MB0053 – International Business Management - 4 Credits Assignment Set- 1 (60 Marks) Q.1 What is globalization? What are its benefits?

How does globalization help in international business? Give some instances?

Globalization (or globalisation) describes the process by which regional economies, societies, and cultures have become integrated through a global network of political ideas through communication, transportation, and trade. The term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence.[1] However, globalization is usually recognized as being driven by a combination of economic, technological, sociocultural, political, and biological factors.[2] The term can also refer to the transnational circulation of ideas, languages, or popular culture through acculturation. An aspect of the world which has gone through the process can be said to be globalized. Against this view, an alternative approach stresses how globalization has actually decreased inter-cultural contacts while increasing the possibility of international and intra-national conflict.

Globalization has various aspects which affect the world in several different ways

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Industrial - emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within national boundaries. International trade in manufactured goods increased more than 100 times (from $95 billion to $12 trillion) in the 50 years since 1955.China's trade with Africa rose sevenfold during 2000-07 alone. Financial - emergence of worldwide financial markets and better access to external financing for borrowers. By the early part of the 21st century more than $1.5 trillion in national currencies were traded daily to support the expanded levels of trade and investment Economic - realization of a global common market, based on the freedom of exchange of goods and capital Job Market- competition in a global job market. In the past, the economic fate of workers was tied to the fate of national economies. With the advent of the information age and improvements in communication, this is no longer the case. Because workers compete in a global market, wages are less dependent on the success or failure of individual economies. This has had a major effect on wages and income distribution Political - some use "globalization" to mean the creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization. Politically, the United States has enjoyed a position of power among the world powers, in part because of its strong and wealthy economy. With the influence of globalization and with the help of the United States’ own economy, the People's Republic of China has experienced some tremendous growth within the past decade. If China continues to grow at the rate projected by the trends, then it is very

likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United States for the position of leading world power. Most of us assume that international and global business are the same and that any company that deals with another country for its business is an international or global company. In fact, there is a considerable difference between the two terms. International companies – Companies that deal with foreign companies for their business are considered as international companies. They can be exporters or importers who may not have any investments in any other country, apart from their home country. Global companies – Companies, which invest in other countries for business and also operate from other countries, are considered as global companies. They have multiple manufacturing plants across the globe, catering to multiple markets. The transformation of a company from domestic to international is by entering just one market or a few selected foreign markets as an exporter or importer. Competing on a truly global scale comes later, after the company has established operations in several countries across continents and is racing against rivals for global market leadership. Thus, there is a meaningful distinction between a company that operates in few selected foreign countries and a company that operates and markets its products across several countries and continents with manufacturing capabilities in several of these countries. Companies can also be differentiated by the kind of competitive strategy they adopt while dealing internationally. Multinational strategy and global competitive strategy are the two types of competitive strategy. · Multinational strategy – Companies adopt this strategy when each country’s market needs to be treated as self contained. It can be for the following reasons: ° Customers from different countries have different preferences and expectations about a product or a service. ° Competition in each national market is essentially independent of competition in other national markets, and the set of competitors also differ from country to country. ° A company’s reputation, customer base, and competitive position in one nation have little or no bearing on its ability to successfully compete in another nation. Some of the industry examples for multinational competition include beer, life insurance, and food products. · Global competitive strategy – Companies adopt this strategy when prices and competitive conditions across the different country markets are strongly linked together and have common

synergies. In a globally competitive industry, a company’s business gets affected by the changing environments in different countries. The same set of competitors may compete against each other in several countries. In a global scenario, a company’s overall competitive advantage is gauged by the cumulative efforts of its domestic operations and the international operations worldwide. A good example to illustrate is Sony Ericsson, which has its headquarters in Sweden, Research and Development setup in USA and India, manufacturing and assembly plants in low wage countries like China, and sales and marketing worldwide. This is made possible because of the ease in transferring technology and expertise from country to country. Industries that have a global competition are automobiles, consumer electronics (like televisions, mobile phone), watches, and commercial aircraft and so on. Table 1.2 portrays the differences in strategies adopted by companies in international and global operations. Table 1.2: Differences between International and Global Strategies Strategy Location International Selected target countries and trading areas Business Custom strategies to fit the circumstances of each host country situation Product-line Adopted to local culture and particular needs and expectations of local buyers Production Plants scattered across many host countries, each producing versions suitable for the surrounding environment Source of supply Suppliers in host country of raw materials preferred Marketing and Adapted to practices and distribution culture of each host country Cross country Efforts made to transfer connections ideas, technologies, competencies and capabilities that work successfully in one country to another country whenever such a transfer appears advantageous Global Most global businesses operate in North America, Europe, Asia Pacific, and Latin America Same basic strategy worldwide with minor country customisation where necessary Mostly standardised products sold worldwide, moderate customisation depending on the regulatory framework Plants located on the basis of maximum competitive advantage (in low cost countries close to major markets, geographically scattered to minimise shipping costs, or use of a few world scale plants to maximise economies of scale) Attractive suppliers from across the world Much more worldwide coordination; minor adaptation to host country situations if required Efforts made to use almost the same technologies, competencies, and capabilities in all country markets (to promote use of a mostly standard strategy), new successful competitive capabilities are transferred to different country markets

Company organisation

Form subsidiary companies All major strategic decisions closely coordinated at global to handle operations in each headquarters; a global organisational structure is used to host country; each subsidiary unify the operations in each country operates more or less autonomously to fit host country conditions

Benefits of globalisation We have moved from a world where the big eat the small to a world where the fast eat the slow", as observed by Klaus Schwab of the Davos World Economic Forum. All economic analysts must agree that the living standards of people have considerably improved through the market growth. With the development in technology and their introduction in the global markets, there is not only a steady increase in the demand for commodities but has also led to greater utilization. Investment sector is witnessing high infusions by more and more people connected to the world's trade happenings with the help of computers. As per statistics, everyday more than $1.5 trillion is now swapped in the world's currency markets and around one-fifth of products and services are generated per year are bought and sold. Buyers of products and services in all nations comprise one huge group who gain from world trade for reasons encompassing opportunity charge, comparative benefit, economical to purchase than to produce, trade's guidelines, stable business and alterations in consumption and production. Compared to others, consumers are likely to profit less from globalization. Another factor which is often considered as a positive outcome of globalization is the lower inflation. This is because the market rivalry stops the businesses from increasing prices unless guaranteed by steady productivity. Technological advancement and productivity expansion are the other benefits of globalization because since 1970s growing international rivalry has triggered the industries to improvise increasingly. Globalization can be described as a process by which the people of the world are unified into a single society and functioning together. This process is a combination of economic, technological, sociocultural and political forces. Globalization, as a term, is very often used to refer to economic globalization, that is integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and spread of technology. The word globalization is also used, in a doctrinal sense to describe the neoliberal form of economic globalization.Globalization is also defined as internationalism, however such usage is typically incorrect as "global" implies "one world" as a single unit, while "international" (between nations) recognizes that different peoples, cultures, languages, nations, borders, economies, and ecosystems exist(http://en.wikipedia.org/). Globalization has two components: the globalization of market and globalization of production.... Some other benefits of globalization as per statistics

Commerce as a percentage of gross world product has increased in 1986 from 15% to nearly 27% in recent years.

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The stock of foreign direct investment resources has increased rapidly as a percentage of gross world product in the past twenty years. For the purpose of commerce and pleasure, more and more people are crossing national borders. Globally, on average nations in 1950 witnessed just one overseas visitor for every 100 citizens. By the mid-1980s it increased to six and ever since the number has doubled to 12. Worldwide telephone traffic has tripled since 1991. The number of mobile subscribers has elevated from almost zero to 1.8 billion indicating around 30% of the world population. Internet users will quickly touch 1 billion. · Promotes foreign trade and liberalisation of economies.

· Increases the living standards of people in several developing countries through capital investments in developing countries by developed countries. · Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies to be competitive by keeping the cost low, with increased productivity. · Promotes better education and jobs. · Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices, and culture. · Provides better quality of products, customer services, and standardised delivery models across countries. · Gives better access to finance for corporate and sovereign borrowers. · Increases business travel, which in turn leads to a flourishing travel and hospitality industry across the world. · Increases sales as the availability of cutting edge technologies and production techniques decrease the cost of production. · Provides several platforms for international dispute resolutions in business, which facilitates international trade. Some of the ill-effects of globalisation are as follows: · Leads to exploitation of labour in several cases. · Causes unemployment in the developed countries due to outsourcing. · Leads to the misuse of IPR, copyrights and so on due to the easy availability of technology, digital communication, travel and so on.

laws. · Harms the local businesses of a country due to dumping of cheaper foreign goods. The following are the four factors that question assumptions regarding the impact of global business in culture: · National cultures are not homogeneous and the impact of globalisation on heterogeneous cultures is not easily predicted. · Globalisation does not characterise a rupture with the past but is a continuation of prior trends. and the way of life of a specific society or group. The MNCs increasingly use their economical powers to influence political decisions. It is the duty of people to respect other cultures. healthcare. Culture affects all the business functions ranging from accounting to finance and from production to service. 1. customs. globalisation has improved our lives in various fields like communication. · Causes destruction of ethnicity and culture of several regions worldwide in favour of more accepted western culture. it is the total sum of knowledge. Culture is very important to understand international business. transportation. In spite of its disadvantages.· Influences political decisions in foreign countries. and education. beliefs. · Causes ecological damage as the companies set up polluting production plants in countries with limited or no regulations on pollution. and not of the marginalised groups. · Leads to adverse health issues due to rapid expansion of fast food chains and increased consumption of junk food. even though the marginalised groups represent a majority or a minority in the society. This shows a close relation between culture and international business. . What is culture and in the context of international business environment how does it impact international business decisions? Answer: Culture is defined as the art and other signs or demonstrations of human customs. which human has created. · Globalisation is only one of many processes involved in cultural change. Research shows that national ‘‘cultures’’ generally characterise the dominant groups’ values and practices in society. Culture is the part of environment. Culture determines every aspect that is from birth to death and everything in between it. and other abilities and habits gained by people as part of society. civilisation. other than their culture. morals. · Culture is not similar to cultural practice. arts. Culture is an important factor for practising international business.

These models show that there is a relation between job satisfaction and production. in underdeveloped countries. corporate training. they have come up with models. product differentiation has become business strategy all over the world. which help the candidate to work in a foreign environment. This is due to varied preferences and tastes. The kinds of products and services that consumers can afford are determined by the level of per capita income. the demand for luxury products is limited. ° Manage employees – It is said that employees in Japan were normally not satisfied with their work as compared with employees of North America and European countries. · The organisation must consider the concept of international business and construct guidelines that help them to take business decisions. they know that the management style and practices will be quite alike to those found in their present firm. This study showed the fact that it is tough for Japanese workers to change jobs. For example. particularly those with an ancient cultural heritage. and perform activities as they are different in different nations. Thus. Also. even if a worker can go to another Japanese entity. discontent might not impact their level of production. . As such. the organisation has to be aware of the customer choice or preferences. The following are the factors which a company must consider while dealing with international business: · The consumers across the world do not use same products. Hence the management style. they know that the conditions may not change considerably at another place. The following are the two main tasks that a company must perform: ° Product differentiation and marketing – As there are differences in consumer tastes and preferences across nations. The company must modify the product to meet the demand of the customers in a specific location and use different marketing strategy to advertise their product to the customers.Cultural differences affect the success or failure of multinational firms in many ways. · The organisation must identify candidates and train them to work in other countries as the cultural and corporate environment differs. To motivate employees in North America. Adaptations must be made to the product where there is demand or the message must be advertised by the company. The following are the three mega trends in world cultures: · The reverse culture influence on modern Western cultures from growing economies. and systems must be modified. practices. even if Japanese workers were not satisfied with the specific aspects of their work. The training may include language training. While this trend is changing. training them on the technology and so on. the fact that job turnover among Japanese workers is still lower than the American workers is true. · The organisation must manage and motivate people with broad different cultural values and attitudes. Before manufacturing any product. however the production levels stayed high.

a fifth dimension called ‘long-term outlook’ was added. Cultural differences are a trouble and always a disaster. as national markets are diverse with growing mobility of products. people. · Grow the total share market by innovating affordable products and services. A low individualism ranking characterises societies of a more collective nature with close links between individuals. they are affordable for even subsistence level consumers rather than fighting for market share. and Japan and also the ASEAN. Hofstede’s cultural dimensions According to Dr. · Discover and identify global segments and global niche markets. South Korea. and culture. He worked as a psychologist in IBM from 1967 to 1973. These societies follow caste system that does not allow large upward mobility of its people. Later.’ Professor Hofstede carried out a detailed study of how values in the workplace are influenced by culture. capital. The following are the necessary implications in international business: · Avoid self reference criterion such as. Professor Hofstede established a model using the results of the study which identifies four dimensions to differentiate cultures. · Follow a philosophical viewpoint that considers that many perspectives of a single observation or phenomenon can be true. and making them accessible so that. A country with high power distance ranking depicts that inequality of power and wealth has been allowed to grow within the society. between individuals in the nation’s society. Individuals in these societies form a larger number of looser relationships. India. · Organise global enterprises around global centres of excellence. ‘Culture is more often a source of conflict than of synergy. because of the growing economic and political power of China. one’s own upbringing. A high individualism ranking depicts that individuality and individual rights are dominant within the society. At that time he gathered and analysed data from many people from several countries. Geert Hofstede. · The increased diversity within cultures and geographies.· The trend is Asia centric and not European or American centric. values and viewpoints. · Individualism – This dimension focuses on the extent to which the society reinforces individual or collective achievement and interpersonal relationships. . In these societies equality and opportunity is stressed for everyone. A country with low power distance ranking depicts the society and de-emphasises the differences between its people’s power and wealth. The following are the five cultural dimensions: · Power Distance Index (PDI) – This focuses on the level of equality or inequality.

· Masculinity – This focuses on the extent to which the society supports or discourages the traditional masculine work role model of male achievement. readily agrees to changes. believe in many truths. A country with low uncertainty avoidance ranking shows that the country has less concern about ambiguity and uncertainty and has high tolerance for a variety of opinions. and takes greater risks reflects a low uncertainty avoidance ranking. Many western cultures score considerably low on this dimension. and controls is created to minimise the amount of uncertainty. power.These cultures support extended families and collectives where everyone takes responsibility for fellow members of their group. and have thrift for investment. and masculinity dimension rank is 62. Cadbury which were in complete extremes in terms of culture. For example. In low masculinity cultures. A rule-oriented society that incorporates rules. In these cultures. A country with high masculinity ranking shows the country experiences high level of gender differentiation. the Cadbury Kraft Acquisition. A society which is less rule-oriented. LTO dimension rank is 61. Every society has its own unique culture. Cultural elements that relate business The most important cultural components of a country which relate business transactions are: · Language. Culture must not be imposed on individuals of different culture.S. laws. based company Kraft acquired the British chocolate giant. Let us discuss the major cultural elements that are related to business. They have a small term orientation and a concern for stability. . accept change easily. · Religion. with women being controlled and dominated by men. In India. and control. having a low level of differentiation and discrimination between genders. regulations. women are treated equal to men in all aspects of the society. These countries have a long term orientation. · Long-Term Orientation (LTO) – Describes the range at which a society illustrates a pragmatic future oriented perspective instead of a conventional historic or short term point of view. The Asian countries are scoring high on this dimension. 2009 was a landmark international deal. trust in absolute truth is conventional and traditional. in which a U. PDI is the highest Hofstede dimension for culture with a rank of 77. · Conflicting attitudes. · Uncertainty Avoidance Index (UAI) – This focuses on the degree of tolerance for uncertainty and ambiguity within the society that is unstructured situations. A country with low masculinity ranking shows the country. A country with high uncertainty avoidance ranking shows that the country has low tolerance for uncertainty and ambiguity. Cultures recording little on this dimension. men dominate a major part of the society and power structure.

· Establishing and applying formal structures. Any organisation that tries to enforce its behavioural customs on unwilling workers from another culture faces conflict.Cross cultural management is defined as the development and application of knowledge about cultures in the practice of international management. the production of two or more individuals or groups working in cooperation is larger than the combined production of their individual work. when people involved have diverse cultural identities. Group work is a joint venture where. creativity. The managers cannot expect to force members of other culture to fit into their cultural customs. The most important aspect to qualify as a manager for positions of international responsibility is communication skills. The manager has to possess the skills linked with the following: · Providing inspiration and appraisal systems. which is the main assumption of cross cultural skills learning. but several home based managers handle immigrant groups adjusted into a workforce that offers domestic markets. Handling cultural diversity Cultural diversity in a work group offers opportunities and difficulties. and adjusting to change. The managers must adapt to other culture and have the ability to lead its members. Economy is benefited when the work groups are managed successfully. · Identifying the importance of informal structures. Cultural diversity offers key chances for joint work and co-operative action. International managers in senior positions do not have direct interaction that is face-to-face with other culture workforce. It is functionally linked to achieving a performance goal. · Identifying and solving disagreements. The organisation’s capability to draw. · Formulating and applying plans for modification. problem solving. Factors controlling group creativity . save. The factors to be considered in cross cultural management are: Cross cultural management skills The ability to demonstrate a series of behaviour is called skill. and inspire people from diverse cultures can give the organisation spirited advantages in structures of cost.

and organisational and functional discriminations. Negative stereotypes are emphasised if it fails. · Respect each other’s skills and share their own. · Recognises the negative consequences of identifying diversity probably cause greater issues than ignoring it. · Value the exchange of different points of view. A diverse group is known to be more creative. Factors related with the industry and company culture are also important. · Thinks the likely benefits of identifying and managing diversity do not validate the expected expenses. .On complicated problem solving jobs diverse groups do better than identical groups. A successful group is profitable with respect to quick results and the creation of concern for the future. and gives time for the group to overcome the usual process difficulties. This rejection to identify diversity happens when management: · Fails to have sufficient awareness and skills to identify diversity. racial. where the members are tolerant of differences. Ignore diversity It may be difficult to manage diversity. The management must: · Ignore cultural diversity within the employees. Diverse groups require time to solve issues of working together. over time. which is an alternative. It is better to ignore. and the group members are rewarded for their commitment. But the impact cannot be evaluated and there is always risk in creating a diverse group. the work experience helps to overcome gender. · Tolerate uncertainty and try to triumph over the inefficiencies that occur when members of diverse cultures work together. In diverse groups. · Identifies diversity but does not have the skill to manage the diversity. · Value the chance for cross-cultural learning. Diverse groups do well when the members: · Assist to make group decisions. · Down-play the importance of cultural diversity. The top management level provides its moral and administrative support. They also provide diversity training.

Cosmos Limited wants to enter international markets. international. An increasing number of companies involving in external trade indicate huge business opportunities and promising markets. · Transfer risk – Transfer risk arises from a decision by a foreign government to restrict capital movements. and sharing required resources are independent in the workplace. Risk arises from the negative changes in fundamental economic policy goals (fiscal.· Identifies that the job provides no chances for drawing advantages from diversity. In such cases. and avoids countries with excessive risk. Therefore. or wealth distribution or creation). It is used to survey countries where the firm is engaged in international business. All business dealings involve risks. economic. it implies that effort in earning foreign currency increases the possibility of capital controls. economic structures. CRA represents the potentially adverse impact of a country’s environment on the multinational corporation’s cash flows and is the probability of loss due to exposure to the political. Strategies to ignore diversity may be possible when culture groups are given various jobs. the financial markets are being refined with the introduction of new products. These additional risks are called country risks which include risks arising from national differences in socio-political institutions. The CRA monitors the potential for these risks to decrease the expected return of a cross-border investment. With globalisation. When business transactions occur across international borders. 2. For example. Analysts have categorised country risk into following groups: · Economic risk – This type of risk is the important change in the economic structure that produces a change in the expected return of an investment. policies. currencies. The MNE must consider the risks from a broader spectrum of country characteristics. country risk analysis has become essential for the international creditors and investors Overview of Country Risk Analysis Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border investment. they bring additional risks compared to those in domestic transactions. Since the 1980s. . Will country risk analysis help Cosmos Limited to take correct decisions? Substantiate your answer Answer: Country risk analysis is the evaluation of possible risks and rewards from business experiences in a country. Some categories relevant to a plant investment contain a much higher degree of risk because the MNE remains exposed to risk for a longer period of time. and geography. confusion occurs when the diverse value systems are not identified that are held by different staff groups. and social upheavals in a foreign country. It is analysed as a function of a country’s ability to earn foreign currency. monetary. a multinational enterprise (MNE) that sets up a plant in a foreign country faces different risks compared to bank lending to a foreign government. Groups and group members are equally incorporated and work together.

The ways of evaluating country risks by different firms and financial institutions differ from each other. expropriation of assets. Purpose of Country Risk Analysis Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable information. including the decision-making process in the government. · Location risk – This type of risk is also referred to as neighborhood risk. tax laws. corruption and bureaucracy also contribute to the element of political risk. Risk assessment requires analysis of many factors. The assessment of country risk is used to incorporate country risk in capital budgeting and modify the discount rate.· Exchange risk – This risk occurs due to an unfavourable movement in the exchange rate. Sovereign risk is closely linked to transfer risk in which a government may run out of foreign exchange due to adverse developments in its balance of payments. in order to avoid countries with excessive risk. For example. Country risk is determined by the costs and benefits of a country’s repayment and default strategies. or in countries with similar perceived characteristics. Country risk is composed of all the uncertainty that defines the risk of country exposure. · Sovereign risk – This risk is based on a government’s inability to meet its loan obligations. Location risk includes effects caused by troubles in a region. · Political risk – This is the risk of loss that is caused due to change in the political structure or in the politics of country where the investment is made. . Exchange risk can be defined as a form of risk that arises from the change in price of one currency against another. Country risk is due to unpredicted events in a foreign country affecting the value of international assets. CRA regulates the estimated cash flows and explores the main techniques used to measure a country’s overall riskiness. It is essential to analyse the sustainable amount of funds a country can borrow. they face currency risk if their positions are not hedged. or restriction in repatriation of profits. in trading partner of a country. The international trade growth and the financial programs development demand periodical improvement of risk methodology and analysis of country risks. investment projects and their cash flows. It also relates to political risk in which a government may decide not to honor its commitments for political reasons. tariffs. It can be used to monitor countries where the MNC is engaged in international business. The analysis of country risks distinguishes between the ability to pay and the willingness to pay. It is mainly used by MNCs. Whenever investors or companies have assets or business operations across national borders. Analysing the country risk helps in evaluating the risk for a planned project considered for a foreign country and assesses gain and loss possibility outcomes of cross-border investment or export strategy. It includes effects caused by problems in a region or in countries with similar characteristics. relationships of various groups in a country and the history of the country. war.

· Other quantitative methods – The quantitative models used in statistical studies of country risk analysis can be classified as discriminant analysis.Country detailed risk refers to the unpredictability of returns on international business transactions in view of information associated with a particular country. · Checklist method – The checklist method involves scoring the country based on specific variables that can be either quantitative. are associated with the . Fully qualitative method can be adapted to the unique strengths and problems of the country undergoing evaluation. the MNC can assess definite employees who have the capability to evaluate the risk characteristics of a particular country. and consumers. It includes general discussion of a country’s economic. The economic. · Inspection visits – Involves travelling to a country and conducting meeting with government officials. The sum of scores is then used to determine the country risk. principal component analysis. in which the scoring does not need personal judgment of the country being scored or qualitative. These meetings clarify any vague opinions the firm has about the country. · Structured qualitative method – The structured method uses a uniform format with predetermined scope. A survey conducted by the US EXIM bank classified the various methods of country risk assessment used by the banks into four types.1 Data sourcing The basic data is important to analyse a country. The standard economic variables that are found mainly in the varied approach adopted by financial institutions and rating agencies. Many agencies merge both qualitative and quantitative information into a single rating. consistent and comparable. and social conditions and prediction. political. · Delphi technique – The technique involves a set of independent opinions without group discussion. the first step is to make sure that the historical series of official data are reliable. in which the scoring needs subjective determinations. This technique was the most popular among the banks during the late seventies. They are: · Fully qualitative method – The fully qualitative method involves a detailed analysis of a country. business executives. All items are scaled from the lowest to the highest score. As applied to country risk analysis. financial and currency risk components are based on the variables (quantitative and qualitative variables). The variables must consider the particularities of each country and the needs of the model used.4. Therefore. The MNC gets responses from its evaluation and then may determine some opinions about the risk of the country. In structured qualitative method. The standard variables are used to maintain the regular analysis comparable with similar works of other countries. The techniques used by the banks and other agencies for country risk analysis can be classified as qualitative or quantitative. logit analysis and classification and regression tree method 5. it is easier to make comparisons between countries as it follows a specific format across countries.

inflation rate and so on. level of investments. which consider social aspects as population. domestic financial system. The exchange rate (currency risk) is another important variable considered. internal savings. Apart from the macroeconomic variables which deal with the external sector of the economy. money supply. ratios for economic risk evaluation and strength and weakness chart.2 Tools The risk management demands a regular follow up regarding governmental policies. outlook provided by rating agencies. Following are the tools recommended: · Chain of value – Includes the main countries that sustain trade relationships with the nation. The balance of payments (summary account of economic transactions among a country and the others nations of the world. rate of unemployment. dependency level. services. · Strength and weakness chart – Focus the key aspects that warn the country. · Table of macroeconomic variables – Provides alert signals when the behavior of any ratio presents a relevant change. GDP or GNP. The content of country risk analysis mainly involves country history. external and internal environment. during a period) and its evolution through the years means a strong source of data. as it balances the transactions (balances the prices of goods. rate of birthday. The main historical data provides a good understanding of the key factors which draw the behaviour of the society. Country history The historical brief helps to identify aspects that interfere in the future behavior of the country. external environment. the government. life expectancy.country’s real ability to repay its commitments. . consumption. · Table of financial markets performance – Follow up the behavior of bonds and stocks already issued and to be issued. there are some other relevant variables such as the interest rate. level of literacy and so on. reducing the ability to payback any external commitment. 5. public debt and its service.4. and so on. and capital) between residents and non-residents. broken by sectors and products. The social-political aspects are necessary for all kind of analysis as they describe the whole setting of the running economy. corporate risk. The analysis must be accomplished with qualitative variables. The analysis must consider the historical behavior of the exchange rate and the policy which made clear whether the country follows a rational economics approach or it uses the exchange rate as a tool to maintain a forced macroeconomic equilibrium.

the economical. the maturity of debts (internal and external) and the available sources of financing also help to measure the freedom grades of the country. This clarifies that those kind of analysis procures extensive knowledge from the business approach for companies.5. All these aspects are significant to identify the dependency level of the country.5 Domestic financial system The banking sector has implemented many actions to avoid losses. is a clear definition about how the country is positioned in the world in terms of its wide relationships.5. the forecasts for conflicts among nations.2 Corporate risk Both country risk studies and business risk analysis enhances wealth from the available resources. the behavior of financial markets. economic block in which it belongs to. natural resources. Basel Committee has defined some strong measures to be followed by the financial houses and Central Banks are trying to monitor their jurisdictions. Accessing Centrals Bank policies and supervising procedures also help to evaluate the health of the financial system. after the international crisis. 5. The financial dependency to meet the needs of a country is also a strong concern for the analyst. financial crisis and international liquidity is a framework over which the analysis must start. When domestic banks do not have a consistent risk management policies and adequate provisions to theirs credits. 5.5. Apart from those procedures. in terms of capital. the country risk happens to be the worst. a complete vision on economic trends. importance of international trade and so on. the improvement of the economic blocks.4 External environment The external trade is an important factor to the development of societies. 5. In this case. the analysis must consider the health of the domestic financial system. by evaluating information provided by the Central Banks and. and the relationships to neighbour nations and the world as a whole.3 Dependency level The next step after the history in brief.5. political.the private sector. Therefore. 5. from the principal banks of the country. 5.6 Ratios for economic risk evaluation . Globalisation has brought international business to the center of the discussions and the external environment has become vital for all countries.5. Thus. the legal environment. technology and labour forces. including financial theory. the level of openness of the world economy. The international banks had developed many tools to deal with international crisis. recently Asia and Turkey crisis have shown that the inspection is not enough to keep the reliability of some domestic system.

or relations. is a model of relationships among several variables (quantitative and qualitative) to show their interdependency and the complexity of analysis. provides huge facilities to decision makers based on their predictions to expected returns of investments and a firm social. Business ethics is almost similar to the generally accepted norms and principles. . They can be separated into two groups such as domestic and external. The figures must be presented in historic series (at least five years) to provide information about its progress.5. An economy which presents less instability in its prices of goods and services. and is a matter of concern in the corporate world. applies to business as well.· Budget deficit or GDP –· Internal debt or GDP – The monetary policy is essential as it deals with the price stability. percentages. These factors have unique value systems that have varying degrees of control over managers.Cross-border economic risk analysis evaluates the probable macroeconomic ratios among some variables. principles. for example dishonesty. Managers are influenced by three factors affecting ethical values. The mainly used ratios and variables in case of domestic economy are the following: · Gross domestic product (GDP) –· GDP per capita –· GDP growth rate –· Unemployment rate –· Internal savings or GDP –· Investment or GDP –· Gross domestic fixed investment or variation of GDP – Gini Index –· Growth domestic fixed investment or gross domestic savings –.7 Strength and weakness chart In order to explain the significant aspects provided by the analysis. the strength and weakness chart can be used to merge each strength and weakness with the related scenario. Business ethics pertains to the application of ethics to business. All these aspects request a systematic approach over price indicators such as the following: · Real interest rate –· Percentage increase in the money supply The mainly used ratios and variables in case of external economy are the following: · External debt or GDP –· Short term debts and reserves –· Exchange currency rate –· External debt services and exports –. economical and political environment. Behaviour that is considered unethical and immoral in society. How can managers in international companies adjust to the ethical factors influencing countries? Is it possible to establish international ethical codes? Briefly explain? Answer: Ethics can be defined as the evaluation of moral values. and standards of human conduct and its application in daily life to determine acceptable human behaviour. which can be real values. 5. 3.

who develop these services or products. laws are frequently violated. Culture – Culture refers to a set of values and standards that defines acceptable behaviour passed on to generations. Better decision-making – Decisions made by an ethical management are in the best interests of the organisation.Religion – Religion is one of the oldest factors affecting ethics. religions agree on the fundamental principles and ethics. agriculture phase. Every organisation is expected to abide the law. and the industrial phase. economic and ethical factors. an orderly social system. It is important for the top management to impart high ethical standards to their employees. Laws change and evolve with emerging and changing issues. and disregard for environmental protection laws. and the public. These values and standards are important because the code of conduct of people reflects on the culture they belong to. These phases reflect the changing economic and social arrangements in human history. its employees. All major religions preach the need for high ethical standards. and stress on social responsibility as contributing factors to general well-being. organisations must ascertain that they are honest in their transactions. Despite the differences in religious teachings. Employees feel proud to be a part of an organisation that is respected by the public. People tend to favour the products and services of such organisations. Investors’ trust is just as important as public image for any business. The services or products of a business affect the lives of thousands of people. Law – Law refers to the rules of conduct. approved by the legal system of a country or state that guides human behaviour. companies benefit from being ethical because they attract and retain good and loyal employees. but in the pursuit of profit. Thus. Public image – In order to gain public confidence and respect. and accounting and taxation has to follow certain ethics. finance. The role of business ethics is evident from the conception of an idea to the sale of a product. every division such as sales and marketing. A company that is ethically and socially responsible has a better public image. . customer service. Management’s credibility with employees – Common goals and values are developed when employees feel that the management is ethical and genuine. Ethical decisions take into account various social. Ethics is significant in all areas of business and plays an important role in ensuring a successful business. organisation ethics is equally significant. Civilisation is the collective experience that people have passed on through three distinct phases: the hunting and gathering phase. In an organisation. A company that practices good ethical creates a positive impression among its stakeholders. producing inferior quality goods. Management’s credibility with employees and the public are intertwined. The most common breach of law in business is tax evasion. Generous compensations and effective business strategies do not always guarantee employee loyalty.

This section deals with the way individuals in different countries approach ethical issues. Worker compensation – Businesses invest in production facilities abroad because of the availability of low-cost labour. accepting. The issue arises when there are differences in perception in different countries. and hence. Many companies use management techniques to encourage ethical behaviour at an organisational level. Most countries have similar ethical values. . With the rise in global firms. many companies have formulated welldesigned codes of conduct to help their employees. Costs of audit and investigation are lower in an ethical company. Corruption is the abuse of public office for personal gain. In Britain it is considered as an attempt to bribe the official. Two of the most prominent issues that managers in MNCs operating in foreign countries face are bribery and corruption and worker compensation. it is perfectly acceptable to offer an official a gift. and their ethically acceptable behaviour. Some of the ethical requirements for international companies are as follows: · Respect basic human rights. Hence. or soliciting something of value for the purpose of influencing the action of officials in the discharge of their duties. The issue arises when workers are exploited and are underpaid compared to the workers in the parent country who are paid more for the same job. but are practiced differently. Bribery and corruption – Bribery can be defined as the act of offering. issues related to ethical values and traditions become more common. we believed that ethics is a prerogative of individuals. Hence.Profit maximisation – Companies that emphasise on ethical conduct are successful in the long run. Earlier. even though they lose money in the short run. in the Middle East. Thus. Protection of society – In the absence of proper enforcement. but now this perception has immensely changed. The top management must communicate the code of conduct to all members of the organisation along with their commitment in enforcing the code. organisations are responsible to practice ethics and ensure mechanisms to prevent unlawful events. These rules prescribe the duties and limitations of a manager. The disparity arises due to the differences in the regulatory standards in the two countries. by propagating ethical values. These ethical issues create complications to Multi-National Companies (MNCs) while dealing with other countries for business. which enables them to offer goods and services at a lower price than their competitors. Code of conduct for MNCs The code of conduct for MNCs refers to a set of rules that guides corporate behaviour. a business organisation can save government resources and protect the society from exploitation. considered unlawful. For example. a business that is inspired by ethics is a profitable business.

And for some it is a policy driven decision to globalise and to take advantage by pressurising competitors. Taking into account the various conditions on which markets vary and depend. When a manager of an international firm faces an ethical problem. · Transfer technology.5 Discuss the international marketing strategies. The decision of a firm to compete internationally is strategic. it will have an effect on the firm. and marketing practices all vary. How is it different from domestic marketing strategies? Answer: International marketing refers to marketing of goods and products by companies overseas or across national borderlines. For example. To counter this scenario firms must learn how to enter foreign markets and increase their global competitiveness. · Employ labour practices that are not exploitative. including its management and operations locally. . some countries prevent foreign firms from entering into its market space through protective legislation. certain models help in solving these ethical issues Culture is a major factor which influences marketing decisions and practices in a foreign country. · Maintain high standards of local political involvement. as showcasing some aspects of women clothing is considered immodest and immoral Q. · Protect the environment. It also increases the living costs and protects inefficient domestic firms. Firms that plan to do business in foreign land find the marketplace different from the domestic one. Like. Some firms go abroad as the result of potential opportunities to exploit the market and to grow globally. therefore the firms planning to venture abroad must analyse all segments of the market in which they expect to compete. The techniques used while dealing overseas is an extension of the techniques used in the home country by the company.· Minimise any negative impact on local economic policies. in the middle-eastern countries the prior approval of the governing authorities should be taken if a firm plans to advertise a product related to women’s apparel. The decision of a firm to compete in foreign markets has many reasons. customer preferences. · Protect the consumer. Protectionism on the long run results in inefficiency of local firms as it is inept towards competition from foreign firms and other technological advancements. appropriate marketing strategies should be devised and adopted. Market sizes.

Markets can be segmented into nine categories. attitudes.But. education and gender. The basis of behavioural segmentation is the general behavioural aspects of the customers. lifestyles and so on. values. · Pursuing potential abroad. demographic conditions. income. the firm may decide to do business in its home-country (domestic operations) only or host-country (foreign country) only. · Globalising for defensive reasons. there can be other reasons like competition at home. Demographic segmentation considers the factors like age. . opinions. which include the behavioural. and the stage in the product life cycle. To a certain extent. · Pursuing geographic diversification. comparative advantage. · Exploiting different economic growth rates. Segmentation Firms that serve global markets can be segregated into several clusters based on their similarities. a firm should carefully look at their geographic expansion and global marketing strategy. personalities. but the most common method of segmentation is on the basis of individual characteristics. and demographic segmentations. In order to succeed. · Following customers abroad (customer satisfaction). In the process of developing an international marketing strategy. a firm makes a decision about its extent of globalisation by taking a stance that may span from entirely domestic to a global reach where the company devotes its entire marketing strategy to global competition. · Pursuing a global logic or imperative to harvest new markets and profits. In global markets product positioning is categorised as high-tech or high–touch positioning. Segmentation helps the firms to serve the markets in an improved way. culture. Market positioning The next step in the marketing process is. tax structures. the firms should position their product in the global market. economic trends. Product positioning is the process of creating a favourable image of the product against the competitor’s products. Psychographic segmentation takes into account: beliefs. Likewise. · Exploiting product life cycle differences (technology). psychographic. Strategic reasons for global expansion are: · Diversifying markets that provide opportunistic global market development. the decision to compete abroad is always a strategic down to business decision rather than simply a reaction. Each such cluster is termed as a segment.

therefore cars have larger engines than the cars in Asia and Europe.4 International pricing decisions Pricing is the process of ascertaining the value for the product or service that will be offered for sale. a warranty. 8. devaluation and revaluation. Firms have a choice in marketing their products across markets. survival. fuel is relatively cheap. Intel microprocessors are the same irrespective of the country in which they are sold. standardisation proposes the marketing of one global product. Typically. intangibility. market demand. Many a times. For example. These service components are an integral part of the product and its positioning. the firm must know its target market well because when the firm is clear about the market it is serving. and longer distribution channels. firms opt for a strategy which involves customisation. The strategies for international pricing can be classified into the following three types: · Market penetration· Market holding: · Market skimming: The factors that influence pricing decisions are inflation. In international markets. making pricing decisions is entangled in difficulties as it involves trade barriers. frequently even among different locations of the same firm). much of the design is identical or similar. documentation. nature of product or industry and competitive behaviour. status quo. return on investment. and then again.3.S. . Some common pricing objectives are: profit. and perishability.One challenge that firms face is to make a trade-off between adjusting their products to the specific demands of a country and gaining advantage of standardisation such as the maintenance of a consistent global brand image and cost savings. Finally. On the other hand. The pricing policy must be consistent with the firms overall objectives. then it can determine the price appropriately. when moving a product between markets minor modifications are made to the product. inseparability from consumption. and transfer pricing. and distribution. with the belief that the same product can be sold in different countries without significant changes. multiple currencies. products are composed of some service component like. market share. in U. For example. International product policy Some thinkers of the industry tend to draw a distinction between conventional products and services. believing that tastes differ so much between countries that it is necessary to create a new product for each market. through which the firm introduces a unique product in each country. and product quality. Here. Before establishing the prices. This is task is not easy. stressing on service characteristics such as heterogeneity (variation in standards among providers. additional cost considerations. in most cases firms will go for some kind of adaptation.

globalised firms use the same advertising agencies and centralise the advertising decisions and budgets. However. Internal transfer pricing include motivating managers and monitoring performance. and consumption patterns.The approach taken by company towards pricing when operating in international markets are ethnocentric. . Transfer Pricing Manipulation (TPM) is used to overcome these reasons. in common terminology. International advertising can be thought of as a communication process that transpires in multiple cultures that vary in terms of communication styles. and geocentric. local subsidiaries handle their budget. Transfer pricing is determined in three ways: market based pricing. Sometimes. a firm can use different brand names for historic reasons. Price can be defined by the following equation: The pricing decision enables us to change the price in many ways. resulting in greater use of local advertising agencies. External factors include taxes. The acquisition of local firms by global players has resulted in a number of local brands. transfer pricing generally refers TPM. The purpose of international advertising is to reach and communicate to target audiences in more than one country. The reason for transfer pricing may be internal or external. and other charges. where transfer pricing is the act of pricing commodities or services. The target audience differ from country to country in terms of the response towards humour or emotional appeals. polycentric. tariffs. transfer at cost and cost-plus pricing. Many managers consider transfer pricing as non-market based. values. International advertising International advertising is usually associated with using the same brand name all over the world. The Arm’s Length pricing rule is used to establish the price to be charged to the subsidiary. some of them are: · “Sticker” price changes –. Governments usually discourage TPM since it is against transfer pricing. In other cases. perception or interpretation of symbols and stimuli and level of literacy. A firm may find it unfavourable to change those names as these local brands have their own distinctive market. · Change quantity –· Change quality –· Change terms – Transfer pricing Transfer pricing is the process of setting a price that will be charged by a subsidiary (unit) of a multi-unit firm to another unit for goods and services. However. which are sold between such related units.

In international marketing. International marketing Domestic marketing refers to the practice of marketing within a firm’s home country. the marketing is for the domestic operations of the firm in that country. · Holding stocks. The distribution channel is also dependent on the way to manage and control the channel. The stages that have led to achieve global marketing are: . This industry is growing worldwide. It involves advertisers and advertising agencies that create ads and buy media in different countries. culture. Whereas International or foreign marketing is the practice of marketing in a foreign country. foreign marketing deals with these questions and tries to find answers according to the foreign market conditions and it provides a micro view of the market at the firm’s level. Selecting the distribution channel is very important for agents and distributors. companies usually take the advantage of other countries for the distribution of their products. Whereas. Domestic marketing finds the "how" and "why" a product succeeds or fails within the firm’s home country and how the marketing activity affects the outcome. Companies have their own ways of distribution. Some companies directly perform the distribution service by contacting others whereas a few companies take help from other companies who perform the distribution services. · The assembly of an attractive assortment of goods. and propagates certain values worldwide. customer preferences. · Promoting sale of goods to the customer.International advertising is a business activity and not just a communication process. climate and so on of its home country. · The physical movement of goods. International advertising is also reckoned as a major force that mirrors both social values. Domestic vs. International promotion and distribution Distribution of goods from manufacturer to the end user is an important aspect of business. The selection of distribution channel is helpful to gain the competitive advantage. while it is not totally aware of the policies and the market conditions of the foreign country. The distribution services include: · The purchase of goods. In domestic marketing a firm has insight of the marketing practices.

This is achieved by analysing the requirements and the choice of the customers in those countries. The firm is not considered as the corporate citizen of the world as it has a home base. making different products for different countries. There should never be a rigid marketing campaign. · Global marketing – Company operating in various countries opts for a common single product in order to achieve cost efficiencies. · Multinational marketing – In this stage. Few approaches that you can consider for an international marketing are: · Advertise as a foreign product – By doing so. there is no international phenomenon. in the middle-eastern countries the prior approval of the governing authorities should be taken if a firm plans to advertise a product related to women’s apparel. the company identifies the regions to which the company can deliver same product instead of producing different goods for different countries. Sri lanka and Pakistan. · Licensing – You can sell the rights of your product to a foreign firm. · Export marketing – Firms start exporting products to other countries. Here the problem is that the firm may not maintain the quality standard and therefore may hurt the image of the brand. the products are developed based on the company’s domestic market although the goods are exported to foreign countries. The firm must not have a ’single marketing plan’. A firm that is successful internationally first obtains success locally.· Domestic marketing – Firms manufacture and sell products within the country. assuming that the people living in this region have similar choice and at the same time offering different product for American countries. that is. Hence. This approach is called ‘Geocentric approach’. · International marketing – Now. For example. the product will be considered as genuine and original in some countries. . a firm may decide to sell same products in India. The product will be considered as a local product by following this marketing approach. The practice of marketing at the international stage does not designate any country as domestic or foreign. because there are differences between the target markets (that is domestic or international markets). Here. This is a very basic stage of global marketing. Culture is a major factor which influences marketing decisions and practices in a foreign country. · Joint partnership with a local firm – finding a firm that has already established credibility will benefit a lot. For example. as showcasing some aspects of women clothing is considered immodest and immoral. Firms start to sell products to various countries and the approach is ‘polycentric’. the number of countries in which the firm is doing business gets bigger than that in the earlier stage. And hence. This approach is termed ‘regiocentric approach’.

The contributions of different financial innovations like currency derivative. trade. Furthermore. The International Financial Management (IFM) came to its existence when the countries all over the world started opening their doors for each other. This phenomenon is also called as liberalisation. investment management firms and retail foreign exchange brokers and investors. commercial companies. entrepreneurs capitalised the opportunity to step their foot to conduct business in different parts of the world. international stock listing. The firms of all types are now opting to operate their business and deploy their resources abroad. and multicurrency bonds have necessitated the accurate management of the flow of international funds through the study of international financial management. When the doors of liberalisation opened. It is considered to be the leading financial market in the world. For a corporation to be successful. The domestic financial management refers to managing financial services within the country. it is vital to manage the finance and business accounts appropriately. But after the end of the Second World War. The rise in significance and complexity of financial administration in a global environment creates a great challenge for financial managers. loans. The Financial Management can be categorised into domestic and international financial management. the differences between the countries have persisted that has given rise to the prevalence of market imperfections Components of International Financial Management Foreign exchange market The Foreign exchange or the forex markets facilitates the participants to obtain. International trade gave way for the growth of international business. The foreign exchange market consists of banks. hedge funds. trade in goods. exchange and speculate foreign currency. The main aim of international finance management is to maximise the organisation’s value that in turn will increase the impact on the wealth of the stockholders.6 Explain briefly the international financial management components with examples and applicability Answer: The term ‘Financial Management’ refers to the proper maintenance of all the monetary transactions of the organisation. The participant in a foreign exchange market will normally ask for a price. International financial management refers to managing finance and share between the countries. The trading in the foreign exchange market may take place in the following forms: . The foreign exchange market is immense in size and survives to serve a number of functions ranging from the funding of cross-border investment. trade in services and currency speculation. but is created from a global network of computers that connects the participants from all over the world.Q. It also means recording of transactions in a standard manner that will show the financial position and performance of the organisation. central banks. the integration in terms of foreign activities has grown substantially. It is vital to realise that the foreign exchange is not a single exchange.

A variation in foreign exchange markets can be affected to any company whether or not they are directly involved in the international trade or not. The three ways of managing risks are as follows: · Choosing to manage risk by dealing with the spot market whenever the need of cash flow rises. The advantage of spot dealing has resulted in a simplest way to deal with all foreign currency requirements. The spot deal will come to an end in two working days after the deal is struck. For this base. but . A forward rate is based on the existing spot rate plus a premium or discounts which are determined by the interest rate connecting the two currencies that are involved. · “Spot” and “Forward” contracts – A Spot contract is a binding obligation to buy or sell a definite amount of foreign currency at the existing or spot market rate. A forward contract is a binding obligation to buy or sell a definite amount of foreign currency at the pre-agreed rate of exchange. This is often referred to as ‘Economic’ foreign exchange and most difficult to protect a business. · A currency option will prevent unfavourable exchange rate movements in the similar way as a forward contract does. · Swap – Simultaneous sale and purchase of identical amounts of currency for different maturities. the demand and supply of currency being traded and the amount to be dealt. Managing the business becomes difficult if it depends on the selling or buying the currency in the spot market. It carries the greatest risk of exchange rate fluctuations due to lack of certainty of the rate until the deal is carried out. the interest rates of UK are higher than that of US and therefore a modification is made to the spot rate to reflect the financial effect of this differential over the period of the forward contract. · The decision must be made to book a foreign exchange contract with the bank whenever the foreign exchange risk is likely to occur. This will result in a high risk and speculative strategy since one will not know the rate at which a transaction is dealt until the day and time it occurs. Often banks provide currency options which will ensure protection and flexibility. In general. · Next day – foreign exchange currency deals that take place on the next working day. It will permit gains if the markets move as per the expectations. The spot rate that is intended to receive will be set by current market conditions.· Outright cash or ready – foreign exchange currency deals that take place on the date of the deal. on or before a certain date. A forward market needs a more complex calculation. The duration will be up to two years for a forward contract. For example. a currency option is often demonstrated as a forward contract that can be left if it is not followed. a better spot rate can be received if the amount of dealing is high. This will help to fix the exchange rate immediately and will give a clear idea of knowing the exact cost of foreign currency and the amount to be received at the time of settlement whenever this due occurs.

7. currency options and currency swaps are usually traded. The standard agreement made in order to buy or sell foreign currencies in future is termed as currency futures. Figure 7.1 describes the examples of currency derivatives. The authority to buy or sell the foreign currencies in future at a specified rate is provided by currency option. It can also be termed as the agreement where the value can be determined from the rate of exchange of two currencies at the spot. Hence.1: Example for Foreign Currency Derivatives Some of the risks associated with currency derivatives are: .the likely problem to arise is the involvement of premium of particular kind. The currency derivative trades in markets correspond to the spot (cash) market.2 Foreign currency derivatives Currency derivative is defined as a financial contract in order to swap two currencies at a predestined rate.3. currency derivatives like the currency features. The main advantage from derivative hedging is the basket of currency available. These will help to increase the funds of foreign currency from the cheapest sources. In the foreign exchange market. the spot market exposures can be enclosed with the currency derivatives. These will help the businessmen to enhance their foreign exchange dealings. Figure 7. These are usually traded through organised exchanges. The agreement undertaken to exchange cash flow streams in one currency for cash flow streams in another currency in future is provided by currency swaps. The premium involved might be a cash amount or it could also influence into the charge of the transaction. The derivatives can be hedged with other derivatives.

with addition to deferred payment. · Operational risks are one of the biggest risks that occur in trading derivatives due to human error. reversed their currencies with gold bullion and determined to buy and sell the bullion at a fixed cost. This system was also discarded in the 1930s. Any nation which exports more than its import would receive gold in payment of the balance. International monetary systems provide the mode of payment acceptable between buyers and sellers of different nationality. It also consists of set of rules that govern international scenario. The sudden increase in the supply of gold may be due to the discovery of rich deposit. The gold and gold bullion standards The gold standard was the first modern international system. Instead. The gold happened to be the only standard of value under the system.3. which in turn will result in the increase of price abruptly. Thereby it can be operated successfully. The higher prices lead to the decreased demands for exports. It was operating during the late 19th and early 20th centuries. The advantages of this system depend in its stabilising influence. thereby the nations no longer minted gold coins. the investment across crossborders and the reallocation of capital between the states. · Market risk occurs due to adverse moves in the overall market. This in turn has resulted in the lowered value of domestic currency.3 International monetary systems The international monetary systems represent the set of rules that are agreed internationally along with its conventions. This standard was substituted by the gold bullion standard during the 1920s. The global balance can be corrected by providing sufficient liquidity for the variations occurring in trade. the standard provided for the free circulation between nations of gold coins of standard specification. The gold-exchange system . arising from the parties involved in a contract. · Legal risks pertain to the counterparties of currency swaps that go into receivership while the swap is taking place. 7. supporting institutions which will facilitate the worldwide trade. · Settlement risks similar to the credit risks occur when the parties involved in the contract fail to provide the currency at the agreed time.· Credit risk takes place. · Liquidity risks occur due to the requirement of available counterparties to take the other side of the trade.

In this system. . · International money markets – A money market can be conventionally defined as a market for accounts. The greater part of the worlds that deal in foreign currencies is still taking position in the cities where international financial activity is centred. This means that there exists no central place where the trading can take place. international capital markets and international securities markets are as follows: · The foreign currency markets – The foreign currency market is an international market that is familiar in structure. With a view to maintain a stable exchange rate at the global level. The Euro currency market is a money market for depositing and borrowing money located outside the country where that money is officially permitted tender. deposits or deposits that include maturities of one year or less. Many large companies opt to use euro rather than the dollar in bond trading with a goal to receive better exchange rates. The Euro was set up in financial market in 1999 as a replacement for the currencies. Floating exchange rates and recent development After the abundance of the gold convertibility by the US. the value of the currency is fixed by the nations with respect to some foreign currency but not with respect to gold. international money markets. Hence the purchase of goods and services is preceded by the purchase of currency. The ’market’ is actually the telecommunications like among financial institutions around the globe and opens for business at any time. the International Monetary Fund (IMF) was created at the ‘Bretton Woods international Conference’ held in 1944. The drain on the US gold reserves continued up to the 1970s. at the same time the US dollar diminished its significance. the gold convertibility was abandoned by the United States leaving the world without a single international monetary system. Also. The purpose of the foreign currency markets.4 International financial markets International foreign markets provide links connecting the financial markets of each country and independent markets external to the authority of any one country. Euro currencies are bank deposits and loans existing outside any particular country. The gold standard was suspended and the values of different currencies were determined in the market. Very recently the some of the members of Organisation of Petroleum Exporting Countries (OPEC) such as Saudi Arabia. Most of the nations fixed their currency to the US dollar funds in the United States. This is also termed as the Euro currency markets which constitute an enormous financial market that is beyond the influence and supervision of world financial and government authorities. 7. Later in 1971. Hence. the IMF in 1976 decided to be in agreement on the float exchange rates.3. it became the second most commonly used currency after the dollar in the international market. The ‘Japanese yen’ and the ‘German Deutschmark’ strengthened and turned out to be increasingly important in international financial market.Trading was conducted internationally with respect to the gold-exchange standard following World War II. The heart of the international financial market is being governed by the market of currency where the foreign currency is denominated by the international trade and investment. Iraq have opted to trade petroleum in Euro than in Dollar.

WTO represents the latest attempts to create an organisational focal point for liberal trade management and to consolidate a global organisational structure to govern world affairs. WTO created a qualitative change in international trade. the Final Act was signed at a meeting in Marrakesh. · Gain in technology and transaction cost efficiency – The advancements in technology is not only taking place in the distribution of information. adding to the enthusiasm for moving further capital at faster rates. debit. fixed or floating interest rates and maturities varying from one month to thirty years in an international capital markets. The private placements. bonds and equities are included in the international security market. · Market upwings – The financial markets have become increasingly unstable over recent years. in addition to the performance of exchange or trading. The majority of the deregulation that has differentiated government policy over the past 10 to 15 years. income growth and employment throughout the world. trade. The following are the reasons given for the enormous growth in the trading of foreign currency: · Deregulation of international capital flows – Without the major government restrictions. Morocco.2 (60 Marks) 1 . India is one of the founder members of WTO. it is extremely simple to move the currencies and capital around the globe. The scope of international financial management includes management of working capital. In April 1994. WTO was established on 1st January 1995. It also comprises a separate market of their own. financing decisions and taxation. . · International security markets – The banks have experienced the greatest growth in the past decade because of the continuity in providing large portion of the international financial needs of the government and business. the capital market that flows in to the Euro markets. The WTO is the successor to the General Agreement of Tariffs and Trade (GATT). The firms enjoy the freedom to raise capital.What is WTO? Explain its objectives. functions and structure WTO World Trade Organisation (WTO). It is the only international body that deals with the rules of trades between nations. There are faster swings in the stock values and interest rates. WTO has attempted to create various organisational attentions for regulation of international trade. Assignment Set. The Marrakesh Declaration of 15th April 1994 was formed to strengthen the world economy that would lead to better investment. This has resulted greatly to the capacity of individuals on these markets to accomplish instantaneous arbitrage.· International capital markets – The international capital provides links among the capital markets of individual countries.

The other major functions include: · Helping trade flows by encouraging nations to adopt discriminatory trade policies. Mexico. The center accepts requests from member countries. · Providing forum for trade negotiations. The new members benefit hugely from these services. .1 Objectives and functions The key objective of WTO is to promote and ensure international trade in developing countries. The center provides information on export market and marketing techniques. The agreement supports individual countries’ commitments to lower customs tariffs and other trade barriers. · Resolving trade disputes. The export promotion is done through the International Trade Center established by the GATT in 1964. · Promoting employment. This depends on the country’s individual export interest and their participation in WTO-bodies. the government must notify the WTO about the measures adopted to make their trade policies transparent 12.The WTO agreements are a set of rules that are followed by the member governments while formulating policies and practices in the area of international trade. The developing countries such as India. The WTO helps in solving the problems of developing economies. The agreements mainly cover goods. usually developing countries for support in formulating and implementing export promotion programmes. The important functions of the WTO as stated in the WTO agreement are the following: · Developing transitional economies – Majority of the WTO members belong to developing countries. According to the agreement. The agreements comprise the rights and obligations of the government that are enforceable in multilateral framework. expanding productions and trade and raising standard of living and income and utilising the world’s resources. · Ensuring that developing countries secure a better share of growth in world trade.3. The agreements recommend governments to make their trade policies transparent. · Providing help for export promotion – The WTO provides specialised help for export promotion to its members. services and intellectual property. Through this WTO proves its commitment in the upliftment of the world economy. The center also provides assistance in establishing export promotion and marketing services. China. It is operated by the WTO and the United Nations. The developing states are provided with trade and tariff data. Brazil and others have an important role in the organisation. and to open services markets.

· Cooperating in global economic policy-making – The main function of the WTO is to cooperate in global economic policy-making. They are: · Council for Trade in Goods manages the implementation and functioning of all agreements covering trade in goods. In the Marrakesh Ministerial Meeting in April 1994. · Monitoring implementation of the agreement – The WTO administers sixty different agreements that have the statue of international legal documents.2 Structure The structure of the WTO consists of the Ministerial Conference. The General Council delegates responsibility to other major bodies. WTO analyses the impact of liberalisation on the growth and development of national economies which is the important factor in the success of the economy. The General Council on behalf of the Ministerial Conference administers as the Dispute Settlement Body to manage the dispute settlement procedures. It also acts as the Trade Policy Review Body that conducts regular reviews of the trade policies of the individual WTO members. The member-governments sign and confirm all WTO agreements on attainment. The dispute settlement system is prohibited from adding or deleting the rights and obligations provided in the WTO agreements. 12. The negotiations can be on matters already in the WTO agreements or matters not addressed in the WTO law. a separate declaration was adopted to achieve this objective. · Providing forum for negotiations – The WTO provides a permanent forum for negotiations among members. · Administrating dispute settlement – The important function of WTO is the administration of the WTO dispute settlement system. The WTO dispute settlement system helps to: ° Preserve the rights and responsibilities of the members. The Dispute Settlement Body (DSB) is responsible for the settlement of disputes. A dispute arises when a member country adopts a trade policy and other fellow members consider it as a violation of WTO agreements. . The WTO members meet in every two years and take decisions on all matters under the multilateral trade agreements. This body consists of the representatives from all WTO members. International Monetary Fund (IMF) that are involved in monetary and financial matters. ° Clarify the current provisions of the agreements. It helps in settling multilateral trading dispute.3. The daily activities of the WTO are conducted by subsidiary bodies and principally by the General Council which is composed of WTO members. The declaration specifies the responsibility of WTO as. The members report to the Ministerial Conference. which is the highest authority. to improve and maintain the cooperation with international organisations such as the World Bank.

The suppliers. As the e-business is growing. there are many technical and business trends that are associated with it.· Trade in Services and Trade of Intellectual Property Rights are the two councils that have responsibility for their respective WTO agreements and can establish their own subsidiary bodies if required. · The Committee on Balance of Payments conducts consultations between WTO members and countries that take trade-restrictive measures to handle balance-of-payments difficulties.2 Explain briefly the nature of e-business and the challenges involved. . market. Q. Nature of E-Business E-business can be defined as "the use of networks and information technology in order to electronically design. There are four entities in the internet enabled business. The Challenges of E-Business In the previous section.1. in short an electronic medium in support of all the activities of business. Answer: The e-business denotes a major trend in the management like any other trends such as the supply chain management. · Committee on Budget and Administration manages issues relating to financing and budget of WTO. These four entities are as shown in the figure 11. meaning ‘electronic-business’. we have studied about the e-business models. buy. sell and deliver products and services worldwide". mail order service or the service economy. customers and also the competitors coordinate the e-business. The e-business is done by many asynchronous experts across the globe. In this section let us learn about the challenges of e-business. The e-business mainly stands for the internet enabled business. deals with application of information and communication technologies. · The Committee on Trade and Development manages issues relating to the developing countries. Some important trends in e-business are explained below. Ebusiness.

suppliers. The process of e-business is long lasting than that of the re-engineering. structural factors and the management oriented factors. The e-business is mainly the extension of the products and services. The relationship with customers. ° The basis of competition that is not shifted from traditional competitive advantages such as cost.E-business is crucial to business success. These factors are explained as follows: · Strategic factors. ° The buyer’s behaviour and the customer personalisation. quality. Many companies come out with changes that are necessary for e-business to become profitable. and network vendors. software. ° The technologies related to the internet are used as a complement for the existing technologies. ° The innovation was allowed when risks are low. ° The e-business offered good products and services. · E-business implementation effects success and failure of a business – There will be both the success and the failures that are associated with any kind of business. ° The frequent review of the distribution and supply chain model is done in order to maximise the company’s gain. focus on providing the tools for e-business. . ° The strategic position of the company in the market has strengthened. and employees changes as we implement e-business. ° The customer’s and partner’s expectations from the well managed. · E-business produces cumulative effects – E-business is long lasting. · Structural factors. service and features. profit. There are some major success factors for e-business. ° The first-mover advantage and quick time to start. The failures become dramatic with e-business as it is more visible externally. ° The new competitors and market shares are tracked. There are some important trends in the e-business that are described as follows: · Technology focus is on e-business – The hardware. ° The web centric marketing strategy. These factors include the strategic factors.

° The organisation wide commitment to e-business leadership. information. ° Good e-business education and training to employees. The e-business has to undergo lot of challenges in implementing the technologies that are helpful for the organisation since many of the people in the organisation will not be interested to shift to the new technology and learn the new skills. employment.° Correct digital infrastructure. The e-business is facing challenges mainly in the areas of technology.2 Logistics The logistics is defined as the planning framework for maintaining the material. one is the shift from manufacturing to services and second is the shift from physical resources to the knowledge resources. and services that they are offering.5.1 Technology The technology plays a major role in the concept of new economy. 11. electronic networks and value added services are helpful for speeding up the transactions and these are fundamental at the industrial level. management and customers. · Management-oriented factors. 11. Small scale enterprises play a vital role in the implementation of new technologies. Many of the organisations will include different technologies both for quantitative and qualitative terms. logistics. ° The awareness and understanding of capabilities of technology by executives. Internet also provides the contacts to buyers and suppliers on a global basis. both within and outside the countries. ° Good cost control. and capital flow. and legal issues. These areas are explained in the following sections. The logistics includes the complex information. They have added more value in terms of population. communication and control systems required in the business environment. The logistics presents e-business with challenges . ° The necessary support for e-business from the top management. ° Current systems expanded to cover entire supply chain.5. The introduction of technologies like the common database. ° The top management has to communicate about the value of e-business throughout the organisation. The technology has two dimensions. E-business is helps the radical transformation in the way that the business is done. Internet also plays a vital role as it helps the small and medium enterprises in providing the cost effective possibilities to advertise their products. There are so many mechanisms for technology innovation and diffusion.

5. The uncertainties are related to the security. It becomes very difficult to trust the actual with the unethical. · Contact validity – The emerging issue is the legal validity of web wrap or click on contracts. There is a jurisdiction problem in the disputes between the buyer and seller regarding where the contract was formed and which state law applies for the contract. If the webmasters include some unethical information about the client then that can cause everlasting negative consequences for the client. Now-–aday with the help of wireless phones. internet marketing and advertising frauds and e-business email scams and hence one must be careful while performing e-business. The PCI Data Security standard (PCI DSS) needs to be followed by one who handles the credit card information. internet can be accessed from anywhere in the world. Disclaimer notice is required at the start of any business website. 11. When some concepts are copyright then it is necessary to credit the original authors. The legal action is taken against the false advertisements also. In order to meet the high expectations of the customers. . There are uncertainties in e-business when compared with direct business. This type of contract is mainly found on the web site that offers goods and services for the sale. As a result the customers must be provided proper security and privacy to access internet.3 Legal concerns As there is tremendous usage of internet. It is important to check for plagiarism when the company is publishing their own articles. This is because whatever is printed on the net will be accessed by public throughout the world. illegal. The security is the primary concern in e-business. This e-business creates the legal relationship between the seller and buyer. Now–a-day. an e-business needs the special infrastructure for tuning and managing the interactions. and also the customers. The risks associated with conducting e-business over the internet are explained as follows: · Jurisdiction – Contracting over the cyberspace is a challenge for the website owners and the internet is the form of communication that rises above the spatial boundaries.that exceeds the expectations of the customers with a reasonable cost. attempt has been made to reduce the inventory costs. It is necessary to concern the privacy and legal matters while writing a copy and maintaining a client’s e-business. shipping companies. We also have an option of going back and seeing the basics of that information. credit and debit card handling. it is better to consider the legal concerns behind the internet. privacy. There will also be copyright issues that is copying something from other sites and presenting the same content as their own. The interactions can be in between the shippers. E-business is all about the trust between buyer and the seller so one must be careful while dealing with the transactions which involve the handling of credit and debit cards. Personal Digital Assistants (PDAs). logistic providers.

cannot be amended or canceled without prior agreement of the beneficiary. used primarily in trade finance.. the issuing bank of whom the applicant is a client. storm water ponds. and documents proving the shipment was insured against loss or damage in transit. . There is a need for on cryptographic methods for reducing the risks associated with the identification and authentication. for deals between a supplier in one country and a customer in another. not goods. Mere examination of the documents and forwarding the same to the letter of credit issuing bank for reimbursement. Typically.[citation needed] Negotiation means the giving of value for draft(s) and/or document(s) by the bank authorized to negotiate. without giving of value / agreed to give. if any. In executing a transaction. Whereas in a revocable LC changes to the LC can be made without the consent of the beneficiary. which usually provides an irrevocable payment undertaking. Letters of credit are used primarily in international trade transactions of significant value. meaning that redeeming the letter of credit will pay an exporter. The cryptographic methods for eliminating the risks those are associated with the non repudiation and security.e. letters of credit incorporate functions common to giros and Traveler's cheques.[2] They are also used in the land development process to ensure that approved public facilities (streets. The LC could be irrevocable or revocable. and the advising bank of whom the beneficiary is a client. does not constitute a negotiation.) will be built. 3 Mention the relevance of these terms in International business . Bill of Lading and Factoring. In such cases the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits applies (UCP 600 being the latest version). the documents a beneficiary has to present in order to receive payment include a commercial invoice. the issuing bank and the confirming bank. The letter of credit can also be source of payment for a transaction. Letters of credit (LC) deal in documents. A time or date LC will specify when payment will be made at a future date and upon presentation of the required documents. i.· Contract information – The advent of the e-business over the net is responsible for various legal issues regarding the formation of the electronic contracts. viz the nominated bank. bill of lading. Almost all letters of credit are irrevocable. An irrevocable LC cannot be changed unless both the buyer and seller agree.Letter of credit. A sight LC means that payment is made immediately to the beneficiary/seller/exporter upon presentation of the correct documents in the required time frame. · There is a need for matching both the e-customers and e-merchants with the legally responsible parties in the real world. sidewalks. Answer: Letter of credit: A standard. The parties to a letter of credit are usually a beneficiary who is to receive the money. etc. commercial letter of credit (LC[1]) is a document issued mostly by a financial institution.

or a chartering contract. A bill of lading can be used as a traded object.[citation A bill of lading (BL . The term derives from the verb "to lade" which means to load a cargo onto a ship or other form of transportation. reimbursements and other charges like courier are to the account of applicant or as per the terms and conditions of the Letter of credit. If the letter of credit is silent on charges. and it may incorporate the full terms of the contract between the consignor and the carrier by reference (i. buyer's bank supplies a letter of credit to seller. whereas the long form of a bill of lading (connaissement intégral) issued by the carrier sets out all the terms of the contract of carriage). acknowledging that specified goods have been received on board as cargo for conveyance to a named place for delivery to the consignee who is usually identified. A through bill of lading involves the use of at least two different modes of transport from road. rail.e. air. then they are to the account of the Applicant. The description of charges and who would be bearing them would be indicated in the field 71B in the Letter of Credit. negotiation of documents. All the charges for issuance of Letter of Credit.sometimes referred to as BOL or B/L) is a document issued by a carrier to a shipper. The standard short form bill of lading is evidence of the contract of carriage of goods and it serves a number of purposes: • It is evidence that a valid contract of carriage.After a contract is concluded between buyer and seller. exists. and sea. . the short form simply refers to the main contract as an existing document.

The BL also contains other details such as the name of the carrying vessel and its flag of nationality. In certain cases a carrier may issue a separate on board certificate to the shipper. and Freight rate/measurements and weighment of goods/total freight While an air waybill (AWB) must have the name and address of the consignee. This matches everyday experience in that the contract a person might make with a commercial carrier like FedEx for mostly airway parcels. A BL endorsed in blank is transferable by delivery. and owner of the goods. the number of packages. Gross/net/tare weight. If the date on which the goods are loaded on board is different from the date of the bill of lading then the actual date of loading on board will be evidenced by a notation the BL. irrespectively of who the actual holder of the B/L. like a cheque or other negotiable instrument. This is the person whom the shipping company will notify on arrival of the goods at destination. Where the word order appears in the consignee box. and It is also a document of transfer. whether freight costs have been paid or whether payment of freight is due on arrival at the destination. The carrier's duty is to deliver goods to the first person who presents any one of the original BL. In general. it may be endorsed affecting ownership of the goods actually being carried. It is therefore essential that the exporter retains control over the full set of the originals until payment is effected or a bill of exchange is accepted or some other assurance for payment has been made to him. i. The bill of lading has also provision for incorporating notify party. the shipper may endorse it in blank or to a named transferee. The document is dated and signed by the carrier or its agent. and. is separate from any contract for the sale of the goods to be carried. the importer's name is not shown as consignee.• • It is a receipt signed by the carrier confirming whether goods matching the contract description have been received in good condition (a bill will be described as clean if the goods have been received on board in apparent good condition and stowed ready for transport). a brief description of the goods. The BL must contain the following information: • • • • • • • Name of the shipping company. being freely transferable but not a negotiable instrument in the legal sense. The date of the BL is deemed to be the date of shipment. may be at a specific moment. The particulars of the container in which goods are stuffed are also mentioned in case of containerised cargo. it governs all the legal aspects of physical carriage. Shipper's name. Flag of nationality. .e. The carrier need not require all originals to be submitted before delivery. Once the goods arrive at the destination they will be released to the bearer or the endorsee of the original bill of lading. the marks and numbers on the packages in which the goods are packed. Order and notify party. it binds the carrier to its terms. their weight and measurement. however. Description of goods. a BL may be consigned to the order of the shipper.

Finally.[2][1] .[3] while factoring is a Financial Transaction that involves the Sale of any portion of the firm's Receivables. Such bill may be created explicitly or it is an order bill that fails to nominate the consignee whether in its original form or through an endorsement in blank. when we hand over the bill of lading we surrender title to the goods and our power of sale over the goods. where the bill assigned to a certain party.g. Such a BL will not bear a clause or notation which expressively declares a defective condition of goods and/or the packaging. Secondly. Thus. or to order or assigns".[1][2] not the firm’s credit worthiness. [edit] Surrender bill of lading Under a term import documentary credit the bank releases the documents on receipt from the negotiating bank but the importer does not pay the bank until the maturity of the draft under the relative credit. It is different from forfaiting only in the sense that forfaiting is a transaction-based operation involving exporters in which the firm sells one of its transactions. The opposite term is a soiled bill of lading. Factoring differs from a bank loan in three main ways. A bearer bill can be negotiated by physical delivery. i.'s intention to transfer. it can be indorsed (legal spelling of endorse. Consequently. which reflects that the goods are received by the carrier in anything but good condition. it states that delivery is to be made to the further order of the consignee using words such as "delivery to A Ltd. a bank loan involves two parties whereas factoring involves three. or the right to take delivery can be transferred by physical delivery of the bill accompanied by adequate evidence of A Ltd. the emphasis is on the value of the receivables (essentially a financial asset).Main types of bill [edit] Straight bill of lading In this importer/consignee/agent is named in the bill of lading. A clean bill of lading states that the cargo has been loaded on board the ship in apparent good order and condition. It is a document. First. It details to the quality and quantity of goods. factoring is not a loan – it is the purchase of a financial asset (the receivable). e. Factoring is a financial transaction whereby a business job sells its accounts receivable (i.e.. a BL that reflects the fact that the carrier received the goods in good condition. including Bills of Exchange Act 1909 (CTH)) by A Ltd. [edit] Order bill of lading This bill uses express words to make the bill negotiable. maintained in all statute. it is called straight bill of lading.e. in which a seller agrees to use a certain transportation to ship a good to a certain location. [edit] Bearer bill of lading This bill states that delivery shall be made to whosoever holds the bill. invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. This direct liability is called Surrender Bill of Lading (SBL).

The receivable is essentially a financial asset associated with the debtor's liability to pay money owed to the seller (usually for work performed or goods sold). whereas invoice discounting is borrowing where the receivable is used as collateral. . and the factor bills the debtor and makes all collections. the remainder of the total invoice amount held until the payment by the account debtor is made and c. indicating the factor obtains all of the rights and risks associated with the receivables. less the amount lost due to non-payment. a percentage of the invoice face value that is paid to the seller upon submission. under the Generally Accepted Accounting Principles receivables are considered sold when the buyer has "no recourse. and might have a relatively small Cash Flow in another period. A company sells its invoices at a discount to their face value when it calculates that it will be better off using the proceeds to bolster its own growth than it would be by effectively functioning as its "customer's bank.factoring is the sale of receivables.) the fee. By reducing the size of its cash balances. Factoring occurs when the rate of return on the proceeds invested in production exceed the costs associated with Factoring the Receivables. b. The use of factoring to obtain the cash needed to accommodate the firm’s immediate Cash needs will allow the firm to maintain a smaller ongoing Cash Balance. and the factor. and makes accommodation for this when determining the amount that will be given to the seller.Factoring is a word often misused synonymously with invoice discounting[citation needed] . Many businesses have Cash Flow that varies."[6] or when the financial transaction is substantially a transfer of all of the rights associated with the receivables and the seller's monetary liability under any "recourse" provision is well established at the time of the sale. the account debtor is notified of the sale of the receivable. Sometimes the factor charges the seller a service charge. the specialized financial organization (aka the factor). The seller then sells one or more of its invoices (the receivables) at a discount to the third party. a. The sale of the receivables essentially transfers ownership of the receivables to the factor. Usually. Because of this. the cost associated with the transaction which is deducted from the reserve prior to it being paid back the seller. the debtor.[2][1] Accordingly. [5] The factor also estimates the amount that may not be collected due to non-payment.[4] The three parties directly involved are: the one who sells the receivable.) the reserve. Factoring is a method used by a firm to obtain cash when the available cash balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs. Critical to the factoring transaction. the financial transaction is treated as a loan. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor. such as new orders or contracts. the seller should never collect the payments made by the account debtor. the trade off between the return the firm earns on investment in production and the cost of utilizing a Factor is crucial in determining both the extent Factoring is used and the quantity of Cash the firm holds on hand. with the receivables used as collateral.[7] Otherwise. the factor obtains the right to receive the payments made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount. to obtain cash. otherwise the seller could potentially risk further advances from the factor. A business might have a relatively large Cash Flow in one period. There are three principal parts to the factoring transaction. more money is made available for investment in the firm’s growth. as well as interest based on how long the factor must wait to receive payments from the debtor."[8] Accordingly.[2] In the United States.) the advance. Therefore.

The Cash Balance a business holds is essentially a Demand for Transactions Money. Generally. If cash flow can decrease drastically. .4 a) Explain the role played by EXIM bank. the business must balance the opportunity cost of losing a return on the Cash that it could otherwise invest. against the costs associated with the use of Factoring. Export Credit Guarantee Corporation of India. set up in 1982 under the Export-Import Bank of India Act 1981. which has representatives from the Government. The length of time Cash Flow can remain at a below average level.[9] The solution to the problem is: [10] where • • • • CB is the Cash Balance nCF is the average Negative Cash Flow in a given period i is the [Discount Rate] that cover the Factoring Costs r is the rate of return on the firm’s assets[11] Q. 2. As stated. the more cash is needed from another source (Cash Balances or a Factor) to cover its obligations during this time. the size of the Cash Balance the firm decides to hold is directly related to its unwillingness to pay the costs necessary to use a Factor to finance its short term cash needs. the variability in the cash flow will determine the size of the Cash Balance a business will tend to hold as well as the extent it may have to depend on such financial mechanisms as Factoring. a financial institution. the business will find it needs large amounts of cash from either existing Cash Balances or from a Factor to cover its obligations during this period of time. Reserve Bank of India. In this situation. Cash flow variability is directly related to 2 factors: 1. Each business must then decide how much it wants to depend on Factoring to cover short falls in Cash. Answer: Export-Import Bank of India is the premier export finance institution of the country. the longer a relatively low cash flow can last.firms find it necessary to both maintain a Cash Balance on hand. Likewise. and how large a Cash Balance it wants to maintain in order to ensure it has enough Cash on hand during periods of low Cash Flow. The extent Cash Flow can change. in order to enable them to cover their Short Term cash needs in those periods in which these needs exceed the Cash Flow. and to use such methods as Factoring.[2] Exim Bank is managed by a Board of Directors. the business must balance the cost of obtaining cash proceeds from a Factor against the opportunity cost of the losing the Rate of Return it earns on investment within its business. The problem faced by the business in deciding the size of the Cash Balance it wants to maintain on hand is similar to the decision it faces when it decides how much physical inventory it should maintain. As indicated.

or between a wholesaler and a retailer. The Group handles projects and export transactions in the agricultural sector for financing. Information Technology. Export Marketing Services Bank offers assistance to Indian companies. they are now using similar . Many businesses are now using social media to connect with their consumers (B2C). • • • • • b) What are B2B and C2B business models? Business-to-business (B2B) describes commerce transactions between businesses. Internal Audit. and rubber hoses for its vehicles. Contrasting terms are business-to-consumer (B2C) and business-to-government (B2G).public sector banks. to spearhead the initiative to promote and support Agri-exports. which include: Research & Planning. a finished vehicle sold to the consumer. Legal. and the business community. The volume of B2B (Business-to-Business) transactions is much higher than the volume of B2C transactions. such as between a manufacturer and a wholesaler. glass for windscreens. to enable them establish their products in overseas markets. Besides these. an automobile manufacturer makes several B2B transactions such as buying tires. For example. Corporate Finance. Importers. The primary reason for this is that in a typical supply chain there will be many B2B transactions involving sub components or raw materials. however. Human Resources Management and Corporate Affairs. the Support Services groups. is a single (B2C) transaction. specifically sale of the finished product to the end customer. pre-shipment Agri Business Group. Export Services Group offers variety of advisory and value-added information services aimed at investment promotion. and only one B2C transaction. Management Information Services. Small and Medium Enterprise: The group handles credit proposals from SMEs under various lending programmes of the Bank. The final transaction. and overseas investment by Indian companies. Loan Recovery. Project Finance / Trade Finance Group handles the entire range of export credit services such as supplier's credit. The Bank's functions are segmented into several operating groups including: • Corporate Banking Group which handles a variety of financing programmes for Export Oriented Units (EOUs). B2B is also used in the context of communication and collaboration.

NEC has developed an advanced information system to carry out a large part of its procurement activities. a number of models have begun to emerge that manage transactions between buyers and suppliers: 1. Within two hours of the purchasing .com). The purchasing department receives electronic requisitions from internal customers that are then sent to potential suppliers over the Internet. companies have now turned their attention towards the Internet to support these types of buyer-supplier relationships. Due to the aforementioned limitations associated with EDI. both organizations and consumers use the supplier-provided marketplace. Although the exploitation of Internet technologies at the business-to-business level is in its infancy. Many professional institutions and the trade publications focus much more on B2C than B2B. including the integration of manufacturing systems and supplier involvement in new product development. electrical. When communication is taking place amongst employees. 2. Established Buyer-Supplier Relationship This is a pre-determined one-to-one relationship between a buyer and supplier that is supported by electronic commerce technologies. and mechanical components. and tools in Europe. ranging from procurement notices to settlement on the Internet. although most sales and marketing personnel are in the B2B sector. Companies are now pursuing a more intensive and interactive relationship with their suppliers. this can be referred to as "B2B" communication The term "business-to-business" was originally coined to describe the electronic communications between businesses or enterprises in order to distinguish it from the communications between businesses and consumers (B2C). Buyer-Oriented Marketplace Under this model. Supplier-Oriented Marketplace In this model. Today it is widely used to describe all products and services used by enterprises. a buyer opens an electronic market on its own server and invites potential suppliers to bid on the announced Requests for Quotation (RFQs).tools within the business so employees can connect with one another.000 products. A supplier-oriented marketplace may also provide an auctioning facility to offload surplus inventory or offer discounts to customers. The marketplace provides fast search and retrieval of 100. impacting upon the buyer-supplier relationship in a number of areas. This is the most common type of B2B model. In this model. For example. instruments. RS Components is a leading distributor of electronic. Exchanging information via extranets costs less and is more effective than through older traditional methods such as faxes and voicemail. One company that has successfully exploited this model is GE Lighting. initially describing only industrial or capital goods marketing. combined with personalized customer promotions based on the buying profiles of its major customers. 3. An example of this model is RS Components (rswww. both business buyers and individual consumers use the same supplier-provided marketplace. It eventually came to be used in marketing as well.

An example is iMark. which acts as an intermediary between buyers and suppliers of used capital equipment in different industries. as well as those of their customers. its value in the marketplace. the procurement function has been able to concentrate on more strategic activities rather than clerical and administration tasks. and competitors. to achieve maximum benefit the intermediary should be linked seamlessly to the buyer’s purchasing and the suppliers’ systems so that the entire purchasing process can be executed electronically. repetitive transactions. In relation to payment. suppliers. This framework provides a way of distinguishing between buying and selling activities to better understand the interrelationships between customers and suppliers’ business processes. with the marketplace itself acting as a trusted intermediary. and what they term ‘TouchPoints’ in the company.or open to all-comers. There are two types of hubs: • • Vertical . . These B2B hubs tend to focus mainly on non-core items that may range from stationery and computers to catering services and travel. Examples include e-Steel that acts as an intermediary between steel. In the context of competitive advantage and the influence of the Internet. or the buyer-supplier relationship. Business-to-Business Intermediary This model is sometimes referred to as a ‘hub’ or ‘exchange’.where members and trading partners are vetted for legal and financial probity . Alternatively. These intermediaries may attempt to aggregate demand for buyers in order to obtain reduced prices and more favorable terms from suppliers. Horizontal . An intermediary may be closed . 4. a percentage may be charged in the case of value-added services such as auctions. With the transaction handled electronically. process. customer/supplier lifecycle is a useful framework for understanding an organization’s business processes. some intermediaries may charge a flat fee per transaction to both the buyer and suppliers. and VerticalNet that provides intermediaries for many industries including electronics.department starting the process. and utilities.com. Similarly. In the case of large. It is established by an electronic intermediary that runs a marketplace where suppliers and buyers have a central point to come together.makers and customers. It is important to note that intermediaries may be biased towards either buyers or suppliers.focus on an industry and provide content that is specific to the industry’s value system of buyers and suppliers. buy-side intermediaries may be run by a consortia of customers such as Covisint for car makers or by independent organizations such as Achilles for utilities.provide the same function for a variety of industries. A successful electronic business strategy will alter the nature of the product or service being offered. Supply-side intermediaries may be run by consortia of manufacturers such as Chemdex that acts as an intermediary for suppliers to the life sciences industry. suppliers are notified of incoming RFQs and are given seven days to prepare bids and send them back over the extranet to GE. telecommunications.

The individual is paid for the work provided to the companies. The advent of the C2B scheme is due to major changes: • • Connecting a large group of people to a bidirectional network has made this sort of commercial relationship possible. a business acting as buyer and an intermediary dealing with the connection between sellers and buyers. powerful software) C2B business models like most of C2C models like Ebay are based on 3 players: a consumer acting as seller. Decreased cost of technology : Individuals now have access to technologies that were once only available to large companies ( digital printing and acquisition technology.com affiliation program) A photographer or a designer offering stock images to companies by selling his artwork through Fotolia or istockphoto for example Any individual answering a poll through a survey site Any individual with connections offering job hiring service by referring someone through referral hiring sites like jobster.Consumer-to-business (C2B) is an electronic commerce business model in which consumers (individuals) offer products and services to companies and the companies pay them. Here are some examples of potential companies which can be such clients: • • Any company which wants to fill a job (through referral hiring sites) Any company needing to advertise online (through Google Adwords program for example) . We can see this example in blogs or internet forums where the author offers a link back to an online business facilitating the purchase of some product (like a book on Amazon. Depending on the model. high performance computer.com Business Business in the C2B business model represents any companies buying goods or services to individual trough intermediaries. The large traditional media outlets are one direction relationship whereas the internet is bidirectional one. This business model is a complete reversal of traditional business model where companies offer goods and services to consumers (business-to-consumer = B2C). and the author might receive affiliate revenue from a successful sale.com).com or h3. Consumer A consumer in the C2B business model can be any individual who has something to offer either a service or a good. This kind of economic relationship is qualified as an inverted business type. the "consumer" can be: • • • • A webmaster/ blogger offering advertising service (through Google Adsense program for example or amazon.

Google Adsense for web publisher) whereas other companies like Fotolia have only one access because buyers and sellers can be the same. Vectors.com through its affiliation program. Few types of intermediaries Intermediar Examples y Advertising Site Microstock Site Refferal Hiring Site Google Adwords/Adsense Tradedoubler Commission Junction Fotolia Shutterstock Istockphoto What do they sell? Advertising services through search engines and websites Stock Photos. logistic and financial support. Flash animations Job Hiring Service H3 Josbster Jobmeeters . Amazon pays individual to promote its own products. We can differentiate two kinds of intermediaries: • • Extern intermediary : they act as a extern agent within the relation between companies and individual (ex : referral hiring site) Intern intermediary: they play the role both of business and intermediary. The intermediary plays two roles: • • It promotes goods and services offered by individuals by proposing a distribution channel. It offers what individuals can't do themselves : large promotion.• Any advertising agency which needs to buy a stock photo (through microstock sites) Intermediary The Intermediary is the crucial element since it creates the connection between business which needs a service or a good and a mass of individuals. Intermediary is usually a portal both for buyers (businesses) and seller (individuals). technical expertise It offers buyers a contact to a mass of individuals and takes care of money transactions and legal aspects We can notice that some intermediaries prefer creating two different accesses one for buyers and one for sellers (Google Adwords for advertiser . it is the case of amazon. For example.

Till the nineties the process of globalisation of the Indian economy was constrained by the barriers to trade and investment liberalisation of trade.5 What kind of impact will globalization and international business environment create on Indian businesses? [10 marks] Globalisation is the new buzzword that has come to dominate the world since the nineties of the last century with the end of the cold war and the break-up of the former Soviet Union and the global trend towards the rolling ball. But globalisation has also thrown up new challenges like growing inequality across and within nations. Also Globalisation has brought in new opportunities to developing countries. The frontiers of the state with increased reliance on the market economy and renewed faith in the private capital and resources. Greater access to developed country markets and technology transfer hold out promise improved productivity and higher living standard. Another negative aspect of globalisation is that a great majority of developing countries remain removed from the process. a process of structural adjustment spurred by the studies and influences of the World Bank and other International organisations have started in many of the developing countries.September 24. volatility in financial market and environmental deteriorations. investment and financial flows initiated in the nineties has progressively lowered the barriers to competition and hastened the pace of globalisation . 2005 in C2B Business Model | Permalink | Comments (2) | TrackBack (0) C2B vs B2C : Graphical Representation Q.

6 in 1996-97. data and ideas but also infections. ports.1% in 2001-02. amendment of the monopolies and the restrictive trade practices act. India is committed to reduced tariff rates. population migrations and more generally increased mobility of persons. insurance and other major sectors. more and more sectors opened up for foreign direct investments and portfolio investments facilitating entry of foreign investors in telecom.5% in 1991-92 to 24. reduction in the number of areas reserved for the public sector. internationalisation of financial markets.Though tariff rates went up slowly in the late nineties it touched 35. goods. Major measures initiated as a part of the liberalisation and globalisation strategy in the early nineties included scrapping of the industrial licensing regime. airports. Over the years there has been a steady liberalisation of the current account transactions. The new policy regime radically pushed forward in favour of amore open and market oriented economy. Peak tariff rates are to be reduced to be reduced to the minimum with a peak rate of 20%. reduction in tariff rates and change over to market determined exchange rates. capital. Guy Brainbant: says that the process of globalisation not only includes opening up of world trade. The response was a slew of Domestic and external sector policy measures partly prompted by the immediate needs and partly by the demand of the multilateral organisations. Stephen Gill: defines globalisation as the reduction of transaction cost of transborder movements of capital and goods thus of factors of production and goods. growing importance of MNC's. in another 2 years most non-tariff barriers have been dismantled by march 2002. including almost all quantitative restrictions. The Indian tariff rates reduced sharply over the decade from a weighted average of 72. start of the privatisation programme.Though the precise definition of globalisation is still unavailable a few definitions worth viewing. . development of advanced means of communication. roads. diseases and pollution Impact on India: India opened up the economy in the early nineties following a major crisis that led by a foreign exchange crunch that dragged the economy close to defaulting on loans.

good national polices . sound institutions and domestic political stability also matter. But it is not the only reason for this often unrecognised progress. When GDP is calculated on a purchasing power parity basis.8% in 1996-97. Though India's average annual growth rate almost doubled in the eighties to 5. Korea and Indonesia.9% it was still lower than the growth rate in China. Globalisation and Poverty: Globalisation in the form of increased integration though trade and investment is an important reason why much progress has been made in reducing poverty and global inequality over recent decades. which picked up from 5. Though growth rates has slumped to the lowest level 4. The pick up in GDP growth has helped improve India's global position. This is major improvement given that India is growth rate in the 1970's was very low at 3% and GDP growth in countries like Brazil. poverty remains one of the most serious international challenges we face up to 1.3% in 2002-03 mainly because of the worst droughts in two decades the growth rates are expected to go up close to 70% in 200304. Korea. Consequently India's position in the global economy has improved from the 8th position in 1991 to 4th place in 2001. Despite this progress. .8 billion people still live in extreme poverty. But the proportion of the world population living in poverty has been steadily declining and since 1980 the absolute number of poor people has stopped rising and appears to have fallen in recent years despite strong population growth in poor countries.2 billion of the developing world 4.6% in 1990-91 to a peak level of 77. If the proportion living in poverty had not fallen since 1987 alone a further 215million people would be living in extreme poverty today.India is Global: The liberalisation of the domestic economy and the increasing integration of India with the global economy have helped step up GDP growth rates. and Mexico was more than twice that of India. A Global comparison shows that India is now the fastest growing just after China. Indonesia. Growth rates have slowed down since the country has still bee able to achieve 5-6% growth rate in three of the last six years.

GDP Growth rate: The Indian economy is passing through a difficult phase caused by several unfavourable domestic and external developments. Many Indian companies have started .362 million respectively.India has to concentrate on five important areas or things to follow to achieve this goal. The areas like technological entrepreneurship. tariffs of 5% or less on all manufactured goods will be eliminated by 2005 and higher than 5% will be lowered to 8%. Understanding the current status of globalisation is necessary for setting course for future. Domestic output and Demand conditions were adversely affected by poor performance in agriculture in the past two years.4% during the past year growth in real GDP in 2001-02 was 5. For all nations to reap the full benefits of globalisation it is essential to create a level playing field.4% as per the Economic Survey in 2000-01. Export and Import: India's Export and Import in the year 2001-02 was to the extent of 32. The growth of Indian economy very much depends upon rural participation in the global race. The manufacturing of technology and management of technology are two different significant areas in the country. new business openings for small and medium enterprises. In fact it may exacerbate the prevalent inequalities. According to this proposal. After implementing the new economic policy the role of villages got its own significance because of its unique outlook and branding methods. importance of quality management. new prospects in rural areas and privatisation of financial institutions. The performance in the first quarter of the financial year is5. President Bush's recent proposal to eliminate all tariffs on all manufactured goods by 2015 will do it. The global economy experienced an overall deceleration and recorded an output growth of 2.1%.572 and 38. It may be organised in a collective way with the help of co-operatives to meet the global demand. Starting 2010 the 8% tariffs will be lowered each year until they are eliminated by 2015. There will be new prospects in rural India. For example food processing and packaging are the one of the area where new entrepreneurs can enter into a big way.8% and second quarter is 6.

tea and coffee are the other prominent products each of which accounts fro nearly 5 to 10% of the countries total agricultural exports.becoming respectable players in the International scene. Lets look at a few indicators how much we lag.however we look at it. as a geographical.05% to . Whereas FDI inflows into China now exceeds US $ 50 billion annually. Where does Indian stand in terms of Global Integration? India clearly lags in globalisation. Marine products in recent years have emerged as the single largest contributor to the total agricultural export from the country accounting for over one fifth of the total agricultural exports. •As Amartya Sen and many other have pointed out that India. oil seeds.5% of GDP against 5% for China 5. Governor of RBI. politico-cultural entity has been interacting with the .07% over the pat 20 years. Cereals (mostly basmati rice and non-basmati rice). Despite all the talk. large part of east and far east Asia and eastern Europe. Over the same period China's share has tripled to almost 4%. •India's share of global trade is similar to that of the Philippines an economy 6 times smaller according to IMF estimates.India's share of world merchandise exports increased from .5% for Brazil. In fact we are one of the least globalised among the major countries . India under trades by 70-80% given its size. Number of countries have a clear lead among them China. •It is interesting to note the remark made last year by Mr. •Over the past decade FDI flows into India have averaged around 0. Bimal Jalan. It is only US $ 4billion in the case of India •Consider global trade . In 2000-01 Agricultural products valued at more than US $ 6million were exported from the country 23% of which was contributed by the marine products alone. we are now where ever close being globalised in terms of any commonly used indicator of globalisation. Agriculture exports account for about 13 to 18% of total annual of annual export of the country. proximity to markets and labour cost advantages.

This goes without saying even as we move into what is called a globalised world which is distinguished from previous eras from by faster travel and communication. This constrained the policy option available to the government which implies loss of policy autonomy to some extent. Regional Trading Arrangements The European Union (EU) The European Union (EU) is an economic and political union established in 1993. while formulating and evaluating its domestic policy cannot afford to ignore the possible actions and reactions of policies and developments in the rest of the world. Rather. It has to adapt. The EU has developed a single market for all the member states and sixteen member states have adopted a common currency called the Euro. they are influenced by both domestic and international policies and economic conditions. denting of political and economic sovereignty and greater acceptance of democracy as a way of life.outside world throughout history and still continues to do so. It is thus clear that a globalising economy. 4. assimilate and contribute. The member states sign an agreement called Schengen Agreement. Consequences: The implications of globalisation for a national economy are many. greater trade linkages. As a result domestic economic developments are not determined entirely by domestic policies and market conditions. . Discuss any 3 regional trading agreements and its effect on international business Answer: Regional integration is bonding between nations and states through political. Globalisation has intensified interdependence and competition between economies in the world market. signed on 7th February 1992 by the European Communities. The cooperation is overseen by rules and regulations decided upon by the states entering into an understanding. This is reflected in Interdependence in regard to trading in goods and services and in movement of capital. The EU comprises of 27 member states committed to regional integration. goods. cultural and economic cooperation. capital and services. which ensures the free movement of people. in decision-making at the national level. This came into effect because of the Treaty of Maastricht.

transport and technical barriers to trade. fisheries and regional development.3 North American Free Trade Agreement (NAFTA) The North American Free Trade Agreement (NAFTA) was signed in 1994 by three governments. 14. Switzerland. the EFTA states have jointly arranged free trade agreements with many other countries. the European Council. three of the EFTA countries signed European Economic Area (EEA) agreement and became a part of the European Union Internal Market.4. In 1994.4. Switzerland opted to arrange bilateral agreements with the EU. The EU citizens elect the European Parliament every five years. EU ambassadors head the EU delegations.2 European Free Trade Association (EFTA) The European Free Trade Association (EFTA) is a free trade organisation established in 1960 between four European counties. WTO. presently only four countries remain as the members of EFTA. EU has also devised a common foreign and security policy for its member states. The agreement enacts legislation in justice and home affairs. covering a wide range of areas. the Court of Justice of the European Union. Norway. In 1999. This trade agreement is the largest in the world in terms of combined purchasing power parity Gross Domestic Product (GDP) and second largest by nominal GDP comparison. the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labour Cooperation (NAALC). 14. It is an environmental agreement between the United States of America. Switzerland established a number of bilateral agreements with the EU. The Stockholm Convention was replaced by the Vaduz Convention. the Council of the European Union. and the European Central Bank. The Commission for Environmental Cooperation (CEC) was set up as part of the agreement. and the United States. The North American Agreement on Environmental Cooperation (NAAEC) was established in 1994. The EU has established diplomatic missions around the world and they represent the member states at the United Nations. This agreement prompted the EFTA states to modernise their convention to guarantee that it will continue to provide guidelines for the expansion and liberalisation of trade among them and with the rest of the world. . The EFTA was formed as an alternative to EU. The agreement comprises of a declaration of objectives and principles regarding conservation and the protection of the environment. Iceland and Liechtenstein. Canada. G8 and G-20 summits. This Convention provides a framework for a free and liberal trade amongst its member states. allowing countries to join EFTA if they were not willing to join EU. agriculture. and maintains common policies on trade. including movement of persons. In addition. Mexico and Canada. Important organisations of the EU include the European Commission. The EFTA was formed at the Stockholm Convention between seven countries.including the abolition of passport controls. Mexico. It operates parallel to the EU. The NAFTA is divided into two sections.

. · Promote a set of guiding labour principles.North American Agreement on Labour Cooperation (NAALC) was also established in 1994 to achieve the following goals: · Improve working conditions and living standards. · Encourage cooperation to promote innovation. NAALC provides various means such as exchanges of information. · Improve the levels of productivity and quality. technical assistance. and consultations for achieving the above goals.