US firms have established
manufacturing facilities in Asia to take advantage of cheap labour, and then ship
products from there to the US. It is anticipated that NAFTA members will be able to use
each other rather than Asian countries as locations for trade investment. This movement
has already begun in the automobile industry. US automakers such as Ford have
established manufacturing facilities in Mexico to serve the US market.
Population GDP $ US bn. GDP per cap ($
millions (July (1997 est.) US 1997 est.)
1998 est.)
Canada 30.7 658 21700
53
Mexico 98.6 695 7700
USA 270.3 8083 30200
NAFTA has considerable impact on trade as the above table indicates. As the table
shows, Mexico`s share of the total trade has increased significantly from 1993 to 1998.
In fact, Mexico replaced Japan as the second largest market for US exports, while
remaining the third most important supplier to the US market after Canada and Japan.
Also evident from the table is the fact Mexico replaced Japan as the second largest
market for US exports, while remaining the third most important supplier to the US
market after Canada and Japan. Also evident from the table is the fact that export from
US rose by 46.7 percent from 1993 to 1998, rose faster to Canada (54.9 percent) and
Mexico (88.9 percent)
The certain of NAFTA is so significant, as the opening case indicates, that it
compares with the introduction of the euro in Europe. China`s metamorphosis into
capitalism, and Russia`s turbulent embrace of a market economy. When it was formed
NAFTA was seen as a bold attempt to demonstrate to the world the power and ability of
free trade to convert a poor country into a developing one. If there was a litmus test for
globalization, it was NAFTA
Merchendise Trade Between the United States And
Canada And Between The United States And Mexico
1993 % of 1994 1995 1996 1997 1998 % of
Amount Total Amount Amount Amount amount Amount total
Canada
Export to 101.2 22.2 114.8 127.6 135.2 152.1 156.8 23.4 54.9
Imports 113.3 19.2 131.1 147.1 158.7 170.1 175.8 19.2 55.2
from
Mexico
Export to 41.5 9.1 50.7 46.2 56.8 71.1 78.4 11.7 88.9
Imports 40.4 6.9 50.1 62.8 75.1 86.7 95.5 10.4 136.4
from
Total
Export to 456.8 502.4 575.8 612.1 679.7 670.2 46.7
Imports 589.4 668.6 759.6 803.3 876.4 917.2 55.6
from
(source : Christopher L.Bach “US International Transactions”, survey of current
business, july 1999, pp.94, 96)
The agreement is already a decade old. The member countries have reasons to feel
proud of the bloc`s achievement. American manufactures, desperate for relief from
Asian competition, flocked to Mexico to take advantage of wages that were a tenth of
those in the US. Foreign investment almost flooded into Mexico, rising at $12 billion
per annum during the last decade, three times what India receives. Mexico`s per capita
income rose by 24 percent, to roughly $4000 – which is ten times higher than the per
54
capita income in China. The economy of the country, at $594 billion, is ranked the ninth
largest in the world.
Apprehensions are being voiced about the impact of NAFTA. One fear expressed
is the loss of jobs to both US and Canada favour of Mexico. This loss stems from
increasing location of manufacturing facilities in Mexico to take advantage of
low-wage labour there. From the point of Mexico, the integration may lead to massive
restructuring of the economy and consequent unemployment. This is likely to result
from the exposure of the Mexican firms to mighty American and Canadian competitors.
Environmentalists have voiced concerns about NAFTA. They point to the sludge in the
Rio Grande River and the smog in the air over Mexico city and warn that Mexico could
degrade clean air and toxic-waste standards across the continent.
Then three is opposition in Mexico to NAFTA form those who fear a loss of
national sovereignty. Critics in Mexico argue that their country will be dominated by
the US firms that will not really contribute to Mexico`s economic growth, but instead
will use Mexico as a low cost assembly site, while keeping their high-paying,
high-skilled jobs north of the border. The way US firms located in Mexico treat labour,
particularly union organizers, has come in for sharp criticism. In early 1994, for
example, Honeywell Inc was accused of firing employees who were trying to organize
a union at a Mexican manufacturing plant where worker`s average pay was $1.00 per
hour.
Mexicans have a feeling that the US is no more interested in their country; that the
country has not become another Korea or Taiwan-a promise that was held out when the
country joined NAFTA; and the sacrifices made exceeded the benefits they are
receiving. Mexicans hoped that their country would be America`s biggest workshop.
This honour, however, has gone to China, where workers often earn a fraction of what
Mexicans do
Policy makers in Mexico believed that trade pacts would get more benefits and
signed trade agreement with 30 other countries, more than any other nation. No doubt
consumers got cheaper and better goods. But local manufacturers to toys to shoes, as
well as farmers of rice and corn, are struggling to survive the competition from cheap
imports. This perception in Mexico is spreading to other Latin countries which, after 15
years of gradually opening their own economics to trade and investment, are exhibiting
fatigue with the free marker formula preached by the US and the
Promises and Realities of NAFTA
NAFTA and Mexico
The Promise The Reality

EXPORTS : Mexican made Export have tripled, but only a handful
goods compete successfully in of Mexican companies have enjoyed big
the US. gains
INVESTMENT: foreign FDI average $12 billion yearly, but goes
capital would flow across primarily to border states.
Mexico to capitalize on the
country`s low wages.
55
JOBS: the pact would create 500000 jobs have been created, but the
solid manufacturing jobs and peso maquliadora`s crash has held down
lift Mexicans incomes wages.
STABILITY: NAFTA would Mexico has not relapsed into
force Mexico to maintain protectionism; sovereign debt is
financial discipline and stick investment grade.
with reforms.
US RELATIONS: Mexico and Business links stay strong, but
the US would forge and governmental relations have soured.
unbeatable partnership in a
global economy.
IMF. This is an ironic twist. It was NAFTA which triggered the free-trade
movement, spurring the Uruguay Round of global trade talks in the mid 1990s, and
setting the stage of China`s entry into the WTO.
Mercosur
MERCOSUR, the South American trading block, known as Mercosur in Spanish
and Mercosul in Portuguese, include Brazil, Argentina, Paraguay, and Uruguay. Two
more countries- Chile and Bolivia – are in the process of joining the trading block.
Mercosur came into effect on January 1, 1995.
Mercosur seems to be making good progress. Trade among the member of
Mercosur grew from $4 billion in 1990 to $16.9 billion in 1996. The combined GDP of
the four member states grew at an annual average rate of 3.5 per cent between 1990 and
1996, a performance that is significantly better than the four attained during the 1980s.
There are criticisms against Mercosur however. It is pointed out that the trade
division effects of Mercosur outweigh its trade creation effects. The fastest growing
items in intra-Mercosur trade are cars, buses, agricultural equipment, and other
capital-intensive goods that are produced relatively inefficiently in member countries.
In other words, Mercosur countries, insulted from outside competition b y tariffs that
run as high as 70 percent of value on motor vehicles, are investing in factories that build
products that are too expensive to sell to anyone but themselves. Consequently, these
member countries might not be able to complete globally once the group’s external
trade barriers are broken. In the meantime, countries with more efficient manufacturing
enterprises lose because Mercosur external trade barriers keep them out of the market.
Asia Pacific Economic Cooperation
APEC was formed in 1989 in response to the growing interdepence among the
Asia-Pacific-economies. Membership of this trading block comprises 18 countries that
account for about half of the total world’s output, approximately half of the world’s
merchandise trade, and have a combined GNP of $15 trillion.
 The APEC has the following specific objectives:
 To sustain the growth and development of the region;
 To encourage the flow of goods, services, capital, and technology;
 To develop and strengthen an open multilateral trading system;
 To reduce barriers to trade in goods and services among participants.
APEC is a much looser economic groping but is unique for its members, the
huge differences in their economies and stage of development, and for the juxtaposition
56
of almost every system along the political spectrum. Its 18 members were joined by
Peru, Russia, and Vietnam in November 1998. In the 1991, Seoul Declaration, APEC
members agreed to work towards its objectives. They later firmed up their commitment
towards their objectives by agreeing to free trade among their industrialized member by
2010 and among their developing ones by 2020. In practice, the actions of APEC’s
members have not yet matched their ambitions and some of its members have done
little more than reaffirm their existing commitments under GATT. Potentially,
however, this group could have far reaching implications for trade and investment
around the Pacific Rim.
Association of South-East Asian Nations (ASEAN)
ASEAN is the most prominent regional grouping in Asia. Established with the
support of the USA in 1967,ASEAN includes most of the South-East Asian countries.
The original five members, Indonesia, Malaysia, Philippines, Singapore, and Thailand,
have been joined by Brunei, Vietnam, Myanmar, and Laos.
South Asia is home to the poorest of the poor-yet the governments have been
unable to deliver to its residents the basics in terms of food, shelter, education or even
access to clean drinking water. As the SAARC has excluded bilateral issues, it is clear
that politics in one nation often has a direct bearing in another country. The srilanka
based liberation Tigers of Tamil Eelam, of instance, plotted and executed the
assassination of Rajiv Gandhi.
The united Liberation Front of Assam (ULFA) operates camps in Bhutan, and both
New Delhi and Thimpu are cooperating in trying to deal with this problem,
The Kargil incursion by Pakistan demonstrated that Pakistan had little faith in
adhering and little faith in adhering to the “peaceful settlement” of disputes between
member nations,
At a time when regional grouping bloc have shown enormous clout and economic
advantage. The SAARS`s inability to invent itself as a viable regional grouping is
highly disappointing.
Not so if one takes a look at the emergency of the South Asian Free Trade
Agreement (SAFTA) in 2004 the free trade zone to be operationalised in 2006 is seen as
a major confident building measures to ease tensions in the region-particularly
Indo-Pak. SAFTA would also help the south asian region emerge as a global player in
world trade.
With the signing of the agreement Pakistan would have to automatically give the
most favoured nation treatment to India, which has been major stumbling block in
promoting trade in the region.
57
COMMODITY AGREEMENTS
Till now we have discussed the integration of countries. It is also useful to
understand how countries use commodity agreements to stabilize the price and supply
of selected commodities.
The most widely known commodity agreement is the Organisation of Petroleum
Exporting Country (OPEC). OPEC become a significant force in the world economy
in the 1970s. in 1973 the Arab members of OPEC were angered by US support for
Israel in the war in the Middle East. In response the Arab members declared an
embargo on the shipment of oil to the US and quadrupled the price of oil-from
approximately $3 to $12 per barrel. OPEC tactics included both price fixing and
production quotas.
OPEC is a producer cartel (a group of commodity producing countries that have
significant control over supply and that band together to control output and price) and
the oil rich countries are performing that role to their advantage.
But not always. The cartel experienced severe problems during the 1980s. First, the
demand for OPEC oil declined considerably as the result of conservation the use of
alternative sources, and increased oil production by non-members. All these factors
also contributed to sharp decline in the price of oil. Secondly, the cohesiveness among
members diminished. Sales of fen occurred at less than the agreed upon price, and
production Saddam Hussain’s feeling that oil price were depressed because Kuwait
refused to accept lower production quatas.
International commodity agreements involve both buyers and sellers in an
agreement to manage the output and price of certain commodity. Often, the free market
is allowed to determine the price of the commodity over a certain range. However, if
demand and supply pressure cause the commodity’s price to move outside that range.
The market controls the buffer stock of the commodity. If prices float downward, the
manager purchases the commodity and adds to the buffer stock. Under upward
pressure, the manager sells the commodity from the buffer sock. International
commodity agreements are currently in effect for sugar, tin, rubber, cocoa, and coffee.
58
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UNIT - III
MULTINATIONAL ENTERPRISES (MNEs)
A multinational enterprise (MNEs) is an MNC that operates in a number of
countries with a single recognized headquarters. Daft (1989, pp 674-675) noted that the
MNE has three distinctive managerial characteristics
1. The MNE is managed as an integrated global business system. All branches of the
MNE operate in close alliance with each other. The sources of production –
materials capital, equipment, technology, people and so on – are transferred
between and shared among affiliates. The MNE is free to acquire resources and / or
to set up manufacturing or distribution operations anywhere in the world where it is
most advantageous to do so.
2. the MNE is ultimately controlled by one single management authority that makes
all key strategic decisions.
3. the MNE executive team is presumed to regard the entire world markets as the
relevant frame of reference for all strategic decisions. Resource acquisitions.
Facility location, and marketing efficiency.
Impact of the MNE on Host Countries
There are a number of potential costs and benefits that an MNE brings to its host
country. Christopher North (1985) compiled a list of these potential benefits and costs.
The potential benefits are:
1. The potential transfer of capital, technology and entrepreneurship to the host
country.
2. The potential improvement of the host country`s balance of international
payments.
3. The potential for the creation of local job an career opportunities.
4. Potentially improved competition in the local economy
5. A potentially greater availability of products and services for local consumers
on the other hand, the list of potential costs to the host country include:
6. Potential political influence on the part of the MNE
7. potential socio-cultural distuptions and changes. Which are bound to have both
advocates and opponents.
8. A potentially large dependence on decisions made outside the country.
Perhaps the single greatest danger for the host country is the potential economic
clout of the MNE. Too often, the MNE has a great deal more economic power than the
host country. For instance, General Motors has annual sales that are twenty times
greater that the gross national product (GNP) of nations such as Paraguay and Srilanka.
This inequity in economic power is bound to foster unhealthy relationships between the
MNE and the host country.
In the past quarter century. U.S. MNEs have become the third largest economy in
the world. Behind only the domestic economies of the United States and Russia.
Impact of the MNE on the Home Country
Although MNEs seem to be having considerable problems working with their
host countries. It appears that they are having even greater controversies with their
60
home countries. For the MNE operating in a host country can have a number of
advantages, including.
1. increased profits
2. economics growth
3. development of new products
4. acquisition of raw materials
5. reduced labor costs
6. reduced operations costs
on the other hand, when establishing major operations in another country. The
MNE comes under home country criticism for
1. exporting jobs : reduced employment opportunities at home.
2. exporting goods and services : reducing the supply and / or variety of goods and
services available at home.
3. increasing the home country`s foreign trade deficit
4. decreasing capital investment in the home country
5. reducing tax receipts and domestic income
Strategic Planning Process
The international business environment is characterized by fast changes of varied
nature. Dynamic enterprises device strategies to seize the opportunities, and to compact
the threats of the environmental changes. The technological explosion, information
revolution emergency of well-developed international financial market, cosmopolitan
nature of consumer, growing democratization of nations, expanding world market, and
so on trend to drive such enterprise multinational. Meeting uncertainty by emphasizing
a set of new basics, world class quality and service, enhanced responsiveness and
continuous short-cycle innovation, and improvement aimed at creating new markets for
both new and apparently mature products and services which will be the tune of the
game in future.
General electric employed 3.05lakh people out of which 1.5lakh are foreigners also
operates with 1,068 foreign affiliates out of 1,398 total affiliates in 2003. Ford Motor
Company also employed critical role in the strategic –planning process. According to
General Electric – the marketing manager is the most significant functional
contributors to the strategic planning process, with leadership in defining the business
mission; analysis of the environmental, competitive, and business situations developing
objectives, goals, and strategies; and defining product, market, distribution, and quality
plans to implement to the business’s strategies. This involvement extends to the
development of programs and operating plans that are fully linked with the strategic
plan. The business plan operates at two levels – strategic and tactical. Plans are
developed by teams, with inputs and sign-offs from every important function. These
plans are then implemented at the appropriate levels of the organization. Results are
monitored, and corrective action is taken when necessary. The complete planning
implementation, and control cycle is shown in figure. They also define the major
competitive scopes within which the company will operate:
(a) Industry scope: the range of industries in which a company will operate. Some
companies will operate in only one industry; some only in a set or related
industries; some only in industrial goods, consumer goods, or service; and some in
61
any industry. For example, Dupont prefers to operate in the industrial market,
whereas Dow is willing to be operative in the industrial and consumer markets. 3M
will get into almost any industry where it can make money. Dupont is having 115
foreign affiliates and Dow with 216 foreign affiliates in 2003.
(b) Products and application scope: The range of products and application that a
company will supply. St Jude Medical aims to ‘serve physicians worldwide with
high-quality products for cardiovascular care’.
Planning Implementing Controlling
Corporate Measuring
planning Organizing results
Diagnosing
Division planning result
Implementing
Taking
Business planning corrective
actions
Product planning
Figure: 3.1 The Strategic-planning, implementing and control process

(c) Competence scope: The range of technological and other core competencies that a
company will master and leverage. Japan’s NEC has built its core competencies in
computing, communications, and components. These competencies support its
production of laptop computers, television receivers, and handled telephones.
(d) Market-segment scope: The type of market or customer a company will serve.
Some companies will serve only the upscale market. For example, Mercedes
makes only expensive cars. Gerber serves primarily the baby market.
(e) Vertical scope: The number of channel levels from raw material to final products
and distribute. At one time Ford owned its own rubber plantations, sheep farms,
glass manufacturing plants, and steel foundries. At the other extreme are ‘hollow
corporation’ or ‘pure marketing companies’ consisting of a persons with a phone,
fax, computer, and desk who contracts out for every service, including design,
manufacture, marketing, and physical distribution.
(f) Geographical scope: The range of regions, countries, or country groups in which a
company will operate. At one extreme are the companies that operate in a specific
city or state. At the other extreme are multinationals such as Pepsi. Cock, Unilever
and Caterpillar, which operate in almost every country. Unilever operates 316
foreign affiliates out of total 522 and employed 1.79 lakh foreigners in 2003.
(g) Determinants of strategic options: What characteristics of the business make some
options nearly infeasible with out major organizational change? What
characteristics will be pivotal in making a choice between strategic options? Again
the answers to these questions will depend upon the situation, but as noted in figure
six areas warrant close scrutiny.
After measuring the different risks associated with international investment, the
analyst needs to present an aggregated picture of the total country risk in each of the
countries in which one proposes present an aggregated picture of the total country risk
62
in each of the countries in which one proposes to set up a subsidiary. For each country,
the analysts gives a rating, say on a 5 – point scale and adds them to arrive at the total
country risk. This is done for all the countries, and the country with the highest total has
the highest country risk. Depending on the need, the analyst may also give importance
to the risks if he thinks that one type of risk affects the decision more than the others.
Here, it should be noted that the same specific risk is given same importance across all
the countries of comparison.
3.2. Determinants of Strategic Options and Choice
DEVELOPING GLOBAL COMPETITIVENESS

Indian firms are infinitely more adapt in managing the dynamic environment than
their competitors abroad, and are capable of adjusting to changes in the macro and
microenvironment of business easily, Cost of operation is comparatively low and
availability of trained human resources is plenty, and most successful Indian firms have
a well-established distribution system. There are three broad areas where India will
have to focus to be globally competitive. These are:
(a) Physical Competitiveness
Physical competitiveness comes from building competitive advantages.
Competitive advantage are build in an environment that fosters competition, embraces
complex engineered system, and has the enabling infrastructure that improves capital
productivity.
After the sweeping economic reforms of the nineteen seventies, the Chinese
economy picked up per capita GDP growth which averaged 8 per cent in the
twenty-five years since 1980 . Much of China’s growth was powered big labour
intensive manufactured exports which accounted for 40 per cent of GDP in 2003.
 Comparative Advantage to Competitive Advantage
63
As of now, India’s basis for competition is built around her comparative

advantage based on natural resources and labour. The fact remains that India’s
participation in global trade is a minuscule 1.0 per cent and 4 per cent of Asia’s trade.
Similarly, India’s often-repeated belief in labour-based advantages is fallacious
because of extremely low productivity of labour. To give an example, wages in India
are about 15 per cent of that in the USA . Productivity of labour in India is just 14 per
cent of that of the USA. Value added per work in India is about a thousand US dollars.
This is just one-fiftieth of that of the USA. In agriculture, is India’s labour productivity,
as measured by value added per worker, is about USS400. This is only one hundredth
of that of the USA.
We must realize that in the organized sector we are employing only 40 million
of the 400 million work forces. India must follow a labour policy that created for our
entire workforce. A large proportion of India’s cost of production emanate from labour,
transportation services, power, and water. Cost of power in Shanghai is only 0.75
rupees per unit as against 4 rupees in India. Port turn around at Shenzhen is 24 hours as
against 7 days at Nhava Sheva. Funds in China are sourced at 6 per cent as against 12
per cent in India. These non-tradable inputs cannot be imported. Thus, a concerted
effort in necessary to shift gears from the comparative advantage to competitive
advantage. According to World Investment Report 2005 , productivity in Chinese
manufacturing increased from S900 in 1984 to S 5,400 in 2002 and the productivity in
India’s service sector reached S530 in 1991 but rose to $870 in 2000.
 Infrastructure
To address non-tradable input related costs in the context of physical
competitiveness, an enabling infrastructure must be created. Critical are power and
energy, transportation , communications, and financial markets. China has 2.7 times
more of electricity production, 4.5 times of goods ranked in railways. 15.7 times more
in container number (ports) and 9.7 times more in air freights.
Let us take power, as an example. Per capita power consumption in India is 363 k
Wh, which is half of China’s 714 and compares poorly with world average of 2,054k
Wh. Transmission and distribution losses in India are 18 per cent of output. The world
average is 8 per cent. The government should neither act as a profit guarantorin the
power sector, nor should subsidise all the users. Consumers must learn to pay for
goods and services. To those who cannot afford, the government must put in place a
policy of targeted subsidies. Deregulation with unrestricted entry is leading to the next
generation communication infrastructure. By all projection, the number of voice lines
in the next five years will increase by the same amount as in the last fifty years and costs
will be more than halved. This will benefit consumers, improve capital productivity and
help enterprises participate in market opportunities, especially in the developed world.
On financial markets, we have nor fully harnessed the high rate of household
savings in India. We have a high cost and inefficient financial intermediation system.
India’s few countries globally have double-digit interest rates. We have to completely
delicence the financial sector and have better regulation. This will bring down the cost
of financial intermediation from 5 to 2 per cent, which is the global norm. Thus, India
needs to cover a lot of ground, particularly in power, energy and financial markets, if
capital productivity has to be improved, and India has to achieve physical
competitiveness.
64
 Competition Policy
It is a fact that a country cannot become physically competitive unless its
productive instruments individually achieve high level of competitiveness. Each one of
the Indian companies has to be competitive at the micro level. Government must
promote competition not only in industry, but also in infrastructure and knowledge
sectors. A free, unlimited entry, market based pricing in all areas will foster capital and
operational productivity in all sectors. Benefits to consumer from a competitive
environment are already being seen. For example, prices of consumer durable or white
good have come down. TVs, washing machines and video players are cheaper than
before. Airtime rates of mobile phone service providers are down from 16 rupee in
1988 a minute to less than 2 rupees a minute in 2005. Benefits to consumers in other
sectors are also on the cards. Prospects of competition in petroleum products are giving
rise to superior fuel quality and improved services.
65
 Organic Investments
To create a competitive environment, green field or organic investments that
achieve capital productivity must also be encouraged. Unfortunately, our investment
policies have done exactly the opposite. There is evidence to show that withdrawal of
investment allowances doctor in the as stymied new investments. 40 to 60 per cent of
FDI flows since the year 1990 were multinationals and related to merger and
acquisitions, which does not enhance capital stock. Greenfield investments have a
multiplier effect. Had the government given control of public sector undertakings in the
petroleum sector to foreign companies, it would have led to marginal increase only in
distribution related investments, higher levels of imports of petroleum products, and
competitiveness compromised.
 Complex Engineered Systems
Complex engineering systems with end to end system-engineering capabilities are
now becoming the hallmark of globally competitive companies in the knowledge age.
Indian industry must graduate form one-dimensional manufacturing to complex
engineered systems. In future, a doctor in the system that encompasses telemedicine,
remote surgery, and robotics surgery.
A soldier on the battlefront will no longer use just a weapon. He will be a part of an
assault system that uses wearable computers, global positioning and remote activated
devices. A farmer in the field will no longer use just farm equipments. He will be a part
of precision farming system that leverages the power of global positioning systems,
sensors for root, and leaf and produce growth and computerized control of plant
growth environment. Therefore, to attain leadership, all existing industrial
investments, instead of offering discrete products or services, must integrate knowledge
based complex engineered system.
 Creative Destruction
Creative destruction is an essential ingredient of competitiveness. Hyderabad is a
good example. At one time it was considered to be a city or public sector units such as
IDPL and ECIL. Today these organizations are in troubled times. In their place many
health care and IT companies have come up. Hyderabad is heading to be one of the
India’s knowledge capitals. Hence, it is better to concentrate on the positive aspects of
the phenomena of creative destruction, necessary to create a competitive environment ,
Thus, competitive advantage fostered in an environment of competition, enabling
infrastructure, organic investments, complex engineered systems and creative
destruction are crucial to building physical competitiveness.
 Intellectual Competitiveness
In essence, it means that every Indian manager, technician, and worker must be
better than his or her counterpart in the world. Intellectual competitiveness comes from
investing in education, and supporting innovation. According to World Bank Report
2005, India has advanced its position in technology activity index from 69 in 1995 to
66 in 2001 and China from 63 to 58 position during the same period. India spend
S2,112 million for R&D in 1996 which grew up to S3,743 million in 2001.
 Education
To build intellectual competitiveness, investment in education is an imperative.
Education is like a cradle to global leadership because knowledge has become the
single most important economic resource today. Progressive nations are investing
66
heavily in education in order to be at the forefront. Sweden leads with an investment of

8.2 per cent of GDP in education. In contrast, India spends just 3.3 per cent of GDP on
education in. 1995 and 4.1 per cent in 2002. This is not only lower than the world
average of 4.8 per cent. When it comes to higher education, the picture is worse. We
spend only 0.1 per cent of GDP on higher education, not to speak of science and
technology education, where we spend just 0.05 per cent of GDP. The greatest
economic returns in development comes from investment in education, that too primary
education. We must create a significant resource base of professional knowledge
workers. This is an essential precondition for attaining and retaining global leadership.
 Professional Resource Base
Education is to the knowledge economy what limestone quarries are for cement
plants. Knowledge industries will be built on an education system that creates a talented
professional work force. This is important because the developed world will see
account significant shortage of talent. Again in the developed world is making skilled
workers hard to find. America is already facing a shortage of skilled professionals.
Over the next ten to fifteen years, the USA will see professionals’ workforce shortage
to peak to 15 million. Germany, Japan, and Australia are forecasting large shortages of
professional talent.
Thus , developed countries will compare to attract the right kind of skill sets –
either through immigration or by outsourcing. India is uniquely placed to capitalize on
this opportunity. For example, India has work force of 400 million. With an emphasis
on technical and professional education, we can create several million people with
domain knowledge. Let us train just one million of them every year in marketable world
class’s skills in diverse sectors that would be in demand. If they work for 2,000 hours
per year earning uSS20 dollars an hour, which is about half the average salary, it means
that we are creating a sustainable income of USS40 billion per year. These USS40
billion in income, in turn, can catalyze an output of at least US$120 billion and provide
employment for several million in other sectors.
In other words, we are talking of a basis for a 30 per cent growth in economic
output each year purely on the strength of our professional talent. These additional
benefits will be in improving current account balances and external debt. Growth based
on export of talent is sustainable, unlike exports of physical assets that are opportunistic
to market conditions. This single strategic move of harnessing India’s professional
resource will unleash a self-sustaining economic revolution. Of course, India cannot
remain satisfied with the present resource base of about 5.5 millions professional
managers, engineers, scientists, and doctors. To meet the demands of internal economy
and external markets, India will require creating a pool of 53 millions professionals.
This is ten times our current professional resource base, and about 10 per cent of the
work force.
This window of opportunity is open today. It will not remain available eternally.
English language was imposed on us. But it was perhaps a boon in disguise because we
can now settle the scores by using the knowledge of English, to bring wealth from
abroad into India. Other nations, not so endowed with the knowledge of English in such
large numbers have launched a massive campaign to overcome this deficiency. The
great success of overseas Indians and Indian professionals in the technology sector has
generated an India wave. India needs to build on this. The number of Patent of Patent
Application from India has grown up from 56 in 1992-2 to 909 in 2001-3.
67
This intellectual competitiveness of ours, at this time, is unmatched in the world. If

India launched a war like effort to create skills, match them with the requirement in the
developed market, and deliver them in high quality and low-cost framework
consistently, nothing can stop us. It is realized that creation of a professional resource
base in India must be pursued as a national mission. This is the key to intellectual
competitiveness. It is the surest route for India to carve out a dominant position in the
knowledge economy.
SYSTEMIC COMPETITIVENESS
Systemic competitiveness refers to issues, attitudes, and mindsets that are
necessary to fostering a competitive instinct.
 From Self-reliance to Global Leadership
Since independence, Indian’s have been trained to think in terms of self-reliance.
In today’s context the fortress is likely to become a prison. A strong Indian economy is
the most dependable defense of our national interest. We should be satisfied only when
it is ready to withstand global competition and is on roads in foreign markets on its own
merit and develops global brands. Already, There are several example of world-class
Indian organizations. For Example, in Chennai, Sundaram Fasteners has global
acceptance for product quality. Jet Airways has won international acclaim for in flight
service. NDTV has established itself as a world-class news and current affairs
organization. IIM Ahmedabad is rated as the best management institution in Asia.
Indian Institutes of Technology have left an indelible imprint on technical education.
TCS, Infosys and Wipro leads the global IT services.
 Governmental as Saviour
There are several components of attitudinal changes that are needed to move India
significantly towards global leadership. On the top of the list is the attitude that looks at
the governments as a saviour. It is a fact that India has to focus on three sectors
simultaneously – agricultural economy. Industrial economy, and knowledge economy.
In all three areas we have develop strategies and management skills to attain world –
class efficiency and global competitiveness.
We had the world`s first university at Takshashila in 700 BC. We had a global
university in Nalanda in the fourth century. We were far ahead of other civilizations in
medicine and surgery 2500 years ago. We led the world in astronomy, and
mathematics. We showed the world how to navigate. We created footprints across the
world through merchandise and trade. Our textile industry was a world leader in the
seventeenth and eighteenth centuries. We must seek inspiration from our past, stride
opportunities of the present, and secure a glorious future in the emerging global
economic order. The wealthier states in India, who participate in the service and
manufacturing revolutions accounted 40 percent of GDP. Their real per capita GDP has
grown from $267 with 521 million people and 1.5 million square kilometer in 2003.
CONCLUSION
As discussed in this chapter, the objective of OD is to provide, maintain, and
develop organizational structure that work towards the achievement of corporate goals.
Organizational structure is ultimately driven by strategy; in the near term however,
strategy is shaped by organizational structure, because structure provides a constraint to
action. Structure is relatively immobile in the short – run ; in the longer term, it can (and
does) change. Coordination provides linkages between different task units within an
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organizations. Mechanisms include centralization / decentralization, formalization,

planning, output control, targets, and behavioral controls. According to Prime Minister
Dr. Manmohan Singh, globalization offers US enormous opportunities in the race to
leapfrog in development process.
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UNIT - IV
THE COTROLLING PROCESS
In many ways, the control function is conceptually and practically similar to
decision making. Like decision making, the approaches used by multinationals in
controlling their operations have long been an area of interest. Of particular concern has
been how companies attempt to control their overseas operations to become integrated,
coordinated units. Unfortunately, a number of control problems arise:
(1) The objectives of the overseas operation and the corporation conflict.
(2) The objectives of joint-venture partners and corporate management are not in
accord.
(3) Degrees of experience and competence in planning vary widely among managers
running the various overseas units.
(4) There are basic philosophic disagreement about the objectives and policies of
international operations and the approaches that are often employed in dealing
with these types of problems.
TYPES OF CONTROL
There are two complementary ways of looking at how MNCs control operations.
One way is by determining whether the enterprises choose to use internal or external
control in devising its overall strategy. The other is by looking at the ways in which the
organization uses direct and indirect controls.
Internal and external control.
From an internal control standpoint, an MNC will focus on the things that it does
best. At the same time, of course, management wants to ensure that there is a market for
the goods and services that it is offering. So the company first needs to find out what the
consumers want and be prepared to respond appropriately. This requires an external
control focus. Naturally, ever MNC will give consideration to both internal and
external perspectives of control. However, one is often given more attention than the
other. In explaining this idea, Trompenaars and Hampden – Turner set fourth four
management views regarding how a control strategy should be devised and
implemented:
1. No one dealing with customers is without a strategy of sorts. Our task is to find
out which of these strategies work, which don’t and why. Devising our own
strategy in the abstract and imposing it downwards only spreads confusion.
71
2. No one dealing with customers is without a strategy of sorts. Our task is to find
out which of these strategies work and then create a master strategy from proven
successful initiatives by encouraging and combining the best.
3. To be a leader is to be the chief advisor of strategy. Using all the experience,
information, and intelligence we can mobilize, we need to advise an innovative
strategy and then cascade it down the hierarchy.
4. To be a leader is to be the chief deviser. Using all the experience, information,
and intelligence we can mobilize, we must create a broad thrust, while leaving it
to subordinates to fit these to customer needs.
Trompenaars and Hampden – Turner ask managers to rank each of these four
statement by placing a “1” next to the one they feel would most likely be used in their
company, a “2” next to the second mostly likely. On down to a “4” next to the one that
would be internal control approach. Answer 1 focuses most strongly on an external –
direct approach and rejects the internal control option. Answer 3 represents the
opposite. Answer 2 affirms a connections between an external – directed strategy and
an inner directed one, whereas answer 4 does the opposite. 17
Cultures differ in the control approach they use. For example among U.S.
multinational it is common to find mangers using an internal control approach. Among
Asian firms an external control approach is more typical. The following table
provides some contrasts between the two.
DIRECT CONTROL
Direct Control involves the use of face-to-face or personal meetings to monitor
operations. A good example is International Telephone and Telegraph (ITT) which
holds monthly management meetings at its New York headquarters. These meetings
are run by the CEO of the company and reports are submitted by each ITT unit manager
through out the world. Problems are discussed, goals set, evaluations made, and actions
taken that will help the unit to improve its effectiveness.
The impact of Internal and External Oriented Cultures on the control Process
Key difference between…………..
Internal Control External Control
Often dominating attitude Often flexible attitude, willing to
bordering on aggressiveness compromise and keep the peace.
towards the environment.
Conflict and resistance means that Harmony, responsiveness, and
a person has convictions. sensibility are encouraged.
The focus is one self , functions, The focus is on others such as
one`s own group, and one`s own customers, partners and colleagues.
organizations There is comfort with waves, shifts
There is discomfort when the and cycles, which are regarded as
environment seems “out of “natural”
control” or changeable.
72
Tips for Doing Business with…………..

Playing “hardball” is legitimate to Softness, persistence, politeness, and
test the resilience of an opponent. long, long patience will get rewards.
It is most important to “win your It is most important to maintain one`s
objective” relationships with others.
Win some, lose some. Win together, lose apart.
Source: Adapted from Fons Trompenaares and Charles Hampden-Turner,
Riding the Waves of Culture : Understanding Diversity in Global Business,
2nd ed. (New York : McGraw-Hill, 1998), pp. 160-161
Another common form of direct control is visits by top executives to overseas
affiliates or subsidiaries. During these visits, top managers can learn firsthand the
problems and challenges facing the unit and offer assistance.
A third form is the staffing practices of MNC`s. by determining whom to send
over-seas to run the unit. The corporation can directly control how the operation will be
run. The company will want the manager to make operating decisions and handle
day-to-day matters, but the individual also will know which decisions should be cleared
with the home office. In fact, this approach to direct control sometimes results in a
manager who is more responsive to central management than to the needs of the local
unit.
A fourth form is the organizational structure itself. By designing a structure that
makes the unit highly responsive to home-office requests and communications, the
MNC ensures that all overseas operations are run in accord with central management`s
desires. This structure can be established through formal reporting relationships and
chain of command (who reports to whom)
Indirect Control
Indirect Control involve the use of reports and other written forms of
communication to control operations. One of the most common examples is the use of
monthly operating reports that are sent to the home office. Other examples, which
typically are used to supplement the operating report, include financial statement, such
as balance sheets, income statements, cash budgets, and financial ratios, that provide
insights into the unit`s financial health. The home office will use these operating and
financial statements, such as balance sheets, income statements, cash budgets, and
financial ratios, that provide insights into the unit’s financial health. The home office
will use these operating and financial data to evaluate how well things are going and
make decision regarding necessary changes. Three sets of financial statements usually
are required from subdirectories: (1) statements prepared to meet the national
accounting standards and procedures prescribed by law and other professional
organizations in the host country; (2) statements prepared to comply with the
accounting principles and standards required by the home country; and (3) statements
prepared to meet the financial consolidation requirements of the home country.
Indirect controls are particularly important in international management
because of the great expense associated with direct methods. Typically, MNCs will use
indirect controls to monitor performance on a monthly basis, whereas direct controls
are used semiannually or annually. This dual approach often provides the company
with effective control of its operations at a price that also is cost-effective.
73
APPROACHES TO CONTROL
International managers can employ many different approaches to control. These
approaches typically are dictated by the MNC`s philosophy of control, the economics
environment in which the overseas unit is operating. And the needs and desires of the
managerial personnel who staff the unit. Working within control parameters, MNC`s
will structure their processes so that they are as efficient and effective as possible.
Typically, the tools that are used will give the unit manager the autonomy needed to
adapt to changes in the markets as well as to attract competent local personnel. These
tools will also provide for coordination of operations with the home office, so that the
overseas unit is in harmony with the MNC`s strategic plan.
Some control tools are universal. For example, all MNCs use financial tools in
monitoring overseas unit. This was true as long as three decades ago, when the
following was reported.
The cross – cultural homogeneity in financial control is in marked contrast to the
heterogeneity exercised over the areas of international operations. American
subsidiaries of Italian and scan-dinavian firms are virtually independent operationally
from their parents in functions pertaining to marketing, production, and research and
development; whereas the subsidiaries of German and British firms have limited
freedom in these areas. Almost no autonomy on financial matters is given by any
nationality to the subsidiaries.
Some Major Difference
MNCs control operations in many different ways, and these often vary
considerably from country to country. For example, how British firms monitor their
overseas operations often is different from how German or French firms do, similarly,
U.S. MNCs tend to have own approach to controlling, and it differs from both European
and Japanese approaches. When Horovitz examined the key characteristics of top
management control in Great Britain, Germany, and France, he found that British
controls had four common characteristics:
1. Financial records were sophisticated and heavily emphasized.
2. Top management tended to focus its attention on major problem areas and did not
get involved in specific, detailed matters of control,
3. Control was used more for general guidance than for surveillance.
4. Operating units had a large amount of marketing autonomy.
74
This model was in marked contrast to that of German managers, who employed
very detailed control and focused attention on all variances large and small. These
managers also placed heavy control on the production area and stressed operational
efficiency. In achieving this centralized control, managers used a large central staff for
measuring performance, analyzing vacancies, and compiling quantitative reports for
senior executives. Overall, the control process in the German firms was used as a
policing and surveillance instrument. French managers employed a control system that
was closer to that of the German than to British. Control was used more for surveillance
than for guiding operations, and the process was centrally administered. Even so, the
French system was less systematic and sophisticated.
How do U.S. MNCs differ from their European counterparts? One comparative
study found that a major difference is that U.S firms tend to rely much more heavily on
reports and other performance-related data. Americans make greater use of output
control, and European rely more heavily on behavioral control. Commenting on the
differences between these two groups, the researcher noted: “this pattern appears to be
quite robust and continues to exist even when a number of common factors that seem to
influence control are taken into account. some specific findings from this study include:
1. Control in U.S. MNCs focuses more on the quantifiable, objective aspects of a
foreign subsidiary, whereas control in European MNCs tends to be used to measure
more qualitative aspects. The U.S. approach allows comparative analyses between
other foreign operations as well as domestic units; the European measures are more
flexible and allow control to be exercised on a unit-by-unit basis.
2. Control in U.S. MNCs requires more precise plans and budgets in generating
suitable standards for comparison. Control in European MNCs requires a high
level of company wide understanding and agreement regarding what constitutes
appropriate behavior and how such behavior supports the goals of the both the
subsidiary and the parent firm.
3. Control in U.S. MNCs requires large central staffs and centralized information
processing capability. Control in European MNCs requires a large cadre of capable
expatriate managers who are willing to spend long periods of time abroad. This
control characteristic is reflected in the career approaches used in the various
MNCs. Although U.S. multinational do not encourage lengthy stays in foreign
management positions, European MNCs often regard these positions as stepping
stones to higher offices.
4. Control in European MNCs requires more decentralization of operating decision
than does control in U.S. MNCs.
5. Control in European MNCs favors short vertical spans or reporting channels from
the foreign subsidiary to responsible positions in the parent.22
75
As noted in the discussion of decision making, these differences help to explain

why many researchers have found European subsidiaries to be more decentralized than
U.S, subsidiaries. European rely on the managerial personnel they assign from
headquarters to run the unit properly. Americans tend to hire a greater percentage of
local management people and control operations through reports and other objective,
performance – related data. The difference results in European’s relying more on socio
emotional control system and American’s opting for task – oriented, objective control
systems.
EVALUATING APPROACHES TO CONTROL
Is one control approach any better than the other? The answer is that each seems to
work best for its respective group. Some studies predict that as MNCs increase in size,
however, they likely will move towards the objective orientation of the MNCs.
Commenting on the data gathered from large German and U.S. MNCs, the researcher
concluded:
Control mechanism have to be harmonized with the main characteristics of
management corporate structure to become an integrated part of the global organization
concept and to meet situational needs. Trying to explain the differences in concept of
control, we have to consider that the companies of the U.S. sample were much larger
and more diversified Accordingly, they use different corporate structures, combining
operational units into larger units and integrating these through primarily centralized,
indirect, and task-oriented…The Germen companies have not (yet) reached this size
and complexity, so a behavioral model of control seems to be fitting.23
Approaches to control also differ between U.S. and Japanese firms. For
example, one study surveyed the attitudes of a large sample of Japanese and U.S.
controllers and line managers. Respondents were down from the 500 largest industrial
firm in both countries. Some of the results are presented.
One overall findings of the research was that Japanese controllers and managers
prefer less participation in the control process than their U.S. counterparts do. In
addition, the Japanese have longer-term planning horizons, view budgets as more of a
communication device than a controlling tool, and prefer more slack in their budgets
than the Americans. These results are extremely important in terms of adapting U.S.
approaches to Japanese owned subsidiaries. The study results suggest the following:
U.S. managers who wish to design control systems for foreign division in Japan
(or vise-versa) may wish to consider modifications to the typical domestic system, or
they should at least be aware of the potential differences in responses to the system in
the areas of budget development, evaluation against budgets, long-run/short-run
orientation of budgets, the use of budget slack, and the use of analytic tools in
developing inputs to the budget process to name a few.
76
It is also important to understand why Japanese managers act as they do.

Yoshimura and Anderson conducted a detailed analysis of white-collar middle
managers in Japan in order to determine what foreign managers need to know about
these “salarymen”. One thing that the researchers found was that Japanese managers
place human relationship ahead of economic efficiency. As a result, when Western
managers try to penetrate Japanese markets by offering superior technology or lower
prices as their levels, they often find that these strategies do not work. If a Japanese
company has had a satisfactory relationship with supplier, the company may continue
doing business with this firm even if it means accepting higher costs. Second, when
dealing with a Japanese company, nothing is more important than a supplier’s ability to
meet this customer’s expectations. When salary men complain about non – Japanese
companies and the products or service they provide, they usually contend that
consistency is missing:
They want their supplier to understand customer expectations without being
told explicitly, and they want assurance that even “unreasonable” expectations, such as
midnight service, will met. They don’t want their relationship manager changed
frequently because of turnover, a new contact may not understand their expectations
immediately. Japanese overseas subsidiaries do business with their traditional suppliers
because they want to maintain continuity in relationship, even if lower-cost local firms
are available. The Japanese believe that, in the long run if both parties contribute to
the relationship in good faith, results will take care of themselves.
Another thing that the researchers discovered is that sometimes performance
results are not as high as they could be because of the fear of embarrassing others in the
organization.
For example, even through some decisions might result in higher returns on
investment for the company, if these decisions put others in a bad light, they will not be
made. This means that if a bank has two groups that are charged with buying and selling
foreign currency and one of the groups concludes that the U.S. dollar is going to decline
against the Japanese yen, it would be wise for this group to sell those dollars and buy
yen. On the other hand, if there is another group in the bank that has large position in
dollar and will be unable to unload this currency very quickly, the first group might
refuse to sell its dollars because this would end up making the group that held dollars
look foolish and this is something that Japanese salary men try very hard to avoid.
In fact, the avoidance of embarrassment – saving “face” – is one reason that
many Japanese firms focus on long-term objectives rather than short-term ones. While
their pronouncement seem to emphasize the long-term orientation of their company, in
truth this approach is a way of deflecting embarrassment. After all, no one knows what
will happen in the long run, so by pretending to be highly interested in 50-year goals,
the management sidestep any likelihood that its currently performance will be
criticized. After all, it can always argue that in the long run it will achieve high-level
performance despite the facts that it is not doing very well at present. So in deciding
which from of control to use, MNCs must determine whether they want s more
bureaucratic or a more cultural control approach, and form the cultural perspective, it
must be remembered that this control will vary across subsidiaries.
CONTROL TECHNIQUES
A number of performance measures are used for control purposes. Three of the
most common evaluate financial performance, and personnel performance.
77
FINANCIAL PERFORMANCE
Financial performance evaluate of a foreign subsidiary or affiliate usually is based
on profit and return on investment. Profit is the amount remaining after all expenses are
deducted from total revenues. Return on investment (ROI) is measured by dividing
profit by assets; some firms use profit divided by owner’s equity (return on owner’s
investment, or ROOI) in referring to the return – on – investment performance measure.
In any case, the most important part of the ROI calculation is profits, which often can be
manipulated by management. Thus, the amount of profit directly relates to how well or
how poorly a unit is judged to perform. For example, if an MNC has an operation in
both country A and country B and taxes are lower in country A, the MNC may be able
to benefit if the two units have occasion to do business with each other. This benefit can
be accomplished by having the unit in country A charge higher prices than usual to the
unit in country B, thus providing greater net profits to the MNC. Simply put, sometimes
differences in tax rates can be used to maximize overall MNC profits. This same basic
from of manipulation can be used in transferring money from one country to another,
which can be explained as follows:
Transfer prices are manipulated upward or downward depending on whether the
parent company wishes to inject or remove cash into or from a subsidiary. Prices on
imports by a subsidiary from a related subsidiary are raised if the multinational
company wishes to move funds from the receiver to the seller, but they are lowered if
the objective is to keep the funds in the importing subsidiary….Multinational
companies have been known to use transfer pricing for moving excess cash from
subsidiaries located in countries with weak currencies to countries with strong
currencies in order to protect the value of their current assets.
The so-called bottom-line (i.e., profit) performance of subsidiaries also can be
affected by a devaluation or revaluation of local currency. For example, if a country
devalues its currency, then subsidiary export sales will increased, because the price of
these goods will be lower for foreign buyers, whose currencies now have greater
purchasing power. If the country revalues its currency, then export sales will decline
because the price of goods for foreign buyers will rise, since their currencies now have
less purchasing power in the subsidiary’s country. Likewise, a devaluation of the
currency will increase the cost of imported materials and supplies for the subsidiary,
and a revaluation will decrease these cost because of the relative changes in the
purchasing power of local currency. Because devaluation and revaluation of local
currency are outside the control of the overseas unit, bottom-line performance
sometimes will be a result of external conditions that do not accurately reflect how well
the operation actually is being run.
Of course, not all bottom-line financial performance is a result of manipulation or
external economic conditions. Sometimes other forces account for the problem. For
example, one of Volkswagen’s goals for a recent year was to earn a pretax 6.5 percent
on revenues. The firm fell far short of this goal, earning only 3.5 percent before taxes.
One reason for this poor performance was that labor costs in Lower Saxony, where
approximately half of its workforce is located, are very high. Workers here produce
only 40 vehicles per employee annually in contrast to the VW plant in Navarra, Spain,
which turns out 79 vehicles per employee per year. Why doesn’t VW move work to
lower-cost production sites? The major reason is that the state of Lower Saxony owns
19 percent of the companies voting stock, so the worker’s jobs are protected.
78
Simply put, relying solely on financial results to evaluate performance can

result in misleading conclusions.
QUALITY PERFORMANCE
Just as quality has become a major focus in decision making, it also is a major
dimension of the modern control process of MNCs. The term quality control (QC) has
been around for a long time, and it is a major function of production and operations
management. Besides the TQM techniques of concurrent engineering/inter functional
teams, employee empowerment, reward/recognition systems, and training, discussed
earlier in this chapter in the context of decision making, another technique more
directly associated with the control function is the use of quality circles, which have
been popularized by the Japanese. A Quality control circle (QCC) is a group of workers
who meet on a regular basis to discuss ways of improving the quality of work. This
approach has helped many MNCs to improve the quality of their goods and services
dramatically.
Why are Japanese-made goods of higher quality than the goods of many other
countries? The answer cannot rest solely on technology, because many MNCs have the
same or superior technology or the financial ability to purchase it. There must be other
causal factors. “ International management in Action: How the Japanese do things
differently” gives some details about these factors. One study attempted to answer the
question by examining the difference between Japanese and U.S. manufacturers of air
conditioners. In this analysis, many of the commonly cited reasons for superior
Japanese quality were discovered to be inaccurate. One theory was that the Japanese
focus their production processes on a relatively limited set of task and narrow product
lines, but this was not so. Nor was support found for the commonly held belief that
single sourcing provided Japanese firms with cost advantages over those using multiple
sourcing; the firms studied regularly relied on a number of different suppliers. So, what
were the reasons for the quality differences?
One reason was the focus on keeping the workplace clean and ensuring that all
machinery and equipment were properly maintained. The Japanese firms were more
careful in handling incoming parts and materials, work-in-process, and finished
products than their U.S. counterparts. Japanese companies also employed equipment
fixtures to a greater extent than did U.S. manufacturers in ensuring proper alignment of
parts during final assembly.
The Japanese minimized worker error by assigning new employees to existing
work teams or pairing them with supervisors. In this way, the new workers gained
important experience under the watchful eye of someone who could correct their
mistake.
Another interesting finding was that the Japanese made effective use of QCCs.
Quality targets were set, and responsibility for their attainment then fell on the circle
while management provided support assistance. This was stated by the researcher as
follows:
In supporting the activities of their QCC’s, the Japanese firms in this industry
routinely collected extensive quality data. Information on defects was compiled daily,
and analyzed for trends. Perhaps most important, the data were made easily accessible
to line workers, often in the form of publicly posted charts. More detailed data were
available to QCC’s on request.
79
This finding pointed out an important difference between Americans and Japanese.
The Japanese pushed data on quality down to the operating employees in the quality
circles, whereas Americans tended to aggregate the quality data into summary reports
aimed at middle and upper management.
Another important difference is that the Japanese tend to build in early warning
systems so that they know when something is going wrong. Incoming field data, for
example, are reviewed immediately by the quality department, and problems are
assigned to one of two categories: routine or emergency. Special efforts then are made
to resolve the emergency problems as quickly as possible. High failure rates
attributable to a single persistent problem are identified and handled much faster than
they would be in U.S. firms.
Still another reason is that the Japanese work closely with their suppliers so that the
latter’s quality increases. In fact, research shows that among suppliers that have
contracts with both American and Japanese auto plants in United States. The Japanese
plant get higher performance from their suppliers than do the Americans. The Japanese
are able to accomplish this because they work closely with their suppliers and help
them develop lean manufacturing capabilities. Some of the steps that Japanese
manufactures take in doing this include (1) leveling their own production schedules in
order to avoid big spikes in demand, thus allowing their suppliers hold less inventory;
(2) encouraging their suppliers to ship only what is needed by the assembly plant at a
particular time, even if this means sending partially filled trucks; and (3) creating a
disciplined system of delivery time windows during which all parts have to be received
at the delivery plant. A close look at table shows that the 91 suppliers who were
working for both Japanese and Americans auto firms performed more efficiently for
their Japanese customers than for their American customers.
Management attitudes towards quality also were quite different. The Japanese
philosophy: “Anything worth doing in the area of quality is worth overdoing.” Workers
are trained for all jobs on the line, even though they eventually are assigned to a single
workstation. This method of “training overkill” ensures that everyone can perform
every job perfectly and results in two important outcomes: (1) If someone is moved to
another job, he or she can handle the work without any additional assistance. (2) The
workers realize that management puts an extremely high value on the need for quality.
When questioned regarding whether their approach to quality resulted in spending
more money than was technically possible and economically feasible. They did not
accept the common U.S. strategy of building a product with quality that was “good
enough.”
These managers were speaking only for their own firms, however. Some evidence
shows that, at least in the short run, an over focus on quality may become economically
unwise. Even so, firms must remember that quality goods and services lead in the long
run to repeat business, which translate into profit and growth. From a control
standpoint, however, the major issue is how to identify quality problems and resolve
them as efficiently as possible. One approach that has gained acceptance in the United
States is outlined by Genichi Taguchi, one of the foremost authorities on quality
control. Taguchi’s method is to dispense with highly sophisticated statistical methods
unless more fundamental ways do not work. Figure compares the use of the Taguchi
method and the traditional method to identify the cause of defects in the paint on a
minivan hood. The Taguchi approach to solving quality control problem is proving to
80
be so effective that many MNCs are adopting it. They also are realizing that the belief
that Japanese firms will correct quality control problems regardless of the cost is not
true. As Taguchi puts it, “the more efficient approach is to identify the things that can
be controlled at a reasonable cost in an organized manner abd simply ignore those too
expensive to control.” To the extent that U.S. MNCs can do this, they will be able to
complete on the basis of quality.
PERSONNEL PERFORMANCE
Besides financial techniques and the emphasis on quality, another key area of
control is personnel performance evaluation. This type of evaluation can take a number
of different forms, although there is a great deal of agreement from firm to firm about
the general criteria to be measured. Table provides a list of the 50 most admired global
companies. What makes these MNCs so successful? Consultants at Hay Group made an
analysis of the best global firms and identified seven common themes:
1. Top managers at the most-admired companies take their mission statements
seriously and expect everyone else to do the same.
2. Success attracts the best people – and the best people sustain success.
3. The top companies know precisely what they are looking for.
4. These firms see career development as an investment, not a chore.
5. Whenever possible, these companies promote from within.
6. Performance is rewarded.
7. The firm are genuinely interested in what their employees think, and they
measure work satisfaction often and thoroughly.
Traditional method possible causes are studied one by one while holding the
other factors constant.
One of the most common approaches to personnel performance evaluation is the
periodic appraisal of work performance. Although the objective is similar from country
to country, how performance appraisals are done differs. For example, effective
employee performance in one country is not always judged to be effective in another.
Awareness of international differences is particularly important when expatriate
managers evaluate local managers on the basis of home-country standards. A good
example comes out of a survey that found Japanese managers in U.S. based
manufacturing firms gave higher evaluation to Japanese personnel than to Americans.
The results led the researcher to conclude: “ It seems that cultural differences and
diversified approaches to management in MNCs of different nationalities will always
create a situation where some bias in performance appraisal may exist.” Dealing with
these biases is big challenge facing MNCs.
Another important difference is how personnel performance control actually is
conducted. A study that compared personnel control approaches used by Japanese
managers in Japan with those employed by U.S. managers in the United States found
marked differences. For example, when Japanese work group were successfully
because of the actions of a particular individual, the Japanese manager tended to give
credit to the whole group. When the group was unsuccessful because of the actions of a
particular individual, however, the Japanese manager tended to perceive this one
employee as responsible. In addition, the more unexpected the poor performance, the
greater was the likelihood that the individual would be responsible. In contrast,
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individuals in the United States typically were given the credit when things went well
and the blame when performance was poor.
Other differences relate to how rewards and monitoring of personnel
performance are handled. Both U.S. and Japanese managers offered greater rewards
and more freedom from close monitoring to individuals when they were associated
with successful performance, no matter what the influence of the group on the
performance. The Americans carried this tendency further than the Japanese in the case
of rewards, however, including giving high rewards, however, including giving high
rewards to a person who was a “lone wolf.”
A comparison of these two approaches to personnel evaluation shows that the
Japanese tend to use a more social or group orientation, while the Americans are more
individualistic. The researcher found that overall, however, the approaches were quite
similar, and that the control of personnel performance by Japanese and U.S. managers
is far more similar than different.
Such similarity also can be found in assessment centers used to evaluate
employees. An assessment center is an evaluation tool that is used to identify
individuals with the potential to be selected or promoted to higher –level positions.
Used by large U.S. MNCs for many years, these centers also are employed around the
world. A typical assessment center would involve simulation exercises such as these:
(1) in-basket exercises that require managerial attention; (2) a committee exercise in
which the candidates must work as a team in making decision; (3) business decision
exercise in which participants compete in the same market; (4) preparation of a
business plan; and (5) a letter-writing exercise. These forms of evaluating are beginning
to gain support, because they are more comprehensive than simple checklists or the use
of a test or an interview and thus better able to identify those managers who are most
likely to succeed when hired or promoted.
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UNIT - V
SPECIAL PROBLEMS IN INTERNATIONAL BUSINESS
What make international business strategy different from the domestic is the
differences in the business environment. The important special problems in
international business are as follows:
1. Political and legal differences: The political and legal environment of foreign
markers is different from that of the domestic market. 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 markers. For instance, the legal environment is not
exactly the same in all the states of India.
2. Cultural differences: Cultural differences are one of the most difficult problems in
international marketing, as explained in the next chapter. Many domestic markets,
however, are also not free from cultural diversities.
3. Economic differences the economic environment may vary from country to
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 differences in the language. Even when the same language is used in
different countries, the same words or terms may have different meanings or
connotations. The language problem, however, is not something peculiar to the
international marketing. The multiplicity of language in India is an example.
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 that is very effective in one market may not be available or
may be underdeveloped in another market.
7. Trade and investment restrictions Trade and investment restrictions are very
important problems in international business.
8. High costs of distance: when the markets are far removed by distance, the transport
cost becomes high and the time required for effecting the delivery tends to become
longer. Distance tends to increase certain other costs also.
9. Difference in business practices: Trade and other business practices and customs
may differ between markets.
What is Negotiation?
Negotiation between and among multination and global corporations occur
daily. As businesses expand globally, international negotiation has become a routine
activity for many global organizations rather than an occasional event. Global
managers must negotiate with parties in other countries to develop specific strategies
for exporting, setting up joint ventures, and managing subsidiaries. The art of effective
negotiation is difficult at best, and it can be challenging for even the most experienced
84
global managers, Effective negotiation requires attention to important aspects of the

process before, during, and after the negotiation session itself.
Negotiation is a basic form of interchange between two or more individuals,
groups or organizations-a process that is used in labor-management relation, business
deals, such as sales agreements and mergers, and international relations. In simple term,
negotiation is a process in which an individual or a group or an organization tries to
change the beliefs, preferences, and behaviors of another individual, group, or
organization. It can be defined as the process of verbal and nonverbal exchanges
between two or more parties with the goal of reaching a mutually satisfactory
agreement. However, mutually satisfactory agreements are not always possible in
real-life situations, as we will discuss later.
In everyday life, the concepts of bargaining and negotiation are used
interchangeably, but they have different meanings. Bargaining is the process of arguing
and haggling over process and other details involved in transactions of goods and
services, and it is seen in flea markets, bazaars, and fairs all over the world. Negotiation
is a more formal process reflecting genuine concerns by the parties to reach an
acceptable solution when interests conflict.
Negotiations take place in order to reach peaceful solutions to conflicts between
nations or to end a labor dispute. The process is not necessarily only for professionals,
because we encounter the need for negotiating with people we work and live with daily.
Individuals tend to negotiate about different things in many different situations, and
knowledge about what and how to negotiate is essential for people who need to work
with other to accomplish objectives. Sometimes people fail to negotiate because they
do not have relevant information, time, and/ or power to be effective.
Discussions between the United States, Canada, and Mexico to create the North
American Free Trade Agreement (NAFTA), the ongoing diplomatic communications
between the United States and Japan aimed at improving the free flow of goods and
services between these counters, and the establishment if strategic alliances between
Xerox and Fuji- Xerox are examples of international negotiation.
Situations in which negotiators may find themselves very widely according to
national contexts. Smart negotiators recognize the impact of situational cues on the
bargaining process from their own as well as from their opponent`s cultural
backgrounds. In preparing for effective negotiations across borders, it is important to
imagine how the proposal might look to the other negotiating across borders. What are
their distinct needs, compared to ours? What kind of outcome is at stake? What is their
time frame – long term or short term? Do they prefer a sequential or a holistic
approach? Some of the specific situational characteristics that influence the process of
cross – border negotiation are :
 Contents of the negotiation : Is it taking place at their office or your or at a neutral
location? When negotiations take place in comfortable locations, such as a yacht
or a resort, the party that provides such surroundings generally tends to achieve
desired outcomes. A division of Catepillar Company in California succeeded in
controlling negotiations with its international clients by having them on a
luxurious yacht. 2
 Physical arrangements : Paying attention to the seating arrangements of both
parties is not trivial. In traditional American negotiations, the two parties face
each other across a large table. Negotiations from East Asian countries, however
85
may view this process as more confrontational and open than their usual format.
The Japanese like both parties to sit on the same side of the table. Indicating that
they are facing the problem rather than confronting each other. holistic approach
to arranging the physical layout are particularly important in South and East
Asian as well as Arabic countries.
 Time limits : the duration of negotiations is remarkably important. Americans
negotiators are given a limited time to bring about a successful negotiation. They
often communicate with their bosses through e-mail and faxes and respond to
sequential processes emphasized in their headquarters. Negotiators from
collectivistic cultures amount of time. It is not unusual for the Russians and
Chinese negotiators to delay the final stage of negotiations until immediately
before the Americans are ready to leave for home. Herb Cohen`s book you can
Negotiate Anything provides a number of interesting examples of how
open-minded Americans lost negotiations with Russian counterparts because of
the Americans impatience.3 and one Brazilian tour guide reported to the second
author that he succeeded in making good sales of Brazilian jewelry just before
Americans departed for home. He found that Americans were not interested in
negotiating just departure.
 Status difference : Americans, in particular among the Westerners, favor an
egalitarian, informal approach to life, and negotiations tend to deemphasize status
differences. However, negotiators from the United Kingdom, Germany, and
France are noted for using status as an informal mechanism for attempting to
achieve gains in cross-border negotiations. Managers from most countries respect
hierarchy and formality more than Americans and feel more comfortable in
situations explicitly recognizing their status. Chinese and Japanese negotiators
present their business cards to the western managers with both hands and expect
them to the read the card immediately and recognize their status from the titles
given. Americans tend to focus on the content and the openness to the
negotiations and less on the status of the members of the negotiations party in his
or her company.
86
The Negotiation Process

The process of negotiations consists of four fundamental elements:
1. Two or more parties involved in real or perceived conflict over important goals.
2. Shared interest in reaching an agreeable solutions.
3. Background preparations leading to the process of negotiation.
4. A goal, but not a certainty, of reaching mutual agreement.4
Negotiation involves continuous communications, as discussed in chapter 12. in
the past, negotiations involved face-to-face meetings, but now negotiations can occur
through postal mail, telephone, videoconferencing, e-mail, and the Internet.
The negotiations process entails five stages:
1. Preparations
2. Relationship building
3. Information exchange
4. Persuasion
5. Making concessions and reaching agreement
As illustrated in Exhibit. The importance and duration of each stage varies
across cultures.5 cultural, national and organizational influences are also seen in the
exhibit. All of these influences are discussed later, but you must remember that they
exert significant pressures on negotiators of all parties.
Preparations
In this stage, negotiator focus on gathering information, planning their strategies,
and learning as much as possible about the other party or parties. The headquarters of
multinational and global corporations are the appropriate settings for this step.
Managers who were involved in previous negotiations of the same kind play the role of
coaches, teaching the negotiation team about the other party`s objectives, need,
preferences, and so on.
Relationship Building
In this stage, parties meet to discuss their mutual interest in the negotiations and get
to know each other. This stage involves both formal and informal meetings at mutually
agreeable and neutral locations. Exchange of business cards, many days of
conversation, dinners, and other forms of entertainment often accompany this stage.
The emphasis on building relationships and the need to know about the other group
depends on national and cultural factors. For example, although U.S. negotiators do not
like to spend much time in this stage, in much of the rest of the world, moving rapidly to
the task of negotiating is not only inappropriate but many violate certain established
protocols of behavior. French negotiators do not like to talk about business during
dinner. They would rather enjoy fine wines and get to know their counterparts during
evening hours. Similarly, Mexican negotiators often schedule sightseeing tours to
important cultural sites and expect foreigners to pay some attention to their heritage and
culture.
Information Exchange
During this stage, each party formally presents an initial positions and
discussion of the issues involved follows. The other party has the opportunity to ask
questions and clarify important points. American managers consider this to be the start
87
of the real negotiating process and expect the other party to present relevant
information in a succinect, logical and comprehensive fashion. However, negotiators
from other parts of the world may not follow this protocol and may even be skeptical of
presenting a great deal of information up front. 6 in fact, in most countries, particularly
those with a strong norm of collectivism, the emphasis on relationship building is
regarded as the real beginning of the negotiation process.
Persuasion
During this stage, each party is concerned with changing the beliefs, preference
structures, attitudes, and interests of the other parties. Attempts are made to work
toward a mutually satisfactory agreement that can succeed in both the short and long
term. The role of cultural variables is particularly important in this stage. International
studies of negotiation have reveled the use of certain tactics and strategic that are
culture-specific. 7 differences in the use of threats, promises, recommendations,
self-disclosure, appeals, and rewards are common. Exhibit 5.2 shows some of the
difference in three countries, Japan, the United States, and Brazil which are culturally
disparate.
Making Concessions and Reaching Agreement
This final stage of negotiation is the stage where parties make appropriate
concessions and reach agreement. The agreement could be for the short term or long
term. Skilled negotiators generally decide on the number of final concessions and
agreements may be (the bottom line) during the preparation stage. Concessions and
agreements may be reached without revealing total strategic that could be value in
future negotiations. Cultural differences play a significant role in the way concessions
and agreements are made. U.S. negotiators negotiate sequentially (one issue at a time)
and conclude the process with legal contract, binding on all parties. Many East Asian
negotiators do not like the idea of negotiating one issue at a time and find legal
contracts to be less honorable than agreements based on mutual trust and respect. 8
similarly, Russians attach less meaning to contracts and prefer to reach agreements
based on a through discussion of the whole, rather than one issue at a time.
88
EXHIBIT 5.1.
stages of Negotiation in International Management
Cultural,
Cultural,
National and
National and
Organization
Organization
influences
influences
Cultural
Cultural variables Party Party B
variables
Political and A
Political and
Legal Pluralism
Legal Pluralism
International Preparation Preparation International
Economic
Economic
Situation
Situation
Nature of
Nature of
Regulations and
Regulations and
Control Process
Control Process
Political Risk and
Political Risk
Instabilities
Relationship Building and Instabilities
Difference in
Difference in
Ideology
Ideology
Organizational
Organizational
Stakeholders
Stakeholders
Administrative
Administrative
Heritage
Heritage
Nature of
Nature of
organizational Information Exchange organizational
Control
Control
Processes
Processes
Patterns of past
Patterns of past
successes and
successes and
failures
failures
Persuasion
Concession and agreement
EXHIBIT 5.2.
Difference in Negotiator Strategies and Tactics in Three Countries
89
Individual
Tactics as a percentage of Total Tactics
Japanese N = American N = Brazilian N =
Promise 6 6 6
Threat 7 8 3
Recommendation 4 4 2
Warning 7 4 5
Reward 2 1 1
Punishment 1 2 2
Positive normative appeal 1 3 3
Negative normative appeal 1 1 0
Commitment 3 1 1
Self – disclosure 15 13 8
Question 34 36 39
Command 20 20 22
8 6 14
Occurrences in a 30 minute Bargaining Session

Number of times word ‘no’ 5.7 9.0 83.4
used 5.5 3.5 0
Silent periods of 10 seconds 12.6 10.3 28.6
or more
Conversational overlaps 1.3 min 3.3 min 5.2 min
(interruptions)
0 0 4.7
Gazing (minutes per
random 10 min period)
Touching
Source : from J.L. Graham, “The influences of Culture on the process of Business
Negotiation: an exploratory study”, journal of International Business Studies. Vol. 16,
1985. Reproduced with permission of Palgrave Macmillan.
Using the Internet to Manage Negotiations
The use the Internet in managing negotiations is also increasing. Global
organizations with sophisticated computer-mediated communication systems are
evolving strategies of managing negotiations through the Internet. Decision support
systems can provide support for the negotiation process by:
 Reducing the amount of time is necessary for feedback from headquarters in
order to carry out effective negotiations.
 Providing a large amount of data and information on alternative scenarios that
may result from the negotiation process.
 Increasing the likelihood that important data and information are available
when needed.
90
However, just because information can be sent by electronic media before,

during, and after the course of a negotiation, it should not be assumed that negotiation
can proceed without hurdles. Significant national and cultural blinders may prevent
correct interpretation of information.
Exhibit 5.3
Differences between American and Chinese Culture and Approaches to the
Negotiation Process.
Contrast of Basic Cultural Values
American Chinese
Task – and information oriented Relationship – oriented
Egalitarian Hierarchical
Analytical Holistic
Sequential, monochronic Circular, polychromic
Seeks the complete truth Seeks the harmonious way collectivist
individualist Haggling, bargaining
Confrontative, argumentative
Approach to the Negotiation Process
Nontask Sounding
Quick meetings Long courting process
Informal Formal
Make cold cells Draw on intermediaries
Informal exchange
Full authority Limited authority
Direct Indirect
Proposals first Explanations first
Means of Persuasion
Aggressive Questioning
Impatient Patient
Terms of Agreement
A “good deal” A long – term relationship
91
Managing Negotiation and Conflict

Negotiation can become extremely complex in developing joint ventures,
strategic alliances, and foreign direct investments and in dealing with foreign
governments. Conflicts can arise in any negotiation, Conflicts can arise in any
negotiation, but they are especially frequent in international and cross-border
negotiation. Since conflicts can be costly and lead to dysfunctional outcomes, they need
to be properly managed. The process of managing conflict for multinational and
global organizations becomes tricky because a great many factors must be considered.
Differences in cultural, national, and organizational variables, as discussed above,
create the potential for conflict to arise.
As we have already discussed, much of the negotiation process involves both
explicit and implicit conflict between two parties. Conflict can be understood as a state
of disagreement or opposition between two parties. Where the accomplishment of one
party’s objectives neutralizes the other party’s ability to achieve its desired outcomes.
Conflict present before, during, and after negotiation can cause significant disruption,
such as creating a showdown, a lose-lose situation. The presence of consider may
indicate that the parties will not engage in future negotiations and will not consider
alternative scenarios.
Exhibit 5.4
nature of conflict between members of low and high context cultures
Key questions Low – context conflict High – context conflict
Why Analytic, linear logic, Synthetic, spiral logic,

instrumental oriented, expressive oriented,
dichotomy between integration of conflict and
conflict and conflict parties conflict parties
When Individuals oriented, low Group-oriented, high
collective normative collective normative
expectations, violations of expectations, violations of
individuals expectations collective expectations
create conflict potentials create conflict potentials
What Revealment, direct, Concealment, indirect non
confrontational attitude, confrontational attitude,
action and solution “face”-and relationship
oriented oriented
How Explicit communication Implicit communication
codes line-logic style, codes, point-logic style,
rational – factual rhetoric intuitive-effective rhetoric,
open, direct strategies ambiguous, indirect
stragetic
Source : W. Gudykunst, L.steward, and S.Ting-Toomey, communication, culture and
organizational process (New York: sage, 1985)
National and cultural factors, are often responsible for creating severe conflicts,
leading to breakdown in communication and negotiation. Negotiators from low-context
cultures end to approach conflict directly through confrontation. A distinction is also
92
made between the people involved and the conflict itself. On the other hand, negotiators
from high-context cultures tend to approach conflict indirectly and subtly, through
references to history of previous conflicts between the parties. Rarely is a distinction
made between the person engaged in the conflict and the conflict itself. The
differences between members of low-context and high-context cultures in the handling
of conflict are illustrated in Exhibit 5.4.
For example, Western businessmen report that while Chinese put great
emphasis on building relationships based on friendship and mutual respect, Americans
are interested in getting to the point and are willing to reveal their objectives in the
initial stages. The implicit communication styles used by Chinese and other East
Asian negotiators also conflict with the explicit styles of communication used by
Western negotiators. Even with the emergence of China as a global economic power
in the 1990s, most negotiations are still accomplished within the framework of budget
allocations, mandated by the government for the project, as opposed to the potential
profitability of the project. In addition, the negotiation tends to be understood in the
context of culturally ingrained values of politeness and emotional restraint.
The overlapping of work/family and other social obligations enters the context
of negotiation in ways that Western negotiators do not understand. The concept of
saving face in any negotiation is of critical importance in the East Asian cultures.
Westerners often do not understand how powerful this concept is and how it affects the
entire process of negotiation. If the negotiation leads to unsatisfactory outcomes for
the East Asian parties, appropriate concessions must be made to allow them to save
face. Future negotiations are likely to be problematic, if not impossible, if the
outcomes do not result in saving face for the East Asian negotiators.
In managing effective international negotiations, it is useful to focus on:
 Dealing with people, especially building relationships with members of cultures
for whom this is important.
 Allowing time for relationship building, thinking through various unexpected
issues, and using interruptions to think through the issues in sufficient detail.
 Assessing possible barriers to communication, such as language and style
differences, tendencies to stereotype, explicit versus implicit forms of
communication, and the use of interpreters with resulting translation difficulties
 Clarifying agreements, so that a signed, legally enforceable agreement is
finalized. This can be an issue for some countries where a handshake is
regarded as signifying a contract. Emphasis on too much formality might
signal a lack of trust.
 Exercising power, bearing in mind mutual dependences and differences in
power between the parties. Too much difference in power might lead to
negotiations that might not be honored in the long-term.
Ethics in International Negotiations
Accepting bribes, encouraging corrupt practices, and lying about one’s true
motives and capabilities in honoring the terms of the contract are all unethical. The
U.S Foreign Corrupt Practices Act of 1977, revised in 1998, is an example of a
country-specific approach to maintaining universalism-ethical standards and values
applicable worldwide. This legislation was designed to prevent American companies
from accepting or giving bribes and other illegal actions that take place outside the
93
United States and its territories with international companies, foreign governments, and
others.
Another view of ethics is relativism-a belief that values, rules, and regulations are
local and cannot be applied in cross-border and international negotiations. In fact, it is
precisely because of this view of ethics held by traditional Asian, Latin American, and
African cultures that the U.S Foreign Corrupt Practices Act was developed.
Modifying the terms of a contract after the deal is signed is not uncommon in these
culture, reflecting the notion that what matters is what works.
What Is Decision Making?
The nature of decisions that the parties make during the negotiation process
determines the success of the outcome. Decisions made before, during, and after
negotiations should be carefully thought out for their implications and consequences.
Effective decision making is crucial in today’s highly competitive and global business
environment. Managers are faced daily with a variety of decisions that have important
cross-border implications for expanding their operations, as well as protecting their
businesses. Correct choices can affect the success of global corporations, and the
careers of individual managers are often linked to correct decisions, particularly in the
West.
One of the first things to understand about decision making is that individualistic
and collectivistic cultures promote difference styles of information gathering. In
individualistic cultures, people often consider their own information and that of experts
in the area. In collectivistic cultures, people live in a sea of information embedded in
the in-group context. For example, they use an open office design to promote
information flow between individuals. Decisions in collectivistic cultures are more
often made on a group basis rather than on an individual basis.
The Decision-Making Process
Decision making is the conscious process of moving toward objectives after
considering various alternatives. It is concerned with making an appropriate choice
among a multitude of possible scenarios. Effective decision making has been called
one of the most important management tasks.
Decision making is studied primarily by the descriptive approach and the
prescriptive approach. The descriptive approach focuses on the various steps that are
involved in the way managers carry out the task of decision making. When you describe
the various steps that managers take in cross-border transactions, then you are using the
descriptive approach. It may involve consideration of such issues as the amount of
information they need, the kind of approvals that are required, the chain of command
that they must respect, and the amount of time they have to make the decision.
Decisions involving implementation of a joint venture agreement or launching a new
product in the global marketplace can be described using this approach.
The prescriptive approach is concerned with understanding the rational processes
that managers use to reach an optimal outcome. The importance of rationality-the use
of reason and logic-in making a decision is the key to the prescriptive approach. The
prescriptive approach highlights the importance of both subjective and objective factors
that must be considered in the art and science of making a decision. When you de
scribe how managers arrive at the decision to undertake a joint venture, you are using
the prescriptive approach. This approach takes into account the role of situational
factors such as time and market pressures, as well as concessions that are needed for an
94
optional decision. Therefore, international managers must understand the role of

culture and other variables, such as the national and organizational contexts, on the
decision making process.
The decision-making process is not just the province of managers. People make
decisions on a daily basis when confronted with problems and opportunities. Some
problems are routine, and managers can implement standard operating procedures or
explicit rules. These are programmed decisions. On the other hand, some problems
are new or complex, requiring consideration of many alternatives-they are non
programmed decisions and follow the following seven basic steps.
1. Defining the problem is the first step in decision making, and is probably the most
important. A problem represents a state of affairs different from normal and desired
functioning. If the problem is not well defined, or if it is defined incorrectly, then the
solution will not solve the problem. For example, if the problem in an international
negotiation is due to differences in political ideologies but the parties focus only on
cultural preferences, the problem will worsen.
95
1. Define the problem
2. Analyze the Problem
3. Identify Decision criteria and

their importance
4. Develop and Evaluate alternate

solution
5. Choose the Best Solution
6. Implement the Solution
7. Evaluate the outcomes
Steps in the decision making process

2. Analyzing the problem focuses on finding the key factors responsible for the
problem. These factors could be present in the task, the people, or the nature of
the situation. In launching a new product, if the key factor is lack of global
market demand but the manager identifies product quality as the key factor, then
he or she is analyzing the wrong factor to reach a decision.
3. Identifying decision criteria and their importance helps narrow the goals or
objectives. For example, in selecting a new site for manufacturing, the
manager may want to maximize the benefit of having a qualified workforce and
minimize the importance of local taxes and tariffs. If the criteria for making
decision are inappropriate, chances are high that the outcome will be poor.
4. Developing and evaluating alternative solutions enables the manager to consider
different ways to solve the problem or take advantage of opportunities. The
more alternatives considered, the more likely that an optimum solution will be
found.
5. Choosing the best solution is not as easy as it may sound. A Manager may come
up with a set of solutions that look equally attractive, but the one that will
maximize the outcome is not always clear. Such dilemmas are routing in
international transactions. When confronted with political risk in China, some
companies pull out completely without recognizing the long-term benefits of
continuing to work with the political system.
6. Implementing the solution involves putting the decision into practice. The
Manager must consider factors such as the amount of time needed, nature of
preferences of those implementing the plan, and the amount of resources needed
to implement the decision correctly.
7. Evaluating outcomes is particularly important and often missed. In this step,
managers consider whether the outcome actually solved the problem they defined
96
in the first step. If it does not, then they need to assess whether the problem was
defined correctly, whether all possible viable alternatives were identified, or
whether important criteria were considered when choosing the solution.
International Managers should pay special attention to this step because there are
many conflicting factors that must be carefully considered in decision making in
the global context.
Internal and External Factors
External factors identified in the section on negotiation earlier in this chapter are
relevant here. The importance of political factors in some countries, such as Brazil,
India, and Egypt, requires managers to focus on the political preferences of the key
parties involved rather than profitability alone. Economic factors, including volatility
of exchange rates and the nature of foreign direct investment, are also factors for
consideration. Decisions involving organizational factors include a consideration of
whether the decision is made in the headquarters, subsidiaries, or with an alliance
partner.
Internal factors important in decision making relate to differences in thought and
reasoning processes found in different parts of the world. In most Asian cultures.
Managers are unwilling to make rapid decisions. This is also true for managers in
France and in Middle Eastern, Latin American, and Mediterranean countries. They
focus on different aspects of the issues, like to negotiate for a long time, and have a
tendency to engage in a great deal of relationship building. This process delays the
speed to engage in a great deal of relationship building. This process delays the speed
at which decisions are, made. There is also an emphasis on associative thinking
leading to associations among factors that are not necessarily logically linked in most
Western countries,
Deductive versus Inductive styles of Decision making.
Deductive Decision Making Inductive Decision
Making General facts and objective Specific information and

observations details
Specific information and General facts and

details objective observations
Decision
Some differences in reasoning are based on cultural preferences for inductive or

deductive reasoning. Societies emphasizing inductive reasoning encourage managers
in consider all of the specific facts and objective observations and slowly move toward
generalizations and then a decision. Societies emphasizing deductive reasoning
encourage managers to start with broad generalizations or categories and then evaluate
the details to arrive at a decision. The difference between the two is illustrated in
Exhibit.
97
Decisions arrived at through deductive reasoning appear poorly thought out and
rapidly executed by people from inductive culture. “Jumping to a conclusion” is the
way many Japanese managers describe U.S decision making. The speed with which
people think and the manner they use to approach the task affect decision making. The
use of Internet and computer mediated technology is making speed an even more
important factor in cross-border negotiations and decision making. However, as we
have discussed national differences inherent in the process of decision making are not
likely to disappear just because the countries are connected through the Internet.
98

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International Business

THEORIES OF INTERNATIONAL TRADE

The doctrine of mercantilism propagates in the 16th and 17th centuries,

technical improvements to the product or to the production process. Porter

Factor conditions Demand

Strategy for locations.

Sourcing and Marketing

Exporting Contractual Production/Assembly

FEATURES OF FOREIGN TRADE POLICY 2004-2009

entitlement is broadbanded, and shall extend also to merchant exporters

Major Functions of the EPCs

13. The Gems and Jewellery Export Promotion Council

A commercial invoice and sometimes a Certificate of Origin are required to be

Those who are interested in Export-Import business need to apply to the

for marine/air insurance cover.

After completion of these formalities, the exporters contact the clearing

1. Transfer of Purchasing Power:

3. Provision of Hedging Facilities:

Pf - Foreign country’s price index

12. No satisfactory explanation of short-term changes in exchange rates is

Types of Foreign Exchange Risks

statement must be assigned HC values. In particular, the financial statements of an

Laws and Regulations

These and other communication problems facing international business are

DIFFERENCE BETWEEN GATT AND THE WTO

The WTO reached at an Information Technology Agreement (ITA) in the

1. To obtain economic benefits from achieving a more efficient production structure

Free trade Free trade

Custom Free trade Common

Characteristics of Integration Schemed

5. Acceptance of common agricultural policies, transport policies, technical

Canada 30.7 658 21700

Mexico 98.6 695 7700

USA 270.3 8083 30200

The Promise The Reality

Figure: 3.1 The Strategic-planning, implementing and control process

3.2. Determinants of Strategic Options and Choice

DEVELOPING GLOBAL COMPETITIVENESS

As of now, India’s basis for competition is built around her comparative

heavily in education in order to be at the forefront. Sweden leads with an investment of

This intellectual competitiveness of ours, at this time, is unmatched in the world. If

organizations. Mechanisms include centralization / decentralization, formalization,

Tips for Doing Business with…………..

As noted in the discussion of decision making, these differences help to explain

It is also important to understand why Japanese managers act as they do.

Simply put, relying solely on financial results to evaluate performance can

global managers, Effective negotiation requires attention to important aspects of the

The Negotiation Process

Concession and agreement

Occurrences in a 30 minute Bargaining Session

However, just because information can be sent by electronic media before,

Managing Negotiation and Conflict

Why Analytic, linear logic, Synthetic, spiral logic,

optional decision. Therefore, international managers must understand the role of

1. Define the problem

2. Analyze the Problem

3. Identify Decision criteria and

4. Develop and Evaluate alternate

5. Choose the Best Solution

6. Implement the Solution

7. Evaluate the outcomes

Steps in the decision making process

Making General facts and objective Specific information and

Specific information and General facts and