1. What are the various method to entry in the foreign marke t?

Ans:
The decis ion of how to enter a fore ign market can have a signi f i cant impact on the resul ts . Expansion in to foreign markets can be achieved via the fo l lowing four mechanisms:
• • • •

Export ing Licensing Joint Venture Direct Investment

Exporting Export ing is the marketing and direct sale of domestical l y - produced goods in another country. Export ing is a tradi t i onal and well - establ ished method of reaching foreign markets. Since export ing does not require that the goods be produced in the target country, no investment in foreign product ion faci l i t i e s is required. Most of the costs associated with export ing take the form of marketing expenses. Export ing commonly requires coordinat ion among four players:
• • • •

Exporter Importer Transport provider Government

Licensing Licensing essentia l l y permits a company in the target country to use the property of the l i censor. Such property usual ly is intangib le , such as trademarks, patents, and production techniques. The l i censee pays a fee in exchange for the r ights to use the intangib le property and possibly for technical assistance.

Because l i t t l e investment on the part of the l i censor is required, l i censing has the potent ia l to provide a very large ROI. However, because the l i censee produces and markets the product, potent ia l returns from manufactur ing and marketing activ i t i es may be lost .

Joint Venture There are f ive common object ives in a jo in t r isk / reward sharing, technology sharing and conforming to government regulat ions. Other connections and distr i bu t ion channel access relat ionships. Such al l i ances often are favorable when:
• • •

venture: market entry, jo in t product development, and benefi ts include pol i t i ca l that may depend on

the partners ' strategic goals converge while thei r competi t i ve goals diverge; the partners ' size, market power, and resources are small compared to the industry leaders; and partners ' are able to learn from one another while l imi t i ng access to thei r own proprie tary ski l l s .

The key issues to consider in a jo in t venture are ownership, contro l , length of agreement, pric ing, technology transfer , local f i rm capabil i t i es and resources, and government intent ions. Potentia l problems include:
• • • • • •

confl i c t over asymmetric new investments mistrust over proprie tary knowledge performance ambiguity - how to spl i t the pie lack of parent f i rm support cultura l clashes i f , how, and when to terminate the relat ionship

Joint ventures have confl i c t i ng pressures to cooperate and compete:

Strategic imperat ive: the partners want to maximize the advantage gained for the jo in t venture, but they also want to maximize thei r own competi t i ve posit ion .

• •

The jo in t venture attempts to develop shared resources, but each f i rm wants to develop and protect i ts own proprie tary resources. The jo in t venture is contro l led through negotiat ions and coordinat ion processes, while each f i rm would l i ke to have hierarchica l control .

Foreign Direct Investment Foreign direct investment (FDI) is the direct ownership of faci l i t i e s in the target country. I t involves the transfer of resources including capi ta l , technology, and personnel. Direct fore ign investment may be made through the acquisi t i on of an exist ing enti ty or the establ ishment of a new enterpr ise. Direct ownership provides a high degree of contro l in the operat ions and the abi l i t y to better know the consumers and competi t i ve environment. However, i t requires a high level of resources and a high degree of commitment.

The Case of EuroDisney Dif ferent modes of entry may be more appropriate under dif fe rent circumstances, and the mode of entry is an important factor in the success of the project . Walt Disney Co. faced the chal lenge of bui ld ing a theme park in Europe. Disney's mode of entry in Japan had been l i censing. However, the f i rm chose direct investment in i ts European theme park, owning 49% with the remaining 51% held publ ic ly . Besides the mode of entry, another important element in Disney's decision was exact ly where in Europe to locate. There are many factors in the si te select ion decision, and a company careful l y must define and evaluate the cr i te r ia for choosing a locat ion. The problems with the EuroDisney project i l l us t ra te that even i f a company has been successful in the past, as Disney had been with i ts Cali fo rn ia , Flor ida, and Tokyo theme parks, future success is not guaranteed, especial l y when moving in to a dif fe rent country and culture. The appropriate adjustments for national dif fe rences always should be made.

Comparision of Market Entry Options The fo l lowing table provides a summary of the possible modes of fore ign market entry:

Comparison of Foreign Market Entry Modes Mode Conditions Favoring this Mode
Limited sales potent ia l in target country; l i t t l e product adaptat ion required Minimizes r isk and Distr ibut ion channels close investment. to plants Speed of entry High target country product ion costs Maximizes scale; uses exist ing faci l i t i e s . Liberal import polic ies High poli t i ca l r isk Import and investment barr iers Legal protect ion possible in target environment. Minimizes r isk and investment. Speed of entry

Advantages

Disadvanta ges

Trade barr iers & tar i f f s add to costs. Transport costs Limits access to local informat ion Company viewed as an outsider

Exporting

Lack of control over use of assets. Licensee may become competi tor . Knowledge spi l lovers License period is l imi ted

Licensing Low sales potent ia l in
target country. Large cultura l distance High ROI Licensee lacks abi l i t y to become a competi tor . Able to circumvent trade barr iers

Joint Import barr iers Ventures
Large cultura l distance Assets cannot be fai r l y priced High sales potent ia l Some poli t i ca l r isk

Overcomes ownership rest r i c t i ons and cultura l distance

Dif f i cu l t to manage Dilut ion of control

Combines resources of Greater r isk than 2 companies. export ing a & l i censing Potent ia l for learning Knowledge spi l lovers Viewed as insider Partner may become a competi tor .

Government restr ic t i ons on

required dist r ibut ion network. Numerous factors . Import barr iers Small cul tura l distance Greater knowledge of local market Can better apply special i zed ski l l s Minimizes knowledge spi l lover Can be viewed as an insider Higher r isk than other modes Requires more resources and commitment May be dif f i cu l t to manage the local resources. resources. brand name. What are various environm e n t a l factors that affect Interna tional Business? Ans: A company that chooses to implement an internat ional project is obl igated to conduct a thorough research in order to understand i f such project is viable and can be brought to l i f e in a certa in country. etc.fore ign ownership Local company can provide Less investment ski l l s . Direct Assets cannot be fai r l y Investme priced nt High sales potent ia l Low pol i t i ca l r isk Feedback 2.

i t has to be done object ive ly from the point of view of the host country in which business wil l be performed. First of al l i t is necessary to careful l y examine the f i rm ’ s competi t i ve posit ion and understand i f a project is able to bring prof i t in the global industry . for instance unpaved roads and no electr i ca l power can easi ly fa i l the project in the very beginning and thus knowing such condit ions is necessary.have to be taken in to considerat ion and invest igated. Adequate f inancia l resources. Workers who are knowledgeable about cultura l dif fe rences in a host country are more l i ke ly to perform . Legal and pol i t i ca l factors are essentia l for the implementat ion of the project abroad and each country has i ts own laws and regulat ions that could be of negative or posit i ve in f luence which great ly depends on the nature of business. people make things happen and i f they are in a dangerous environment i t is priory impossible to do business. successful global ventures in the past. i t has to study issues and chal lenges that are caused by macro economical and other environmental factors. Economic condit ion of the host county is a core issue in deciding where and when project wil l be carr ied out and i f i t is feasib le at al l . future success of business in a new economy. Thus the home company can ensure the real izat ion of the project in specif ied terms with regards to projected prof i t s and spending funds. There are also factors that are direct ly connected to specif i c projects and si tuat ions and that in f luence the outcome of the venture and have to be considered. Infrast ructure and geography are among other factors that wil l affect the project or not al low i ts execution in case a host county has severe weather condit ions or undeveloped inf rast ructure. In case when a company is ready to start internat ional project in terms of i ts internal si tuat ion. or help i f used eff ic ient l y . Such environmental issues as GDP. r isk levels that a company is able to undertake and growing in ternat ional demand are those few questions that need to posed before a f i rm can make any project ions as to doing business abroad. While analyzing foreign environment companies have to pay close attent ion to various factors that wil l effect . Securi ty of the country in which project wil l be developed is essentia l as well . inf la t i on f luctuat ions and populat ion growth have to be considered in order to comprehend condit ions in which business wil l operate.

companies hire professionals already experienced in such ventures with foreign education who speak two or more languages. Studying i ts economical condit ion. Those intermediar ies who are famil ia r with host country ’ s tradi t i ons and have social connections are great helpers in establ ish ing a good image of the company abroad and in avoiding mistakes in a sett ing up period.successful ly as tradi t i ons and hol idays can play a huge role in certa in marketing campaigns and serve for the good image of the company. Often. In case when al l of those factors are studied and considered advantageous for a new enterpr ise. major role in deciding whether or not the project wil l be successful is comprehending macro environment of a new country. securi ty levels and inf rast ructure system is a core competence of a company who wants to be more successful that i ts competi tors . Select ing and tra in ing employees for the internat ional project is very important for the future success of the company. Thus businesses must attent ive ly analyze what changes have to be made in the business plan and what people are best sui t for i ts implementat ion. Consequently f i rms need to inform and tra in employees on how to cope with cultura l diversi t i es and benefi t from them to better manage in the new environment. Feedback . Working in a foreign country requires a great deal of preparat ion and assessment of al l possible dif fe rences that the business is about to encounter. As was already said. Culture shock and coping with i t are issues that have to be addressed to potent ia l workers. i t is important to bear in mind that cultura l di f fe rences can make al l effor ts void.

Developed countr ies also seek to bring in more FDI and use various pol ic ies and incent ives to att ract overseas investors. an estate ( law) . Give ten reasons why FDI is beneficial to developing Economy? Ans: Foreign direct investment (FDI) was founded by Aziz Mahdi and is a measure of fore ign ownership of productive assets. a group of related indiv iduals . Foreign direct investment (FDI) pol ic ies play a major role in the economic growth of developing countr ies around the world. trust or other societa l organisat ion. a government body. Increasing fore ign investment can be used as one measure of growing economic global izat ion. or any combination of the above.3. A foreign direct investor may be classified in any sector of the economy and could be any one of the fo l lowing:         an indiv idual . such as factor ies. Attract ing FDI inf lows with conductive pol ic ies has therefore become a key batt leground in the emerging markets. part icu lar l y for capita l - . mines and land. a publ ic company or private company. an incorporated or unincorporated enti ty . a group of related enterpr ises.

distr i bu t ion and transmission. the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. and address the various problems that continue to chal lenge the country.in a lo t of ways . This money has al lowed India to focus on the areas that may have needed economic attent ion. The Indian national government also provided permission to FDIs to provide up to 100% of the f inancing required for the construct ion of bridges and tunnels. FDI is al lowed in f inancia l services.5m.500 crores. nuclear. coal & l ign i te or mining industr ies . although there is condit ion that st ipula tes that these banks . rai lway. with opportuni t i es for fore ign investors. and have the potent ia l to reap prof i t s from economical ly viable businesses. FDI in India has . and in jo in t ventures. Current ly .intensive industr ies and advanced technology. FDI investments are permit ted through f inancia l col laborat ions. A number of projects have been announced in areas such as electr i c i t y generat ion. The prospect of new growth opportuni t i es and outsized prof i t s encourages large capita l inf lows across a range of industry and opportuni ty types. by way of capita l markets through Euro issues. as well as the development of roads and highways. but with a l imi t on foreign equity of INR 1. FDI is not permit ted in the arms. growth and development. through private equity or preferent ia l al lo tments. approximately $352. The primary aim of these pol ic ies is to create a fr iendly business environment where foreign investors feel comfortable with the legal and f inancia l framework of the country. IN INDIA (FDI) in India has played an important role in the development of the Indian economy. In 1998 and 1999. Foreign investors can buy up to 40% of the equity in private banks. India has continual ly sought to att ract FDI from the world ’ s major investors . including the growing credi t card business.enabled India to achieve a certa in degree of f inancia l stabi l i t y . These services include the non-banking f inancia l services sector.

lag so far behind China in FDI amounts? Although the Chinese approval process is complex. big growth compared to previous years.3 bi l l i on in FDI. All other proposals. By 2004. They are al lowed to hold up to 100 percent equity in civ i l aviat ion sector in which otherwise foreign equity only up to 40 per cent is permit ted. Up to 45% of the shares of companies in the global mobile personal communication by satel l i t e services (GMPCSS) sector can also be purchased. . but less than 10% of the $60.This is one of the major sectors. India actual ly receives less than half the FDI that the federal government approves. in which foreign direct investment is not permit ted. and th is often leads to projects gett ing bogged down in red tape and bureaucracy. which is enormously benefi ted from fore ign direct investment. with a stable democracy and a smoother approval process. A remarkable in f low of FDI in various industr ia l units in India has boosted the economic l i f e of country. The NRIs and OCBs are al lowed to invest in housing and real estate development sector. BENEFITS OF FDI: Economic growth. India received $5. which do not fu l f i l any or. Why does India.6 bi l l i on that f lowed in to China.must be mult i la te ra l f inancia l organizat ions. excluding those fal l i ng under Government approval . Federal democracy is perversely an impediment for India. INVESTMENT BY NON RESIDENT INDIANS & OVERSEAS CORPORATE BODIES For al l sectors. Local authori t i es are not part of the approvals process and have thei r own r ights. i t includes both national and regional approval in the same process. NRIs (which also inc ludes PIOs) and OCBs (an overseas corporate body means a company or other enti ty owned direct ly or indi rect l y to the extent of at least 60% by NRIs) are el ig ib le to bring investment through the automatic route of RBI. al l of the cri te r ia for automatic approval are considered by the Government through the FIPB (Foreign Investment Promotion Board).

At t imes i t has been observed that there is considerable instabi l i t y in a part icu lar geographical region. Foreign direct investment. This has often caused many companies to approach fore ign direct investment with a certa in amount of caution. is also disadvantageous for the ones who are making the investmentthemselves.FDI apparently helps in the outsourcing of knowledge from India especial l y in the Information Technology sector. Products of superior qual i ty are manufactured by various industr ies in India due to greater amount of FDI inf lows in the country. This causes a lot of inconvenience to .Foreign Direct Investments have opened a wide spectrum of opportuni t i es in the trading of goods and services in India both in terms of import and export product ion. Technology diffusion and knowledge transfer.FDI has also ensured a number of employment opportuni t i es by aiding the sett ing up of industr ia l units in various corners of India. Linkages and spillover to domestic firmsnow occupying a posit ion in the Indian market col laborat ion concerns.Trade. The maximum amount of foreign f i rms through these jo in t ventures is Various fore ign f i rms are through Joint Ventures and the prof i t s gained by the spent on the Indian market. Yet another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on i ts ownership to an overseas company. Foreign direct investment may entai l high travel and communications expenses. at t imes. Employment and skill levels. I t helps in developing the know-how process in India in terms of enhancing the technological advancement in India. DISADVANTAGES OF FDI: At t imes i t has been observed that certa in foreign pol ic ies are adopted that are not appreciated by the workers of the recip ient country. The dif fe rences of language and cul ture that exist between the country of the investor and the host country could also pose problems in case of fore ign direct investment.

The crucia l dif fe rence wil l be that the committee wil l be t ime bound and wil l have specif i c parameters to weigh the r isks. has said there is an urgent need to attract and sustain fore ign direct investment in the text i l es sector i f India is to achieve the goals of employment generat ion and technology upgradation. The Texti les Minister . While approving 17 fore ign direct investment proposals worth Rs 1. wil l refer foreign investments in sensit i ve sectors to a committee of secretar ies. Mr Dayanidhi Maran. The FIPB.159 crore at i ts October 30 meet. The Foreign Investment Promotion Board has rejected a proposal by the Jaipur IPL Cricket Pvt to induct 100% foreign equity by issuing shares for a non-cash considerat ion. besides atta in ing four per cent share in the global trade in text i l es and cloth ing. Feedback: . The panel wil l have representat ives from various government departments. CURRENT EVENTS RELATED TO FDI: IAF Vice Chief Air Marshal P K Barbora said that private industry ' s part ic ipat ion be increased in the defence sector and India should be "bold enough" to al low more FDI in the area.the investor .

4. China and Vietnam . Discuss the FDI climat e betw e e n India. China and Vietna m . Ans: FDI Climate between India.

Bridges and Ports • Sick Industr ia l Units • Industr ies Requir ing Compulsory Licensing • Industr ies Reserved for Small Scale Sector • Private banking (49%) • Insurance (26%) • Telecommunication (49% / 74 %) • Retai l (51% in single brand) • Arms and ammunit ion • Atomic Energy • Coal and l ign i te • Rail Transport • Mining of metals l i ke i ron. • • • 1) Out FDI not at al l al lowed war d FDI: . via Euro issues • Through private placements or preferent ia l al lo tments Sectors in which FDI or 100% equity is Foreign Direct Investment is any form of investment that earns interest in enterpr ises which funct ion outside of the domestic terr i t o ry of the investor Types: 100% is not al lowed al lowed Hotel & tour ism Trading companies Power generat ion/ transmission/d is t r i b ution • Drugs & Pharma • Shipping • Deep Sea Fishing • Oil Explorat ion • Housing and Real Estate Development • Highways.PARAMETER FDI IN 2008-09 How to enter • India 23885 $ Through f inancia l al l i ance • Through jo in t schemes and technical al l i ance • Through capita l markets. manganese. sul fur . chrome. gypsum.

France. the in f low of FDI into India is l i ke ly to fur ther accelerate. investment of fore ign capita l occurs in local resources. South Korea. innovat ive and technological l y advanced products being manufactured in India and low cost and effect ive solut ions. The growth rate of foreign direct investment (FDI) in to China accelerated to 23% in 2008 to $92. 3) Vertical FDI: I t takes place when a mult inat ional corporat ion owns some shares of a fore ign enterpr ise. which suppl ies input for i t or uses the output produced by the MNC.31 mil l i on wil l be brought in by Essel Group-promoted DTH service provider. China also received the most votes in a 2007 .532 bi l l i on were received during Apri l July 2009. India is target ing annual foreign direct investments worth $50 bi l l i on by 2012. FDI equity inf lows amounting to US$ 10. This form of FDI is subject to tax incent ives as well as disincent ives of various forms 2) Inward FD I : Here. The largest FDI of US$ 153. Western Samoa.bound FDI is backed by the government against al l types of associated r isks. Among those projects approved were FDI appl icat ions for steel maker ArcelorMit ta l and i ron pipe maker Electrosteel Castings. I t would double the inf lows by 2017. Japan. the United States. largest FDI recip ient . the Cayman Is lands.56 mil l i on . and the Netherlands. the United Kingdom. With the government planning more l ibera l i sa t i on measures across a broad range of sectors and continued investor interest . Singapore. according to Minist ry of Commerce stat is t i cs . According to the United Nations Conference on Trade and sixth Development (UNCTAD). II]CLIMATE IN CHINA: The top sources of FDI in China in 2008 were: Hong Kong.An outward. mainland China was the world ’ s Canada. I] CLIMATE IN INDIA : Several factors being att r ibuted to the revival in foreign direct investments (FDI) in the country include l ibera l investment pol ic ies and reforms.3 bi l l i on . 4) Horizontal FDI : I t happens when a mult inat ional company carr ies out a simi lar business operat ion in dif fe rent nations. after the United States. the Bri t i sh Virgin Is lands. The government has approved 17 (FDI) proposals amounting to US$ 250. and Taiwan. in 2007.

authorized monopolies or from a legacy of state investment. mandatory foreign investment approval process. First . Russia. investors continued to face a range of potent ia l problems that could expose them to r isks in the future. overal l predictabi l i t y for foreign investors has suffered because investors are less certa in that China wil l approve proposed investment projects. in sectors where China is seeking to cult i va te “ n a t i ona l champions. they present several concerns to foreign investors. Final ly . Key terms and standards in the new regulat ions are undefined. weak IPR protect ion. the new rules. ” in sectors that have benefi ted histor ica l l y from state. codify standards and pract ices that China was already employing in i ts exist ing. corrupt ion.UNCTADpol l of att ract i ve investment destinat ions. While FDI in China shot higher. industr ia l pol ic ies that protect and promote local f i rms. Some areas where investment is restr i c ted are news agencies radio and TV . fo l lowed by India. They are also often appl ied in a manner that is not transparent. China continued to lay out a legal and regulatory framework grant ing i t the authori ty to restr i c t foreign investment that i t deems not to be in China ’ s national interest . Although i t remains to be seen how many of these rules wil l be applied. and an unrel iab le legal system. and Vietnam. At the moment. Problems foreign investors face in China include lack of transparency. inconsistent ly enforced laws and regulat ions. In many ways. in sectors deemed key to social stabi l i t y . they appear to give regulators signi f i cant discret ion to shield inef f i c i en t or monopolis t i c enterpr ises from fore ign competi t i on . China appears to be using the rules to restr i c t foreign investments that are: • • intended to prof i t from currency speculat ion. in sectors where the government is try ing to tamp down aggregate capi ta l in f lows and in f la t i on . In 2008. the United States. and nominal ly “ f o r e ign ” investment that is actual ly Chinese capi ta l • • • • that has been exported and re. Brazi l . l i ke foodstuf fs and heavi ly pol lu t ing industr ies .imported to take advantage of preferent ia l treatment accorded to foreigners.

Western. and Shandong provinces. and welcome fore ign f i rms. construct ion materia ls . processing of green and “ s pec ia l ” medicine At the end of 2008. energy. and Northeastern China.transmission networks. and modern agricul tu re and services. Jiangsu. communications. including high technology research and development. Foreign investment in most service sectors lags manufactur ing. publ icat ion and importat ion of press and audio. management and funding support for start .ups across a varie ty of industr ies . advanced manufactur ing. energy conservat ion. machinery. business tax cuts. pharmaceuticals . including Guangdong. in response to the weakening economy. many focused on commercial iz ing research developed in Chinese universi t i es . compulsory basic education. Fujian. China is committed to gradual ly phasing out barr iers in many service industr ies . China announced a st imulus package that includes f isca l st imulus. and Shanghai.visual products. environmental protect ion. including transportat ion. Investmen t Guidelines While ins is t i ng i t remains open to inward investment. f i lm product ion. and support for prior i t y sectors that may present foreign investors with new opportuni t i es . metal lurgy. mining and processing of certa in minerals. and electronics. energy eff ic iency. mainly due to government. medical equipment. China offers preferences for investments in sectors i t seeks to develop. China would also seek to spread the benefi ts of foreign investment beyond China ’ s more wealthy coastal areas by encouraging mult inat ionals to establ ish regional headquarters and operat ions in Central . Final ly .imposed restr i c t i ons.added sectors. The parks provide in f rast ructure. China ’ s leadership has also stated that China is active ly seeking to target investment in higher value. China boasts numerous national science parks. Distribution of Foreign Investmen t The vast majori ty of fore ign investment is concentrated in China's more prosperous coastal areas. chemicals. rather than basic manufactur ing. but progress has been slow Dispute Settleme nt tea using Chinese tradi t i onal craf ts and preparat ion of Chinese tradi t i onal .

Foreign f i rms report inconsistent resul ts with al l of China ’ s dispute sett lement mechanisms. none of which are independent of the government. Corrupt ion may also inf luence local court decisions and local off ic ia l s may disregard the judgments of domestic courts. so as to keep the capita l f low coming. the FDI in Vietnam surged to a level of $64 bi l l i on in 2008. there have been anecdotal reports of local governments singl ing out fore ign investors. The government often in tervenes in disputes. Stat is t i ca l l y speaking. thus becoming the th i rd most popular investment dest inat ion after China and India. The major factors in the country which have led. mult inat ionals park huge investments in the country can be tabulated as fo l lows    Availabi l i t y of a young. very low as compared to other locales On account o the above stated reasons. Well. China ’ s legal system rarely enforces foreign court judgments As the economy has slowed. cl ients .3 bi l l i on in 2005 to $ 50 mil l i on in 2008. This year though the FDI f lows have taken a drubbing because of the volat i l e economic prevalence and thus the reluctance of the fore ign majors to part with the cash. but the experts feel that Vietnam ’ s ident i t y as an investor ’ s heaven is here to stay.pol i t i ca l si tuat ion Vietnam ’ s professional ized investment promotion act iv i t i es . l i t e ra te and cheap workforce. pol icy formulat ion and implementat ion Cost of land. A stable socio. cost of consumables.connected local business people are often in a better posit ion to win court cases than are fore ign investors and i t is possible that they may use thei r connections to avoid prosecut ion for taking i l l ega l act ions against thei r former foreign partners. The investments were primari ly in sectors l i ke   Construct ion High-tech areas . the FDI pledges in Vietnam have gal loped from a meager $ 11. and partners of Chinese businesses to repay debts incurred by local businesses III] CLIMATE IN VIETNAM Vietnam has seen a vert ica l surge in i ts FDI inf lows in the recent years. The Vietnamese government is also try ing i ts best to mould the exist ing pol ic ies and laws.

the expected inf lows in the country in the form of FDI pledges are reported to plunge drast ica l l y on account of the skeptic ism. These trends could fur ther intensi fy the dol lar shortage faced by the country. which wil l restore investor confidence in Vietnam ’ s capabi l i t y to absorb the incoming funds. Apart from the slowdown. due to the ongoing slowdown. In 2009. Thus the need of the hour for the government is to plan and implement pol ic ies and in f rast ructure development. Experts have forecasted a f igure of $ 20-25 bi l l i on for this f inancia l year in terms of the FDI pledges. which is a fa l l of above 60%. The various factors that play a role here are    inadequate inf rast ructure Management problems Shortage of adequately tra ined human resource This lack of absorpt ion capabil i t y has become a huge spoi lsport as i t is bel ieved that in 2006.  Production of electronics Telecommunications thus turning Vietnam into a manufactur ing hub in Asia. 60 % remained unuti l i zed. out of the tota l investment funds inf low. on account of hoarding by companies expecting the dong to depreciate. the various reasons that can be att r ibu ted to the same are doubts of Vietnam ’ s capabi l i t y to digest such huge investment sums. on the part of the global investors. Feedback .

Theory of Mercantilism 1) The f i rs t theory of internat ional trade emerged in England in the mid-16th century.5. to export more than i t imported. Discuss various interna tion al trade theories. a country could earn gold and si lver by export ing goods. At that t ime. Referred to as mercanti l i sm. gold and si lver were the currency of trade between countr ies. By . 2) The main tenet of mercanti l i sm was that i t was in a country ’ s hand to maintain a trade surplus. i ts princip le assert ion was gold and si lver were the mainstays of national wealth and essentia l to vigorous commerce. Ans: 1.

According to Hume. increase i ts national wealth and prest ige. consequently. the mercanti l i s t doctr ine advocated government intervent ion to achieve a surplus in the balance of trade. Rather. they recommended pol ic ies to maximize exports and minimize imports. 7) The f law with mercanti l i sm was that i t viewed trade as a zero game. . To achieve this . This change in relat i ve prices between France and England would encourage the France to buy fewer English goods (because they were becoming more expensive) and the English to buy more Franch goods.doing so.sum game is one in which a gain by one country resul ts in a loss by another. In France. The mercanti l i s t s saw no vir tue in a large volume of trade per se. (A zero.trade surplus with France ( i t exported more than i t imported) the resul t i ng inf low of gold and si lver would swell the domestic money supply and generated in f la t i on in England. Adam Smith attacked the mercanti l i s t assumption that trade is a zerosum game. i f England had a balance-of. France ’ s money supply would contract . while exports were subsidized. 5) The classical economist David Hume pointed out an inherent inconsistency in the mercanti l i s t doctr ine in 1752. ) 2. The resul t would be deter iora t ion in the English balance of trade and an improvement in France ’ s trade balance. 4) Consistent with th is bel ie f . and i ts prices would fa l l . a country would accumulate gold and si lver and. where we must ever observe th is rule: to sel l more to strangers yearly than we consume of thei rs in value. unti l the English surplus was el iminated. The ordinary means therefore to increase our wealth and treasure is by foreign tread. imports were l imi ted by tar i f f s and quotas. Absolute Advantage Theory 1) In his 1776 landmark book The Wealth of Nations. in the long run no country could sustain a surplus OD the balance of trade and so accumulate gold and si lver as the mercanti l i s t s had envisaged. 3) As the English mercanti l i s t wri ter Thomas Mun put i t in 1630. 6) Hence. however the outf low of gold and si lver would have the opposite effect . according to Hume.

3) In his t ime. 7) In Smith ’ s t ime. countr ies should special i ze in the product ion of goods for which they have an absolute advantage and then trade these for goods produced by other countr ies. Thus. while the French had an absolute advantage in the product ion of wine. the English. Thus. were the world ’ s most eff ic ient text i l e manufacturers. 6) According to Smith. and capita l . The product ion of any good (output) requires resources ( inputs) such as land. is that you should never produce goods at home that you can buy at a lower cost from other countr ies. therefore. 11) Assume fur ther that 200 units of resources are avai lable in each country. the French had the world ’ s wine industry . most eff i c ien t 4) Due to the combination of favorable cl imate. Ghana could produce 20 tons of cocoa and no r ice. 10) Consider the effects of trade between Ghana and South Korea. Smith ’ s basic argument. a country has an absolute advantage in the product ion of a product when i t is more eff ic ient than any other country in producing it. 8) Similar ly . both countr ies benefi t by engaging in trade. by vir tue of thei r superior manufactur ing processes. France could get al l the text i l es i t needed by sel l i ng wine to England and buying text i l es in exchange. 9) Smith demonstrates that by special i z ing in the product ion of goods in which each has an absolute advantage. th is suggested that the English should special i ze in the product ion of text i l es while the French should special i ze in the production of wine. 10 tons of r ice and . Imagine that in Ghana i t takes 10 resources to produce one ton of cocoa and 20 resources to produce one ton of r ice. England could get al l the wine i t needed by sel l i ng i ts text i l es to France and buying wine in exchange. good soi ls . Assume that Ghana and South Korea both have the same amount of resources and that these resources can be used to produce either r ice or cocoa. 5) The English had an absolute advantage in the product ion of text i l es .2) Smith argued that countr ies di f fe r in thei r abi l i t y to produce goods eff i c ien t l y . labor. and accumulated expert ise.

(More resources are needed to produce a ton of cocoa in South Korea than in Ghana. 20 tons of r ice and no cocoa. which is South Korea ’ s PPF.no cocoa. 3. 12) The dif fe rent combinations that Ghana could produce are represented by the l ine GG’ in Figure 2. Ghana has an absolute advantage in the product ion of cocoa. 2) Smith ’ s theory of absolute advantage suggests that such a country might derive no benefi ts from in ternat ional trade. South Korea has an absolute advantage in the product ion of r ice. Ricardo showed that th is was not the case. i t makes sense for a country to special i ze in the product ion of those goods that i t produces most eff ic ient l y and to buy the goods that i t produces less eff ic ient l y from other countr ies. The dif fe rent combinations avai lable to South Korea are represented by the l ine KK ’ in Figure 2. or some combination between these two extremes. 4) According to Ricardo ’ s theory of comparative advantage. Ricardian Model (Compara tive Advantage Theory) 1) David Ricardo took Adam Smith ’ s theory one step fur ther by explor ing what might happen when one country has an absolute advantage in the product ion of al l goods. even i f this means . 14) Clearly .1. 13) Thus. imagine that in South Korea i t takes 40 resources to produce one ton of cocoa and 10 resources to produce one ton of r ice. or some combination of r ice and cocoa between these two extremes.) By the same token. Similar ly . This is referred to as Ghana ’ s production possibi l i t y front ie r (PPF). 3) In his 1817 book Princip les of Poli t i ca l Economy. South Korea could produce 5 tons of cocoa and no r ice.1.

10 tons of r ice and no cocoa. each country uses half of i ts resources to produce r ice and 7) half to produce cocoa. Assume that Ghana is more eff i c ien t in the product ion of both cocoa and r ice. In South Korea i t takes 40 resources to produce one ton of cocoa and 20 resources to produce one ton of r ice.5 tons (7. without “ t r ade. Without trade the combined production of cocoa wil l be 12. or any combination in between on i ts PPF (the l ing GG’ in f igure 2. In Ghana i t takes 10 resources to produce one ton one ton of cocoa and. i t has a comparative advantage only in the product ion of cocoa: Ghana can produce 4 t imes as much cocoa as South Korea.2).5 in South Korea). Thus.5 tons of cocoa and 5 tons of r ice (point B in Figure2. the two countr ies can increase thei r combined production of r ice and cocoa. Ghana is comparative ly more eff ic ient at producing cocoa than i t is at producing r ice. Ghana can produce 20 tons of cocoa and no r ice. Thus South Korea can produce 5 tons of cocoa and no r ice. and the combined production of r ice wil l also be 12.5 tons of r ice (point A in 8) Figure 2.2). that is Ghana has an absolute advantage in the product ion of both products.5 tons (10 tons in Ghana and 2. while South Korea wil l produce 2.2). Without trade each country must consume what i t produces. 6) Again assume that without trade. 5) While this may seem counterin tu i t i ve .5 t imes as much r ice. Thus. and 7. . the logic can be explained with a simple example.5tons in Ghana and 5 tons in South Korea). 15 tons of r ice and no cocoa.2). 13 1/3 resources to produce one ton of r ice. 9) In l ight of Ghana ’ s absolute advantage in the production of both goods. but only 1. Ghana wil l produce 10 tons of cocoa. and consumers in both nations can consume more of both goods. given i ts 200 units of resources. By engaging in trade.buying goods from other countr ies that i t could produce more eff i c ien t l y i tse l f . why should i t trade with South Korea? Although Ghana has an absolute advantage in the product ion of both cocoa and r ice. or any combination on i ts PPF (the l ink KK ’ in f igure 2.

which is more than i t had before special i za t ion . b) Meanwhile. South Korea st i l l ends up with 6 tons off i ce . e) Thus. Similar ly .75 tons i t now produces domestical l y .10) The Gains from Trade a) Imagine that Ghana exploi ts i ts comparative advantage in the product ion of cocoa to increase i ts output from 10 tons to 15 tons. with both countr ies choosing to exchange 4 tons of thei r export for 4 tons of the import . the 4 tons of cocoa i t receives in exchange is 1.75 tons of r ice (point C in f ig. when added to the 3. but also both countr ies can now benefi t from trade.5 tons of r ice.75 tons in Ghana and 10 tons in South Korea).2). This uses up 150 units of resources. Thus.ure 1. producing l0 tons. c) Before special i za t ion . the combined output was 12.5 tons of cocoa and 12. which is 1 ton more than i t had before trade. leaving the remaining50 units of resources to use in producing 3. d) Not only is output higher.75 tons of r ice. f) In addit ion.75 tons of r ice (3. I f Ghana and South Korea swap cocoa and r ice on a one-toone basis. both countr ies are able to consume more cocoa and r ice than they could before special i za t i on and trade (see Table 2. leaves i t with a tota l of 7. Now i t is 15 tons of cocoa and 13. which is 25 of a ton more than i t had before special i za t ion . i t is st i l l lef t with 11 tons of r ice.2. The combined output of both cocoa and r ice has now increased. South Korea special i zes in the production of r ice. The 4 tons of r ice i t gets from South Korea in exchange for i ts 4 tons of cocoa.2). i f Ghana exchanges 4 tons of cocoa with South Korea for 4 tons of r ice. after swapping 4 tons of r ice with Ghana.5 tons more than i t produced before trade. consumption of cocoa and . The source of the increase in product ion is summarized in Table 2.

Ohlin theory attempts to explain the pattern of internat ional trade that we observe in the world economy. rather than di f fe rences in product iv i t y . the Heckscher. The Heckscher. the theory of comparative advantage suggests that trade is a posit i ve. This occurs even in countr ies that lack an absolute advantage in the product ion of any good. labor.Ohlin theory argues that the pattern of in ternat ional trade is determined by dif fe rences in factor endowments. Ricardo ’ s theory suggests that consumers in al l nations can consume more i f there are no restr i c t i ons on trade. and capita l Nations have varying factor endowments. Thus. Unlike Ricardo ’ s theory. The more abundant a factor . to an even greater degree than the theory of absolute advantage. By factor endowments they meant the extent to which a country is endowed with such resources as land.r ice can increase in both countr ies as a resul t of special i za t ion and trade. th is theory provides a strong rat ionale for encouraging free trade.Ohlin theory predicts that countr ies wil l export those goods that make intensive use of factors that are local l y abundant. 13) In other words.Ohlin Theory Swedish economists Eli Heckscher ( in 1919) and Bert i l Ohlin ( in 1933) argued that comparative advantage arises from di f fe rences in national factor endowments. however. 11) The basic message of the theory of comparative advantage is that potent ia l ’ 12) world product ion is greater with unrestr i c ted free trade than i t is with restr i c ted trade. while import ing goods that make in tensive use of factors that are local l y scarce. Heckscher. . the lower i ts cost. 4. and di f fe rent factor endowments explain dif fe rences in factor costs. the Heckscher.sum game in which al l countr ies that part ic ipate real ize economic gains. So powerful is Ricardo ’ s theory that i t remains a major inte l l ec tual weapon for those who argue for free trade.Ohlin theory argues that free trade is benefic ia l . 14) As such. Like Ricardo ’ s theory the Heckscher.

intensive goods. China excels in the export of goods produced in labor. ‘ Un i t ed States has long been a substant ia l exporter of agricul tu ra l goods. The United States. however. The Leontief Paradox Using the Heckscher Ohlin theory. ref lect i ng in part i ts unusual abundance of arable land. Note that i t is rela t i ve .S.in tensive goods and an importer of labor. ‘ h e found .The Heckscher. while import ing heavy manufactur ing products that use large amounts of capita l . As per Heckscher.in tensive manufactur ing industr ies .S. No one is quite sure why we observe the Leontie f paradox.in tensive goods and an importer of labor. endowments that are important . One possible explanat ion is that the United States has a special advantage in producing new products or goods made with innovat ive technologies.Ohlin theory also has commonsense appeal.intensive goods. a country may have larger absolute amounts of land and labor than another country. This ref lec ts China ’ s rela t i ve abundance of low-cost labor. Wassily Leontie f postulated that since the United States was rela t i ve ly abundant in capita l compared to other nations. To his surpr ise. however. the uni ted States would be an exporter of capita l . ‘ h e found that U. the United States may be export ing goods that heavi ly use ski l l ed labor and innovat ive entrepreneurship. To his surpr ise. Since th is resul t was at variance with the predict ions of the theory. has been a primary importer of these goods.cost labor. not absolute. many of these tests have raised quest ions about the val id i t y of the HeckscherOhlin theory. Thus. exports were less capita l intensive than U. which lacks abundant low. such as computer software. such as text i l es and footwear. In contrast . For example. i t has become known as the Leontie f paradox. imports. the United States would be an exporter of capita l . but be rela t i ve ly abundant in one of them. What is Leontief Paradox? Wassily Leontie f (winner of the Nobel Prize in economics in 1973).Ohlin theory Leontie f postulated that since the uni ted States was relat i ve ly abundant in capi ta l compared to other nat ions. Such products may be less capita l in tensive than products whose technology has had t ime to mature and become sui table for mass product ion.

S market gave U. i t has become known as the Leontie f paradox. I t could be produced abroad at some low. f i rms a strong incent ive to develop new consumer products. Vernon ’ s theory was based on the observat ion that for most of the 20th century a very large proport ion of the world ’ s new products had been developed by U. the high cost of U. Such products may be less capi ta l in tensive than products whose technology has had t ime to mature and become sui table for mass product ion. No one is quite sure why we observe the Leontie f paradox. This may not to be the case. Since th is resul t was at variance with the predict ions of the theory.cycle theory in the mid-1960s. exports were less capita l in tensive than U.Ohlin theory is that technologies are . photocopiers. the same across countr ies. market. imports.in .S. Vernon argued that the wealth and size of the U. United States exports commercial aircra f t and imports automobiles not because i ts factor endowments are especial l y sui ted to aircraf t manufacture and not sui ted to automobile manufacture. United States may be export ing goods that heavi ly use ski l l ed labor and innovat ive entrepreneurship.S. However.S. 5. labor gave U. instant cameras. f i rms an incent iveto develop cost.massproduced automobiles. while import ing heavy manufactur ing products that use large amounts of capita l . market (e. i t does not fo l l ow that the product must be produced in the United States.S. f i rms and sold f i r s t in the U. To explain th is . and semiconductor chips) . f i rm and f i r s t sold in the U. .that U.Just because a new product is developed by a U. such as computer software. personal computers. Thus. Inaddi t ion .S.S. One possible explanat ion is that the United States has a specia l advantage in producing new products or goods made with innovat ive technologies. Vernon argued that most new products were in i t i a l l y products were in i t i a l l y produced. Example : As per the theory. which in turn.S. drives in ternat ional t rade patterns . te lev is ions.S. A key assumption in the Heckscher.saving process innovat ions. and dif fe rences in technology may lead to di f fe rences in product iv i t y .cost locat ion and then exported back into the United States. The Product Life Cycle Theory Raymond Vernon in i t i a l l y proposed the product l i f e .S. but because the United States is more eff i c i en t at producing aircra f t than automobiles.g.

. As th is occurs. Over t ime. U. I f cost pressures become in tense. Consequently .f i rms might set up product ion faci l i t i e s in those advanced countr ies where demand is growing. but i t does necessi ta te some exports f rom the United States to those countr ies. I ta ly . demand for the new product starts to grow in other advanced countr ies (e. The l imi ted in i t i a l demand in other advanced countr ies does not make i t worthwhi le for f i rms in those countr ies to star t producing the new product. Spain) might now be able to export to the United States. the product becomes more standardized. Great Bri ta in . Producers based in advanced countr ies where labor costs are lower than in the United States (e. i t becomes worthwhile for fore ign producers to begin producing for thei r home markets.America.g. Thailand) begin to acquire a product ion advantage over advanced countr ies . the locus of global product ion in i t i a l l y switches from the United States to other advanced nat ions and then from those nat ions to developing countr ies. Consequently . The cycle by which the United States lost i ts advantage to other advanced countr ies might be repeated once more. In addit ion .g. As i t does. the demand for most new products tends to be based on nonprice factors. Germany. . and Japan). and price becomes the main competi t i ve weapon. demand is star t i ng to grow rapid ly in the United States. France.g. the process might. . product ion within other advanced countr ies begins to l imi t the potent ia l for exports from the United States. f i rms can charge relat i ve ly high prices for new products. the pioneering f i rms bel ieved i t was better to keep product ion faci l i t i e s close the market and to the f i rm ’ s center of decis ion making. Also. demand in other advance countr ies is l imi ted to highincome groups. Thus. . Apparently . As the market in the United States and other advanced nations matures. Vernon went on to argue that early in the l i f e cycle of a typica l new product. not stop there. as developing countr ies (e. which obviate the need to look for low cost product ion si tes in other countr ies . given the uncerta in ty and r isks inherent in in t roducing new products.S. cost considerat ions star t to play a greater role in the competi t i ve process.

Figure 2. other advanced countr ies. New Trade theor is ts chal lenge the assumption of diminish ing returns to special i za t i on used in in ternat ional t rade theory.cost fore ign locat ions. 6.5 shows the growth of product ion and consumption over t ime in the United States. I t argues that increasing returns to special i za t ion might exist in some industr ies .The consequence of these trends for the pattern of world trade is that is over t ime the United States switches. New Trade Theory New Trade Theory (NTT) is the economic cr i t i que of internat ional free trade f rom the perspect ive of increasing returns to scale and the network effect 1. New t rade theory also argues that i f the output required to real ize signi f i cant scale economies represents a substant ia l proport ion of . 2. f rom being an exporter of the Product to an importer of product as product ion becomes concentrated in lower. and developing countr ies.

war Japan offers for benefic ia l protect ion ism is unusual. which is current ly dominated by just two f i rms. Japan is ci ted as evidence of the benefi ts of " in te l l i gent " protect ion ism.by. regressions on the outcomes of such " industr ia l pol ic ies" ( inc lud ing the fa i lu res) have been less conclusive Feedback . The story of and predicted the industr ia l possibi l i t i e s of national special i za t i on. highly planning and jud ic ious tar i f f s technical . Economies of scale in th is industry come from the abi l i t y to spread f ixed costs over a large output. Impl icat ion : • "NTD" was the r igor of the mathematical economics used to model the increasing returns to scale. Boeing and Airbus.dependent concentrat ions sometimes leads to monopolis t i c competi t i on . Econometric evidence: • The econometric evidence for NTT was mixed. there is too l imi ted a dataset to produce a rel iab le test of the hypothesis which doesn' t require arbi t ra ry judgements from the researchers.industry observed in the path. and that the NTT argument is based on a select ive sample of histor i ca l cases. stat i s t i ca l judgements have been hard to make. but cr i t i c s of NTT have argued that the empir ica l support post. In many ways. industr ia l world. is a good example of th is theory. Although many examples ( l i ke Japanese cars) can be ci ted where a 'protected ' industry subsequently grew to world status. and again. and especial l y the use of the network effect to argue that the formation of important industr ies was path dependent in a way which industr ia l might contro l .scales required and the part icu la r nature of product ion in each 'monopol izable ' sector . • The model they developed was highly technical . Due to the t ime.tota l world demand for that product the world market may be able to support only a l imi ted number of f i rms based in a l imi ted number of countr ies producing that product Example: The commercial aerospace industry .

Competit ion from fore ign goods. with greater emphasis on competi t i veness.Need to strengthen competi t i veness among domestic SSI through modernisat ion and technology development.4. . . (India is committed to a bind tar i f f l ines at 40 per cent on f in ished goods and 2S per cent on intermediate goods.2000 (or ig ina l deadl ine set was 2003.Discriminat ion between domestic and lawful l y imported foreign goods Binding of tar i f f l ines.Create freer trade regime. . Need for Reservat ion Policy to move in tandem with OGL l i s t .Discuss the impact of WTO on India’s trade policy.6. machinery and equipment. phased reduct ion by 2005).Quanti ta t i ve restr i c t i ons of imports to be phased out by 1. but India has lost in the Disputes Sett lement Case).Actions of Government I Organisat ions that distor t normal . Ans: Agreemen t Provisions Impact Policy issue General Agreement on Trade'" Tari f f . . .This affects eff i cacy of Reservat ion Policy. .Discriminat ion between Member nations . (GATT) Prohibi ts : .

As import by other countr ies are subject to mandatory product standards. Most of Indian standards in conformity with Internat ional standards.Benefic ia l to both importers and exporters Indian companies export ing to countr ies using PSI companies to benefi t . To check arbi t ra ry ways of PSI companies in valuat ion of goods. Benefic ia l to small businesses. Barr iers to Trade (TBT) Countries to fo l low uniform procedures in respect of customs formal i t i es .shipment inspect ion (PSI) Agreement on Technical .Process and product ion methods can be used to discr iminate against Indian exports.Conformity with internat ional standards .Checks on misuse of mandatory products standards .Indian exporters to benefi t . . Delays.Agreement on valuat ion of Goods Agreement on Pre.Establ ishment of enquiry points Agreement on Sanitary and Phytosanitary Measure.SIS in conformity with Internat ional standards.Greater transparency . . discret ion and misuse of l i censing procedures to be cut. . . Internat ional standards to be adopted India bas amended the Customs Act in conformity with the Agreement. India does not use services of PSI companies. .BIS to serve as enquiry point . as they are usual ly at the receiv ing end of restr i c ted pract ices. (SPM) Agreement on import l i censing Same as above except that countr ies can deny import from certa in region/country on the ground of pest I disease Transparency and t ime bound . .Enquiry points help faci l i t a t i on .Bureau of Indian Standards (SIS) conforms to Agreement. .

) . advance l i censes etc.Review of direct tax benefi ts . .EXIM pol icy provides scheme for neutra l i sa t ion of incidence of indi rect taxes (e.Present schemes providing waiver of Income Tax on export earnings to be scrapped.g.Rules Applicable on Exports . Would affect price competi t i veness . . . .g.Allows export (to be rel ieved of indi rect taxes (e. Income Tax waiver on export earnings).Allows levy of duties on exports .Prohibi ts direct tax benefi ts (e.Neutral isa t ion of indi rect taxes good.g. Duty drawback. Excise Duty).

. Market Access Negotiat ions Binding of tar i f f l ines .Affects FOREX posi t ion. Will make Indian exports more expensive.Permits permissible subsidies.Dumping Measures (ADP) Allows countr ies to take act ion against undue import surge in jur ious to domestic industry during transi t i on period. duty enhancement beyond bound rates etc. Agreement on Safeguard Measures Agreement on Anti.Phasing out by 2003. . period extendable Allows counter ing Helpful provis ion unfair trade pract ices. export obl igat ion on investors.Dumping establ ished in Minist ry of Commerce & Industry.table in terms of reduct ion . Helpful provis ion EXIM Policy to be made WTO compatible . . Directorate of Anti. . Trade Related Prohibi ts Investment Measures countr ies from (TRIMS) imposing condit ions such as local i sa t i on .Increased competi t ion from fore ign goods. .Affects Government fore ign Investment Policy .Import ing countr ies can countervai l subsidies that are act ionable.Enhances competi t ion to domestic industry .Small businesses have to become more competi t i ve . Measures underway to terminate noti f i ed TRIMs such as Dividend Balancing India fo l lowed the WTOt ime. Measures can include Quanti ta t i ve Restr ic t i ons (QRs).Prohibi ts export subsidies .Subsidies given to small businesses are usual ly permissible and non-act ionable. Minist ry of Commerce & Industry is putt ing required system in place.Agreement on Subsidies and Countervai l i ng Measures (SCM) .

Most Favoured Nation Treat m en t (MFN): No discr iminat ion between member nations. non-permissib le . The reason this would be optimal is because a company is new to sel l i ng internat ional l y . Using the Internat ional Area Structure wil l al low a company to hire managers who special i ze in understanding the cul tura l . Global Product Structure. National Treatme n t : No discr iminat ion between domestic products and lawful l y imported products. Internat ional Area Structure. "In th is organizat ional structure. Feedback 7. the company is organized in to countr ies or geographic regions. INTERNATIONAL AREA STRUCTURE The one that would be optimal for a company that is just expanding is the Internat ional Area Structure. social . As a company grows internat ional l y we can expect to see a companies organizat ion grow as well . Global Matrix Structure.Actionable and non-actionable. commercial ." This would be a benefi t to have the organizat ional in th is manner because i t would al low a company to focus on the region of the world we are sel l i ng to and ta i lo r the needs of mobil i t y products to that area. Discuss the various organisa tional structure in Interna tional Business. Ans: There are f ive types of organizat ional structures: Internat ional Divis ion Structure. and Global Functional Design Structure. Subsidies: Permissib le .

In addit ion. without disrupt ing the ones company managers have worked so hard for .domestic strategy . a company must l ink and in tegrate funct ions and act iv i t i es of dif fe rent divis ions of the company. • • • • • • • Worldwide area structure Favored by f i rms with low degree of diversi f i ca t i on & domestic structure based of funct ion World is divided in to autonomous geographic areas Operational authori ty decentral i zed Faci l i t a tes local responsiveness Fragmentat ion of organizat ion can occur Consistent with mult i . By using the Internat ional Area Structure. this is going to al low the company to adapt addit ional marketing strategies.and economic condit ions we wish to expand to. "an internat ional f i rm must address i ts coordinat ion needs" Meaning.

then this is an internat ional divis ion structure. . I t is usual ly based on the character is t i cs l i ke a funct ion. product or on geography. This structure is designed do that the mult inat ional wil l have a free access to explore the resources that are present internat ional l y . The abroad unit is required to contro l al l the activ i t i es which are to be performed in ternat ional l y .INTERNATIONAL DIVISION STRUCTURE When a company has a branch that is located abroad and that abroad company is said to be attached with the orig inal company. • • • • • • • Adopted in early stages of in ternat ional business operat ions Coordinate al l IB activ i t i es Develop internat ional expert ise & ski l l s Develop a global/ in te rnat ional mindset Champion of foreign business Favored by f i rms with low degree of diversi f i ca t i on .

• • Adopted by f i rms that are reasonably diversi f i ed Original domestic f i rm structure based on product divis ion .• • • Area is usual ly a country. Largely autonomous. unrelated business. Under th is structure dif fe rent subsidiar ies pertain ing to di f fe rent products with in the same foreign country report to the head of dif fe rent product groups at the head quarters. Faci l i t a tes local responsiveness GLOBAL PRODUCT STRUCTURE The product divis ion structure is popular with large conglomerates with mult ip le . The product divis ion structure enhances coordinat ion between dif fe rent areas for any one product l ine but i t reduces coordinat ion of al l product l ines within each zone.

"In th is organizat ional structure. subservient to product divis ion managers. we can expect to see a company grow into a Global Matrix Structure. • Helps to cope with confl i c t i ng demands of earl ie r strategies . the chain of command is spl i t between product managers and area managers.• • • • • Value creat ion activ i t i es of each product divis ion coordinated by that divis ion worldwide Help real ize locat ion and experience curve economies Faci l i t a te transfer of core competencies Problem: area managers have l imi ted control . we can expect to see the chain of command spl i t between product managers and area managers." As we develop the sales in areas of the world. leading to lack of local responsiveness GLOBAL MATRIX STRUCTURE Over t ime.

marketing. In certa in industr ies l i ke energy and mining. is common. a varia t ion of the funct ional structure known as the process structure. such as product ion. are responsible for the worldwide operat ions of thei r own funct ional areas. f inance and personnel. which uses processes as the basis for the structure. the head of funct ional areas. Feedback .• • • • • Two dimensions: product divis ion and geographic area Product divis ion and geographic areas given equal responsibi l i t y for operat ing decisions Problems: Bureaucrat ic structure slows decision making Confl ic t between areas and product divis ions Dif f i cu l t to make one party accountable due to dual responsibi l i t y GLOBAL FUNCTIONAL DESIGN STRUCTURE Under the funct ional structure.

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