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BA4202 International Business -
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BA4302
BA4102
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3rd Semester
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2nd Semester

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BA4103
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Elective - 2
BA4204
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Making - BA4104
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BA4205

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BA4105
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Elective - 5
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BA4106 BA4207 Elective - 5
 All MBA Engg Subjects (Click on Subjects to enter)
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DEPARTMENT OF MANAGEMENT STUDIES

II YEAR / III SEMESTER

BA4302: INTERNATIONAL BUSINESS

COURSE MATERIAL

Anna University Chennai

Regulation 2021

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JEPPIAAR ENGINEERING COLLEGE

DEPARTMENT OF MANAGEMENT STUDIES
VISION
To build Jeppiaar Engineering College as an institution of academic excellence in
technology and management education, leading to become a world class university..

MISSION
• To excel in teaching and learning, research and innovation by promoting the principles of scientific analysis and
creative thinking.
• To participate in the production, development and dissemination of knowledge and interact with national and
international communities.
• To equip students with values, ethics and life skills needed to enrich their lives and enable them to contribute
for the progress of society.
• To prepare students for higher studies and lifelong learning, enrich them with the practical skills necessary to
excel as future professionals and entrepreneurs for the benefit of Nation’s economy.

PROGRAMME EDUCATIONAL OBJECTIVES (PEOS):

MBA programme curriculum is designed to prepare the post graduate students
• To have a thorough understanding of the core aspects of the business.
• To provide the learners with the management tools to identify, analyze and create business opportunities as well
as solve business problems.
• To prepare them to have a holistic approach towards management functions.
• To inspire and make them practice ethical standards in business.

PROGRAMME OUTCOMES (POS)

On successful completion of the programme,
1. Ability to apply the business acumen gained in practice.
2. Ability to understand and solve managerial issues.
3. Ability to communicate and negotiate effectively, to achieve organizational and individual goals.
4. Ability to understand one’s own ability to set achievable targets and complete them.
5. Ability to fulfill social outreach
6. Ability to take up challenging assignments

COURSE OBJECTIVE:
To understand the multinational dimensions in management of a MNC company and the business operations in
more than one country.

COURSE OUTCOMES:
1. In Depth knowledge of driving factors of international Business
2. Understanding of theories of trade and investment practiced in the global world
3. Deep Insights in to various market entry strategies followed by Global Organizations
4. Ability to identify the various global production and supply chain issues and have an understanding of foreign
exchange determination system
5. Enhance the cognitive knowledge of managing business across the cultures

CO –PO Matrix

CO PO1 PO2 PO3 PO4 PO5 PO6

CO1 3 3 0 1 1 2
CO2 3 3 0 1 1 2
CO3 3 3 0 1 1 2
CO4 3 3 0 0 0 2
CO5 3 3 3 1 3 2
Average 3 3 3 1 1.5 2

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BA4302 INTERNATIONAL BUSINESS

UNIT I AN OVERVIEW OF INTERNATIONAL BUSINESS 9

Definition and drivers of International Business- Changing Environment of International Business-
Country attractiveness- Trends in Globalization- Effect and Benefit of Globalization-International
Institution: UNCTAD Basic Principles and Major Achievements, Role of IMF, Features of IBRD,
Role and Advantage of WTO.

UNIT II THEORIES OF INTERNATIONAL TRADE AND INVESTMENT 9

Theories of International Trade: Mercantilism, Absolute Advantage Theory, Comparative Cost
Theory, Hecksher-Ohlin Theory-Theories of Foreign Direct Investment : Product Life Cycle,
Eclectic, Market Power, Internationalisation-Instruments of Trade Policy : Voluntary Export
Restraints, Administrative Policy, Anti-dumping Policy, Balance of Payment.

UNIT III GLOBAL ENTRY 9

Strategic compulsions-– Strategic options – Global portfolio management- Global entry strategy,
different forms of international business, advantages - Organizational issues of international
business – Organizational structures – Controlling of international business, approaches to control
– Performance of global business, performance evaluation system.

UNIT IV PRODUCTION, MARKETING, FINANCIALS OF GLOBAL BUSINESS 9

Global production: Location, scale of operations- cost of production- Standardization Vs
Differentiation- Make or Buy decisions- global supply chain issues- Quality considerations.
Globalization of markets: Marketing strategy- Challenges in product development- pricing-
production and channel management. Foreign Exchange Determination Systems: Basic Concepts-
types of Exchange Rate Regimes- Factors Affecting Exchange Rates.

UNIT V HUMAN RESOURCE MANAGEMENT IN INTERNATIONAL BUSINESS 9

Selection of expatriate managers- Managing across cultures -Training and development-
Compensation- Disadvantages of international business – Conflict in international business-
Sources and types of conflict – Conflict resolutions – Negotiation –Ethical issues in international
business – Ethical decision-making.

TEXT BOOKS
1. Charles W.I. Hill and Arun Kumar Jain, International Business, 6th edition, Tata McGraw Hill,
New Delhi, 2010.
2. Michael R. Czinkota, Ilkka A. Ronkainen and Michael H. Moffet, International Business, 7th
Edition, Cengage Learning, New Delhi, 2010.
3. K. Aswathappa, International Business, 5th Edition, Tata Mc Graw Hill, New Delhi, 2012.
4. John D. Daniels and Lee H. Radebaugh, International Business, Pearson Education Asia, New
Delhi,12 th edition.
5. Vyuptakesh Sharan, International Business, 3rd Edition, Pearson Education in South Asia, New
Delhi, 2011.
6. Rakesh Mohan Joshi, International Business, Oxford University Press, New Delhi, 2009

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UNIT-1

International Business
International business may be defined simply as business transactions that take place
across national borders. Nearly all business enterprises, large and small, are inspired to carry on
business across the globe. This may include, purchase of raw materials, from foreign suppliers,
assembling products from components made in several countries or selling products or services to
customers in other nations.

Other definitions:
1) IB field is concerned with the issues facing international companies and governments in
dealing with all types of cross border transactions.
2) IB involves all business transactions that involve two or more countries.
3) IB consists of transactions that are devised and carried out across borders to satisfy the
objectives of individuals and organizations.
4) IB consists of those activities private and public enterprises that involve the movement across
national boundaries of goods and services, resources, knowledge or skills.Nature of

Multinational Enterprise:
A MNE has a worldwide approach to foreign markets and production and an integrated
global philosophy encompassing both domestic and international markets.

International Business
1. Accurate Information
2. Information not only accurate but should be timely
3. The size of the international business should be large
4. Market segmentation based on geographic segmentation
5. International markets have more potential than domestic markets

Scope of International Business

1. International Marketing
2. International Finance and Investments
3. Global HR
4. Foreign Exchange

Need for International Business

1. To achieve higher rate of profits
2. Expanding the production capacity beyond the demand of the domestic country
3. Severe competition in the home country
4. Limited home market
5. Political conditions
6. Availability of technology and managerial competence
7. Cost of manpower, transportation
8. Nearness to raw material
9. Liberalization, Privatization and Globalization (LPG)
10. To increase market share
11. Increase in cross border business is due to falling trade barriers (WTO), decreasing
costs in telecommunications and transportation; and freer capital markets

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Reasons for Recent International Business Growth

1. Expansion of technology
2. Business is becoming more global because
 Transportation is quicker
 Communications enable control from afar
 Transportation and communications costs are more conducive for international
operations
3. Liberalization of cross-border movements
4. Lower Governmental barriers to the movement of goods, services, and resources enable
Companies to take better advantage of international opportunities

Problems in International Business

1. Political factors
2. High foreign investments and high cost
3. Exchange instability
4. Entry requirements
5. Tariffs, quota etc.
6. Corruption and bureaucracy
7. Technological policy

INTERNATIONAL BUSINESS ENVIRONMENT

The environment of international business is regarded as the sum total of all the external forces
working upon the firm as it goes about its affairs in foreign and domestic markets. The
environment can be classified in terms of domestic, foreign, and international spheres of impact.
1. The domestic environment – is familiar to managers and consists of those uncontrollable
external forces that affect the firm in its home market.
2. The foreign environment - can be taken as those factors which operate in those other
countries within which the MNC operates.
3. The international environment - is conceived as the interaction between domestic and
foreign factors and indeed they cover a wide spectrum of forces

The forces:
• Political environment
• Legal environment
• Cultural environment
• Technological environment
• Economic environment.

1. Political Environment
A political system is basically the system of politics and government in a country. It governs a
complete set of rules, regulations, institutions, and attitudes. A main differentiator of political
systems is each system’s philosophy on the rights of the individual and the group as well as the role
of government. Each political system’s philosophy impacts the policies that govern the local
economy and business environment. It refers to the influence of the system of government and
judiciary in a nation on international business. The type and structure of government prevailing in
a country decides, promotes, fosters, encourages, shelters, directs, and controls the business of that
country. A political system is stable, honest, efficient, and dynamic and which ensures political
participation to the people and assures personal security to the citizens, is a primary factor for
economic development.
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Democracy: refers to a political arrangement in which the supreme power is vested in the people.
Democracies maintain stable business environments primarily through laws protecting individual
property rights. Ex: India.
Merits of democracy:
1. Need for supportive values
2. Function of free speech

Classification of political risks

2. Legal environment
The legal system refers to the rules and laws that regulate behavior of individuals and
Organization.
Systems of law:
There are four basic legal systems prevailing around the world.
1. Islamic law: derived from the interpretation of the Quran and practiced in countries
where Muslims are in majority. Ex: Saudi Arabia, Pakistan, Iran.
2. Common law: derived from English law, is prevalent in countries, which were under
British influence. Ex: US, Canada, England, Australia.
3. Civil law or code law: derived from Roman law, practiced in Germany, Japan, France,
and non - Marxist and non - Islamic countries. Ex: Germany, France, Japan.
4. Marxist legal system: This has takers in communist countries. Ex: China, Vietnam,
North Korea and Cuba.

Industrial disputes resolution: Legal disputes can arise in three situations: between
governments, between a firm and a government, and between two firms.
Conciliation: also known as mediation, this is a nonbonding agreement between parties to
resolve disputes by asking a third party to mediate.

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Arbitration: is the preferred method for resolving international commercial disputes. The usual
arbitration procedure is for the parties involved to select a disinterested and informed party or
parties as referee to determine the merits of the case and make a judgment that both parties agree
to honor.
Litigation: a wise course of action would be to seek a settlement other than by suing.

3. Cultural environment:
According to Elbert W Steward and James A Glynn “Culture consists the thought and
behavioral patterns that members of a society learn through language and other forms of
symbolic interaction – their customs, habits, beliefs and values, the common viewpoints that bind
them together as a social entity.

Levels of culture:
1. National culture:
It is dominant culture within the political boundaries of a country.
2. Business culture:
It also provides the guides for everyday business interactions.
3. Occupational and organizational cultures:
It’s sister term is corporate culture refers to the philosophies, ideologies, values,
assumptions, beliefs, expectations, attitudes and norms that knit an organization together and are
shared by its employees
4. Mechanistic and organic cultures:
It exhibits the values of bureaucracy and feudalism.
5. Authoritarian and participative cultures:
Power is concentrated on the leader and obedience to orders and disciplines are
stressed. Participative cultures tend to emerge where most organizational members are
professionals or see themselves as equals.
6. Dominant and sub-cultures:
Dominant culture, normally referred to as the organizational culture reflects core
values that are shared by the majority of the employees. By contrast, sub-cultures are found in
departments, divisions and geographical areas and reflect the common problems or experiences of
employees who reside in these areas.
7. Strong, Weak and Unhealthy cultures:
A Strong culture will have a significant influence on employee behavior manifesting in reduced
turnover, lower absenteeism, increased cohesiveness, and positive attitudes.
A Weak culture is characterized by the presence of several sub-cultures, sharing of few values
and behavioral norms by employees and existence of few sacred traditions.
One Unhealthy culture is a politicized internal environment that allows influential manager to
operate autonomous “fiefdoms” and resist needed change.

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Elements of culture
1. Language
2. Customs and manners
3. Attitudes
4. Aesthetics
5. Religion
6. Education
7. Supernatural beliefs
Implications for international business

Multiculturalism:
Managing multiculturalism is essential for every international firm.
1. Spread cross-cultural literacy
2. Compatibility between strategy and culture
3. Culture and competitive advantage
4. Managing diversity.

Changing Preferences
 A major socio-cultural factor influencing businesses and business decisions is changing
consumer preferences.
 What was popular and fashionable 20 years ago may not be popular today or 10 years
down the road.
 Different styles and priorities can undermine long successful products and services. For
example, a clothing company must constantly be aware of changing preferences when
creating new products or it will quickly become outdated.

Demographics
 Changes in demographics are also a significant factor in the business world.
 As populations age, for example, markets for popular music and fashions may shrink
while markets for luxury goods and health products may increase.
 Additionally, changes in the proportion of genders and different racial, religious and
ethnic groups within a society may also have a significant impact on the way a company
does business.

Advertising Techniques
 Advertising is perhaps the area of business most closely in touch with socio-cultural
changes.
 Advertising often seeks to be hip and trendsetting, and to do this, advertising agencies
and departments cannot lose track of the pulse of the societies in which they engage in
business.
 Changes in morals, values and fashions must all be considered when creating outward
facing advertising.

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• TECHNOLOGICAL ENVIRONMENT

Economic implications:
• Increased productivity
• Need to spend on R&D
• Jobs become intellectual
• Problems of techno-structure
• Increased regulation and stiff opposition
• Rise and decline of products and organizations
• Boundaries redefined
• Training of scientists and engineers.
Plant level changes:
• Organization structure
• Resistance to change
• Fear of risk
• E-commerce
• Patenting
• Transportation
• Markets
• Technology transfers
• Production
Operational sequences for technology transfer
• Arrangements for sales & licensing
• Provision of know-how & technical expertise
• Provision of detailed engineering designs & installation
• Purchases and leases of technology elements

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• Technical cooperation agreements

4. ECONOMIC ENVIRONMENT:
It can help international managers, to predict how trends and events might affect
performance of foreign business.
I) Classification on the basis of income:
1. Developing countries: share a set of common and well – defined goals. Ex: India, China.
2. Developed countries: Those are highly industrialized, highly efficient. Ex: Canada,
Japan, Australia, US.
II) Countries classified by economic system:
1. Market economy: production of goods and services is not planned by individuals
2. Command economy: decisions relating to all economic activities – what to produce,
how to produce.
3. Mixed economy: it includes both. Ex: India.
III) Classification of countries by region:
1. East Asia and Pacific
2. Europe and central Asia
3. Latin America and the Caribbean
4. Middle east and North Africa
5. South Asia
6. Sub-Saharan Africa
7. High income countries
IV) Economic scenario:
1. Rates of growth
2. Inflation
3. Savings and investment
4. Fiscal stability
5. Balance of payments
6. Financial system
V) Economic policies:
1. Industrial policy
2. Monetary policy
3. Fiscal policy
4. Trade policy

Government System
• Businesses must often contend with different governmental systems.
• Examples include democracies, authoritarian governments, and monarchies.
• Some governments are easier to work with than others.
• Democracies, for example, are answerable to their citizens and the rule of law.
Authoritarian regimes are usually answerable to no one, including the law. It is less risky
to conduct business in democracies and constitutional monarchies (a monarch with a
constitution that protects the public and subjects the monarch to the rule of law) than in
countries with authoritarian regimes.

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c) Trade Agreements
 Countries often enter into trade agreements to help facilitate trade between them.
 If your country has entered into a trade agreement with another country, conducting
business in that country will usually be easier and less risky because the trade agreement
will provide some predictability and protection.
• One great advantage, for example, is that your products will be subjected to fewer
trade barriers that serve as obstacles to exporting your products into the country.

d) Formal Trade Barriers

 A trade barrier is simply anything that makes it harder for a company to export products
to a foreign country.
 Formal trade barriers are enacted by governments for the purpose of restricting imports
to protect a country's domestic industries.
 Formal trade barriers include tariffs, which are taxes on imports that helps make
domestic products more competitive, and product quotas that limits the number of
products imported into the country.

e) Informal Trade Barriers

 Governments may impose regulations that aren't primarily promulgated as barriers to
trade but have the same effect.
• Examples can include specific product standards and health and safety standards that
businesses will be required to meet before the products can be sold.

Economic Development:
 Economic development differs widely among the countries and regions of the world.
Countries can be categorized as either developing or developed.
 Developing countries are referred to as less developed countries (LDCs).
 The criterion traditionally used to classify countries as developing is per capita income,
which is the income generated by the nation’s production of goods and services divided
by total population.
 The developing countries have low per capita incomes.
 LDCs generally are located in Asia, Africa, and South America. Developed countries are
generally located in North America , Europe and Japan.
 Most international business firms are headquartered in the wealthier, economically
advanced countries,
 However, smart companies are investing heavily in Asia, Eastern Europe and Latin
America.
 For example the number of Internet users and the rate of e-commerce in Latin America
is rapidly growing. Computer companies have launched on line stores for Latin
American customers to buy computers over the Internet.
 American Online sees Latin America as crucial to expanding its global presence, even
though Universe Online International (UOL) based in Brazil got a tremendous head
start over AOL.
 These companies face risks and challenges today, but they stand to reap huge benefits in
the future.

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Infrastructure:
 A country’s physical facilities that support economic activities make up its infrastructure
which includes transportation facilities such as airports highways, and railroads, energy
producing facilities such as utilities and power plants and communication facilities such
as telephone lines and radio stations.
 Companies operating in LDCs must contend with lower levels of technology and
perplexing logistical distribution and communication problems.
 Undeveloped infrastructures represent opportunities for some firms, such as United
Technologies Corporation based in Hartford, Connecticut whose business include jet
engines air conditioning and heating systems and elevators.

Trade
 Trade barriers are government-induced restrictions on international trade. Man-made
trade barriers come in several forms, including:

o Tariffs
o Non-tariff barriers to trade
o Import licenses
o Export licenses o Import quotas o Subsidies
o Voluntary Export Restraints o Local content requirements o Embargo
o Currency devaluation

Trade restriction
 Most trade barriers work on the same principle–the imposition of some sort of cost on
trade that raises the price of the traded products. If two or more nations repeatedly use
trade barriers against each other, then a trade war results.
 Economists generally agree that trade barriers are detrimental and decrease overall
economic efficiency. This can be explained by the theory of comparative advantage.
 In theory, free trade involves the removal of all such barriers, except perhaps those
considered necessary for health or national security.
 In practice, however, even those countries promoting free trade heavily subsidize certain
industries, such as agriculture and steel.
 Trade barriers are often criticized for the effect they have on the developing world.
 Because rich-country players set trade policies, goods, such as agricultural products that
developing countries are best at producing, face high barriers.
 Trade barriers, such as taxes on food imports or subsidies for farmers in developed
economies, lead to overproduction and dumping on world markets, thus lowering prices
and hurting poor-country farmers.
 Tariffs also tend to be anti-poor, with low rates for raw commodities and high rates for
labor-intensive processed goods.
 The Commitment to Development Index measures the effect that rich country trade
policies actually have on the developing world.
 Another negative aspect of trade barriers is that it would cause a limited choice of
products and, therefore, would force customers to pay higher prices and accept inferior
quality.
 In general, for a given level of protection, quota-like restrictions carry a greater potential
for reducing welfare than do tariffs.
 Tariffs, quotas, and non-tariff barriers lead too few of the economy's resources being
used to produce tradeable goods.

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 An export subsidy can also be used to give an advantage to a domestic producer over a
foreign producer.
 Export subsidies tend to have a particularly strong negative effect because in addition to
distorting resource allocation, they reduce the economy's terms of trade.
 In contrast to tariffs, export subsidies lead to an over allocation of the economy's
resources to the production of tradeable goods.

Internal Environment
 In addition to a company's interactions with the market and its customers, socio-cultural
factors also impact a company's internal decision-making process.
 For example, changing gender roles and increasing emphasis on family life have led to
increased respect for maternity and even paternity leave with organizations.
 Additionally, attitudes towards racial discrimination and sexual harassment have changed
drastically over the years as a result of socio-cultural change.

Religion and Custom

 Religion and custom are two of the most important factors impacting a business.
 Every organization has to adapt itself to the prevalent customs and traditions in a region.
 A uniform business policy cannot be implemented throughout the world, as allowances
need to be made for the religious sensibilities of the local population.
 Let us understand the concept in detail with the help of an example.
o McDonald's, one of the largest restaurant chains in the world, started its India
operations in 1996.
o Although McDonald's had been in business for roughly 40 years, during which it
had expanded to different parts of the world, its foray into the Indian sector was
met with skepticism.
o The prime reason why many people didn't give McDonald's a chance in India
was because most of the McDonald's restaurants around the world served beef in
their burgers.
o India, with its Hindu majority population, considers cow as sacred, and
vegetarianism is taken so seriously that many vegetarians avoid sitting with
someone having a non-vegetarian meal.
o The marketing heads at McDonald's were also aware of the vast diversity in
Indian food habits, and they had to come up with a menu that would appeal to
such a large number of people.
o To succeed in a country where frugality was an inherent characteristic,
McDonald's also had to work towards keeping the price of its products under
check, without compromising on the hygiene and quality factors.
o To succeed in such a behemoth and diverse market, McDonald's had to pay
attention to all these socio-cultural factors.

Change in Preferences
 One of the most important socio-cultural trends which has an impact on a business is the
constantly changing preferences of customers.
 A business may build a brand name for itself and model its core strategies in a certain
manner, but if it fails to recognize and adapt to the changing preferences of the
customers, it is doomed to fail.
 The example given below will analyze this in detail.
o Nokia was one of the biggest mobile handset manufacturers until recently.
o In 2007, Apple launched the iPhone, which completely changed the rules in
the smartphone market.
o iPhone was a bold statement by Apple on what a phone could achieve.

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• The launch of iPhone, and its subsequent critical and commercial acclaim, was a
clear indicator to all handset manufacturers that customers expected quality
experience while browsing the internet, listening to songs, watching videos, etc.
iPhone's unprecedented sales, despite the fact that it came with a higher contract
cost, was a testimony to the fact that the customers were appreciative of
innovation and technology, and didn't mind paying extra to get the best thing in
the market.

Change in Demographics
 Demographics is another socio-cultural factor that has an impact on the fortunes of a
business.
 The number of people living in a region, their ethnicity, age, gender, race, sex, etc. are
important factors to consider for any business organization.
 An understanding of the demographics of the customer base can provide a business with
invaluable pointers towards launching new products, pricing, marketing strategies, etc.
 The following example will illustrate how demographics lead to a change in strategy.
 o Harley Davidson, the iconic US-based motorcycle manufacturer, has
established itself as one of the premier bike makers in the world.
o Most of the customer base of Harley Davidson comprises Baby Boomers, over the
age of 35. After the World War II ended, America emerged as one of the most
powerful nations of the world.
o The period after the war was filled with optimism and exhilaration.
o The Baby Boomer generation grew up in a period marked with added emphasis
on individuality and adventure.
o Motorcycling had emerged as an alternate lifestyle, with most motorcyclists
preferring the heavy, cruiser bikes of Harley Davidson.

Marketing
 Socio-cultural factors play a major role in the marketing strategy of a business.
 In fact, the whole idea of marketing is to connect with the existing customers, and to reach
out to potential customers.
 The way a society is composed, and the manner in which it views itself culturally, plays an
important role in the development of a robust marketing strategy.
 The marketing strategies vary from one country to another, and the factors that influence
the strategy are literacy levels of the population, its core beliefs, its sensitivities, willingness
to change, etc.

 In the following example, we will take a look at how Nestlé had to change its marketing
policy to prevent itself from being in the center of a controversy.
o Nestlé, one of the largest food-processing brands in the world, was involved in a
controversy in the 1970s, when it was accused of causing deaths and malnutrition
in infants in sub-Saharan Africa.
o The center of the controversy was Nestlé's breastfeeding substitute - a baby
milk powder.
o The substitute was marketed aggressively all around the world, but in several
African countries, where literacy levels were low, people failed to realize that the
product was aimed to act as a substitute for those children, whose mothers were
unable to breastfeed them.

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CHALLENGES FOR GLOBAL BUSINESS

Too often business owners jump when they see opportunities abroad without first taking
the time to conduct research and train their employees for the challenges they may face.
Here are some of the top challenges and risks that small businesses face.
 Inexperienced management team.
The management team of small businesses may not have experience with international
businesses.
Having experience with conducting business globally is critical for businesses to move into
the international market with the lowest amount of surprises, mistakes, and expenses.
The management team should be provided with appropriate training beforehand. Another
option is to hire internal or external experts to guide decision making.

 No local marketing contacts or partners.

Having connections in the foreign country is a valuable asset to pushing the product out
faster and obtaining a quicker ROI.
If the business does not have any contacts or partners, it should start working on
networking and possibly hiring a local marketing firm.

 Foreign country's laws and regulations.

Each country has its own set of laws and regulations when it comes to importing goods,
taxes, and even selling online.
Obtain legal advice from someone experienced in business law for that country and
conduct your own research to see which laws and regulations will affect your business.
However, finding information online does not replace legal advice from a qualified lawyer.
 Inadequate infrastructure within the foreign country.
Some countries do not have adequate infrastructure for transporting goods.
Find out which obstacles exist and what should be done to overcome them or what
adjustments should be made.

 Cultural and language barriers.

Researching the local culture and speaking the same language is not enough to
communicate efficiently.
When two people are speaking the same sentence, the underlying meaning may not be the
same.
Find out how the locals conduct business and how their culture affects their decision
making and communication.

 Corruption amongst foreign officials.

Corruption is more prevalent than what most small business owners are prepared for.
Conduct research into the foreign country and find out how business is truly conducted.
If possible, avoid countries where corruption is prevalent to save on future headaches and
possible losses.
 Company is not flexible.
After entering into the foreign market the business may have to adapt further to the local
market.
Small businesses that are not flexible or refuse to make alternations will lose out on
customers and potential revenue.
The business should be prepared to make changes after entrance and have the structure in
place for quick decision making and implementations.

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 Tariffs and quotas.

Countries add taxes or restrictions to particular products coming into their country in order
to give their own businesses a higher advantage.
Unsuspecting small business owners unaware of these tariffs and quotas can end up at a
loss instead of profiting.
 Pricing is not optimized for the country.
Small business owners that price its products the same in foreign country as in the United
States is either overcharging or undercharging customers.
For instance, in countries with a lower GDP, consumers have less money to spend on
purchases so lower price points should be set to attract more buyers.

 Does not provide after sales services.

Customer support should be available in the language of each country and be conveniently
accessible.
Customers should not have to pay long distance charges in order to receive assistance.
Small business owners should ensure that they are providing adequate customer service to
all their customers.
They can outsource this to a customer call center within the country.

COUNTRY ATTRACTIVENESS:
It is a multidisciplinary concept at the crossroads of development economics, financial
economics, comparative law and political science: it aims at tracking and contrasting the relative
appeal of different territories and jurisdictions competing for “scarce” investment inflows, by
scoring them quantitatively and qualitatively across ad hoc series of variables such as GDP growth,
tax rates, capital repatriation.
There are multiple factors determining host country attractiveness in the eyes of large
foreign direct institutional investors, notably pension funds and sovereign wealth funds.
Research conducted by the World Pensions Council (WPC) suggests that perceived
legal/political stability over time and medium-term economic growth dynamics constitute the
two main determinants. Some development economists believe that a sizeable part of Western
Europe has now fallen behind the most dynamic amongst Asia’s emerging nations, notably because
the latter adopted policies more propitious to long-term investments:

Country Attractiveness Assessment

A country attractiveness assessment is based on two dimensions
 Market and industry opportunities
 Country risks (many organizations publish country assessment results based on various
economic/political/social factors)

Country attractiveness analysis

1. Market opportunities
Market opportunities assessment measures the potential demand in the country for a
firm’s products or services based on:
 Market size
 Growth
 Quality of demand.

2. Industry opportunities
 Industry opportunities assessment determines profitability potential of a company’s
presence in a country given the following factors:
 Quality of industry competitive structure (Porter’s five-force Industry Analysis
Framework)

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Resource availability (Porter’s diamond framework)

Framework for country market and industry attractiveness assessment MARKET – How
important is the demand in this country? + Growth? + Size? + Customer quality
 Resources
 Skilled personnel
 Raw materials
 Components
 Labor
 Technology
 Innovation
 Quality of infrastructure supporting services
 Location

Country attractiveness analysis

 Political risks
Political risks are probable disruptions owing to internal or external events or
regulations resulting from political action of governments or societal crisis and unrest.
 Economic risks
Economic risks expose business performance to the extent that the economic
business drivers can vary and therefore put profitability at stake.
 Competitive risks
Competitive risks are related to non-economic distortion of the competitive
context owing to cartels and networks as well as corrupt practices. The competitive
battlefield is not even and investors who base their competitive advantage on product
quality and economics are at disadvantage.
 Operational risks.
Operational risks are those that directly affect the bottom line, either because
government regulations and bureaucracies add costly taxation or constraints to foreign
investors or because the infrastructure is not reliable.

Framework for country risk analysis

Political risks operational risks competitive risks economic risks
 Shareholders exposure
 Assets destruction (war, riots)
 Assets spoliation (expropriation)
 Assets immobility (transfer, freeze )
 Operational Exposure
 Market disruption
 Labor unrest
 Racketing
 Supply shortages
 Employees Exposure
 Kidnapping
 Gangsterism
 Harassment
 Variability
 Inflation
Cost of inputs
 Exchange rates
 Business logics
 Corruption
 Cartels

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 Networks
Infrastructure - Power, Telecommunication, Transport - Supplier Country Risk Analysis
o Regulations
o Nationalistic preferences
o Constraints on local capital, local content, local employment

GLOBALIZATION
Globalization of the economy means reduction of import duties, removal of Non-Tariff
Barriers on trade such as Exchange control, import licensing etc., allowing FDI and FPI,
allowing companies to raise capital abroad and grow beyond national boundaries and encourage
exports. Both Foreign Trade and Foreign investment volume have grown rapidly over the last few
years.
The IMF defines globalizations as “the growing economic interdependence of countries
worldwide through increasing volume and variety of cross border transactions in goods and
services and of international capital flows, and also through the more rapid and widespread
diffusion of technology.

Benefits of Globalization
1. Free Trade
 Free trade is a way for countries to exchange goods and resources.
 This means countries can specialize in producing goods where they have a comparative
advantage (this means they can produce goods at a lower opportunity cost).
 When countries specialize there will be several gains from trade
o Lower prices for consumers
p Greater choice of goods
o Bigger export markets for domestic manufacturers
o Economies of scale through being able to specialise in certain goods

2. Free Movement of Labor

 Increased labor migration gives advantages to both workers and recipient countries.
 If a country experiences high unemployment, there are increased opportunities to look
for work elsewhere.
 This process of labor migration also helps reduce geographical inequality.
 This has been quite effective in the EU, with many Eastern European workers migrating
west.
 Also, it helps countries with labor shortages fill important posts.
 For example, the UK needed to recruit nurses from the far east to fill shortages.

3. Increased Economies of Scale.

 Production is increasingly specialized.
 Globalization enables goods to be produced in different parts of the world.
 This greater specialization enables lower average costs and lower prices for consumers.

4. Greater Competition
 Domestic monopolies used to be protected by lack of competition.
 However, globalization means that firms face greater competition from foreign firms.

5. Increased Investment
 Globalization has also enabled increased levels of investment.
 It has made it easier for countries to attract short term and long term investment.
 Investment by multinational companies can play a big role in improving the economies
of developing countries.

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Factors Causing Globalization of Business

1. Technological Advancement
 Technological advancement at almost every level, from widespread Internet access to
standardization of transport containers and rapid global transportation, serves as a key
driver of globalization.
 Standardization of manufacturing processes allows businesses to harness the economies
of scale that make it feasible to serve a global-sized market, and reliable, worldwide
transportation provides the necessary element to build a supply chain to serve that
market.
 The 24/7 nature of the Internet gives consumers easy access to products from across the
world and, in turn, drives a need for globalization in marketing.

2. Global Communication
 Global communication, aided in large part by online communication channels, such as
social media, aid in the transmission not only of ideas, but of social norms and wants.
 In essence, global communication leads to more homogenized tastes in everything from
tablet computers to music.
 This trend toward global-level interest in products, regardless of origin point, calls for
marketing that deals with brands from a global perspective, rather than a local or even
national level.
 Marketers must craft imagery and messages that transcend cultural particulars and reflect
universally appealing core ideas.

3. Capital Mobility

.
 Capital now moves across national borders with comparative ease, which makes it easier
for companies to secure financing from a variety of sources.
 This ability to secure funding from abroad, should domestic sources prove unwilling, can
facilitate domestic growth and foreign expansion.
 In order to secure foreign funding, a business’s marketing team must prove capable of
demonstrating that, for example, a foreign market exists for the business’s products, and
that it knows how to address both domestic and foreign markets to capture share in both.

4. Considerations
 Globalization presents a conundrum for small business owners.
 On the one hand, small businesses often find themselves competing with and
marketing in competition with better funded global brands.
 On the other hand, these same businesses have access to a worldwide consumer base
that can prove a substantial source of income.
 Choosing between offering service to a worldwide consumer base or focusing on
capturing local and regional business means weighing a number of factors, including
logistics, expense, and the difficulty inherent in developing global-friendly marketing
materials.
 Although some businesses lend themselves to serving the global market, selling
information products for example, many small businesses opt out of globalization.

5. The Reduction and Removal of Trade Barriers

 Since the end of World War II, the General Agreement on Tariffs and Trade (GATT)
and its successor, the WTO, have reduced tariffs and various non-tariff barriers to trade,
enabling more countries to exploit their comparative advantage.

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 Developing countries continue to drive the global recovery, but their output growth is
also expected to moderate to 6.0 per cent during 2011-2012, down from 7.0 per cent in
2010, because of the slowdown in the advanced countries and phasing out of stimulus
measures.
 Developing Asia, led by China and India, continues to show the strongest growth
performance, but some moderation (to around 7 per cent) is expected in 2011 and 2012.

6. High unemployment is the Achilles heel for the recovery

 The Uruguay Round of trade negotiations (1986-94) was the real watershed for global
trade.
 Here, a large package of measures was agreed, which freed up trade in both goods and in
services.
 As a result, the volume of world trade rose by 50% just in the 6 years following the
conclusion of the Uruguay Round.
 Equally important is the number of countries taking part in free trade negotiations.
 In 1948, when the GATT treaty became effective, there were only 23 Contracting Parties
to the agreement.
 Just over 60 years later, there are now 153 member states of the WTO who all enjoy the
benefits of free trade based on the principle of comparative advantage.
 Accordingly, between 1948 and 2008, trade rose from only 5% to a massive >25% of
world GDP.
 This means countries are becoming more and more reliant upon each other for their
export earnings, income and employment.
 This exposes them to the international trade multiplier, where domestic business cycles
become vulnerable to changes in the level of economic activity in the rest of the world.

7. Transport Costs
 Improvements in containerization have drastically lowered freight charges.
 For example, over the last 25 years, sea transport unit costs have fallen by over 70%,
while air-freight costs have fallen by 3-4% year-on-year.
 The result has been a boost in trade flows, as transport costs are now less likely to
cancel out the gains from comparative advantage.
 However the rise in sea and air transport has also caused great concern over the
negative externalities of global trade.
 Indeed recent estimates that CO2 emissions will rise by >70% by 2020 have led to
calls for green taxes on shipping transport.
 If these go ahead, they will partially offset the falls in transport costs, hence the
process of globalization will be dampened to some extent.

8. Growth of the Internet

 The growth of the internet has increased e-commerce, enabling firms of all sizes to
compete more easily in global markets.
 Essentially, the internet acts as a 24-hour shop front allowing consumers all over the
world to buy products online and around the clock, from whoever happens to be
offering the best deal.
 For the firm, it therefore provides cheap marketing with global reach, such that even
small local businesses can afford to serve customers abroad.
 Accordingly, the internet gives all firms - both domestic and MNCs alike - easier access
to foreign markets.
 We now find that international trade is no longer the sole preserve of the larger firm.
 It can now even be undertaken by, say, a local antiques shop, which can either set up its
own website or sell through an online auction like eBay.

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 The end result is of course that more countries become interdependent and reliant upon
each other for the sale and provision of goods and services.

Problems in Globalization:
• Global competition and imports keep a lid on prices, so inflation is less likely to derail
economic growth.
• An open economy spurs innovation with fresh ideas from abroad.
• Export jobs often pay more than other jobs.
• Unfettered capital flows give the US access to foreign investment and keep interest rates
low.
• Millions of Americans have lost jobs due to imports or production shifts abroad. Most find
new jobs that pay less
• Millions of others fear losing their jobs, especially at those companies operating under
competitive pressure.
• Workers face pay cut demands from employers, which often threaten to export jobs.
• Service and white collar jobs are increasingly vulnerable to operations moving offshore
• U S employees can lose their comparative advantage when companies build advanced
factories in low-wage countries, making them as productive as those at home.

Globalization of Indian Business:

• India’s economic integration with the rest of the world was very limited because of the
restrictive economic policies followed until 1991. Indian firms confined themselves, by and
large, to the home market. Foreign investment by Indian firms was very insignificant.
• With the new economic policy ushered in 1991, there has, however, been a change.
Globalization has in fact become a buzz-word with Indian firms now, and many are
• expanding their overseas business by different strategies.

Factors Favoring Globalization:

• Human Resources
• Wide Base
• Growing Entrepreneurship
• Growing Domestic Market
• Niche Markets
• Expanding Markets
• Trans-nationalization of World Economy
• NRIs
• Economic Liberalization• Competition

Disadvantages of globalization
1. Globalization may encourage more offshoring instead of less.
With fewer restrictions in place at the national level, some businesses may use offshoring to
their advantage. Even if they kept jobs local, the threat of sending jobs to a different,
cheaper region overseas could be used to justify lower wages at home. The end result of an
effort to remove borders would be an increase in wages in the developing world, but a
decrease in developed countries. Many households could see their standard of living go
down if consumable price decreases don’t occur simultaneously.

2. Globalization benefits the wealthy more than the poor.

Value-added taxes above 25% exist in some nations. Tariffs above 70% exist for some
products. Unless borders are completely removed, the advantages of globalization are
challenging to achieve. The people who have the power to dictate policy would reap the
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most significant rewards. Those with money to invest would see their bank accounts
continue to rise. At the same time, households living paycheck-to-paycheck would struggle
to access what they require, suppressing their ability to pursue a better job.
3. Globalization would encourage disease transfer.
The outcome of the Columbian Exchange was profound at the time. Over 90% of some
population centers died because of their exposure to smallpox, chickenpox, and other
diseases that the Europeans were somewhat immune to at the time. The Europeans
brought back syphilis and other diseases as well. If global travel restricts eased, then issues
with malaria and tropical disease could spread to portions of the world where exposures
are minimal. Tuberculosis, certain influenza strains, and other communicable disease
could produce outbreaks at epidemic levels.
4. Globalization could reduce social safety net programs.
Most nations today offer those in extreme poverty access to safety net programs for basic
supplies. Even in the United States, programs like WIC and SNAP offer food and care
access to those who cannot afford it on their own for whatever reason. When we reduce or
eliminate borders, there would be a likely shift in social programs to benefit those earning
less than $2 per day while ignoring the needs of those at home. Households living in
poverty in the U.S. or United Kingdom fit into a different definition when compared to
global poverty.
5. Globalization would create a new system of politics.
We’ve already received a sneak peek of what a global society would be like from a political
perspective. The individuals and organizations who spend the most to lobby politicians
would receive the best chance of having their needs met first. We’ve seen billions spent in
U.S. elections lately to influence legislation and policy to become favorable toward specific
outcomes. This issue would translate to a global economy, where only the richest and most
influential would influence laws which would impact everyone.
6. Globalization would not prevent resource consumption.
The goal of globalization is to equalize patterns of consumption for populations around the
world. Even though there would be movement toward doing so, there is no getting around
the fact that the wealthiest nations will still consume the most resources. The 20 richest
countries in the world today consume almost 90% of the planet’s resources each year. The
United States constitutes 5% of the global population right now, but it consumes 24% of the
world’s energy as a country.
7. Globalization would make it easier for people to cheat.
The statistics of consumption (especially food) show us already that those who are in power
take the majority of resources away from the general population. Americans eat almost 200
billion more calories per day as a nation than they require, which means 80 million people
are hungry needlessly because of these consumption habits. About 200,000 tons of edible
food is disposed of daily in the United States. By the age of 75, the average person in the
U.S. creates 52 tons of garbage.
8. Globalization doesn’t fix a lack of skills.
The future of employment involves programming, robotics, and artificial intelligence.
Workers who adapt to automation with their skillset are the most likely to find
employment in the coming generations. Jobs which require repetitive functions will be the
first to go away, which are the employment opportunities often found in the developing
world. With no meaningful skills to a globalized economy, there could be a higher
unemployment rate if border restrictions reduce because only those in the developed world
would be trained for the new economy.
9. Globalization changes how humans would identify themselves.
Humans are global citizens in some ways already. We all share the same planet, after all, so
we are united with that common ground. If we lose borders, however, we also lose a piece
of our culture, ethnicity, or family heritage. People identify themselves based on their
history, so being Irish in a global world would have less impact than it does today. We

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already seen how this works when Texas came into the U.S. after being an independent
nation. Some Texans label themselves as such first, but many see themselves as an
American before being a Texan.
10. Globalization would negatively impact the environment.
We’ve already seen what free trade does to the environment. Greenhouse gas emissions
rose in 2018 despite efforts to curtail them. Micro-plastics invaded our oceans, creating
negative impacts on marine life. The waters of our planet are slowly acidifying, creating
economic and health impacts every day. Over 200,000 Americans die each year because of
pollution exposure. If caps are taken off of what is not permitted through globalization,
then this issue will continue growing worse.

INTERNATIONAL AGENCIES
UNCTAD:
The Bretton Woods System had the guiding principles of free trade and non-discrimination in
international trade. It resulted in the emergence of institutions like the IMF and GATT. After a
decade of euphoria and expectations from these institutions, the LDC’s realised that these
institutions were meant primarily for advanced countries through fostering freer and expanded
trade among them and to extend just temporary assistance to them to adjust their payments
imbalances within the regime of fixed exchange rates.

Organisation and Functions of UNCTAD:

The U.N. General Assembly declared in December 1961 that 1960’s would be the development
decade. It indicated the recognition of the need for adopting measures to bridge up the trade and
technological gaps between the rich and the poor countries of the world. In July 1962, the
developing countries at their Cairo Conference adopted “Cairo Declaration” and called upon the
United Nations to convene an international conference on trade and development.The United
Nations Economic and Social Council agreed to convene such a conference and passed a
resolution to this effect on August 3, 1962. The United Nations General Assembly endorsed it in
its resolution of December 8, 1962. It was on the recommendation of the United Nations
Economic Council in July 1963 for convening a conference on trade and development that the
United Nations Conference on Trade and Development (UNCTAD) was set up in 1963 as a
permanent organ of the UN General Assembly.
It also defined the functions, activities and membership of the UNCTAD. All these developments
resulted in the convening of the United Nations Conference on Trade and Development in
Geneva from March to June 1964.
Organisation:
The UNCTAD has been set up as a permanent organ of the UN General Assembly. It has its own
structure of subsidiary bodies and a full time Secretariat. It has instituted a Trade and
Development Board and takes policy decisions when the conference is not in session. It is
composed of 55 members, elected by the conference from among its members on the basis of
equitable geographical distribution. The meeting of the Board takes place twice a year.
The Trade and Development Board is assisted in its functions by four subsidiary committees.
These include:
(i) The committee on commodities,
(ii) The committee on manufactures,
(iii) The committee on shipping; and
(iv) The committee on invisible items and financing related to trade.
The meeting of these committees generally takes place once a year but the special session of
committees can be convened to deal with the matters of urgent nature. All the members of the
United Nations are eligible for the membership of the UNCTAD.
Functions:

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The essential purpose of instituting UNCTAD was to promote accelerated development of the less
developed regions of the world by dealing properly with the problem of slow expansion of exports,
persistently increasing BOP deficits, burden of external debts etc. confronting the LDC’s.

Functions of the UNCTAD:

(i) To promote international trade between the developed and under-developed countries having
diverse socio-economic organisations with special emphasis upon the accelerated development of
the under-developed countries.
(ii) To formulate the principles and policies concerning international trade and related problems of
economic development.
(iii) To make proposals for putting the said principles and policies into effect and to adopt
measures that may be relevant to this end.
(iv) To generally review and facilitate the coordination of activities of other institutions within the
fold of the United Nations related to international trade and economic development.
(v) To be available as a centre for harmonious trade-related policies of governments and the
regional economic groupings in pursuance of Article 7 of the Charter of the United Nations.

Basic Principles:
(i) Sovereign right of each member country to dispose of freely its natural resources in the interest
of its development, well-being of its population and furtherance of its trade with other countries.
(ii) International economic and trade relations shall be based on such principles as respect for
sovereign equality of states, self-determination and non-interference in the internal affairs of the
others.
(iii) No discrimination among member countries on account of differences in socio-economic
system and independent pursuit of economic and other policies.
(iv) Extension of preferential concessions.
(v) Greater market access for the products of the less developed countries.
(vi) Reduction in tariff and non-tariff restrictions on trade.
(vii) Unconstrained flow of international aid.

International Monetary Fund (IMF) was established at a United Nations Monetary and Financial
Conference, also known as Bretton Woods Conference, on 22 July 1944 as an organ under the
UN System. The IMF headquarters is located in Washington D.C., U.S.A.
IMF is responsible for promoting international monetary cooperation; facilitating the expansion
and balanced growth of international trade; promoting exchange stability; assisting in the
establishment of a multilateral system of payments; and providing resources available to members
experiencing balance of payments difficulties. The International Monetary Fund aims to reducing
global poverty, encouraging international trade, and promoting financial stability and economic
growth.
The IMF has three main functions: overseeing economic development, lending, and capacity
development.
Surveillance : The IMF closely monitors each member country's economic and financial
developments and holds a policy dialogue with a member country on a regular basis (also known
as Article IV Consultation), usually once each year, to assess its economic conditions with a view to
providing policy recommendations. The IMF also reviews global and regional developments and
outlook based on information from individual consultations. The IMF publishes such assessment
on the multilateral surveillance through the World Economic Outlook and the Global Financial
Stability Report on a semi-annual basis.
Financial Assistance : The IMF lends to its member countries facing balance of payments
problems in order to facilitate the adjustment process and restore member countries' economic
growth and stability through various loan instruments or "facilities". An IMF loan is usually
provided under an "arrangement," requiring a borrowing country to undertake the specific policies
and measures to resolve its balance of payments problem as specified in a "Letter of Intent." Most

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IMF loans are primarily financed by its member countries through payments of quotas. Thus, the
IMF's lending capacity is mainly determined by the total amount of quotas. Nevertheless, if
necessary, the IMF may borrow from a number of its financially strongest member countries
Technical Assistance : The IMF provides technical assistance to help member countries strengthen
their capacity to design and implement effective policies in four areas, namely, 1) monetary and
financial policies, 2) fiscal policy and management, 3) statistics and
4) economic and financial legislation. In addition to technical assistance, the IMF also offers
training courses and seminars to member countries at the IMF Institute in Washington D.C., and
other regional training institutes (Austria, Brazil, China, India, Singapore, Tunisia and United Arab
Emirates).

IBRD
The International Bank for Reconstruction and Development (IBRD), commonly referred to as
the World Bank, is an international financial institution whose purposes include assisting the
development of its member nation’s territories, promoting and supplementing private foreign
investment and promoting long-range balance growth in international trade. The World Bank was
established in December 1945 at the United Nations Monetary and Financial Conference in
Bretton Woods, New Hampshire. It opened for business in June 1946 and helped in the
reconstruction of nations devastated by World War II. Since 1960s the World Bank has shifted its
focus from the advanced industrialized nations to developing third-world countries.

Organization and Structure:

The organization of the bank consists of the Board of Governors, the Board of Executive
Directors and the Advisory Committee, the Loan Committee and the president and other staff
members. All the powers of the bank are vested in the Board of Governors which is the supreme
policy making body of the bank.
The board consists of one Governor and one Alternative Governor appointed for five years by
each member country. Each Governor has the voting power which is related to the financial
contribution of the Government which he represents.

Objectives:
1. To provide long-run capital to member countries for economic reconstruction and
development.
2. To induce long-run capital investment for assuring Balance of Payments (BoP) equilibrium and
balanced development of international trade.
3. To provide guarantee for loans granted to small and large units and other projects of member
countries.
4. To ensure the implementation of development projects so as to bring about a smooth
transference from a war-time to peace economy.
5. To promote capital investment in member countries by the following ways;
(a) To provide guarantee on private loans or capital investment.
(b) If private capital is not available even after providing guarantee, then IBRD provides loans for
productive activities on considerate conditions.

Functions:
World Bank is playing main role of providing loans for development works to member countries,
especially to underdeveloped countries. The World Bank provides long-term loans for various
development projects of 5 to 20 years duration.
1. World Bank provides various technical services to the member countries. For this purpose, the
Bank has established “The Economic Development Institute” and a Staff College in Washington.
2. Bank can grant loans to a member country up to 20% of its share in the paid-up capital.

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3. The quantities of loans, interest rate and terms and conditions are determined by the Bank
itself.
4. Generally, Bank grants loans for a particular project duly submitted to the Bank by the member
country.
5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan
was sanctioned.
6. Bank also provides loan to private investors belonging to member countries on its own
guarantee, but for this loan private investors have to seek prior permission from those counties
where this amount will be collected.

GATT (General Agreement On Tariffs And Trade)

GATT is a multilateral trade agreement with overseas and it has been labeled the
locomotive that powers international conference. Created in January 1948 is intended to
achieve a broad, multilateral and free worldwide system of trading.

Formation:
• A treaty created following the conclusion of World War II. The General Agreement on
Tariffs and Trade (GATT) was implemented to further regulate world trade to aide in the
economic recovery following the war. GATT's main objective was to reduce the barriers of
international trade through the reduction of tariffs, quotas and subsidies.
• Formed in 1947 and signed into international law on January 1, 1948, GATT remained
one of the focal features of international trade agreements until it was replaced by the
creation of the World Trade Organization on January 1, 1995.
• The role of GATT in integrating developing countries into an open multilateral trading
system is also of major consequence.
• The increasing participation of developing countries in the GATT trading system and the
pragmatic support provided to them through the flexible application of certain rules helped
developing countries to both expand and diversify their trade.

Basic principles of GATT:

• Member countries will consult each other concerning trade problems.
• It provides a framework for negotiation and embodies results of negotiations in a
legal environment.
• Trade should conduct on a non-discriminatory basis.

Objectives of GATT:
1. To provide equal opportunities to all countries in international market for trading
purpose.
2. To increase the effective demand.
3. To provide amicable solution to the disputes related to international trade.
4. To ensure a better living standards in the world as a whole.

WTO
WTO (World Trade Organization) is an international organization. It enacts the rules
governing trade between countries of goods, services, agricultural and industrial goods, and
intellectual property. Its aim is to reduce the obstacles to free trade in order to help producers of
goods and services, exporters and importers to carry out their activities.
WTO officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by
123 nations on 15 April 1994, replacing the General Agreement on Tariffs and Trade(GATT) .
WTO currently has 164 members, of which 117 are developing countries or separate customs

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territories. WTO activities are supported by a Secretariat of some 700 staff, led by the WTO
Director-General. The Secretariat is located in Geneva, Switzerland, and has an annual budget of
approximately CHF 200 million ($180 million, €130 million). The three official languages of the
WTO are English, French and Spanish.
Objectives of WTO
 To improve the standard of living of people in the member countries.
 To ensure full employment and broad increase in effective demand.
 To enlarge production and trade of goods.
 To increase the trade of services.
 To ensure optimum utilization of world resources.
 To protect the environment.
 To accept the concept of sustainable development.

Functions of WTO:
 To implement rules and provisions related to trade policy review mechanism.
 To provide a platform to member countries to decide future strategies related to trade and
tariff.
 To provide facilities for implementation, administration and operation of multilateral and
bilateral agreements of the world trade.
 To administer the rules and processes related to dispute settlement.
 To ensure the optimum use of world resources.
 To assist international organizations such as, IMF and IBRD for establishing coherence in
Universal Economic Policy determination.

Organization structure of the WTO

1. Ministerial conference
2. General council,
3. Councils,
4. Committees and Management bodies

1. Ministerial conference:
It is the authority to make decisions on all matters relating to multilateral trade agreements. It is the
top decision making body of the WTO. It meets at least once in every two years. There have been
seven ministerial conferences.
I) First ministerial conference – held in Singapore 1996, primary purpose to initiate an
international effort among global trading nations.
II) Second ministerial conference - was held in Geneva in Switzerland.
III) Third ministerial conference - was held in Seattle in Washington
IV) Fourth ministerial conference - was held in Doha in Persian Gulf Nation of Qatar.
V) Fifth ministerial conference - was held in Cancun, Mexico.
VI) Sixth ministerial conference - held in Hong Kong.
VII) Seventh ministerial conference - held in Geneva, Switzerland

2. General council:
The general council has other forms like dispute settlement body and trade policy
reviews body.

3. Councils:
I. Council for trade in goods
There are 11 committees under the jurisdiction of the Goods Council each with a specific
task. All members of the WTO participate in the committees. The Textiles Monitoring
Body is separate from the other committees but still under the jurisdiction of Goods
Council. The body has its own chairman and only 10 members. The body also has several

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groups relating to textiles.

II. Council for trade in services

The Council for Trade in Services operates under the guidance of the General Council
and is responsible for overseeing the functioning of the General Agreement on Trade in
Services (GATS). It is open to all WTO members, and can create subsidiary bodies as
Required.

III. Council for trade related aspects of intellectual property rights.

Information on intellectual property in the WTO, news and official records of the
activities of the TRIPS Council, and details of the WTO's work with other international
organizations in the field.

4. Committee and management bodies:

The general council delegates powers, responsibilities and authorities to these bodies.
I. Committee on trade and development
II. Committee on balance of balance of payments
III. Committee on budget, finance and administration.
Trade Negotiations Committee
The Trade Negotiations Committee (TNC) is the committee that deals with the current
trade talks round. The chair is WTO's director-general. As of June 2012 the committee
was tasked with the Doha Development Round.
The Service Council has three subsidiary bodies: financial services, domestic regulations,
GATS rules and specific commitments. The council has several different committees, working
groups, and working parties. There are committees on the following: Trade and Environment;

Secretariat
 The WTO secretariat, based in Geneva, has around 600 staff and is headed by a Director-
General.
 Its annual budget is roughly 160 million Swiss Francs.
 It does not have branch offices outside Geneva.
 Since decisions are taken by the members themselves, the secretariat does not have the
decision making the role that other international bureaucracies are given.
 The secretariat s main duties to supply technical support for the various councils and
committees and the ministerial conferences, to provide technical assistance for developing
countries, to analyze world trade and to explain WTO affairs to the public and media.
 The secretariat also provides some forms of legal assistance in the dispute settlement
process and advises governments wishing to become members of the WTO.

GATT-WTO: Comparison

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Major Issues Agreements

• Agreement on Agriculture:
The Agreement on Agriculture includes specific and binding commitments made
by WTO Member governments in the three areas of market access, domestic support
and export subsidization for strengthening GATT disciplines and improving agricultural
trade. These commitments were implemented over a six-year period.

• Agreement on the Application of Sanitary and Phytosanitary (SPS) Measures:

This agreement establishes multilateral frameworks for the planning, adoption
and implementation of sanitary and phytosanitary measures to prevent such measures
from being used for arbitrary or unjustifiable discrimination or for camouflaged restraint
on international trade and to minimize their adverse effects on trade.

• Agreement on Textiles and Clothing:

Textile trade was governed by the Multi-Fiber Arrangement (MFA) since 1974.
However, the GATT principles had been undermined by import protection policies, etc.
The agreement provides that textile trade should be deregulated by gradually integrating
it into GATT disciplines over a 10-year transition period.

• Agreement on Technical Barriers to Trade (TBT)

Standards and conformity assessment systems, such as industrial standards and
safety/environment regulations, may become trade barriers if they are excessive or
abused. This agreement aims to prevent such systems from becoming unnecessary trade
barriers by securing their transparency and harmonization with international standards.

• Agreement on Trade-Related Investment Measures (TRIMs):

In relation to cross-border investment, countries receiving foreign investment
may take various measures, including imposing requirements, conditions and restrictions
(investment measures) on investing corporations. In the Uruguay Round,
negotiations were initially conducted with an eye toward expanding disciplines
governing investment measures. However, the Agreement on Trade-Related Measures,
which was the result of the negotiations, banned only those investment measures
inconsistent with the provisions of ArticleIII (principle of national treatment) and Article
XI (general elimination of quantitative restrictions) which have direct adverse effects on
trade in goods. As examples, the Agreement cited local content requirements (which
require that certain components be domestically manufactured) and trade balancing
requirements.

• Anti-Dumping Agreement
This agreement aims to tighten and codify disciplines for calculating dumping
margins and conducting dumping investigations, etc. in order to prevent anti-dumping
measures from being abused or misused to protect domestic industries.

• Agreement on Pre-shipment Inspection (PSI):

This agreement aims to secure transparency of PSI and to provide a mechanism
for the solution of disputes between PSI agencies and exporters.

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• Agreement on Rules of Origin:

This agreement provides a program for the harmonization of rules of origin for
application to all non-preferential commercial policy instruments. It also establishes
disciplines that must be observed in instituting or operating rules and provides for
dispute settlement procedures and creates the rules of origin committee. However, details on the
harmonization of rules of origin are left for future negotiations.

• General Agreement on Trade in Services (GATS)

This agreement provides general obligations regarding trade in services, such as
most- favored-nation treatment and transparency. In addition, it enumerates 155 service
sectors and stipulates that a member country cannot maintain or introduce, in the service
sectors for which it has made commitments, market access restriction measures and
discriminatory measures that are severer than those on the commitment table.

• Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

This agreement stipulates most-favored-nation treatment and national treatment
for intellectual properties, such as copyright, trademarks, geographical indications,
industrial designs, patents, IC layout designs and undisclosed information. In addition,
it requires Member countries to maintain high levels of intellectual property protection
and to administer a system of enforcement of such rights. It also stipulates procedures
for the settlement of disputes related to the agreement.

• Agreement on Government Procurement;

This agreement requires national treatment and non-discriminatory treatment in
the area of government procurement (purchase or lease of goods and services by
governments) and calls for fair and transparent procurement procedures. It also
stipulates complaint and dispute settlement procedures. The new Government
Procurement Agreement is based on the Agreement of 1979 (an agreement from the
Tokyo Round), but expands its scope. The new Agreement covers the procurement of
services (in addition to goods) and the procurement by sub-central government entities
and government-related agencies.
• Agreement on Subsidies and Countervailing Measures:
This agreement aims to clarify definitions of subsidies, strengthen disciplines by
subsidy type (extension of the range of prohibited subsidies, etc.), and to strengthen and
clarify procedures for adopting countervailing tariff.

• Agreement on Import Licensing Procedures:

In order to prevent import licensing procedures of different countries from
becoming unnecessary trade barriers, this agreement aims to simplify administrative
procedures and ensure their fair operation.

• Agreement on Rules of Origin:

This agreement provides a program for the harmonization of rules of origin for
application to all non-preferential commercial policy instruments. It also establishes
disciplines that must be observed in instituting or operating rules and provides for
dispute settlement procedures and creates the rules of origin committee. However,

Advantages and disadvantages of WTO

• Lower prices for consumers. Removing tariffs enables us to buy cheaper imports
• Free trade encourages greater competitiveness. Through free trade, firms face a higher
incentive to cut costs. For example, a domestic monopoly may now face competition from
foreign firms.

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• The law of comparative advantage states that free trade will enable an increase in economic
welfare. This is because countries can specialise in producing goods where they have a
lower opportunity cost.
• Economies of scale. By encouraging free trade, firms can specialise and produce a higher
quantity. This enables more economies of scale, this is important for industries with high
fixed costs, such as car and aeroplane manufacture. In new trade theory, it is this
specialisation and exploitation of economies of scale that is most important factor in
improving economic welfare.

Disadvantages of WTO
• However, the WTO has often been criticised for trade rules which are still unfavourable
towards developing countries. Many developed countries went through a period of tariff
protection; this enabled them to protect new, emerging domestic industries. Ha Joon
Chang argues WTO trade rules are like 'pulling away the ladder they used themselves to
climb up' (Kicking away the ladder at Amazon)
• Free trade may prevent developing economies develop their infant industries. For example,
if a developing economy was trying to diversify their economy to develop a new
manufacturing industry, they may be unable to do it without some tariff protection.
• WTO is being overshadowed by new TIPP trade deals. These deals are negotiated away
from WTO and focuses mainly on US and EU. It excludes China, Russia, India, Brazil
and South Africa. It threatens to diminish the global importance of WTO
• Difficulty of making progress. WTO trade deals have been quite difficult to form
consensus. Various rounds have taken many years to slowly progress. It results in countries
seeking alternatives such as TIPP or local bilateral deals.
• WTO trade deals still encompass a lot of protectionism in areas like agriculture.
Protectionist tariffs which primarily benefit richer nations, such as the EU and US.
• WTO has implemented strong defense of TRIPs ‘Trade Related Intellectual Property’
rights These allow firms to implement patents and copyrights. In areas, such as life-saving
drugs, it has raised the price and made it less affordable for developing countries.
• WTO has rules which favour multinationals. For example, 'most favoured nation' principle
means countries should trade without discrimination. This has advantages but can mean
developing countires cannot give preference to local contractors, but may have to choose
foreign multinationals - whatever their history in repatriation of profit, investment in area.

WTO and India

• India was a founding member of the General Agreement on Tariffs and Trade (GATT)
and its successor, the World Trade Organisation (WTO) in 1947.
• India's participation in a more rule-based system of international trade regulation will
assure greater stability and predictability, which will lead to increased commerce and
prosperity.
• Services exports account for 40% of India's overall commodities and services exports. The
services sector accounts for more than 55 percent of India's GDP.
• Around 142 million people are employed in the sector (domestic and exports), accounting
for 28 percent of the country's workforce.
• IT and IT-enabled services, travel and transportation, and financial services account for the
majority of India's exports.
• The United States (33 percent), the European Union (15 percent), and other rich countries
are the most popular destinations.
• India has a clear interest in the liberalization of services trade and wants industrialized
countries to grant commercially meaningful access.
• India has liberalized its services trade system across the board since the Uruguay Round.

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• It's vital to ensure food and livelihood security, especially in a big agrarian economy like
India.
• India has been lobbying the WTO for a long-term solution to public stockholding
subsidies.
• An interim agreement (a peace clause) on "public stockholding" continued exceptions that
allow developing countries to stockpile agricultural products to protect against food
shortages at the 2013 Ministerial Conference (MC9) in Bali.
• India is a big supporter of giving geographical indicators for products like Basmati rice,
Darjeeling tea, and Alphonso mangoes the same level of protection as wines and spirits
under the Trade-related Aspects of Intellectual Property Rights (TRIPS) accord.
• Non-trade topics such as labor standards, environmental protection, human rights,
investment laws, and competition policy have been pushed into WTO agreements by
developed countries.
• India opposes any inclusion of non-trade issues that are aimed at enforcing protectionist
measures in the long run (based on non-trade issues, developed countries such as the
United States and the European Union are attempting to ban the imports of certain goods
such as textiles, processed foods, and so on), particularly against developing countries.

UNIT-2

Theories of International Trade and Theories of International Investment

THEORIES OF INTERNATIONAL TRADE

• International trade theories are simply different theories to explain international trade.
• Trade is the concept of exchanging goods and services between two people or entities.
• International trade is then the concept of this exchange between people or entities in two
different countries.
• People or entities trade because they believe that they benefit from the exchange. They
may need or want the goods or services.
• While at the surface, this many sound very simple, there is a great deal of theory, policy,
and business strategy that constitutes international trade.

Classical or Country-Based Trade Theories

1. Mercantilism
• Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop
an economic theory.
• This theory stated that a country’s wealth was determined by the amount of its gold and
silver holdings.
• In its simplest sense, mercantilists believed that a country should increase its holdings of
gold and silver by promoting exports and discouraging imports.
• In other words, if people in other countries buy more from you (exports) than they sell to
you (imports), then they have to pay you the difference in gold and silver.
• The objective of each country was to have a trade surplus, or a situation where the value of
exports are greater than the value of imports, and to avoid a trade deficit, or a situation
where the value of imports is greater than the value of exports.
• A closer look at world history from the 1500s to the late 1800s helps explain why
mercantilism flourished.
• The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their
nations by building larger armies and national institutions.
• By increasing exports and trade, these rulers were able to amass more gold and wealth for
their countries.
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• One way that many of these new nations promoted exports was to impose restrictions on
imports. This strategy is called protectionism and is still used today.
• Nations expanded their wealth by using their colonies around the world in an effort to
control more trade and amass more riches.
• The British colonial empire was one of the more successful examples; it sought to increase
its wealth by using raw materials from places ranging from what are now the Americas and
India. France, the Netherlands, Portugal, and Spain were also successful in building large
colonial empires that generated extensive wealth for their governing nations.
• Although mercantilism is one of the oldest trade theories, it remains part of modern
thinking.
• Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports
and discourage imports through a form of neo-mercantilism in which the countries
promote a combination of protectionist policies and restrictions and domestic-industry
subsidies.
• Nearly every country, at one point or another, has implemented some form of protectionist
policy to guard key industries in its economy.
• While export-oriented companies usually support protectionist policies that favor their
industries or firms, other companies and consumers are hurt by protectionism.
• Taxpayers pay for government subsidies of select exports in the form of higher taxes.
Import restrictions lead to higher prices for consumers, who pay more for foreign-made
goods or services.
• Free-trade advocates highlight how free trade benefits all members of the global
community, while mercantilism’s protectionist policies only benefit select industries, at the
expense of both consumers and other companies, within and outside of the industry.

2. Absolute Advantage
• Recent versions have been edited by scholars and economists.
• Smith offered a new trade theory called absolute advantage, which focused on the
ability of a country to produce a good more efficiently than another nation.
• Smith reasoned that trade between countries shouldn’t be regulated or restricted by
government policy or intervention.
• He stated that trade should flow naturally according to market forces.
• In a hypothetical two-country world, if Country A could produce a good cheaper or
faster (or both) than Country B, then Country A had the advantage and could focus on
specializing on producing that good.
• Similarly, if Country B was better at producing another good, it could focus on
specialization as well.
• By specialization, countries would generate efficiencies, because their labor force would
become more skilled by doing the same tasks.
• Production would also become more efficient, because there would be an incentive to
create faster and better production methods to increase the specialization.
• Smith’s theory reasoned that with increased efficiencies, people in both countries would
benefit and trade should be encouraged.
• His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it
had but rather by the living standards of its people.

3. Comparative Advantage
• The challenge to the absolute advantage theory was that some countries may be better at
producing both goods and, therefore, have an advantage in many areas.
• In contrast, another country may not have any useful absolute advantages.

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• To answer this challenge, David Ricardo, an English economist, introduced the theory of
comparative advantage in 1817.
• Ricardo reasoned that even if Country had the absolute advantage in the production of
both products, specialization and trade could still occur between two countries.
• Comparative advantage occurs when a country cannot produce a product more efficiently
than the other country; however, it can produce that product better and more efficiently
than it does other goods.
• The difference between these two theories is subtle.
p Comparative advantage focuses on the relative productivity differences, whereas absolute
advantage looks at the absolute productivity.

4. Heckscher-Ohlin Theory (Factor Proportions Theory)

• The theories of Smith and Ricardo didn’t help countries determine which products would
give a country an advantage.
• Both theories assumed that free and open markets would lead countries and producers to
determine which goods they could produce more efficiently.
• In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their
attention on how a country could gain comparative advantage by producing products that
utilized factors that were in abundance in the country.
• Their theory is based on a country’s production factors—land, labor, and capital, which
provide the funds for investment in plants and equipment.
• They determined that the cost of any factor or resource was a function of supply and
demand.
• Factors that were in great supply relative to demand would be cheaper; factors in great
demand relative to supply would be more expensive.
• Their theory, also called the factor proportions theory, stated that countries would produce
and export goods that required resources or factors that were in great supply and therefore,
cheaper production factors. In contrast, countries would import goods that required
resources that were in short supply, but higher demand.
For example, China and India are home to cheap, large pools of labor. Hence these
countries have become the optimal locations for labor-intensive industries like textiles and
garments.

5. Leontief Paradox
• In the early 1950s, Russian-born American economist Wassily W. Leontief studied the US
economy closely and noted that the United States was abundant in capital and, therefore,
should export more capital-intensive goods.
• However, his research using actual data showed the opposite: the United States was
importing more capital-intensive goods.
• According to the factor proportions theory, the United States should have been importing
labor-intensive goods, but instead it was actually exporting them.
• His analysis became known as the Leontief Paradox because it was the reverse of what was
expected by the factor proportions theory.
• In subsequent years, economists have noted historically at that point in time, labor in the
United States was both available in steady supply and more productive than in many other
countries; hence it made sense to export labor-intensive goods.
• Over the decades, many economists have used theories and data to explain and minimize
the impact of the paradox.
• However, what remains clear is that international trade is complex and is impacted by
numerous and often-changing factors.

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• Trade cannot be explained neatly by one single theory, and more importantly, our
understanding of international trade theories continues to evolve.

6. Modern or Firm-Based Trade Theories

• In contrast to classical, country-based trade theories, the category of modern, firm-based
theories emerged after World War II and was developed in large part by business school
professors, not economists.
• The firm-based theories evolved with the growth of the multinational company (MNC).
• The country-based theories couldn’t adequately address the expansion of either MNCs or
intra industry trade, which refers to trade between two countries of goods produced in the
same industry.
• For example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz
automobiles from Germany.
• Unlike the country-based theories, firm-based theories incorporate other product and
service factors, including brand and customer loyalty, technology, and quality, into the
understanding of trade flows.

7. Country Similarity Theory

• Swedish economist Steffan Linder developed the country similarity theory in 1961, as he
tried to explain the concept of intra industry trade.
• Linder’s theory proposed that consumers in countries that are in the same or similar stage
of development would have similar preferences.
• In this firm-based theory, Linder suggested that companies first produce for domestic
consumption.
• When they explore exporting, the companies often find that markets that look similar to
their domestic one, in terms of customer preferences, offer the most potential for success.
• Linder’s country similarity theory then states that most trade in manufactured goods will be
between countries with similar per capita incomes, and intra industry trade will be
common.
• This theory is often most useful in understanding trade in goods where brand names and
product reputations are important factors in the buyers’ decision-making and purchasing
processes.

8. Product Life Cycle Theory

• Raymond Vernon, a Harvard Business School professor, developed the product life cycle
theory in the 1960s.
• The theory, originating in the field of marketing, stated that a product life cycle has three
distinct stages: (1) new product, (2) maturing product, and (3) standardized product.
• The theory assumed that production of the new product will occur completely in the home
country of its innovation.
• In the 1960s this was a useful theory to explain the manufacturing success of the United
States.
• US manufacturing was the globally dominant producer in many industries after World
War II.
• It has also been used to describe how the personal computer (PC) went through its product
cycle.
• The PC was a new product in the 1970s and developed into a mature product during the
1980s and 1990s.
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• Today, the PC is in the standardized product stage, and the majority of manufacturing and
production process is done in low-cost countries in Asia and Mexico.
• The product life cycle theory has been less able to explain current trade patterns where
innovation and manufacturing occur around the world.
• For example, global companies even conduct research and development in developing
markets where highly skilled labor and facilities are usually cheaper.
• Even though research and development is typically associated with the first or new product
stage and therefore completed in the home country, these developing or
• emerging-market countries, such as India and China, offer both highly skilled labor and
new research facilities at a substantial cost advantage for global firms.

9. Global Strategic Rivalry Theory

• Global strategic rivalry theory emerged in the 1980s and was based on the work of
economists Paul Krugman and Kelvin Lancaster.
• Their theory focused on MNCs and their efforts to gain a competitive advantage against
other global firms in their industry.
• Firms will encounter global competition in their industries and in order to prosper, they
must develop competitive advantages.
• The critical ways that firms can obtain a sustainable competitive advantage are called the
barriers to entry for that industry.
• The barriers to entry refer to the obstacles a new firm may face when trying to enter into an
industry or new market.
• The barriers to entry that corporations may seek to optimize include:
o research and development, the ownership of intellectual property rights, economies
of scale, unique business processes or methods as well as extensive experience in the
industry, and the control of resources or favorable access to raw materials.
Porter’s National Competitive Advantage Theory
• In the continuing evolution of international trade theories, Michael Porter of Harvard
Business School developed a new model to explain national competitive advantage in
1990.
• Porter’s theory stated that a nation’s competitiveness in an industry depends on the
capacity of the industry to innovate and upgrade.
• His theory focused on explaining why some nations are more competitive in certain
industries. To explain his theory, Porter identified four determinants that he linked
together.
• The four determinants are (1) local market resources and capabilities, (2) local market
demand conditions, (3) local suppliers and complementary industries, and (4) local firm
characteristics.
Local market resources and capabilities (factor conditions).
 Porter recognized the value of the factor proportions theory, which considers a
nation’s resources (e.g., natural resources and available labor) as key factors in
determining what products a country will import or export.
 Porter added to these basic factors a new list of advanced factors, which he defined
as skilled labor, investments in education, technology, and infrastructure.
 He perceived these advanced factors as providing a country with a sustainable
competitive advantage.

Local market demand conditions.

o Porter believed that a sophisticated home market is critical to ensuring ongoing
innovation, thereby creating a sustainable competitive advantage.

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o Companies whose domestic markets are sophisticated, trendsetting, and demanding

forces continuous innovation and the development of new products and
technologies.
o Many sources credit the demanding US consumer with forcing US software
companies to continuously innovate, thus creating a sustainable competitive
advantage in software products and services.
Local suppliers and complementary industries.
o To remain competitive, large global firms benefit from having strong, efficient
supporting and related industries to provide the inputs required by the industry.
Certain industries cluster geographically, which provides efficiencies and
productivity.
Local firm characteristics.
o Local firm characteristics include firm strategy, industry structure, and industry
rivalry. Local strategy affects a firm’s competitiveness.
o A healthy level of rivalry between local firms will spur innovation and
competitiveness.

THEORIES OF INTERNATIONAL INVESTMENT

o Monopolistic Advantage Theory
o Stefan Hymer saw the role of firm-specific advantages as a way of marrying the study of
direct foreign investment with classic models of imperfect competition in product markets.
He argued that a direct foreign investor possesses some kind of proprietary or
monopolistic advantage not available to local firms.
o These advantages must be economies of scale, superior technology, or superior knowledge
in marketing, management, or finance.
o Foreign direct investment took place because of the product and factor market
imperfections.
o The direct investor is a monopolist or, more often, an oligopolistic in product markets.
o Humer implied that governments should be ready to impose controls on it.

2. Product and Factor Market Imperfection

• Caves (1971) expanded Hymer's theory and hypothesized that the ability of firms to
differentiate their products - particularly high income consumer goods and services - may
be key ownership advantages of firms leading to foreign production.
• The consumers would prefer to similar locally made goods and thus would give the firm
some control over the selling price and an advantage over indigenous firms.
• To support these contentions, Caves noted that companies investing overseas were in
industries that typically engaged in heavy product research and marketing effort.

3. International Product Life cycle

The international product life cycle theory explains that foreign direct investment is a
natural stage in the life of a product.

4. Other Theories
The Knickerbocker's follow-the-leader theory argued that, as risk minimizers
oligopolistic, wishing to avoid destructive competition, would normally follow each other
into (e.g., foreign) markets, to safeguard their own commercial interests. This theory is
considered defensive because competitors are investing to avoid losing the markets served
by exports when their initial investor begins local production. They may also fear that the
initiator will achieve some advantage of risk diversification that they will have unless they
also enter the market.

5. Cross Investment Theory

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Graham noted a tendency for cross investment by European and American firms in
certain oligopolistic industries; that is, European firms tended to invest in the United States
when American companies had gone to Europe.
He postulated that such investments would permit the American subsidiaries of European
firms to retaliate in the home market of U.S. companies if the European subsidiaries of
these companies initiated some aggressive tactic, such as price cutting, in the European
market.

6. The Internalization Theory

• Is an extension of the market imperfection theory. By investing in a foreign subsidiary
rather than licensing, the company is able to sent the knowledge across borders while
maintaining it within the firm, where it presumably yields a better return on the investment
made to produce it.
• Other theories relate to financial factors. Robert Aliber believes the imperfections in the
foreign exchange markets may be responsible for foreign investment.
• He explained this in terms of the ability of firms from countries with strong currencies to
borrow or raise capital in domestic or foreign markets with weak currencies, which, in turn,
enabled them to capitalize their expected income streams at different rates of interest.
Structural imperfections in the foreign exchange market allow firms to make foreign
exchange gains through the purchase or sales of assets in an undervalued or overvalued
currency.
• One other financially based theory (portfolio theory) was put by Rugman, Agmon and
Lessard.
• These researchers argued that international operations allow for a diversification of risk
and therefore tend to maximize the expected return on investment.
• Rugman and Lessard have further argued that the location of the foreign direct investment
would be a function of both the firm's perception of the uncertainties involved and the
geographical distribution of its existing assets.

7. The Eclectic Paradigm

The eclectic paradigm is developed by John Dunning seeks to offer a general framework for
determining the extent and pattern of both foreign-owned production undertaken by a country's
own enterprises and also that of domestic production owned by foreign enterprises.

8. Industrial Organization Theory

 Mainly explains the nature of the ownership (O) advantages that arise:
(1) From the possession of particular intangible assets - assets advantages (Oa);
(2) From the ability of the firm to coordinate multiple and geographically dispersed value-added
activities and to capture the gains of risk diversification- transaction cost minimizing advantages
(Ot).
• The theory of property rights and the internalization paradigm explain why firms engage in
foreign activity to exploit or acquire these advantages.
• Theories of location and tradeexplain the factors determining the siting of production.
• Theories of oligopoly and business strategy explain the likely reaction of firms to particular
OLI configurations.
• The eclectic paradigm suggests that all forms of foreign production by all countries can be
explained by reference to the above conditions.
• Dunning further argued that the eclectic paradigm offers the basis for a general explanation
of international production.
• The propensity of enterprises of a particular nationality to engage in foreign direct
investment will vary according to the economic et al. specific characteristics of their home
country and the country(ies) in which they propose to invest, the range and types of
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products they intend to produce, and their underlying management and organizational
strategies.

INTERNATIONALISATION-INSTRUMENTS OF TRADE POLICY

Trade policy encompasses all instruments that governments may use to promote or restrict
imports and exports. Trade policy also includes the approach taken by countries in trade
negotiations. While participating in the multilateral trading system and/or while negotiating
bilateral trade agreements, countries assume obligations that shape their national trade policies.
The instruments of trade policy that countries typically use to restrict imports and/ or to
encourage exports can be broadly classified into price- related measures such as tariffs and non-
price measures or non-tariff measures (NTMs).

TARIFFS
Tariffs, also known as customs duties, are basically taxes or duties imposed on goods and services
which are imported or exported. It is defined as a financial
charge in the form of a tax, imposed at the border on goods going from one
customs territory to another. They are the most visible and universally used trade
measures that determine market access for goods. Import duties being pervasive
than export duties, tariffs are often identified with import duties and in this unit,
the term ‘tariff’ would refer to import duties. Tariffs are aimed at altering the relative prices of
goods and services imported, so as to contract the domestic demand and thus regulate the
volume of their imports. Tariffs leave the world market price of the goods unaffected; while
raising their prices in the domestic market. The main goals of tariffs are to raise revenue for the
government, and more importantly to protect the domestic import-competing
industries.

Forms of Import Tariffs:

(i) Specific Tariff: A specific tariff is an import duty that assigns a fixed
monetary tax per physical unit of the good imported. It is calculated on the
basis of a unit of measure, such as weight, volume, etc., of the imported good.
Thus, a specific tariff of `1000/ may be charged on each imported bicycle.
The disadvantage of specific tariff as an instrument for protection of domestic
producers is that its protective value varies inversely with the price of the
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import. For example: if the price of the imported cycle is ` 5,000/,then the
rate of tariff is 20%; if due to inflation, the price of bicycle rises to ` 10,000 ,
the specific tariff is only 10% of the value of the import. Since the calculation
of these duties does not involve the value of merchandise, customs valuation
is not applicable in this case.
(ii) Ad valorem tariff: An ad valorem tariff is levied as a constant percentage of
the monetary value of one unit of the imported good. A 20% ad valorem
tariff on any bicycle generates a `1000/ payment on each imported bicycle
priced at `5,000/ in the world market; and if the price rises to ` 10,000, it
generates a payment of `2,000/. While ad valorem tariff preserves the
protective value of tariff on home producer, it gives incentives to deliberately
undervalue the good’s price on invoices and bills of lading to reduce the tax
burden. Nevertheless, ad valorem tariffs are widely used the world over.
There are many other variations of the above tariffs, such as:
(a) Mixed Tariffs : Mixed tariffs are expressed either on the basis of the value
of the imported goods (an ad valorem rate) or on the basis of a unit of
measure of the imported goods (a specific duty) depending on which
generates the most income( or least income at times) for the nation. For
example, duty on cotton: 5 per cent ad valorem 0r ` 3000/per tonne,
whichever is higher.
(b) Compound Tariff or a Compound Duty is a combination of an ad valorem
and a specific tariff. That is, the tariff is calculated on the basis of both the
value of the imported goods (an ad valorem duty) and a unit of measure of
the imported goods (a specific duty). It is generally calculated by adding up
a specific duty to an ad valorem duty. For example: duty on cheese at 5 per
cent advalorem plus 100 per kilogram
(c) Technical/Other Tariff: These are calculated on the basis of the specific
contents of the imported goods i.e the duties are payable by its components
or related items. For example: `3000/ on each solar panel plus ` 50/ per kg
on the battery.
(d) Tariff Rate Quotas: Tariff rate quotas (TRQs) combine two policy
instruments: quotas and tariffs. Imports entering under the specified quota
portion are usually subject to a lower (sometimes zero), tariff rate. Imports
above the quantitative threshold of the quota face a much higher tariff.
(e) Most-Favored Nation Tariffs: MFN tariffs are what countries promise to
impose on imports from other members of the WTO, unless the country is
part of a preferential trade agreement (such as a free trade area or customs
union). This means that, in practice, MFN rates are the highest (most
restrictive) that WTO members charge one another. Some countries impose
higher tariffs on countries that are not part of the WTO.
(f) Variable Tariff: A duty typically fixed to bring the price of an imported
commodity up to the domestic support price for the commodity.
(g) Preferential Tariff: Nearly all countries are part of at least one preferential
trade agreement, under which they promise to give another country's
products lower tariffs than their MFN rate. These agreements are reciprocal.
A lower tariff is charged from goods imported from a country which is given
preferential treatment. Examples are preferential duties in the EU region
under which a good coming into one EU country to another is charged zero
tariffs. Another example is North American Free Trade Agreement (NAFTA)
among Canada, Mexico and the USA where the preferential tariff rate is zero
on essentially all products. Countries, especially the affluent ones also grant
‘unilateral preferential treatment’ to select list of products from specified
developing countries .The Generalized System of Preferences (GSP) is one

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such system which is currently prevailing.

(h) Bound Tariff : A bound tariff is a tariff which a WTO member binds itself with
a legal commitment not to raise it above a certain level. By binding a tariff,
often during negotiations, the members agree to limit their right to set tariff
levels beyond a certain level. The bound rates are specific to individual
products and represent the maximum level of import duty that can be levied
on a product imported by that member. A member is always free to impose
a tariff that is lower than the bound level. Once bound, a tariff rate becomes
permanent and a member can only increase its level after negotiating with its trading partners and
compensating them for possible losses of trade. A
bound tariff ensures transparency and predictability.
(i) Applied Tariffs: An 'applied tariff' is the duty that is actually charged on
imports on a most-favoured nation (MFN) basis. A WTO member can have
an applied tariff for a product that differs from the bound tariff for that
product as long as the applied level is not higher than the bound level.
(j) Escalated Tariff structure refers to the system wherein the nominal tariff
rates on imports of manufactured goods are higher than the nominal tariff
rates on intermediate inputs and raw materials, i.e the tariff on a product
increases as that product moves through the value-added chain. For example
a four percent tariff on iron ore or iron ingots and twelve percent tariff on
steel pipes. This type of tariff is discriminatory as it protects manufacturing
industries in importing countries and dampens the attempts of developing
manufacturing industries of exporting countries. This has special relevance
to trade between developed countries and developing countries. Developing
countries are thus forced to continue to be suppliers of raw materials without
much value addition.
(k) Prohibitive tariff: A prohibitive tariff is one that is set so high that no imports
will enter.
(l) Import subsidies: In some countries, import subsidies also exist. An import
subsidy is simply a payment per unit or as a percent of value for the
importation of a good (i.e., a negative import tariff).
(m) Tariffs as Response to Trade Distortions: Sometimes countries engage in
'unfair' foreign-trade practices which are trade distorting in nature and
adverse to the interests of the domestic firms. The affected importing
countries, upon confirmation of the distortion, respond quickly by measures
in the form of tariff responses to offset the distortion. These policies are often
referred to as "trigger-price" mechanisms. The following sections relate to
such tariff responses to distortions related to foreign dumping and export
subsidies
(i) Anti-dumping Duties: Dumping occurs when manufacturers sell goods in a
foreign country below the sales prices in their domestic market or below their
full average cost of the product. Dumping may be persistent, seasonal, or
cyclical. Dumping may also be resorted to as a predatory pricing practice to
drive out established domestic producers from the market and to establish
monopoly position. Dumping is an international price discrimination avouring buyers of exports,
but in fact, the exporters deliberately forego
money in order to harm the domestic producers of the importing country.
This is unfair and constitutes a threat to domestic producers and therefore
when dumping is found, anti-dumping measures which are tariffs to offset
the effects of dumping may be initiated as a safeguard instrument by
imposition of additional import duties so as to offset the foreign firm's unfair
price advantage. This is justified only if the domestic industry is seriously
injured by import competition, and protection is in the national interest (that

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is, the associated costs to consumers would be less than the benefits that
would accrue to producers). For example: In January 2017, India imposed anti-
dumping duties on colour-coated or pre-painted flat steel products imported
into the country from China and European nations for a period not exceeding
six months and for jute and jute products from Bangladesh and Nepal.
(ii) Countervailing Duties: Countervailing duties are tariffs that aim to offset the artificially low
prices charged by exporters who enjoy export subsidies and tax concessions offered by the
governments in their home country. If a foreign country does not have a comparative advantage
in a particular good and a government subsidy allows the foreign firm to be an exporter of the
product, then the subsidy generates a distortion from the free-trade allocation of resources. In
such cases, CVD is charged in an importing country to negate the advantage that exporters get
from subsidies to ensure fair and market oriented pricing of imported products and thereby
protecting domestic industries and firms. For example, in 2016, in order to protect its domestic
industry, India imposed 12.5% countervailing duty on Gold jewellery imports from ASEAN

Effects of Tariffs
A tariff levied on an imported product affects both the country exporting a product
and the country importing that product.
(i) Tariff barriers create obstacles to trade, decrease the volume of imports and exports and
therefore of international trade. The prospect of market access of the exporting country is
worsened when an importing country imposes a tariff.
(ii) By making imported goods more expensive, tariffs discourage domestic consumers from
consuming imported foreign goods. Domestic consumers suffer a loss in consumer surplus
because they must now pay a higher price.

ECONOMICS FOR FINANCE for the good and also because compared to free trade quantity,
they now consume lesser quantity of the good.
(iii) Tariffs encourage consumption and production of the domestically produced import
substitutes and thus protect domestic industries.
(iv) Producers in the importing country experience an increase in well-being as a
result of imposition of tariff. The price increase of their product in the
domestic market increases producer surplus in the industry. They can also
charge higher prices than would be possible in the case of free trade because
foreign competition has reduced.
(v) The price increase also induces an increase in the output of the existing firms
and possibly addition of new firms due to entry into the industry to take
advantage of the new high profits and consequently an increase in
employment in the industry.
(vi) Tariffs create trade distortions by disregarding comparative advantage and
prevent countries from enjoying gains from trade arising from comparative
advantage. Thus, tariffs discourage efficient production in the rest of the
world and encourage inefficient production in the home country.
(vii) Tariffs increase government revenues of the importing country by the value of the total tariff it
charges. Trade liberalization in recent decades, either through government policy measures or
through negotiated reduction through the WTO or regional and bilateral free
trade agreements, has diminished the importance of tariff as a tool of protection.
Currently, trade policy is focusing increasingly on not so easily observable forms of
trade barriers usually called nontariff measures (NTMs). NTMs are thought to have
important restrictive and distortionary effects on international trade. They have
become so invasive that the benefits due to tariff reduction are practically offset by
them.

NON -TARIFF MEASURES (NTMS)

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Non-tariff measures (NTMs) are policy measures, other than ordinary customs tariffs, that
can potentially have an economic effect on international trade in goods,
changing quantities traded, or prices or both (UNCTAD, 2010). Non-tariff measures
comprise all types of measures which alter the conditions of international trade,
including policies and regulations that restrict trade and those that facilitate it. It
should be kept in mind that NTMs are not the same as non-tariff barriers (NTBs).
Compared to non-tariff barriers which are simply discriminatory non-tariff
measures imposed by governments to favour domestic over foreign suppliers, non-
tariff measures encompass a broader set of measures.
According to WTO agreements, the use of NTMs is allowed under certain
circumstances. Examples of this include the Technical Barriers to Trade (TBT)
Agreement and the Sanitary and Phytosanitary Measures (SPS) Agreement, both
negotiated during the Uruguay Round. However, NTMs are sometimes used as a
means to circumvent free-trade rules and favour domestic industries at the expense
of foreign competition. In this case they are called non-tariff measures (NTMs). It is
very difficult, and sometimes impossible, to distinguish legitimate NTMs from
protectionist NTMs, especially as the same measure may be used for several
reasons.
Depending on their scope and/or design NTMs are categorized as:
I. Technical Measures:
Technical measures refer to product-specific properties such as characteristics of the product,
technical specifications and production processes. These measures are intended for ensuring
product quality, food safety, environmental protection, national security and protection of animal
and plant health.
II. Non-technical Measures:
Non-technical measures relate to trade requirements; for example; shipping requirements, custom
formalities, trade rules, taxation policies, etc. These are further distinguished as:
(a) Hard measures (e.g. Price and quantity control measures),
(b) Threat measures (e.g. Anti-dumping and safeguards) and
(c) Other measures such as trade-related finance and investment measures.
Furthermore, the categorization also distinguishes between:
(i) Import-related measures which relate to measures imposed by the importing country, and
(ii) Export-related measures which relate to measures imposed by the exporting country itself.
(iii) In addition, to these, there are procedural obstacles (PO) which are practical problems in
administration, transportation, delays in testing, certification etc that may make it difficult for
businesses to adhere to a given regulation.

Technical Measures
I Sanitary and Phytosanitary (SPS) Measures:
SPS measures are applied to protect human, animal or plant life from risks arising from additives,
pests, contaminants, toxins or disease-causing organisms and to protect biodiversity.
These include ban or prohibition of import of certain goods, all measures governing quality and
hygienic requirements, production processes, and associated compliance assessments. For
example; prohibition of import of poultry from countries affected by avian flu, meat and poultry
processing standards to reduce pathogens, residue limits for pesticides in foods etc.

II Technical Barriers To Trade (TBT):

Technical Barriers to Trade (TBT) which cover both food and non-food traded products refer to
mandatory ‘Standards and Technical Regulations’ that define the specific characteristics that a
product should have, such as its size, shape, design, labelling / marking / packaging, functionality or
performance and production methods, excluding measures covered by the SPS
Agreement. The specific procedures used to check whether a product is really conforming to
these requirements (conformity assessment procedures e.g. testing, inspection and certification) are

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also covered in TBT. This involves compulsory quality, quantity and price control of goods before
shipment from the exporting country. Just as SPS, TBT measures are standards-based measures
that countries use to protect their consumers and preserve natural resources, but these can also be
used effectively as obstacles to imports or to discriminate against imports and
protect domestic products.

Non-technical Measures
These include different types of trade protective measures which are put into operation to
neutralize the possible adverse effects of imports in the market of the importing country.
Following are the most commonly practiced measures in respect of imports:
(i) Import Quotas: An import quota is a direct restriction which specifies that
only a certain physical amount of the good will be allowed into the country during
a given time period, usually one year. Import quotas are typically set below the free
trade level of imports and are usually enforced by issuing licenses. This is referred
to as a binding quota; a non-binding quota is a quota that is set at or above the
free trade level of imports, thus having little effect on trade.
Import quotas are mainly of two types: absolute quotas and tariff-rate quotas.
Absolute quotas or quotas of a permanent nature limit the quantity of imports to
a specified level during a specified period of time and the imports can take place
any time of the year. No condition is attached to the country of origin of the
product. For example: 1000 tonnes of fish import of which can take place any time
of the year from any country. When country allocation is specified, a fixed volume
or value of the product must originate in one or more countries. Example: A quota
of 1000 tonnes of fish that can be imported any time of the year, but where 750
tonnes must originate in country A and 250 tonnes in country B. In addition, there
are seasonal quotas and temporary quotas. With a quota, the government, of course,
receives no revenue. The profits received by the holders of such import licenses are known
as ‘quota rents’. While tariffs directly interfere with prices that can be charged for an
imported good in the domestic market, import quota interferes with the market prices
indirectly. Obviously, an import quota at all times raises the domestic price of the imported
good. The license holders are able to buy imports and resell them at a higher price in the
domestic market and they will be able to earn a ‘rent’ on their operations over and above
the profit they would have made in a free market

(ii) Price Control Measures: Price control measures (including additional taxes
and charges) are steps taken to control or influence the prices of imported goods
in order to support the domestic price of certain products when the import prices
of these goods are lower. These are also known as 'para-tariff' measures and
include measures, other than tariff measures, that increase the cost of imports in a
similar manner, i.e. by a fixed percentage or by a fixed amount. Example: A
minimum import price established for sulphur.
(iii) Non-automatic Licensing and Prohibitions : These measures are normally
aimed at limiting the quantity of goods that can be imported, regardless of whether
they originate from different sources or from one particular supplier. These
measures may take the form of non-automatic licensing, or through complete
prohibitions. For example, textiles may be allowed only on a discretionary license
by the importing country. India prohibits import/export of arms and related
material from/to Iraq. Also, India prohibits many items (mostly of animal origin)
falling under 60 EXIM codes.
(iv) Financial Measures: The objective of financial measures is to increase import
costs by regulating the access to and cost of foreign exchange for imports and to
define the terms of payment. It includes measures such as advance payment
requirements and foreign exchange controls denying the use of foreign exchange

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for certain types of imports or for goods imported from certain countries. For
example, an importer may be required to pay a certain percentage of the value of
goods imported three months before the arrival of goods or foreign exchange may
not be permitted for import of newsprint.
(v) Measures Affecting Competition: These measures are aimed at granting
exclusive or special preferences or privileges to one or a few limited group of
economic operators. It may include government imposed special import channels
or enterprises, and compulsory use of national services. For example, a statutory
marketing board may be granted exclusive rights to import wheat: or a canalizing
agency (like State Trading Corporation) may be given monopoly right to distribute
palm oil. When a state agency or a monopoly import agency sells on the domestic
market at prices above those on the world market, the effect will be similar to an
import tariff.
(vi) Government Procurement Policies: Government procurement policies may
interfere with trade if they involve mandates that the whole of a specified
percentage of government purchases should be from domestic firms rather than
foreign firms, despite higher prices than similar foreign suppliers. In accepting public
tenders, a government may give preference to the local tenders rather than
foreign tenders.
(vii) Trade-Related Investment Measures: These measures include rules on local
content requirements that mandate a specified fraction of a final good should be
produced domestically.
(a) requirement to use certain minimum levels of locally made components, ( 25
percent of components of automobiles to be sourced domestically)
(b) restricting the level of imported components , and
(c) limiting the purchase or use of imported products to an amount related to
the quantity or value of local products that it exports. ( A firm may import
only up to 75 % of its export earnings of the previous year)
(viii) Distribution Restrictions: Distribution restrictions are limitations imposed
on the distribution of goods in the importing country involving additional license
or certification requirements. These may relate to geographical restrictions or
restrictions as to the type of agents who may resell. For example: a restriction that
imported fruits may be sold only through outlets having refrigeration facilities
(ix) Restriction on Post-sales Services: Producers may be restricted from
providing after- sales services for exported goods in the importing country. Such
services may be reserved to local service companies of the importing country.
(x) Administrative Procedures: Another potential obstruction to free trade is
the costly and time consuming administrative procedures which are mandatory for
import of foreign goods. These will increase transaction costs and discourage
imports. The domestic import-competing industries gain by such non- tariff
measures. Examples include specifying particular procedures and formalities,
requiring licenses, administrative delay, red-tape and corruption in customs
clearing frustrating the potential importers , procedural obstacles linked to prove
compliance etc.
(xi) Rules of origin: Rules of origin are the criteria needed by governments of
importing countries to determine the national source of a product. Their
importance is derived from the fact that duties and restrictions in several cases
depend upon the source of imports. Important procedural obstacles occur in the
home countries for making available certifications regarding origin of goods,
especially when different components of the product originate in different
countries.

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(Xii) Safeguard Measures are initiated by countries to restrict imports of a product

temporarily if its domestic industry is injured or threatened with serious injury
caused by a surge in imports.
(Xiii) Embargos : An embargo is a total ban imposed by government on import or
export of some or all commodities to particular country or regions for a specified
or indefinite period. This may be done due to political reasons or for other reasons
such as health, religious sentiments. This is the most extreme form of trade barrier

Voluntary Export Restraints :

Voluntary Export Restraints (VERs) refer to a type of informal quota administered by an
exporting country voluntarily restraining the quantity of goods that can be exported out of that
country during a specified period of time. Such restraints originate primarily from political
considerations and are imposed based on negotiations of the importer with the exporter.

Anti-Dumping Duty
Anti-dumping duty is a tariff imposed on imports manufactured in foreign countries that are priced
below the fair market value of similar goods in the domestic market. The government imposes
anti-dumping duty on foreign imports when it believes that the goods are being “dumped” –
through the low pricing – in the domestic market. Anti-dumping duty is imposed to protect local
businesses and markets from unfair competition by foreign imports.
Dumping is, in general, a situation of international price discrimination, where the price of a
product when sold to the importing country is less than the price of the same product when sold in
the market of the exporting country. Anti- Dumping laws basically comprise the provisions that
govern such practices. In the globalize economy, dumping is one of the most controversial issues
and so are the anti-dumping laws.

History
The origin of the anti-dumping legislation can be traced back to the 19th century, when the
European sugar industries appealed to their respective governments for protection against sugar
being dumped at unfairly low prices. In 1902, there was a formal agreement on anti-dumping.
Canada adopted the first anti-dumping law in 1904, followed by the European countries and then
the US in 1916. The US law, as modified in 1921, and the Canadian one, formed the basis for the
original GATT article (Article VI of GATT) on anti-dumping in 1947. Subsequently, codes on
anti dumping were developed during the Kennedy Round (1962-67) and Tokyo Round (1973-79).

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However, these were not binding on all GATT members; they were open to signature by those
countries that wished to do so. They were plurilateral agreements, not multilateral ones. Unlike
these, the Uruguay Round, (1986-94) anti-dumping agreement is a multilateral agreement binding
on all GATT or WTO members.

Terms used

Normal Value: Normal value is the comparable price at which the goods under complaint
are sold, in the ordinary course of trade, in the domestic market of the exporting country
f the normal value cannot be determined by means of the domestic sales, the following two
alternative methods may be employed to determine the normal value: -
•Comparable representative export price to an appropriate third country.
•Constructed normal value, i.e. the cost of production in the country of origin with
reasonable addition for administrative, selling and general costs and reasonable
profits.

Export price: The Export price of the allegedly dumped goods means the price at which it is
exported to the complaining country. It is generally the CIF value minus the adjustments on
account of ocean freight, insurance, commission, etc. so as to arrive at the value at ex-
factory level.

Dumping Margin: The margin of dumping is the difference between the Normal value and
the export price of the goods under complaint. It is generally expressed as a percentage of
the export price. To ensure dumping activities do not affect the domestic market, the Indian
government has imposed anti-dumping duties against an exporter who causes any material or
substantial injury to a domestic industry in India. The anti-dumping law in India is the Customs
Tariff Act, 1975, which was amended in 1995

Types of Dumping
Below are the four types of dumping in international trade:
1. Sporadic dumping
Companies dump excess unsold inventories to avoid price wars in the home market and preserve
their competitive position. They can either dump by destroying excess supplies or export them to a
foreign market where the products are not sold.
2. Predatory dumping
Unlike sporadic dumping, which is occasional, predatory dumping is permanent. It involves the
sale of goods in a foreign market at a price lower than the home market. Predatory dumping is
done to gain access to the foreign market and eliminate competition. It creates a monopoly in the
market.
3. Persistent dumping
When a country consistently sells products at a lower price in the foreign market than the local
prices, it is called persistent dumping. It happens when there is a constant demand for the product
in the foreign market.
4. Reverse dumping
Reverse dumping happens when the demand for the product in the foreign market is less elastic. It
means that price changes do not impact demand. Therefore, the company can charge a higher
price in the foreign market and a lower price in the local market.

Advantages of Dumping
• Consumers in the importer’s country can gain access to products at lower prices.
• Exporters receive subsidies from their government to sell at lower prices abroad.
• The exporter’s country can generate employment and become industry leaders.

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Disadvantages of Dumping
• The debt of the exporter’s country will increase due to subsidies provided to sell at lower
prices abroad.
• Dumping is expensive, and it will take the exporters years to sell at a lower price and put
competitors out of business.
• The target company can retaliate and cause a trade war.

The World Trade Organization’s and the European Union’s Fight against Dumping
The World Trade Organization (WTO) and the European Union (EU) continuously take
measures to discourage countries from dumping by imposing tariffs and taxes.

The WTO’s Role

Member countries of the WTO lay down principles during the negotiation of the General
Agreement on Trade and Tariff (GATT), where they agree not to dump and enforce tariffs on
each other.
According to the WTO, if a country wants to put an anti-dumping tariff on a trading partner, then
that country needs to prove the occurrence of the dumping and its impact on the local market.
They also need to show that the dumped price is much lower than the exporter’s domestic price.
The disputing country should also determine the normal price before the anti-dumping tariff is in
place.

The EU’s Role

Like the WTO, the European Union also enforces anti-dumping measures through its economic
arm – the European Commission (EC). If a member country accuses a trading partner of
dumping, the EC needs to find that dumping has caused material harm to the complainant.
Before imposing the duties, the EC must find that the dumping has caused material harm to the
local market. It also needs to ensure that the anti-dumping duties do not violate the best interests
of the EU.
If found guilty, the exporter can agree to sell at a minimum price, and duties can be imposed if the
EU rejects the price offered by the exporter.

Causes of Illegal Dumping

• Population growth.
• High levels of waste production per capita.
• Disposal fees.
• Laziness.
• People do not care.
• Lack of education.
• Low fines.
• Bribing.

Anti-dumping measures include:

• Anti-dumping investigations;
Anti-dumping investigations are procedures initiated and conducted either following a
complaint by the domestic industry producing the like product or, in some situations,
investigations that are self-initiated by authorities in the importing country (ex officio
investigations) to determine whether a product is being dumped and is injuring national
producers (or a third country’s exporters) of the like product. Provisional duties may be
applied during the investigation.
• Anti-dumping duties;
Anti-dumping duties are duties levied on imports of a particular good originating from a
specific trading partner to offset injurious dumping found to exist as the result of an
investigation.

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• Price undertakings.
Price undertakings are undertakings by exporters to increase their export price to avoid the
imposition of antidumping duties.

The balance of payment is the statement that files all the transactions between the entities,
government anatomies, or individuals of one country to another for a given period of time. All the
transaction details are mentioned in the statement, giving the authority a clear vision of the flow of
funds. After all, if the items are included in the statement, then the inflow and the outflow of the
fund should match. For a country, the balance of payment specifies whether the country has an
excess or shortage of funds. It gives an indication of whether the country’s export is more than its
import or vice versa.

Types of Balance of Payment

The balance of payment is divided into three types:
Current account: It deals with current, ongoing, short term transactions like trade in goods, services
(invisible) etc. It reflects the nation’s net income. For instance, if you a buy a laptop from US, it will
be a current account transaction and it will be debit on current account as you have to pay to US.
There are 4 components of Current Account:
1. Goods – trade in goods
2. Services (invisible) – trade in services e.g. tourism
3. Income – investment income
4. Current unilateral transfers – donations, gifts, grants, remittances Note that grants might
appear as component of capital account but are included in current account as they are
unilateral, create no liability. Recipient does not have to give anything back in return.

Capital account: It deal with capital transactions i.e. those transactions which create assets or
liabilities. It reflects the net changes in the ownership of national assets.
For instance, if you buy a stocks or property in US, it will be a capital account transaction and it
will be debit on capital account as you have to pay to US to buy the asset.

Components of Capital Account

1. Foreign Direct Investment (FDI)
2. Foreign Portfolio Investment (FPI)
3. External Borrowings such as ECB
4. Reserve Account with the Central Bank

Finance account: The funds that flow to and from the other countries through investments like real
estate, foreign direct investments, business enterprises, etc., is recorded in this account. This
account calculates the foreign proprietor of domestic assets and domestic proprietor of foreign
assets, and analyses if it is acquiring or selling more assets like stocks, gold, equity, etc.

Importance of Balance of Payment

A balance of payment is an essential document or transaction in the finance department as it gives
the status of a country and its economy. The importance of the balance of payment can be
calculated from the following points:
• It examines the transaction of all the exports and imports of goods and services for a given
period.
• It helps the government to analyse the potential of a particular industry export growth and
formulate policy to support that growth.
• It gives the government a broad perspective on a different range of import and export
tariffs. The government then takes measures to increase and decrease the tax to discourage
import and encourage export, respectively, and be self-sufficient.

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• If the economy urges support in the mode of import, the government plans according to
the BOP, and divert the cash flow and technology to the unfavourable sector of the
economy, and seek future growth.
• The balance of payment also indicates the government to detect the state of the economy,
and plan expansion. Monetary and fiscal policy are established on the basis of balance of
payment status of the country.

How is the Balance of Payments Calculated?

The sum of the current account and capital account indicates the overall balance, which could
either be in surplus or in deficit.
Balance of Payments is the net credit in Current Account and Capital Account.
BoP = net credit in ( Current Account + Capital Account and Financial Account).
BoP Deficit or Surplus
• The decrease (increase) in official reserves is called the overall balance of payments deficit
(surplus).
• The balance of payments deficit or surplus is obtained after adding the current and capital
account balances.
• The balance of payments surplus will be considered as an addition to official reserves
(reserve use).
BoP Crisis
• Countries with current account deficits can run into difficulties. If the deficit is large and the
economy is not able to attract enough inflows of foreign investment, then their currency
reserves will dwindle.
• There may come a point when the country needs to seek emergency borrowing from
institutions such as the International Monetary Fund, that may lead to external debt.
• Countries with deficits in their current accounts will build up increasing debt and/or see
increased foreign ownership of their assets.
• BoP crisis is also known as the currency crisis.

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Autonomous Transactions vs Accommodating Transactions

• International economic transactions are called autonomous when transactions are made
independently of the state of the BoP (for instance due to profit motive).
• These items are called ‘above the line’ items in the BoP.
• The balance of payments is said to be in surplus (deficit) if autonomous receipts are greater
(less) than autonomous payments.
• Accommodating transactions (termed ‘below the line’ items), on the other hand, are
determined by the net consequences of the autonomous items, that is, whether the BoP is
in surplus or deficit.
• The official reserve transactions are seen as the accommodating item in the BoP (all others
being autonomous).
Errors and Omissions
Errors and Omissions constitute the third element in the BoP (apart from the current and capital
accounts) which is the ‘balancing item’ reflecting our inability to record all international
transactions accurately.

What is Current Account Deficit?

It’s simply deficit on all 4 components of current account.
(Export – Import) + Net income from abroad + Net Transfers
(Export – Import) is trade deficit
CAD = Trade Deficit + Net Income From Abroad + Net transfers
Note that Trade Deficit and CAD are not one and the same. Trade deficit is only a component of
CAD.

What does deficit on Current Account imply?

If we forget income and transfers for a moment, what it means is that we import more than what
we export.

How do we pay for that extra import?

Either we get more foreign investment (FDI & FII) and pay via that or we borrow from foreign
banks (ECB) or we will have to dip into our external reserves to pay for that amount and in the
process our forex reserves come down. When forex reserves come down below a critical level,
country appears on the brink of BoP crisis.
So, is CAD such a bad thing?
Depends on what you do with those extra imports and how you finance the deficit!
CAD is bad because:
• If a CAD is financed through borrowing, it is unsustainable because borrowing lead to high
interest payments in the future.
• Attracting capital flows (hot money, FII) to finance the deficit is risky as when confidence
falls, hot money flows dry up, leading to a rapid devaluation and crisis of confidence. Eg.
East Asian Crisis.
Run a CAD necessarily means running a surplus on the capital account. This means foreigners
have an increasing claim on your assets, which they could redeem any time.

However a current account deficit is not necessarily harmful

CAD during a period of inward investment particularly stable long term FDI may not be a bad
things as investment can create jobs. Investments will lead to higher growth will be able to pay
debts back.
Developing countries may use CAD to buy Capital goods and later export consumer goods and
thus repay the debt.
Moderate current account deficit (2% of GDP) financed mainly by stable foreign investments
which creates jobs and infrastructure in the economy can be helpful in the long run as it improves
productivity.

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BOT VS BOP

• The balance of Trade (BoT) or Trade Balance is a part of the Balance of Payments (BoP).
BoT just includes the balance between export and import of goods.
• BoP not only adds the service-trade but also many other components in the current
account (Eg: Transfer payments) and capital account (FDI, loans etc).

Disequilibrium in Balance of Payments:Types,Causes

A country's balance of payment can be favourable or unfavourable.If there is a trade surplus

and net inflow of capital the balance of payments would be favourable and show a surplus.
Surplus in balance of payments is an indicator of soundness of the economy.
If,on the other hand,there is trade deficit and net capital outflow from the economy,the
balance of payments is unfavourable and there is a deficit in the balance of payments.Both
surplus and deficit are disequilibrium in balance of payments which arise out of certain
factors.

Types of disequilibrium
• Cyclical disequilibrium
Disequilibrium in balance of payments caused by the ups and downs of business cycles is
called cyclical disequilibrium.
• Secular disequilibrium
When balance of payments deficit or surplus is long term,it is called secular disequilibrium.
• Structural disequilibrium
Such disequilibrium is caused due to changes in the international demand or supply of a
product or changes in the institutions of the economy

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Factors responsible for disequilibrium in Balance of Payments

1.Trade Cycles:
Cyclical fluctuations, their phases and amplitudes, differences in different countries, generally
produce cyclical disequilibrium.
2. Huge Developmental and Investment Programmes:
Huge development and investment programmes in the developing economies are the root causes
of the disequilibrium in the balance of payments of these countries. Their propensity to import
goes on increasing for want of capital for rapid industrialisation; while exports may not be boosted
up to that extent as these is the primary producing countries.
Moreover, their exports quantum of primary commodities may decline as newly-created domestic
industries may require them. Thus, there will be structural changes in the balance of payments and
structural disequilibrium will result.
3. Changing Export Demand:
A vast increase in the domestic production of foodstuffs, raw materials, substitute goods, etc. in
advanced countries has decreased their need for import from the agrarian underdeveloped
countries. Thus, export demand has considerably changed, resulting in structural disequilibrium in
these countries.
Similarly, advanced countries also will suffer in their exports as a result of loss of their markets in
developing countries owing to the tendency of the poor nations for self-reliance and their ways and
means of curtailing their imports. But disequilibrium (deficit) in balance of payments seems to be
more persistent in the underdeveloped or developing nations than in the advanced rich nations.
4. Population Growth:
High population growth in poor countries also had adversely affected their balance of payments
position. It is easy to see that an increase in population increases the needs of these countries for
imports and decreases the capacity to export.
5. Huge External Borrowings:
Another reason for a surplus or deficit in the balance of payments arises out of international
borrowing and investment. A country may tend to have an adverse balance of payments when it
borrows heavily from another country, while the lending country will tend to have a favourable
balance and the receiving country will have a deficit balance of payments.
6. Inflation:
Owing to rapid economic development, the resulting income and price effects will adversely affect
the balance of payments position of a developing country. With an income, the marginal
propensity to import being high in these countries, their demand for imported articles will rise.
Since marginal propensity to consume is also high in these countries, people’s demand for
domestic goods also will rise, and hence less may be spared for export. Moreover, a huge
investment in heavy industries in the developing countries may have an inflationary impact, as the
output of these industries will not be forthcoming immediately, whereas money income will have
been already expanded.
Thus, there will be an excess of monetary demand for goods and services in general which will
push up the price levels. A rise in the comparative price level certainly encourages imports and
discourages exports, resulting in a deficit balance of payments.
7. Demonstration Effect:
Demonstration effect is another most important factor causing deficit in the balance of payments of
a country — especially of an underdeveloped country. When people of underdeveloped nations
come into contact with those of advanced countries through economic, political or social relations,
there will be a demonstration effect on the consumption pattern of these people and they will
desire to have western style goods and pattern of consumption so that their propensity to import
increases, whereas their export quantum may remain the same or may even decline with the
increase i in income, thus causing an adverse balance of payments for the country.

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8. Reciprocal Demands:
Since intensity of reciprocal demand for products of different countries differs, terms of trade of a
country may be set differently with different countries under multi-trade transactions which may
lead to disequilibrium in a way.

Measures to correct disequilibrium in the Balance of payments.

1. Monetary Policy (Deflection)
Monetary policy may be devised to correct a deficit in the balance of payments of a country. The
deficit occurs because of high import and exports. This is to be reversed.
In this regard, the country may adopt deflationary or dear money policy by raising the bank rate
and restricting credit
Under deflation, prices fall which makes exports attractive and imports relatively costlier.
This eventually leads to a rise in exports and a fall in imports.
The policy of money contraction or deflection keeps exchange rates unaffected and tries to correct
the deficit in the Balance of payments through domestic changes.
However, deflation being in inexpedient, its Side Effects are dangerous to a poor Nation. It creates
more unemployment and poverty.
Again a developing economy has to adopt an expansionary rather than a contraceptive monetary
policy to cater to developmental needs.
2. Exchange Depreciation
Exchange depreciation means the decline in the rate of exchange of one country in terms of
another.
For example – Assume- the Indian rupee exchanges for 65 Roubles of the Russian currency. If
India experiences an adverse Balance of payments with regard to Russia, the Indian demand for
Rouble will be rise.
Consequently, the price of Rouble in terms of Rupee will be appreciated in its external value.
Thus, the rate of exchange of Indian rupee in terms of rouble may change to 1 Rupee = 45
Roubles from 1 equal 45 balls this is known as 1 Rupee = 64 Roubles. This is known as Exchange
Depreciation.
It is automatic and it helps in correcting a mild adverse Balance of payments.
This stimulates exports by making the domestic goods cheaper to the foreigners and thereby
leading to favorable balance However, this method is not feasible under the present system of
IMF which prescribes the fixed exchange rate system.
3. Devaluation
Devaluation of currency is another way that makes exports attractive.
The term Devaluation means a reduction in the official rate at which one currency is exchanged
for another.
It is an alternative to exchange depreciation.
Devaluation is undertaken when the currency is found to be unduly overvalued.
evaluation makes the Goods cheaper for foreigners. Exports will rise and imports decline.
1. It takes considerable time to yield expected results.
2. Its effect is strongly purgative I.e. violent.
4. Exchange Control
Restriction on the use of foreign exchange by the central banks called Exchange Control.
When exchange control is adopted, all the exporters have to surrender their foreign exchange
earnings to Central Bank.
Under exchange control, the central bank releases foreign exchanges only for essential imports and
conserves the rest of the balance.
This is the most direct method of curbing imports.
Exchange control, in General, deals with the balance of payments disequilibrium by suppressing
the deficit that is only a symptom and not the Basic Trouble.
Exchange control deals with only the deficit, not its causes, and it may irritate those causes tending
to create a more basic disequilibrium.

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In other words, exchange control can prevent a complete breakdown, but it cannot eliminate a
condition of disequilibrium.
Thus, exchange control offers no permanent solution to the problem of persistent disequilibrium.
It can, at best be justified only as a temporary measure, to gain time while other more fundamental
adjustments made to restore equilibrium in the Balance of payments.
5. Fiscal Policy- Import Duties
Under this policy, import traffic tariff duties are imposed so as to make the import dearer with an
overall aim of checking imports.
Imports get reduced and Balance of payments becomes favorable.
6. Import Policy (Import Quotes)
Under this mechanism, the government fixes a maximum quantity or value of a commodity to be
imported.
This in turn reduces and the deficit is reduced and thereby the Balance of payments, the position
is improved.
This measure has the immediate effect of checking imports as the marginal propensity to import
becomes zero once the quota limit is reached.
To correct disequilibrium in Balance of payments import quotes are assumed to be better than
import duties.
The quota has the immediate effect of restricting imports as the marginal prosperity to import
become zero, once the quota-limited is reached.
Thus, the effect of quotas on quantitative restriction (QR) of imports is explicit. But the Balance of
payments effects of import duties and not to certain.
.
7. Stimulating/Improving Export
To correct disequilibrium in the Balance of payments, it is necessary that exports should be
increased, the government may adopt export programs for this purpose.
Export promotion programs include subsidies, tax concession to exporters, marketing facilities,
incentives for exporters, reducing export duties, etc.
Further, to encourage exports the level of costs in the country may have to be brought down.
Thus, may involve cutting down on wages and interest rates and other incomes and also a
contraction of currency to bring the prices down.
8. Foreign Loans
The government can also secure loans from foreign banks or foreign governments to reduce the
deficit in the balance of payments.
Since the repayment of these loans is spread over a long period, This helps the government to
remove the deficit in the Balance of payments.
During the currency of the loans, the government takes steps to improve its foreign exchange
position.
9. Encouragement to Foreign Investment
The government induces the foreigners to make an investment in the country offering them all
sorts of investors incentives and concessions.
This provides the government with extra foreign exchanges which are utilized to reduce the deficit
in the Balance of payments.
But while inviting the foreign capitalist to invest their capital within the country, the government
sees to it that this does not produce any adverse repercussions on the economy.
10. Incentives to Foreign Tourist
The government may also encourage foreign tourists to visit the country in increasing numbers of
offering them various facilities and constitutional travel.
This increases the foreign exchange earnings of the country with the help of which the deficit in the
Balance of payments can be reduced.
11. Automatic Measures
The disequilibrium in the balance of payments may automatically disappear after sometime when
certain forces came into operation in the country.

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For example – The disequilibrium in the Balance of payments of a country under the gold
standard was automatically corrected through the inflow and outflow of gold.
If the balance of payments was unfavorable there was an outflow of gold from the country causing a
contraction in the volume of currency and credit, and ultimately a fall in the domestic price level.
This encouraged exports, while it discouraged imports. The equilibrium in the BOP was
automatically restored after some time.
Similarly, the equilibrium in the Balance of payments of a country on the paper standard was
automatically corrected through fluctuations in its rate of exchange.
For example – If the country’s BOP was unfavorable, the demand for foreign exchange exceeded
its supply, and consequently, the exchange value of its currency went down. The fall in its exchange
value encouraged exports while it discouraged imports.
The Equilibrium in the BOP was automatically restored after the lapse of some time. The
opposite process worked when the Balance of payments of the nation turned favorable.
The automatic measures discussed above did not produce the desired results in a short period.
Nor were they effective in dealing with a serious and fundamental disequilibrium in the BOP.
12. Miscellaneous Measures
These include- developing import-substituting Industries, postponing debt payments, check on
inflation, check on smuggling, etc. All these may help in correcting disequilibrium in the Balance
of payments.
To Sum up, some of the deficit in the balance of payments is not a desirable phenomenon for a
nation.
The methods mentioned above aim at reducing imports and stimulating exports.
Of these, The trade measures are better and effective. It produces immediate results

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UNIT III
GLOBAL ENTRY
International business may be defined simply as business transactions that take place across
national borders.This broad definition includes the very small firm that exports (or
imports) a small quantity to only one country, as well as the very large global firm with
integrated operations and strategic alliances around the world.

Within this broad array, distinctions are often made among different types of international
firms, and these distinctions are helpful in understanding a firm's strategy, organization, and
functional decisions (for example, its financial, administrative, marketing, human resource,
or operations decisions).

International strategic management builds on five phases of planning and analysis that
provide a framework for deploying resources and a plan of action.
• Recognizing antecedents
• External and internal analysis
• Strategic analysis and choice
• Leveraging competitive advantage and process
• Implementation and integration

STRATEGIC COMPULSIONS:
It means that the companies face the compulsion to be global if they want to gain the global
market and more values. But in the modern context strategic management faces many
compulsions. The present and future development of the field of strategic management is
likely to be driven by compulsions like contemporary developments in social and
economic theory and recent changes in the nature of the business and economic context.

International/global strategic management

Strategic management is the process of systematically analyzing various opportunities
and threats vis-à-vis organizational strengths and weaknesses, formulating and arriving at
strategic choices through critical evaluation of alternatives and implementing them to meet
the set objectives of the organization.

Area of strategic compulsions

• Orientation for globalization
• Emerging E-commerce and Internet culture
• Cut-throat competition
• Diversification
• Active pressure groups
• Motive for corporate social responsibility (CSR) and ethics.
STANDARDIZATION VERSUS DIFFERENTIATION:
According to Levitt, represents local marketing versus global marketing and focus on
the central question of whether a standardized (global) or a differentiated (local), country-
specific marketing approach.

Perspectives on standardization versus Differentiation:

• Regional perspective
• Marketing process prospective
• Marketing components/marketing mix perspective.

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Micheal Porter’s Generic Strategies

1.Cost Leadership
• Cost leadership means having the lowest per-unit (i.e., average) cost in the industry – that is,
lowest cost relative to your rivals.
• This could mean having the lowest per-unit cost among rivals in highly competitive
industries, in which case returns or profits will be low but nonetheless higher than
competitors
• Or, this could mean having lowest cost among a few rivals where each firm enjoys pricing
power and high profits.
• Notice that cost leadership is defined independently of market structure.

Cost leadership is a defendable strategy because:

• It defends the firm against powerful buyers. Buyers can drive price down only to the level
of the next most efficient producer.
• It defends against powerful suppliers. Cost leadership provides flexibility to absorb an
increase in input costs, whereas competitors may not have this flexibility.
• The factors that lead to cost leadership also provide entry barriers in many instances.
Economies of scale require potential rivals to enter the industry with substantial capacity to
produce, and this means the cost of entry may be prohibitive to many potential
competitors.
Achieving a low cost position usually requires the following resources and skills:
 Large up-front capital investment in new technology, which hopefully leads to large
market share in the long-run, but may lead to losses in the short-run.
 Continued capital investment to maintain cost advantage through economies of scale
and market share.
 Process innovation – developing cheaper ways to produce existing products.
 Intensive monitoring of labor, where workers frequently have an incentive-based pay
structure (i.e., a contract which includes some combination of a fixed-wage plus piece-
rate pay).

 Tight control of overhead.

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2. Differentiation
• Differentiating the product offering of a firm means creating something that is perceived
industry wide as being unique.
• It is a means of creating your own market to some extent.
• There are several approaches to differentiation:
o Different design o
Brand image
o Number of features o
New technology
 A differentiation strategy may mean differentiating along 2 or more of these dimensions.

Differentiation is a defendable strategy for earning above average returns because:

 It insulates a firm from competitive rivalry by creating brand loyalty; it lowers the price
elasticity of demand by making customers less sensitive to price changes in your products.
 Uniqueness, almost by definition, creates barriers and reduces substitutes. This leads to
higher margins, which reduces the need for a low-cost advantage.

 Higher margins give the firm room to deal with powerful suppliers.
 Differentiation also mitigates buyer power since buyers now have fewer alternatives.

Achieving a successful strategy of differentiation usually requires the following:

• Exclusivity, which unfortunately also precludes market share and low cost advantage.
• Strong marketing skills.
• Product innovation as opposed to process innovation.
• Applied R&D.
• Customer support.
• Less emphasis on incentive based pay structure.

1 Focus or Niche Strategy

• Here we focus on a particular buyer group, product segment, or geographical market.

• Whereas low cost and differentiation are aimed at achieving their objectives industry wide,
the focus or niche strategy is built on serving a particular target (customer, product, or
location) very well.
• Note, however, that a focus strategy means achieving either a low cost advantage or
differentiation in a narrow part of the market. For reasons discussed above, this creates a
defendable position within that part of the market.
Stuck in the Middle:
 Failure to develop a strategy in one of these 3 directions is a firm that is “stuck in the
middle.”
 This means you lack the market share, capital, and overhead control to be a cost leader,
and lack the industry wide differentiation necessary to create margins which obviate the
need for a low-cost position.
 Being “stuck” implies low profits as a rule: profits are bid away to compete with low cost
producers; or, the firm loses high margin business to firms who achieve better
differentiation.
 Classic examples of this problem are large, international airline companies, many of which
are now bankrupt.

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 Depending on a firm’s capabilities and resources, a “stuck” firm must gravitate toward
either low cost (usually by buying market share) or focus or differentiation (which may
mean decreasing market share).
Risks of each Strategy:
Each generic strategy is based on erecting different kinds of defences against the
competitive forces, and hence they involve different risks.

Cost Leadership:
Maintaining cost leadership can be risky because:
• Innovations nullify past inventions and learning, and hence cost leadership requires
continual capital investment to maintain cost advantage.
• Exclusive attention to cost can blind firms to changes in product requirements.
• Cost increases narrow price differentials and reduce ability to compete with
competitors’ brand loyalty.
• Differentiation:
o Risks are:
• Cost differentiation between low cost firms and differentiating firms becomes too
large to hold customer loyalty. Buyers trade-off features, service, or image for price.
• Buyers need for differentiation falls.
• Imitation decreases perceived differentiation.

STRATEGIC OPTIONS:
Strategic options/choice involves the selection of a strategy or set of strategies that helps
in achieving organizational objectives.
1. Global strategy
2. International strategy
3. Transactional strategy
4. Multi-domestic strategy
1. Global strategy: It views the world as a single market. Tightly controls global operations
from headquarters to preserve focus on standardization.
2. International strategy: In this strategy company extends marketing, manufacturing and other
activities outside the home country.
3. Multi-domestic strategy: the international company discovers that differences in markets
around the world demand an adaptation of its marketing mix in order to succeed.
4. Transactional strategy: this is company that thinks globally and acts locally. The
transactional corporation is much more than a company with sales, investments and operations in
many countries.
Factors affecting strategic options:
1) External constraints
2) Intra-organizational forces and managerial power-relations
3) Values and preferences and managerial attitudes risk
4) Impact of past strategy
5) Time constraints in choice of strategy.
6) Information constraints
7) Competitor’s reaction

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GLOBAL PORTFOLIO MANAGEMENT:

Global portfolio investment means the purchase of stocks, bonds, and money market
instruments by foreigners for the purpose of realizing a financial return which does not result in
foreign management, ownership, or control. Portfolio investment is part of the capital account on
the balance of payments statistics. An international portfolio is designed to give the investor
exposure to growth in emerging and international markets and provide diversification.
Factors affecting global portfolio investment:
1) Tax rates on interest or dividends
2) Interest rates
3) Exchange rates
Problems of global portfolio investment:
1. Unfavorable exchange rate movement
2. Frictions in international financial market
3. Manipulation of security prices
4. Unequal access to information

GLOBAL ENTRY STRATEGIES:

Level of involvement:
• Wholly-owned subsidiary
• Company acquisition
• Assembly operations
• Joint venture
• Strategic alliance
• Licensing
• Contract manufacture
• Direct marketing
• Distributors and agents
• Sales force
• Trading companies
• Export management companies
• Piggyback operations
• Domestic purchasing
• Franchising

FORMS OF INTERNATIONAL BUSINESS:

I) Exporting as an entry strategy:
Exporting is the most traditional mode of entering the foreign market. Exporting is that
which allows manufacturing operations to be concentrated in a single location, which may lead to
scale economics. Exporting is a typically the easiest way to enter an international market, and
therefore most firms begin their international expansion using this model of entry. Exporting is the
sale of products and services in foreign countries that are sourced from the home country. The
advantage of this mode of entry is that firms avoid the expense of establishing operations in the
new country. Firms must, however, have a way to distribute and market their products in the new
country, which they typically do through contractual agreements with a local company or
distributor. When exporting, the firm must give thought to labeling, packaging, and pricing the
offering appropriately for the market. In terms of marketing and promotion, the firm will need to
let potential buyers know of its offerings, be it through advertising, trade shows, or a local sales
force.

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a) Indirect exporting: For firms that little inclination or few resources for international
marketing, the simplest and lowest cost method of market entry is for them to have their products
sold overseas by others
b) Direct exporting:
Exporting is the most popular approach for firms as it requires fewer resources, has little effect
on existing operation and involves low investment and financial risks.
II) Manufacturing strategies without foreign direct investment:
1) Licensing:
Under a licensing agreement, a company (the licensor) grants rights to intangible property to
another company (the licensee) for a specified period; in exchange, the licensee ordinarily pays a
royalty to the licensor. Licensing is a common method of international market entry for companies
with a distinctive and legally protected asset, which is a key differentiating element in their
marketing offer. It involves a contractual arrangement whereby a company licenses the rights to
certain technological know-how, design, patents, trademarks and intellectual property to a foreign
company in return for royalties or other kinds of payment. For example, Disney's mode of entry in
Japan had been licensing.Because little investment on the part of the licensor is required, licensing
has the potential to provide a very large ROI. However, because the licensee produces and
markets the product, potential returns from manufacturing and marketing activities may be lost.

2) Franchising:
It means of marketing goods and services in which the franchiser grants the legal right to use
branding, trademarks and products and the method of operation is transferred to third party – the
franchise – in return for a franchise fee.
3) Contract manufacture:
A firm which markets and sells products into international markets might arrange for a local
manufacturer to produce the product for them under contract.
4) Turnkey projects:
It is a contract under which a firm agrees to fully design, construct and equip a
manufacturing/business/service facility and turn the project over to the purchaser when it is
ready for operation for remuneration.
5) Managements contracts:
It is an agreement between two companies, whereby one company provides managerial
assistance, technical expertise and specialized services to the second company of the argument
for a certain agreed period in return for monetary compensation
III) Manufacturing strategies with FDI:
1) Joint ventures:
It occurs when a company decides that shared ownership of a specially set up new company for
marketing and/or manufacturing is the most appropriate method of exploiting a business
opportunity.

2) Strategic alliances:
SIA is a business relationship established by two or companies to co-operate out of mutual need
and to share risk in achieving a common objective. A strategic alliance involves a contractual
agreement between two or more enterprises stipulating that the involved parties will cooperate in a
certain way for a certain time to achieve a common purpose. To determine if the alliance approach
is suitable for the firm, the firm must decide what value the partner could bring to the venture in
terms of both tangible and intangible aspects. The advantages of partnering with a local firm are
that the local firm likely understands the local culture, market, and ways of doing business better
than an outside firm. Partners are especially valuable if they have a recognized, reputable brand
name in the country or have existing relationships with customers that the firm might want to

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access. For example, Cisco formed a strategic alliance with Fujitsu to develop routers for Japan.
In the alliance, Cisco decided to co-brand with the Fujitsu name so that it could leverage Fujitsu’s
reputation in Japan for IT equipment and solutions while still retaining the Cisco name to benefit
from Cisco’s global reputation for switches and routers.

3) Merger:
It is a combination (other terms are amalgamation, consolidation or integration) of two or More
organizations in which one acquires the assets and liabilities of the other in exchange for shares or
cash.

4) Acquisition:
It is process of acquiring and purchasing an existing venture. It is one of the easy means of
expanding a business by entering new markets or new product areas. An acquisition is a transaction
in which a firm gains control of another firm by purchasing its stock, exchanging the stock for its
own, or, in the case of a private firm, paying the owners a purchase price. In recent years, cross-
border acquisitions have made up over 60 percent of all acquisitions completed worldwide.
Acquisitions are appealing because they give the company quick, established access to a new
market. However, they are expensive, which in the past had put them out of reach as a strategy for
companies in the undeveloped world to pursue. The higher interest rates in developing nations has
strengthened their currencies relative to the dollar or euro. If the acquiring firm is in a country with
a strong currency, the acquisition is comparatively cheaper to make.

5) wholly-owned subsidiary:
The common reason for operating wholly-owned subsidiary separately from the owner
company could be name value. Often, a well-known and respected corporation is acquired by
another entity that has no name recognition in that particular market. The process of establishing
of a new, wholly owned subsidiary (also called a green field venture) is often complex and
potentially costly, but it affords the firm maximum control and has the most potential to provide
above-average returns. The costs and risks are high given the costs of establishing a new business
operation in a new country. The firm may have to acquire the knowledge and expertise of the
existing market by hiring either host-country nationals—possibly from competitive firms—or costly
consultants.

6) Assembly operations:
A foreign owned operation might be set up simply to assemble components which have
been manufactured in the domestic market. It has the advantage of reducing the effect of tariff
barriers which are normally lower on components than on finished goods.
Increased investment opportunities: with globalization companies can move capital to
whatever country offers the most attractive investment opportunity. This prevents capital being
trapped in domestic economies earning poor returns.
Factors affecting the selection of entry mode
External factors
1) Market size
2) Market growth
3) Government regulations
4) Level of competition
5) Level of risk
Internal factors
1) Company objectives
2) Availability of company resources
3) Level of commitment
4) International experience
5) Flexibility

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Advantage and Organizational Issues in International Business

Advantage of International Business
 Earning valuable foreign currency: A country is able to earn valuable foreign currency by
exporting its goods to other countries.
 Division of labor: International business leads to specialization in the production of goods.
Thus, quality goods for which it has maximum advantage.
 Optimum utilization of available resources: International business reduces waste of
national resources. It helps each country to make optimum use of its natural resources.
Every country produces those goods for which it has maximum advantage.
 Increase in the standard of living of people: Sale of surplus production of one country to
another country leads to increase in the incomes and savings of the people
of the former country. This raises the standard of living of the people of the exporting
country.
 Benefits to consumers: Consumers are also benefited from international business. A
variety of goods of better quality is available to them at reasonable prices. Hence,
consumers of importing countries are benefited as they have a good scope of choice of
products.
 Encouragement to industrialization: Exchange of technological know-how enables
underdeveloped and developing countries to establish new industries with the assistance of
foreign aid. Thus, international business helps in the development of industry.
 International peace and harmony: International business removes rivalry between different
countries and promotes international peace and harmony. It creates dependence on each
other, improves mutual confidence and good faith.
 Cultural development: International business fosters exchange of culture and ideas
between countries having greater diversities. A better way of life, dress, food, etc. can be
adopted form other countries.
 Economies of large-scale production: International business leads to production on a large
scale because of extensive demand. All the countries of the world can obtain the
advantages of large-scale production.
 Stability in prices of products: International business irons out wide fluctuations in the
prices of products. It leads to stabilization of prices of products throughout the world.
 Widening the market for products: International business widens the market for products
all over the world. With the increase in the scale of operation, the profit of the business
increases.
 Advantageous in emergencies: International business enables us to face emergencies. In
case of natural calamity, goods can be imported to meet necessaries.
 Creating employment opportunities: International business boosts employment
opportunities in an export-oriented market. It raises the standard of living of the countries
dealing international business.
 Increase in Government revenue: The Government imposes import and export duties for
this trade. Thus, Government is able to earn a great deal of revenue from international
business.
 Other advantages: Effective business education, Improvement in production systems,
Elimination of monopolies, etc

Disadvantage of International Business

 Adverse effects on economy: One country affects the economy of another country through
international business. Moreover, large-scale exports discourage the industrial development
of importing country. Consequently, the economy of the importing country suffers.
 Competition with developed countries: Developing countries are unable to compete with
developed countries. It hampers the growth and development of developing countries,
unless international business is controlled.

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 Rivalry among nations: Intense competition and eagerness to export more commodities
may lead rivalry among nations. As a consequence, international peace may be hampered.
 Colonization: Sometimes, the importing country is reduced to a colony due to economic
and political dependence and industrial backwardness.
 Exploitation: International business leads to exploitation of developing countries the
developed countries. The prosperous and dominant countries regulate the economy poor
nations.
 Legal problems: Varied laws regulations and customs formalities followed different
countries, have a direct b earring on their export and import trade.
 Publicity of undesirable fashions: Cultural values and heritages are not identical in all the
countries. There are many aspects, which may not be suitable for our atmosphere, culture,
tradition, etc. This, indecency is often found to be created in the name of cultural
exchange.
 Language problems: Different languages in different countries create barriers to establish
trade relations between various countries.
 Dumping policy: Developed countries often sell their products to developing countries
below the cost of production. As a result, industries in developing countries of the close
down.
 Complicated technical procedure: International business in highly technical and it has
complicated procedure. It involves various uses of important documents. It required expert
services to cope with complicate procedures at different stages.
 Shortage of goods in the exporting country: Sometimes, traders prefer to sell their goods to
other countries instate of in their own country in order to earn more profits. This results in
the shortage of goods within the home country.
 Adverse effects on home industry: International business poses a threat to the survival of
infant and nascent industries. Due to foreign competition and unrestricted imports
upcoming industries in the home country may collapse.

ORGANIZATIONAL STRUCTURE
An organizational structure defines how activities such as task allocation, coordination
and supervision are directed towards the achievement of organizational aims. It can also be
considered as the viewing glass or perspective through which individuals see their organization
and its environment. Organizations are a variant of clustered entities.
An organization can be structured in many different ways, depending on their objectives.
The structure of an organization will determine the modes in which it operates and performs.
Organizational structure allows the expressed allocation of responsibilities for different
functions and processes to different entities such as
the branch, department, workgroup and individual. It affects organizational action in two big
ways. First, it provides the foundation on which standard operating procedures and routines rest.
Second, it determines which individuals get to participate in which decision-making processes,
and thus to what extent their views shape the organization’s actions
Designing organizational structure: It includes an analysis of the following aspects;
1) External environment
2) Overall aims and purpose of the enterprise
3) Objectives
4) Activities
5) Decisions
6) Relationships
7) Organization structure
8) Job structure
9) Organization climate
10) Management style
11) Human resource
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Types of organizational structure

1) International division’s structure:
Grouping each international business activity into its own division, puts internationally
specialized personnel together to handle such diverse matters as export documentation, foreign
exchange transactions and relations with foreign governments.

Advantages of Divisional Organizational Structure

Divisions work well because they allow a team to focus upon a single product or service, with a
leadership structure that supports its major strategic objectives. Having its own president or vice
president makes it more likely the division will receive the resources it needs from the company.
Also, a division's focus allows it to build a common culture and esprit de corps that contributes
both to higher morale and a better knowledge of the division's portfolio. This is far preferable to
having its product or service dispersed among multiple departments through the organization.

Disadvantages of Divisional Organizational Structure

A company comprised of competing divisions may allow office politics instead of sound strategic
thinking to affect its view on such matters as allocation of company resources. Thus, one division
will sometimes act to undermine another.
Also, divisions can bring compartmentalization that can lead to incompatibilities. For example,
Microsoft's business-software division developed the Social Connector in Microsoft Office
Outlook 2010. They were unable to integrate

2) Functional division’s structure:

It emphasizes on specific functions such as manufacturing, marketing, finance and so on. It is
more suitable where the products and customers are few and homogeneous.

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A functional structure features well‐defined channels of communication and

authority/responsibility relationships. Not only can this structure improve productivity by
minimizing duplication of personnel and equipment, but it also makes employees comfortable and
simplifies training as well. But the functional structure has many downsides that may make it
inappropriate for some organizations. Here are a few examples:
 The functional structure can result in narrowed perspectives because of the separateness
of different department work groups. Managers may have a hard time relating to
marketing, for example, which is often in an entirely different grouping. As a result,
anticipating or reacting to changing consumer needs may be difficult. In addition, reduced
cooperation and communication may occur.
 Decisions and communication are slow to take place because of the many layers of
hierarchy. Authority is more centralized.
 The functional structure gives managers experience in only one fields their own.
Managers do not have the opportunity to see how all the firm's departments work together
and understand their interrelationships and interdependence. In the long run, this
specialization results in executives with narrow backgrounds and little training handling
top management duties.

3) Product division structure:

It is more common in international business and more suitable in case of a multiple brand
system. In this case, there are different product divisions, in each division, there are subdivisions.

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Examples include departments created to distinguish among production, customer service, and
geographical categories. This grouping of departments is called divisional structure. These
departments allow managers to better focus their resources and results. Divisional structure also
makes performance easier to monitor. As a result, this structure is flexible and responsive to
change. However, divisional structure does have its drawbacks. Because managers are so
specialized, they may waste time duplicating each other's activities and resources. In addition,
competition among divisions may develop due to limited resources.

4) Geographic (Area) division structure:

In case of area structure, organization is based on the geographic areas, namely, Asia, Africa, and
Latin America and so on and the operation is divided accordingly.

Advantages of a geographical structure

A geographical structure can offer several operational and strategic advantages, including:
• close communication with local customers
• strong collaborative teams at each location
• the ability to better serve local needs and tailor their approach to the local market
• the ability to encourage positive competition between different departments

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It makes sense to divide an organisation by region if different cultures, rules, languages and
customer preferences exist in the area where the business operates. Logistics relating to shipping,
resources and staff also sometimes make the geographical structure a good choice.
Disadvantages
The main downside of a geographical organisational structure is the potential conflict between local
and central management, as individual divisions often take on a great deal of autonomy. Other
disadvantages include:
• potential duplication of jobs, resources and functions
• some economies of scale may be lost

5) Matrix division structure:

The global matrix structure is more complex when it combines all the three aspects – product,
area, and function. This is found in multi-product firms where one group of products needs area
structure of organization, while the other group of products needs functional structure, and for yet
another group, product structure is found more appropriate.

Advantages
This structure not only increases employee motivation, but it also allows technical and
general management training across functional areas as well. Potential advantages include
 Better cooperation and problem solving.
 Increased flexibility.
 Better customer service.
 Better performance accountability.
 Improved strategic management.
Disadvantages.
The two‐boss system is susceptible to power struggles, as functional supervisors and team
leaders vie with one another to exercise authority.
 Members of the matrix may suffer task confusion when taking orders from more than one
boss.
 Teams may develop strong team loyalties that cause a loss of focus on larger organization
goals.
 Adding the team leaders, a crucial component, to a matrix structure can result in increased
costs.

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6) Team structure:
Team structure organizes separate functions into a group based on one overall objective (see
Figure 4). These cross functional teams are composed of members from different departments
who work together as needed to solve problems and explore opportunities. The intent is to break
down functional barriers among departments and create a more effective relationship for solving
ongoing problems.

The team structure has many potential advantages, including the following:
 Intradepartmental barriers break down.
 Decision‐making and response times speed up.
 Employees are motivated.
 Levels of managers are eliminated.
 Administrative costs are lowered.
The disadvantages include:
 Conflicting loyalties among team members.
 Time‐management issues.
 Increased time spent in meetings.
Managers must be aware that how well team members work together often depends on the
quality of interpersonal relations, group dynamics, and their team management abilities.

7) Mixed structure:
Most firms allow the hybrid design which best suits their purpose as dictated by size, strategy,
and technology, environment and culture. This is the reason why the famous saying “structure
follows strategy has emerged. Ex: Philips and Unilever

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CONTROLLING OF INTERNATIONAL BUSINESS

According to Child, “Control is essentially concerned with regulating the activities within an
organization so that they are in accord with expectations established in policies, plans and
Practices.
Levels
There are three main levels at which control can be implemented and managed in an
international business. These three key levels of control are as follows:
1. Strategic
2. Organizational
3. Operational
Strategic Control:
Strategic control in intended both how well an international business formulates strategy
and how well it goes about implementing it. Thus strategic control focuses on how well the firm
defines and maintains its desired strategic alignment with its environment and how effectively it
is setting and achieving its strategic goals.
Strategic control also play a major role in the decisions firms make about foreign-market entry
and expansion and most critical aspect of strategic control is control of an international firm’s
financial resources.

Organizational Control:
Organizational control focuses on the design of the organization itself. There are many different
forms of organizational design an international firm can use. But selecting and implementing a
particular design does not necessarily end the organization design process.
International firm generally use one or more of three types of organizational control systems:
a. Responsibility Centre Control:
The most common type of organizational control system is a decentralized one called
responsibility centre control. Using this system, a firm first identifies fundamentals
responsibility centers within the organization. Strategic business units are frequently
defined as responsibility centers, as are geographical regions or product groups.
b. Generic Organizational Control:
A firm may prefer to use generic organizational across its entire organization; that is, the
control systems used are the same for each unit or operation, and the locus of authority
generally resides at the firm’s headquarters.
c. Planning Process Control:
A third type of organizational control, which could be used in combination with either
responsibility center control or generic organizational control, focuses on the strategic
planning process itself rather than on outcomes. Planning process control calls for a firm
to concentrate its organizational control system on the actual mechanics and processes its
uses to develop strategic plans.

Operations Control:
The third level of control in an international firm is operations control. Operations control
focuses specifically on operating processes and systems within both the firm and its subsidiaries
and operating units. Thus a firm needs an operation control system within each business unit and
within each country or market in which it operates.
Types/Methods of control systems:
1) Personal controls: It is control by personal contact with subordinates.
2) Bureaucratic controls: The control through a system of rules and procedures that directs
the actions of sub-units.
3) Output controls: It involves setting goals for subsidiaries to achieve; expressing these
goals in terms of relatively objective criteria such as profitability, productivity, growth,
market share, and quality.

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4) Cultural controls: It exists when employees “buy into” the norms and value systems of
the firm.

Approaches to control:
1) Market approach
2) Rules approach
3) Corporate culture approach

Control mechanisms:
1) Reports
2) Visits to subsidiaries
3) Management performance evaluations
4) Cost and comparisons
5) Evaluative measurements
6) Information systems

Process of performance measurement

• Establish standards of performance
• Measure actual performance
• Analyze performance and compare it with standards
• Construct and implement an action plan
• Review and revise standards

Performance evaluation system

It can be defined as, “the periodic review of operations to ensure that the objectives of the
enterprise are being accomplished”.
Various performance indicators:
1) Financial measures
a) Return on investment(ROI)
b) Budget as a success indicator
2) Non-financial measures.
Types of performance evaluation system
1) Budget programming
2) Management audit
3) PERT(Program evaluation review technique)
4) Management information system

Establishing International Control Systems

Control systems in international business are established through four basic steps:
1. Set Control standards for performance
2. Measure actual performance
3. Compare performance against standards
4. Respond to deviations

 Set Control Standards for Performance

The first step in establishing an international control system is to define relevant control
standards. A control standards in this context is a target, a desired level of performance
component the firm is attempting control. Control standards need to be objective and consistent
with firm’s goals. Suppose a firm is about to open its first manufacturing facility in Thailand. It
might set the following three control standards for the plant:
a. Productivity and quality in the new plant will exceed the levels in the firm’s existing
plants.
b. After an initial break-in period, 90% of all key management positions in the plant will be
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filled by local managers.

c. The plant will obtain at least 89% of its resources from local suppliers.

 Measure Actual Performance

The second step in creating an international control system is to develop a valid measure of the
performance component being controlled. For the firm introducing a new product in a foreign
market, performance is based on the actual number of units sold. For the new plant in Thailand
used as an example earlier, performance would be assessed in terms of productivity, quality, and
hiring and purchasing practices.

 Compare Performance Against Standards

The next step in establishing an international control system is to compare measured performance
against the original control standards. Again, when control standards are straightforward and
objective and performance is relatively easy to asses, this comparison is
easy. But when control standards and performance measures are less concrete, comparing one
against the other is considerably more complicated.

 Responding to Deviations
The final step in establishing an international control system is responding to deviations
observed in step 3. Three different outcomes can result when comparing a control standard and
actual performance:
a. The control standard has been met.
b. It has not been met.
c. It has been exceeded.
Depending on the circumstances, managers have many alternative responses to these
outcomes. If a standard has not been met and the manager believes it is because of performance
deficiencies on the part of employees accountable for the performance, the manger may mandate
higher performance, increase incentives to perform at a higher level, or discipline or even
terminate those employees.

Essential Controlling Techniques

Because of the complexities of both the international environment and international firms
themselves, those firms rely on a wide variety of different control techniques. We do not
describe them all here but introduce a few of the most important ones.
1. Accounting Systems:
Accounting is a comprehensive for collecting, analyzing, and communicating data about
firm’s financial resources. Accounting procedures are heavily regulated and must follow
prescribed methods dictated by national government. Because of these regulations and
systems accounting process can be a good controlling techniques.
2. Procedures:
Firms also use various procedures to maintain effective control. Policies, standard
operating procedures, rules, and regulations all help managers carry out the control
function.
3. Performance Ratio:
International firms also use various performance rations to maintain control. A
performance ratio is a numerical index of performance that the firm wants to maintain. A
common performance ration used by many firms is inventory turnover. Holding
excessive inventory is dysfunctional because the inventory ties up resources that could
otherwise be used for different purposes and because the longer materials sit in inventory,
the more prone they are to damage and loss.

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Controlling Quality in International Business

Control also helps firms maintain and enhance the quality has become such a significant
competitive issue in most industries that control strategies invariably have quality as a central
focus. Quality is a vital importance for several reasons:
1. Many firms today compete on the basis of quality.
2. Quality is important because it is directly linked with productivity.
3. Higher quality helps firms to develop and maintain customer loyalty.

Quality consist of eight dimensions:

1. Performance: comprises the product’s primary operating characteristics, such as, an
automobile’s ability to transport its driver.
2. Features: include supplementary characteristics, such a power window on an
automobile.
3. Reliability: refers to the dependability of a product, such as the probability of an
automobile’s starting.
4. Conformance: is how well the product meets normal standards.
5. Durability: refers to the product’s expected lifespan.
6. Serviceability: refers to how fast and easily the product can be repaired.
7. Aesthetics: refers to how the product looks, feels, tastes, and/or smells.
8. Perceived quality: is the level of quality as seen by the customer.

Quality Improvement Tools

1. Statistical process control: is a family of mathematically-based tools for monitoring and
controlling quality. Its basic purpose is to define the target level of quality, specify an
acceptable range of deviation, and then ensure that product quality is hitting the target.
2. Benchmarking: is the process of legally and ethically studying how other firms do
something in high-quality way and then either imitating or improving on their methods.
3. Total Quality Management (TQM): is an integrated effort to systematically and
continuously improve the quality of an organization’s products and /or services. The
components of TQM are – strategic commitment to quality, employee involvement, highquality
materials, up-to-date technology, and effective process.

PERFORMANCE OF GLOBAL BUSINESS:

Global Business Performance is a flexible, web based solution that provides the key
components to support global decision making. It offers the integration and management of
multiple, cross-country data sources including POS, retailer direct, syndicated and consumer
data. Global Business Performance identifies trends and opportunities and delivers sales and
performance insights across regions, countries and categories, only days after data is available.
Business Issue Addressed:
Sales & Channel Management
Key Features and Benefits:
• Data from many disparate sources can be harmonized and integrated to give one
consistent, accurate and actionable view of a company's performance across many
different markets.
• Sales, trends, performance, issues and opportunities can be identified across multiple
countries, regions and categories a few days after the data is available, rather than weeks
or months later.
• This approach ensures the fast identification of global sales, marketing and supply chain
opportunities, and provides the ability to focus on the key issues, and expand the solution
when and where required
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UNIT- 4
GLOBAL PRODUCTION STRATEGIES:
Multi-domestic. Concerns operations where each market is serviced independently.
Can relate to simple products that are easy to replicate but costly to transport over long distances.
Production can be integrated globally, while the marketing is Multi-domestic, reflecting cultural
and consumer preferences differences. The goal is therefore to better answer the needs of every
market. This implies an independency in productivity, meaning that the efficiencies and
productivities achieved in each market are unrelated to those taking place in other markets.
Globally integrated. Systems of production located in several countries and commonly
involving complex products. Logistics activities are highly important as production and
distribution capabilities need to be effectively reconciled. This implies an interdependency in
productivity, as each component of the supply chain directly impacts the cost and the quality of
the final product.
Four major location strategies for Global Production Networks can be identified:
 Centralized global production. The entire production occurs within only one nation (or
region) and is exported thereafter on the global market. This is particularly the case for
activities that are difficult to relocate, such as goods linked to the location of resources,
difficult to reproduce (e.g. luxury and craft) or depending on massive economies of scale.
 Regional production. Takes place within each region that manufactures a good with the
size of the production system related to the size of the regional market. This system
depends more on a regional accessibility than on economies of scale. It particularly
applies to well known manufacturing technologies and/or to products having high
distribution costs (e.g. soft drinks).
 Regional specialization. This global production network involves a spatial division of
the production based on comparative advantages. Each region specializes in the
production of a specific good and imports from other regions what it requires.
 Vertical transnational integration. This global production network is another variant of
specialization. Different stages of the production occur at locations offering the best
comparative advantages. Raw materials are extracted from locations where they are the
most accessible, while assembly is performed in regions having low labor costs or high
skill levels depending on the type of product or the stage in its manufacturing.
Each production sectors has a different production network. The automotive and electronics
sectors are good examples of vertical integration. For instance, the manufacture of a television
generally implies stages of research and development in the United States and Japan (as well as
being important markets). Several nations, such as England, South Korea and Germany provide
components. The assembly takes place in low wages countries such as China, Mexico and
Thailand. Labor costs are a key element of this system, but also the required level of knows how.

INTERNATIONAL LOCATION DECISIONS:

Major Issues:
The objective of this study is to elicit a consensus of judgments on issues of critical
factors in international location decisions and to classify these factors under type of business
which firms located, location of manufacturing plant, location of parent company and the nature
of business.

The major issues in this study are as follows:

• Identification of motivations of firms that seek to manufacture across the borders.
• Determination of steps in international location decision process.
• Identifying the most difficult problem in making an international location decision and
recommending ways to overcome the problem.

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• Identification of factors relating to international location decisions by asking the experts

indicates the importance of each of the thirteen major factors using a seven-point scale.
• Explanatory on the importance of sub-factors and the sectors, types of business or
countries in which they are most relevant.
• Identifying factors that need to be considered in international location decisions under
location of manufacturing plant in different geographical areas i.e. Western Europe,
Eastern Europe, Japan,
• United Stated, Middle-East, Far-east, Africa, Latin America from experts’ points of view.
• Identifying factors that need to be considered in international location decisions under
location of parent company I United States, United Kingdom, Western Europe and Japan
from experts’points of view.
• Identifying factors that need to be considered in international location decisions under type
of business i.e. Automotive/Motor Vehicles, Electronic Products/IT and Software,
Electronic Equipment and Appliances, Textiles/Apparel, Consumer products/ Food and
Beverages,Rubber/Plastics, Chemical/Petroleum and Coal and other businesses from
experts’ points of view.
• Identifying factors that need to be considered in international location decisions under
nature of firm i.e. world-class manufacturing, large company and medium-sized company
by identifying the top four important factors from experts’ points of view.

SCALE OF OPERATIONS:
The cost advantage that arises with increased output of a product.
Economies of scale arise because of the inverse relationship between the quantity produced and
per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed
cost because these costs are shared over a larger number of goods.

Economies of scale may also reduce variable costs per unit because of operational efficiencies and
synergies. Economies of scale can be classified into two main types: Internal – arising from within
the company; and External – arising from extraneous factors such as industry size.

Economies of Scale and International Trade

One important motivation for international trade is the efficiency improvements that can
arise because of the presence of economies of scale in production. Although economists wrote
about these effects long ago, models of trade developed after the 1980s introduced economies of
scale in creative new ways and became known as the “New Trade Theory.”
The WTO can cut the cost of doing business internationally
Many of the benefits of the trading system are more difficult to summarize in numbers,
but they are still important.
They are the result of essential principles at the heart of the system, and they make life simpler
for the enterprises directly involved in trade and for the producers of goods and services.

Trade allows a division of labor between countries.

It allows resources to be used more efficiently and effectively for production. But the
WTO’s trading system offers more than that. It helps to increase productivity and to cut costs
even more because of important principles enshrined in the system, designed to make life
simpler and clearer.
Imagine a situation where each country sets different rules and different customs duty
rates for imports coming from different trading partners. Imagine that a company in one country
wants to import raw materials or components copper for wiring or touch screens for electronic
equipment, for example for its own production.
It would not be enough for this company to look at the prices offered by suppliers around
the world. The company would also have to make separate calculations about the different duty

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rates it would be charged on the imports (which would depend on where the imports came from),
and it would have to study each of the regulations that apply to products from each country.
Buying copper or touch screens would become very complicated. That, in simple terms, is one of
the problems of discrimination.
Imagine now that the government announces it will charge the same duty rates on imports from
all countries, and will use the same regulations for all products, whether imported or locally
produced. Life for the company would be much simpler. Sourcing components would become
more efficient and cost less.

Non-discrimination is just one of the key principles of the WTO’s trading system. Others
include:
 Transparency (clear information about policies, rules and regulations)
 Increased certainty about trading conditions (commitments to lower trade barriers and to
increase other countries’ access to one’s markets are legally binding)
 Simplification and standardization of customs procedure, removal of red tape, centralized
databases of information, and other measures to simplify trade, known as “trade
facilitation”.
Together, they make trading simpler, cutting companies’ costs. That, in turn, means more jobs
and better goods and services for consumers.

Trade facilitation” has become an important subject in the Doha Round negotiations.
Red tape and other obstacles are like a tax on trade. The saving from streamlining procedures
could be 2% –15% of the value of the goods traded, according to estimates by the Organization
for Economic Cooperation and Development (OECD). The Peterson Institute for International
Economics estimates that it could add $117.8 billion to the world economy (global GDP). The
World Bank says that for every dollar of assistance provided to support trade facilitation reform
in developing countries, there is a return of up to $70 in economic benefits.

MAKE-OR-BUY DECISION:
Definition:
The act of choosing between manufacturing a product in-house or purchasing it from an
external supplier. In a make-or-buy decision, the two most important factors to consider are cost
and availability of production capacity.
An enterprise may decide to purchase the product rather than producing it, if is cheaper to buy
than make or if it does not have sufficient production capacity to produce it in-house. With
the phenomenal surge in global outsourcing over the past decades, the make-or-buy decision is
one that managers have to grapple with very frequently.

Make-or-Buy decision situation:

The make-or-buy decision is the act of making a strategic choice between producing an item
internally or buying it externally. The buy side of the decision also is referred to as outsourcing.
Make-or-buy decisions usually arise when a firm that has developed a product or part or
significantly modified a product or part is having trouble with current suppliers, or has
diminishing capacity or changing demand.
Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the strategic
level is the more long-range of the two. Variables considered at the strategic level include analysis
of the future, as well as the current environment. Issues like government regulation, competing
firms, and market trends all have a strategic impact on the make-or-buy decision. Of course, firms
should make items that reinforce or are in-line with their core competencies. These are areas in
which the firm is strongest and which give the firm a competitive advantage.
The increased existence of firms that utilize the concept of lean manufacturing has prompted an
increase in outsourcing. Manufacturers are tending to purchase subassemblies rather than piece
parts, and are outsourcing activities ranging from logistics to administrative services.

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In their 2003 book World Class Supply Management, David Burt, Donald Dobler, and
Stephen Starling present a rule of thumb for out-sourcing.
It prescribes that a firm outsource all items that do not fit one of the following three categories:
(1) The item is critical to the success of the product, including customer perception of
important product attributes
(2) The item requires specialized design and manufacturing skills or equipment, and the
number of capable and reliable suppliers is extremely limited
(3) The item fits well within the firm's core competencies, or within those the firm must
develop to fulfill future plans. Items that fit less than one of these three categories are considered
strategic in nature and should be produced internally if at all possible.

Make-or-buy decisions also occur at the operational level.

 Desire to integrate plant operations
 Productive use of excess plant capacity to help absorb fixed overhead
 Need to exert direct control over production and/or quality
 Better quality control
 Design secrecy is required to protect proprietary technology
 Unreliable suppliers
 No competent suppliers
 Desire to maintain a stable workforce (in periods of declining sales)
 Quantity too small to interest a supplier
 Control of lead time, transportation, and warehousing costs
 Greater assurance of continual supply
 Provision of a second source Political, social or environmental reasons (union pressure)
 Emotion (e.g., pride)

Factors that may influence firms to buy a part externally include:

 Lack of expertise
 Suppliers' research and specialized know-how exceeds that of the buyer
 cost considerations (less expensive to buy the item)
 Small-volume requirements
 Limited production facilities or insufficient capacity
 Desire to maintain a multiple-source policy
 Indirect managerial control considerations
 Procurement and inventory considerations
 Brand preference
 Item not essential to the firm's strategy
The two most important factors to consider in a make-or-buy decision are cost and the
availability of production capacity. Burt, Dobler, and Starling warn that "no other factor is
subject to more varied interpretation and to greater misunderstanding" Cost considerations
should include all relevant costs and be long-term in nature. Obviously, the buying firm will
compare production and purchase costs. Burt, Dobler, and Starling provide the major elements
included in this comparison. Elements of the "make" analysis include:
 Incremental inventory-carrying costs
 Direct labor costs
 Incremental factory overhead costs
 Delivered purchased material costs
 Incremental managerial costs
 Any follow-on costs stemming from quality and related problems
 Incremental purchasing costs
 Incremental capital costs

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Cost considerations for the "buy" analysis include:

 Purchase price of the part
 Transportation costs
 Receiving and inspection costs
 Incremental purchasing costs
 Any follow-on costs related to quality or service

One will note that six of the costs to consider are incremental. By definition, incremental
costs would not be incurred if the part were purchased from an outside source. If a firm does not
currently have the capacity to make the part, incremental costs will include variable costs plus
the full portion of fixed overhead allocable to the part's manufacture.
If the firm has excess capacity that can be used to produce the part in question, only the
variable overhead caused by production of the parts are considered incremental. That is, fixed
costs, under conditions of sufficient idle capacity, are not incremental and should not be
considered as part of the cost to make the part. While cost is seldom the only criterion used in a
make-or-buy decision, simple break-even analysis can be an effective way to quickly surmise the
cost implications within a decision.

Situation of Make-or-Buy Decisions:

International businesses frequently face sourcing decisions, decisions about whether they
should make or buy the component parts that go into their final product. Should the firm
vertically integrate to manufacture its own component parts or should it outsource them, or buy
them from independent suppliers? Make-or-buy decisions are important factors of many firms'
manufacturing strategies. In the automobile industry, for example, the typical car contains more
than 10,000 components, so automobile firms constantly face make-or-buy decisions. Ford of
Europe, for example, produces only about 45 percent of the value of the Fiesta in its own plants.
The remaining 55 percent, mainly accounted for by component parts, come from independent
suppliers. In the athletic shoe industry, the make-or-buy issue has been taken to an extreme with
companies such as Nike and Reebok having no involvement in manufacturing; all production has
been outsourced, primarily to manufacturers based in low-wage countries. Make-or-buy decisions
pose plenty of problems for purely domestic businesses but even more problems for international
businesses. These decisions in the international arena are complicated by the volatility of countries'
political economies, exchange rate movements, changes in relative factor costs, and the like.

THE ADVANTAGES OF MAKE:

The arguments that support making component parts in-house--vertical integration--are
fourfold. Vertical integration may be associated with lower costs, facilitate investments in highly
specialized assets, protect proprietary product technology, and facilitate the scheduling of
adjacent processes.
 Lower Costs
It may pay a firm to continue manufacturing a product or component part in-house if the
firm is more efficient at that production activity than any other enterprise. Boeing, for example,
recently undertook a very detailed review of its make-or-buy decisions with regard to
commercial jet aircraft (for details see the accompanying Management Focus). It decided that
although it would outsource the production of some component parts, it would keep the
production of aircraft wings in-house.
Its rationale was that Boeing has a core competence in the production of wings, and it is
more efficient at this activity than any other comparable enterprise in the world. Therefore, it
makes little sense for Boeing to out-source this particular activity.

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 Facilitating Specialized Investments

We first encountered the concept of specialized assets in Chapter 6 when we looked at
the economic theory of vertical foreign direct investment. A variation of that concept explains
why firms might want to make their own components rather than buy them. The argument is that
when one firm must invest in specialized assets to supply another, mutual dependency is created.
In such circumstances, each party fears the other will abuse the relationship by seeking more
favorable terms.
 Proprietary Product Technology Protection
Proprietary product technology is technology unique to a firm. If it enables the firm to
produce a product containing superior features, proprietary technology can give the firm a
competitive advantage. The firm would not want this technology to fall into the hands of
competitors. If the firm contracts out the manufacture of components containing proprietary
technology, it runs the risk that those suppliers will expropriate the technology for their own use
or that they will sell it to the firm's competitors. Thus, to maintain control over its technology,
the firm might prefer to make such component parts in-house.
An example of a firm that has made such decisions is given in the accompanying
Management Focus, which looks at make-or-buy decisions at Boeing. While Boeing has decided
to outsource a number of important components that go toward the production of an aircraft, it
has explicitly decided not to outsource the manufacture of wings and cockpits because it believes
that doing so would give away key technology to potential competitors.
 Improved Scheduling
The weakest argument for vertical integration is that production cost savings result from
it because it makes planning, coordination, and scheduling of adjacent processes easier. This is
particularly important in firms with just-in-time inventory systems. In the 1920s, for example, Ford
profited from tight coordination and scheduling made possible by backward vertical integration
into steel foundries, iron ore shipping, and mining. Deliveries at Ford's foundries on the Great
Lakes were coordinated so well that ore was turned into engine blocks within 24 hours. This
substantially reduced Ford's production costs by eliminating the need to hold excessive ore
inventories.

ADVANTAGES OF BUY:
The advantages of buying component parts from independent suppliers are that it gives
the firm greater flexibility, it can help drive down the firm's cost structure, and it may help the
firm to capture orders from international customers.
 Strategic Flexibility
The great advantage of buying component parts from independent suppliers is that the
firm can maintain its flexibility, switching orders between suppliers as circumstances dictate.
This is particularly important internationally, where changes in exchange rates and trade barriers
can alter the attractiveness of supply sources. One year Hong Kong might be the lowest-cost
source for a particular component, and the next year, Mexico may be.
Sourcing component parts from independent suppliers can also be advantageous when the
optimal location for manufacturing a product is beset by political risks. Under such
circumstances, foreign direct investment to establish a component manufacturing operation in
that country would expose the firm to political risks. The firm can avoid many of these risks by
buying from an independent supplier in that country, thereby maintaining the flexibility to switch
sourcing to another country if a war, revolution, or other political change alters that country's
attractiveness as a supply source.
However, maintaining strategic flexibility has its downside. If a supplier perceives the
firm will change suppliers in response to changes in exchange rates, trade barriers, or general
political circumstances, that supplier might not be willing to make specialized investments in
plant and equipment that would ultimately benefit the firm.
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 Lower Costs
Although vertical integration is often undertaken to lower costs, it may have the opposite
effect. When this is the case, outsourcing may lower the firm's cost structure. Vertical integration
into the manufacture of component parts increases an organization's scope, and the resulting
increase in organizational complexity can raise a firm's cost structure. There are three reasons for
this. First, the greater the number of subunits in an organization, the greater is the problems of
coordinating and controlling those units. Coordinating and controlling subunits requires top
management to process large amounts of information about subunit activities. The greater the
number of subunits, the more information top management must process and the harder it is to
do well.
 Offsets
Another reason for outsourcing some manufacturing to independent suppliers based in
other countries is that it may help the firm capture more orders from that country. As noted in the
Management Focus on Boeing, the practice of offsets is common in the commercial aerospace
industry. For example, before Air India places a large order with Boeing, the Indian government
might ask Boeing to push some subcontracting work toward Indian manufacturers. This kind of
quid pro quo is not unusual in international business, and it affects far more than just the
aerospace industry. Representatives of the US government have repeatedly urged Japanese
automobile companies to purchase more component parts from US suppliers in order to
partially offset the large volume of automobile exports from Japan to the United States.
 Trade-offs
Trade-offs is involved in make-or-buy decisions. The benefits of manufacturing
components in-house seem to be greatest when highly specialized assets are involved, when
vertical integration is necessary for protecting proprietary technology, or when the firm is simply
more efficient than external suppliers at performing a particular activity. When these conditions
are not present, the risk of strategic inflexibility and organizational problems suggest that it may be
better to contract out component part manufacturing to independent suppliers. Since issues of
strategic flexibility and organizational control loom even larger for international businesses than
purely domestic ones, an international business should be particularly wary of vertical integration
into component part manufacture. In addition, some outsourcing in the form of offsets may help
firm gain larger orders in the future.
 Strategic Alliances with Suppliers
Several international businesses have tried to reap some of the benefits of vertical
integration without the associated organizational problems by entering strategic alliances with
essential suppliers. For example, in recent years we have seen an alliance between Kodak and
Canon, under which Canon builds photocopiers for sale by Kodak, and an alliance between
Apple and Sony, under which Sony builds laptop computers for Apple. By these alliances,
Kodak and Apple have committed themselves to long-term relationships with these suppliers,
which have encouraged the suppliers to undertake specialized investments. Recall from our earlier
discussion that a lack of trust inhibits suppliers from making specialized investments to supply a
firm with inputs. Strategic alliances build trust between the firm and its suppliers. Trust is built
when a firm makes a credible commitment to continue purchasing from a supplier on reasonable
terms. For example, the firm may invest money in a supplier--perhaps by taking a minority
shareholding--to signal its intention to build a productive,mutually beneficial long-term
relationship.
This kind of arrangement between the firm and its parts suppliers was pioneered in Japan
by large auto companies such as Toyota. Many Japanese automakers have cooperative
relationships with their suppliers that go back for decades. In these relationships, the auto
companies and their suppliers collaborate on ways to increase value - added by, for example,
implementing just-in-time inventory systems or cooperating in the design of component parts to
improve quality and reduce assembly costs. These relationships have been formalized when the
auto firms acquired minority shareholdings in many of their essential suppliers to symbolize their
desire for long-term cooperative relationships with them.
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At the same time, the relationship between the firm and each essential supplier remains
market mediated and terminable if the supplier fails to perform up to standard. By pursuing such
a strategy, the Japanese automakers capture many of the benefits of vertical integration,
particularly those arising from investments in specialized assets, without suffering the
organizational problems that come with formal vertical integration. The parts suppliers also
benefit from these relationships because since they grow with the firm they supply and they
share in its success.
Because of these strategies, Toyota manufactures only 27 percent of its component parts
in-house, compared to 48 percent at Ford and 67 percent at GM. Of these three firms, Toyota
appears to spend the least on component parts, suggesting it has captured many of the benefits
that induced Ford and GM to vertically integrate. In general, the trends toward just-in-time systems
(JIT), computer-aided design (CAD),and computer-aided manufacturing (CAM) seem to have
increased pressures for firms to establish long-term relationships with their suppliers. JIT, CAD,
and CAM systems all rely on close links between firms and their suppliers supported by substantial
specialized investment in equipment and information systems hardware. To get a supplier to agree
to adopt such systems, a firm must make a credible commitment to an enduring relationship with
the supplier--it must build trust with the supplier. It can do this within the framework of a strategic
alliance.

GLOBAL SUPPLY CHAIN ISSUES:

Supply chain management (SCM) is "the systemic, strategic coordination of the
traditional business functions and the tactics across these business functions within a particular
company and across businesses within the supply chain, for the purposes of improving the long
term performance of the individual companies and the supply chain as a whole." It has also been
defined as the "design, planning, execution, control, and monitoring of supply chain activities with
the objective of creating net value, building a competitive infrastructure, leveraging worldwide
logistics, synchronizing supply with demand and measuring performance
globally."
Main functions of Supply Chain Management are as follows:
 Inventory Management
 Distribution Management
 Channel Management
 Payment Management
 Financial Management
 Supplier Management
 Transportation Management
 Customer Service Management

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GLOBAL SUPPLY CHAIN MANAGEMENT:

In today's competitive environment, managing transportation, inventory, product plans

and schedules, and information flows are critical to satisfying customers and creating
competitive advantages.
Organizations compete globally by working with international suppliers, outsourcing, and
marketing to consumers worldwide. This global reality places even more importance on
successful supply chain management.
The global supply chain management major focuses on global business and prepares
students for success. And with the flexibility of multiple campuses and online courses, you can
personally tailor your educational experience.
Courses provide insight into many subjects, including:
 Managing raw materials and finished products
 Developing transportation and logistics strategies
 Merging transportation policies with production and marketing plans
 Global supply chain analysis and planning

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MANAGING GLOBAL SUPPLY CHAIN:

Globalization is one of those politically charged words that often imply more than it actually
means. From the relatively benign “the world is flat” philosophy that suggests offshore factories
help stimulate U.S. imports, to the “off shoring costs American jobs” idea that everything can and
should be made in the United States, everybody in manufacturing has an opinion on whether
globalization is good or bad for their companies and/or their fellow citizens.
Some might suggest, in fact, that globalization is a fait accompli. As Daniel Ackerson, chairman
and CEO of General Motors Co. (IW 500/4) pointed out at a news conference in 2011, seven out
of 10 of all GM vehicles are made outside the United States, and the trend shows no signs of
stopping.
There’s nothing very new about globalization, though, a concept that basically refers to the
practice of sourcing, manufacturing, transporting and distributing products outside of your native
country. Its modern application predates the rise of the Internet by a good 40 years, beginning in
the early 1950s when container shipping was introduced, making it possible to quickly, efficiently
and economically move entire container loads onto ocean vessels at ports of call throughout the
world.
As the world has gotten flatter and supply chains have gotten longer, the need for companies
to follow best practices in global supply chain management has intensified. Gary Miller has a deep
familiarity with such a role, having spent 40 years as vice president, global supply chain and chief
procurement officer with $23 billion tire manufacturer Goodyear Tire and Rubber Co. (IW
500/54) before taking on the same role in 2008 at A. Schulman Inc. a $2.5 billion plastics
manufacturer. As Miller explains it, he’s responsible for Schulman’s supply chain and
procurement activities to better leverage its worldwide purchasing power, reduce materials
inventories, eliminate waste and improve efficiency. The company has 35 facilities globally, with
nearly 70% of its revenues derived out of the European market. “We have global customers that
we service around the world,” he says. “Europe is a very large region for us, so we have deep
relationships with our customers there. As those customers expand around the world, they’re also
looking for us to come with them.”

QUALITY CONSIDERATIONS IN INTERNATIONAL BUSINESS:

Outsourcing is a strategic management option rather than just another way to cut costs. The
decision to outsource is often made in the interests of lowering costs, redirecting or conserving
energy directed at the competencies of a particular business, or to make more efficient use of
labor, capital, technology and resources. Its aim is to help companies achieve their business
objectives through operational excellence.
One aspect of this is QA and testing. This can provide many benefits to companies, who
are seeking to improve the quality of their production applications, reduce business risk through
rigorous testing and augment and improve upon the incumbent testing teams and processes.
Given the increase in global IT outsourcing agreements, many companies will be looking at
outsourcing QA and testing as an independent validation and acceptance phase in order to ensure
high quality deliverables and gain competitive advantages.
To achieve these benefits, organizations select an outsourcing partner who will typically
have local and offshore test centers and capabilities as well as a strong onsite consultancy
presence.
Some of the critical success factors for outsourcing QA and testing engagements include:
 Ensuring that the business objectives agreed at the outset of the contract or business case
are managed through to successful completion
 Ensuring that transition from the "testing today" to "tomorrow’s testing" is seamless in
terms of business impact and employee satisfaction
 Noticeable and continuous improvements in the approach and methods used within your
IT organization (not just testing)

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Challenge of outsourcing
 Incremental Outsourcing
Organizations can mitigate their risks of outsourcing by dividing the work into small,
more manageable projects that they outsource to service providers. Managers at the client
organization therefore have well defined deliverables, programs that work under an umbrella
contract with associated schedules. The location of the work is determined on a project by
project basis.
 Total Outsourcing - Onsite/Offshore
In this model, multiple projects and programs at the client organizations are outsourced to
a service provider, which also takes on the end-to-end program management and delivery on
behalf of the client. The service provider takes on the project, module or program from a client
organization, deploys a small team onsite that works with the client managers and teams and
coordinates work with the offshore team that does the bulk of the work. Typical models range
from 20-30% onsite to 70-80% offsite.

1. Engagement Models
Selecting an engagement model is a crucial aspect of developing the outsourcing plan.
The process involves several factors, including aspects of international business strategy,
selecting the geographical location, understanding the landscape and deciding on the outsourcing
strategy. Some of the engagement models are:
2. Service Level Agreements (SLAs)
The SLAs should detail the minimum level of service to be provided by the outsourcing
vendor. They should be objective and measurable and have no ambiguity. This helps both parties
in the long term. Some good examples of the type of SLAs that should be considered are:
 On time delivery - dates must be agreed from the outset on all major deliverables with
all efforts to ensure they are met. Use change control processes if these dates need to be
moved.
 Client Satisfaction - periodic surveys should be conducted to make sure that the service
provided by the outsourcing company is satisfactory to customers.
 Effectiveness - effectiveness metrics focus on lowering costs, improving profit, and
adjusting business transactions
 Volume of Work - the volume of work sometimes is difficult to define. For example,
projects that are billed on a time-and-material basis may discuss volume in terms of
number of resources, while a fixed-price project usually specifies number of deliverables.
This metric is an important part of the SLA.
 Sensitivity - sensitivity metrics measure the amount of time required for an outsource
company to handle a request.
 System Downtime and Availability - in outsourcing, guaranteeing 100% availability of
services costs significantly more than guaranteeing 99% or 98%, and not every company
or every application needs 100% reliability. The SLA should request service availability
to meet specific business needs.
It is also good to ensure that SLAs are tied into the contract, sometimes on a risk/reward basis to
ensure that there is mutual interest in meeting them.

3. Mobilization
Once the contract is signed there will be a period of mobilization for both parties. This phase
generally includes setting up communication protocol with the client, defining work breakdown
structure, sharing standard templates (used for authoring test cases, reporting project status,
presenting the key metrics etc.) with the client, building test strategy etc. Some of the key elements
of this can be seen below:
People

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The outsourcing providers maintain a pool of highly qualified and dedicated professionals
including QA engineers, QA leads, project managers and technical specialists. Many outsourcing
providers have unique centers of excellence to train their interns and employees on various testing
methodologies and tools that are required for seamless execution of the engagement. Ensuring the
most appropriate resources for your requirements are in place is critical for the success of the
engagement.
Knowledge Acquisition
Outsourcing providers follow various approaches to obtain adequate knowledge for the test
engineers to understand the core business requirements and also the critical functionality to be
tested. Test leads or managers will be sent onsite long/short term to meet various stakeholders in
the client organization to understand the product/system and its features. They will assume the
responsibility of training the offshore team on the product/system to be tested and all the features
of it that the client and the outsourcing vendor have agreed to be tested.
Infrastructure
Some applications require extensive compatibility testing in different environments and
back-end database systems. Other applications need to be tested in production-sized
environments that closely resemble the final production environment. Outsourcing providers,
with their extensive test labs, should stimulate the production environment for performing such
complex levels of testing. The cost for setting up this environment offshore would be negotiated
with customers with a cost effective solution being drawn in favor of both parties.
Processes
Outsourcing providers in this competitive industry are continuously working on raising
their standards with respect to adhering to CMMi Level 5 and other standard ISO processes to
ensure tangible benefits for their customers. These include low project risk, on time/on budget
deliveries, minimal error rate, high process visibility and enhanced customer satisfaction. Process
implementation not only suggests complying to standard guidelines and procedures but also
gives greater visibility to customers by delivering metrics (such as schedule/effort variance,
productivity etc.) that measure the quality of the product/system which is the ultimate aim for
any outsourcing provider.

4. Integration with other third party service providers

Independent QA and testing is becoming more and more common. One of the reasons for
this is that it provides objective rigor and thoroughness that might not be provided by a single
vendor. However, in this scenario, it is important that all the parties (client, testing vendor and
development vendor) work harmoniously to achieve the right result.
The testing provider should have a good understanding of the challenges involved in
working with multiple vendors spread across geographies and develop appropriate interfaces and
best practices in communication to ensure successful completion of engagements. Understanding
other SDLC methods is also imperative.
A clearly defined defect management and resolution process should be established as a
high priority and ensuring consistent reporting styles on progress will make it easier on all
parties to assess the readiness of any application throughout its lifecycle.

5. Communication:
Outsourcing providers facilitate seamless communication between the client and their
stakeholders. As communication is considered a key obstacle in outsourcing, providers maintain
effective channels and points of contact (POC) open to clients.
An effective model and plan (including methods) should be tailored to the needs of the client and
would help both parties in identifying and resolving issues promptly. A typical communication
flow model is shown below:

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Escalation and Issue Resolution

There needs to be a clear and objective escalation and issue resolution process agreed from the
outset. Early identification should be built into the standard project risks and issues logs as well
as action plans for mitigation. Successful processes work best when there is a trusting
relationship between the vendor and the client.
Reporting
It is important that formal reporting is put in place and communicated by a regular set of reports
and deliverables updating the client on the engagement (at project/IT organization level). These
reports will be sent to the client on a daily, weekly, bi-weekly or on a monthly basis based on the
nature of the reports and the agreed plan. This should be in addition to the less formal reporting
that will become apparent through the personal relationships formed.

6. Flexibility and Scalability

QA and testing outsourcing agreements demand a degree of flexibility and scalability to help
ensure fluctuations in scope and timescales can be met. Some of the scenarios where flexibility is
required are:
 New or enhanced systems require revised testing commitments
 More releases require more testing phases
 Increased levels of system or data integration require wider scope and coverage in testing
 Regression test demands will grow as systems are developed
Performance and load test and other special tests may place demands on the service
The outsourcing provider must have an organization with infrastructure and resources
sufficiently sized so that the client demands are met. The correct scope and planning helps
prevent this but some eventualities are unavoidable. It is therefore important that clients have an
expectation that should the nature of the requirements change, there will be provision made
within the contract or through good change management processes.

7. Quality Improvement
The key objective of the client is often to gain a significant improvement in quality and
this can be achieved through outsourcing. In order to do this, there are some fundamental steps
that need to be taken. The outsourcing provider needs to assess and map the client.s testing
capability to understand how the engagement is going to work. Identifying the "major gaps" in test
processes from the outset and implementing positive changes to address these will result in quality

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improvements. As the relationship matures between the two parties, there should be a willingness
to continually improve process and working methods etc. This should not necessarily be restricted
to just testing, but the whole lifecycle if it improves the end product.

8. Configuration and Change Management

Many businesses have frequently changing requirements which if handled badly can have
a significant impact on time, quality and cost. To help clients overcome this, QA and testing
outsourcing organizations maintain a comprehensive change and configuration management
system. A typical scenario would be that a Change Request is raised by a client and sent to the
vendor. The team then consolidates all Change Requests and performs an impact analysis on the
Project Schedule, resources, costs and assesses the technical feasibility of the changes. These are all
taken into account before the assessment is discussed with the client. Upon approval, an updated
Project Schedule will be laid out to execute that change request.

9. Intellectual Property Protection

Intellectual Property (IP) protection is one of the important considerations for customers
when outsourcing services. QA and testing outsourcing providers have to protect all Personally
Identifiable Information (PII) given by clients or otherwise obtained in the course of outsourcing
engagements and treat it as proprietary and/or trade secrets. Unauthorized use or disclosure by
the QA and testing services provider of any PII will be detrimental to the client.s competitive
position and on-going business operations. The QA and outsourcing provider.s staff should not
duplicate, distribute, disclose, convey or in any other manner make available to third parties any
PII. Most of the outsourcing providers have well established security standards and measures in
place to prevent unauthorized access to and misuse of PII. The IP protection policies of most of
the outsourcing service providers have the following:
 Non-disclosure agreements signed with the client
 Project related IP protection
 Employee Confidentiality contract
10. Security
All the major outsourcing providers have Information Security Policies, Information
Security Standards and Business Continuity Management policies in place, primarily to protect
data. The facilities of the outsourcing providers will have the controls and capability to prevent
loss or accidental release of data or proprietary functionality. In the event of a disaster they
should have the capacity to subsequently restore a service relevant to this. The testing facilities of
most of the outsourcing providers are assessed for BS7799 security management standards.
Security measures are implemented at various levels at the facilities of the outsourcing provider
that include physical security, infrastructure, network security and other ad hoc security measures
based on specific case/project. Some of the physical security measures provided by outsourcing
vendors include measures to restrict the entry and exit of personnel, equipment and media from a
designated area. These controls address not only the area containing system hardware but also the
locations of wiring, supporting services, backup media and other elements required for the
system’s operation.

Seven Considerations for International Licensing

Apparel companies are now, more than ever before, recognizing the great potential in having a
global presence. Licensing is a cost-effective way for small to medium-size companies to "plant their
flag" overseas, without launching speculative joint ventures or wholly-owned subsidiaries. As a
licensor, a company can springboard off a local licensee that has the expertise and presence in a
particular brand category, with the critical knowledge of local markets and tastes.
Licensing represents a way to move a brand into new businesses, new geographical markets and
new distribution channels that otherwise would be unavailable without making a major investment
in new manufacturing processes, machinery, or facilities, while maintaining

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control over the brand image. Licensing in global markets offers important advantages, but apparel
companies should keep a number of other factors in mind, such as the many cultural, linguistic,
political, legal and financial differences that exist in different countries.
1. Brand identity. First and foremost, an apparel firm seeking to become a licensor must
evaluate whether an international licensing arrangement will enhance and improve the company's
brand. Putting the brand into the hands of an overseas licensee requires proper due diligence, as
there is potential for brand damage. The company needs to be sure the licensee can create and
deliver products that are of the agreed upon quality, whose goals for the brand coincide with those
of the licensor, and who will be a true partner in furthering the licensor's brand identity. Also,
apparel enterprises run the risk of creating or strengthening a potential competitor should they
decide to enter that market on their own in the future.
It is also important to understand and limit the time commitments that will be involved from
a creative and management point of view, and that the proper person in the
company is in charge of the international licensing program.

2. Selecting a licensee:
After thoroughly assessing the new market's potential, compile a list of promising
licensee candidates. International trade show organizers and trade associations can be helpful in
identifying and assisting with due diligence. If possible, try to speak with the licensee's past
customers. Search for feedback on the licensee, for example, through the internet or in trade
publications.
After meeting a prospective licensee, preferably in person, try to work with the prospective
licensee on a trial basis if possible, and trust your intuition. The company also needs to evaluate
whether the licensee has the financial strength to perform its obligations to promote the identity
of the brand in a manner that will satisfy the stated objectives.
Contract terms
Key issues to address include: which products and trademarks are covered, the royalty
arrangements and design fees, whether the arrangement is exclusive or nonexclusive, and the
definition of the design and approval relationships relating to the products and product
promotions. If any training is involved, any extra fees or charges need to be identified.
Advertising and other financial obligations need to be clearly defined.

3. License grant
The initial step is to define the products and trademarks to be covered and the rights to
be granted in the license agreement. A licensor can control the scope of the license by including
and excluding certain products and trademarks, incorporating exclusivity and territorial
restrictions, and limiting assignment and sublicensing arrangements.

4. Territory
A strong licensee in one country is not necessarily a strong licensee in another. Care
should be taken in defining the territory and determining if the territory is exclusive or
nonexclusive. Provisions prohibiting licensees from sublicensing or selling into other territories
should be included as well. Since the brand is the most important product, in addition to making
sure translated materials are accurate and properly credited, a licensor should always take the time
to register its trademarks and copyrights in the countries in which it plans to license its products.
Although it is expensive, it is cheaper than buying those rights back from squatters.

5. Royalties and other payments

Most licensing arrangements include initial up-front payments that are generally
nonrefundable license fees, used to compensate the licensor for the costs of investigating the
licensee and covering documentation costs, and which may or may not be creditable to future
royalties. The main source of revenue for the licensor is a royalty fee, and this fee may be fixed

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or varied based on a percentage of sales or other factors. Royalties are typically structured with
minimum payments to ensure that the licensor will have a reliable royalty stream.
6. Approvals and other controls
The licensor will want to include provisions in the agreement allowing the licensor (or a
designated representative or agent) to have periodic inspection rights of the manufacturing
facilities to ensure the quality of the goods produced, and also to monitor whether the licensee is
counterfeiting or otherwise engaging in illegal or unapproved labor or business practices. Even if
a licensor is not likely to conduct such inspections, including these provisions is prudent.

7. Term and termination

The duration of the agreement is negotiable. If the licensee is planning to make a
substantial investment in launching the brand overseas, it is not uncommon to have a 3-, 5-, or
even 10-year agreement, with options to renew. This is often balanced by the licensor with a
minimum sales requirement to ensure that the licensee will be actively marketing the licensed
products. The duration of the license, and any renewal provisions need to be clearly set forth in
the agreement.

GLOBALIZATION IN MARKETS:
Globalization refers to the changes in the world where we are moving away from
selfcontained countries and toward a more integrated world. Globalization of business is the
change in a business from a company associated with a single country to one that operates in
multiple countries.

Impact of Globalization
Imagine for a moment that you run a business that produces digital cameras. How
would globalization impact your company?

Market Globalization & Production Globalization.

Market globalization is the decline in barriers to selling in countries other than the home
country. This change will make it easier for your company to begin selling products
internationally, since lower tariffs keep consumer prices lower and fewer restrictions when
crossing borders makes it easier for a company to enter a foreign market. It also means that
companies must consider other cultures when developing their business strategies and
potentially adjust the product and marketing messages if they aren't appropriate in the target
country. This may not be an issue in the camera industry, but a hamburger company entering
India would definitely need to revisit their product and strategies to be successful!
Production globalization is the sourcing of materials and services from other countries
to gain advantage from price differences in different nations. For example, you might purchase
materials and components for your cameras from multiple countries and then assemble the
product in yet another international location to reduce your costs of production. This change
should lead to lower prices for consumers, since products cost less to produce. It also impacts
jobs, since production may shift from one country to another, usually from more developed
countries to less developed countries with lower average wage rates.

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INTERNATIONAL MARKETING STRATEGY:

Usually, selling focuses on the needs of the seller, marketing on the needs of the buyer
(customer). The purpose of business is to get and keep a customer. Or, to use Peter Drucker`s
more refined construction to create and keep a customer. (Through product Differentiation and
price competition)
International marketing involves the marketing of goods and services outside the
organization`s home country. Multinational marketing is a complex form of international
marketing that engages an organization in marketing operations in many countries. Global
marketing refers to marketing activities coordinated and integrated across multiple
Markets.

A firm`s overseas involvement may fall into one of several categories:

1. Domestic: Operate exclusively within a single country.
2. Regional exporter: Operate within a geographically defined region that crosses national
boundaries. Markets served are economically and culturally homogenous. If activity occurs
outside the home region, it is opportunistic.
3. Exporter: Run operations from a central office in the home region, exporting finished goods to
a variety of countries; some marketing, sales and distribution outside the home region.
4. International: Regional operations are somewhat autonomous, but key decisions are made and
coordinated from the central office in the home region. Manufacturing and assembly, marketing
and sales are decentralized beyond the home region. Both finished goods and intermediate
products are exported outside the home region
5. International to global: Run independent and mainly self-sufficient subsidiaries in a range of
countries. While some key functions (R&D, sourcing, financing) are decentralized, the home
region is still the primary base for many functions. 6- Global: Highly decentralized organization
operating across a broad range of countries. No geographic area (including the home region) is
assumed a priori to be the primary base for any functional area. Each function including R&D,
sourcing, manufacturing, marketing and sales is performed in the locations around the world
most suitable for that function.
Global Marketing Strategies:
Although some would stem the foreign invasion through protective legislation,
protectionism in the long run only raises living costs and protects inefficient domestic firms
(national controls). The right answer is that companies must learn how to enter foreign markets
and increase their global competitiveness. Firms that do venture abroad find the international
marketplace far different from the domestic one. Market sizes, buyer behavior and marketing
practices all vary, meaning that international marketers must carefully evaluate all market
segments in which they expect to compete. Whether to compete globally is a strategic decision
(strategic intent) that will fundamentally affect the firm, including its operations and its
management. For many companies, the decision to globalize remains an important and difficult
one (global strategy and action).
Typically, there are many issues behind a company`s decision to begin to compete in
foreign markets. For some firms, going abroad is the result of a deliberate policy decision
(exploiting market potential and growth); for others, it is a reaction to a specific business
opportunity (global financial turmoil, etc.) or a competitive challenge (pressuring competitors).
But, a decision of this magnitude is always a strategic proactive decision rather than simply a
reaction (learning how to business abroad). Reasons for

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Global expansion is mentioned below:

a) Opportunistic global market development (diversifying markets)
b) Following customers abroad (customer satisfaction)
c) Pursuing geographic diversification (climate, topography, space, etc.)
d) Exploiting different economic growth rates (gaining scale and scope)
e) Exploiting product life cycle differences (technology)
f) Pursuing potential abroad
g) Globalizing for defensive reasons
h) Pursuing a global logic or imperative (new markets and profits)

CHALLENGES IN PRODUCT DEVELOPMENT:

 The cost of manufacturing, distributing and marketing the product.
 The actual physical location of production plants.
 Currency Exchange Rates - US export companies are benefiting from a relatively low US Dollar
price during the 2010s. Most hearing aid companies, however, these are based in Europe and
therefore the high value of the Swiss Franc and the Euro relative to other currencies must be
considered. This make imports into the United States from these countries expensive, but exports
from the US relatively cheap to other nations. This has to do not just with demand for a particular
product, but also with macroeconomic demand for national currencies, which affects inflation and,
by extension, pricing. Currency fluctuations also make it very difficult for companies to make long-
term decisions – such as building large factories in global markets. For example, the costs of
production may be cheap today, but they could be expensive in the future, impacting upon the
price that a manufacturer is forced to charge.
 The price that the international consumer is willing to pay for the product. The manufacturer’s
business objectives. For example, large international companies such as Starbucks may be willing
to operate at a loss in some locations because they need a local presence to maintain their
economies of scale, as well as their reputation as a global player. Some hearing aid manufacturers
act similarly in order to become “world players.”
 The price that competitors in international markets are already charging.
 Business environment factors such as government policy and taxation.
 National Market Size – A company will often attempt to use the potential volume of sales to
estimate the price at which it will need to market a product to break even. For larger countries with
the potential for more sales, this price may be set lower; for smaller countries, the price may be
higher.
 Cultural Differences – One of the more complicated factors in international pricing is cultural
variation among companies. Cultural variations that affect pricing can take many forms, most of
which have to do with how members of certain cultures perceive the value of certain products,
which in turn affects how much they are willing to pay for them. Some cultures do not value
amplification products and they are seen with significant stigma. Thus, hearing aid prices can be
greatly affected depending upon whether a manufacturer’s device is large and obvious or invisible.
 Regulations – When setting prices in other countries, companies must research all national
regulations relevant to their product, as many countries set price ceilings as well as price floors on
certain products. Others require Value Added Tax (VAT) and other taxes that must be considered
during the pricing decisions.

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NINE STEPS TO AN INTERNATIONAL MARKETING STRATEGY:

As technology breaks down geographic and cultural communication barriers, even small
businesses can often tap into the global marketplace. If you think your business is too small to
pursue international business opportunities, think again. Get a jump on those opportunities by
following the 9 steps outlined below.

Research
Unless you spend excessive amounts of time in foreign countries or soak up knowledge
like a Jeopardy Champion, you’re probably not able to make an informed decision about a global
strategy without doing your homework first. Start with the low-hanging fruit: talk to your
coworkers, peers, family and friends. Find out what you can about countries and markets with
the greatest potential. Read relevant print and Web publications voraciously (I prefer e-marketer,
Economist, Wall Street Journal and Yahoo! for general business and market research). Compile
information about various opportunities and determine which markets have the greatest overall
potential (in case you’ve been hiding in a cave, here’s an emerging and growth market cheat
sheet for you: China, India, South America, Russia and The Middle East).

Most small to medium-sized businesses do not have the resources on staff to undertake a
global market strategy. Assuming there are sufficient opportunities abroad, it’s time to determine
how to develop appropriate resources (i.e. in-country sales and support, logistics and fulfillment).
In the build vs. buy decision, many companies prefer to minimize financial risk by partnering
with companies that have extensive experience within the target market to provide those
resources. While partnering minimizes risk, there are drawbacks, such as lack of direct
management oversight. Those negatives can be alleviated by hiring employees who have the
education, experience and native language skills relevant to your target market. International
students are excellent resources: they are educated, affordable, multi-lingual and usually have
some relevant work experience. The potential downside is that you’ll probably have to navigate
through a bushel of red tape in order to secure work visas.
Partner:
While your core business and marketing team may already be in place, there are a variety of
reasons to explore additional partnerships. Companies specializing in marketing, logistics and
customer service are excellent additions to the growing team. Partners within the target market
may have relationships with your potential customers that can be leveraged for business
development. For instance, we’ve partnered with a homeland security and business consultancy,
Eminent Logic, to help penetrate into the Middle Eastern markets. In return, we introduce them
to local companies we know that can further their business objectives.
Network:
Alternative business development strategies include attending, sponsoring, and participating in
industry networking events and conferences. Look into joining industry associations that have a
footprint in your target markets, or that are native to the target market. Web-based networking
groups (e.g. LinkedIn) can also help expand your network.
Market:
Now that you’ve built out your infrastructure, trained and deployed a team, and modified your
offering and marketing collateral, you’re ready to turn on the fire hose. Two of the most effective
forms of outreach are search engine and email marketing. Internet access is everywhere, which
means everyone has access to search engines and email. The best way to build a house list of
potential customers in your target market is to optimize your international Web site for search
engines and offer visitors an incentive to provide their email address. Once you’ve got their
permission to contact them regularly, build a relationship and convert site visitors and email
subscribers into customers.

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Travel:
Over time, cold leads will become hot, and those hot leads will want face-to-face meetings. Its
decision time: are you ready to invest in a global travel expense account? If so, be prepared to
reel in the business, as most of the world works on a handshake and face time is critical. Turn
your business trips into tax-deductible vacations and see the world while you’re at it.

INTERNATIONAL INVESTMENT DECISION MAKING

Direct investors tend to look at a number of factors relating to how they will be able to operate in a
foreign country:
 the rules and regulations pertaining to the entry and operations of foreign investors
 standards of treatment of foreign affiliates, compared to “nationals” of the host country
 the functioning and efficiency of local markets
 trade policy and privatization policy
 business facilitation measures, such as investment promotion, incentives, improvements in
amenities and other measures to reduce the cost of doing business. For example, some
countries set up special export processing zones, which may be free of customs or duties,
or offer special tax breaks for new investors
 restrictions, if any, on bringing home (“repatriating”) earnings or profits in the form of
dividends, royalties, interest or other payments
The determinants of FPI are somewhat more complex, however. Because portfolio investment
earnings are more likely to be tied to the broader macroeconomic indicators of a country, such as
overall market capitalization of an economy, they can be more sensitive to factors such as:
 high national economic growth rates
 exchange rate stability
 general macroeconomic stability
 levels of foreign exchange reserves held by the central bank
 general health of the foreign banking system
 liquidity of the stock and bond market
 interest rates
In addition to these general economic indicators, portfolio investors also look at the economic
policy environment as well, and especially at factors such as:
 the ease of repatriating dividends and capital
 taxes on capital gains
 regulation of the stock and bond markets
 the quality of domestic accounting and disclosure systems
 the speed and reliability of dispute settlement systems
 the degree of protection of investor’s rights

Foreign Exchange Rate

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Foreign Exchange Risk

Foreign exchange risk (also known as exchange rate risk or currency risk) is a financial risk
posed by an exposure to unanticipated changes in the exchange rate between two currencies.[1][2]
Investors and multinational businesses exporting or importing goods and services or making
foreign investments throughout the global economy are faced with an exchange rate risk which can
have severe financial consequences if not managed appropriately.
Types of Exposure
 Transaction Exposure
A firm has transaction exposure whenever it has contractual cash flows (receivables and
payables) whose values are subject to unanticipated changes in exchange rates due to a contract
being denominated in a foreign currency. To realize the domestic value of its foreign-denominated
cash flows, the firm must exchange foreign currency for domestic currency. As firms negotiate
contracts with set prices and delivery dates in the face of a volatile foreign exchange market with
exchange rates constantly fluctuating, the firms face a risk of changes in the exchange rate between
the foreign and domestic currency
 Economic Exposure
A firm has economic exposure (also known as operating exposure) to the degree that its
market value is influenced by unexpected exchange rate fluctuations. Such exchange rate
adjustments can severely affect the firm's market share| position with regards to its competitors,
the firm's future cash flows, and ultimately the firm's value. Economic exposure can affect the
present value of future cash flows. Any transaction that exposes the firm to foreign exchange risk
also exposes the firm economically, but economic exposure can be caused by other business
activities and investments which may not be mere international transactions, such as future cash
flows from fixed assets. A shift in exchange rates that influences the demand for a good in some
country would also be an economic exposure for a firm that sells that good.
 Translation Exposure
A firm's translation exposure is the extent to which its financial reporting is affected by
exchange rate movements. As all firms generally must prepare consolidated financial statements
for reporting purposes, the consolidation process for multinationals entails translating foreign
asset]s and liabilities or the financial statements of foreign subsidiary subsidiaries from foreign to
domestic currency. While translation exposure may not affect a firm's cash flows, it could have a
significant impact on a firm's reported earnings and therefore its stock price. Translation exposure
is distinguished from transaction risk as a result of income and losses from various types of risk
having different accounting treatments.
 Contingent exposure
 A firm has contingent exposure when bidding for foreign projects or negotiating other
contracts or foreign direct investments. Such an exposure arises from the potential for a
firm to suddenly face a transactional or economic foreign exchange risk, contingent on the
outcome of some contract or negotiation. For example, a firm could be waiting for a
project bid to be accepted by a foreign business or government that if accepted would result
in an immediate receivable. While waiting, the firm faces a contingent exposure from the
uncertainty as to whether or not that receivable will happen. If the bid is accepted and a
receivable is paid the firm then faces a transaction exposure, so a firm may prefer to
manage contingent exposures.

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 Measurement
 If foreign exchange markets are efficient such that purchasing power parity, interest rate
parity, and the international Fisher effect hold true, a firm or investor needn't protect
against foreign exchange risk due to an indifference toward international investment
decisions. A deviation from one or more of the three international parity conditions
generally needs to occur for an exposure to foreign exchange risk. Financial risk is most
commonly measured in terms of the variance or standard deviation of a variable such as
percentage returns or rates of change. In foreign exchange, a relevant factor would be the
rate of change of the spot exchange rate between currencies. Variance represents exchange
rate risk by the spread of exchange rates, whereas standard deviation represents exchange
rate risk by the amount exchange rates deviate, on average, from the mean exchange rate in
a probability distribution. A higher standard deviation would signal a greater currency risk.
Economists have criticized the accuracy of standard deviation as a risk indicator for its
uniform treatment of deviations, be they positive or negative, and for automatically
squaring deviation values. Alternatives such as average absolute deviation and semi variance
have been advanced for measuring financial risk.

 Value at Risk
 Practitioners have advanced and regulators have accepted a financial risk management
technique called value at risk (VAR), which examines the tail end of a distribution of
returns for changes in exchange rates to highlight the outcomes with the worst returns.
Banks in Europe have been authorized by the Bank for International Settlements to
employ VAR models of their own design in establishing capital requirements for given
levels of market risk. Using the VAR model helps risk managers determine the amount

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that could be lost on an investment portfolio over a certain period of time with a given
probability of changes in exchange rates.
Management
Foreign exchange hedge
 Managers of multinational firms employ a number of foreign exchange hedging strategies in
order to protect against exchange rate risk. Transaction exposure is often managed either
with the use of the money markets, foreign exchange derivatives such as forward contracts,
futures contracts, options, and swaps, or with operational techniques such as currency
invoicing, leading and lagging of receipts and payments, and exposure netting. Firms may
exercise alternative strategies to financial hedging for managing their economic or operating
exposure, by carefully selecting production sites with a mind for lowering costs, using a
policy of flexible sourcing in its supply chain management, diversifying its export market
across a greater number of countries, or by implementing strong research and development
activities and differentiating its products in pursuit of greater inelasticity and less foreign
exchange risk exposure.

 Translation exposure is largely dependent on the accounting standards of the home

country and the translation methods required by those standards. For example, the United
States Federal Accounting Standards Board specifies when and where to use certain
methods such as the temporal method and current rate method. Firms can manage
translation exposure by performing a balance sheet hedge. Since translation exposure arises
from discrepancies between net assets and net liabilities on a balance sheet solely from
exchange rate differences. Following this logic, a firm could acquire an appropriate amount
of exposed assets or liabilities to balance any outstanding discrepancy. Foreign exchange
derivatives may also be used to hedge against translation exposure.

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UNIT-V
SELECTION OF EXPATRIATE MANAGERS:
An expatriate (often shortened to expat) is a person temporarily or permanently
residing in a country other than that of the person's upbringing. The word comes from
the Latin terms ex ("out of") and patria ("country, fatherland"). In common usage, the term is
often used in the context of professionals or skilled workers sent abroad by their
companies, rather than for all 'immigrants' or 'migrant workers'. The differentiation found in
common usage usually comes down to socio-economic factors, so skilled professionals working
in another country are described as expatriates, whereas a manual laborer who has moved to
another country to earn more money might be labeled an 'immigrant' or 'migrant worker'.
There is no set definition and usage varies with context, for example the same person
may be seen as an "expatriate" by their home country and a "migrant worker" where they work.
Retirement abroad, in contrast, usually makes one an "expatriate".
Phase of the International HRM
 Selection – By focusing on selection criterions and characteristics of the expatriates.
 Training – Prepare the expatriate for the international assignment.
 Arrival and Support – Period where the expatriate learn to adjust to new
behaviors, norms, values and assumptions.
 Repatriation – How to prepare the expatriate and his/her spouse and family to re-
turn to the home country.

Expatriation
 A fundamental challenge faced by multinational companies today is how to ensure that
managers develop not only an overview of the organization in its entirety, but also a feel for
international business (Gooderham & Nordhaug, 2003).
 Due to globalization, in order to stay resistant in the increasing competing global market, it
is important to train the em-ployee to become international minded.
 As Briscoe and Schuler (2004) say, the health of today’s multinational companies is the
function of International Human Resource Man-agement’s ability to match the firms’
workforce forecast with the supply of global talent.
 “People that are living and working in a non-native country"
 The first definition put emphasize of not being born in the specific country whereas in the
second definition the expatriate does not need to be born in the country he/she considers
to be his/her home country.
 The last definition describes an expatriate that works in a country which he/she is not a
citizen. Since we believe that these three definitions differ from each other, we have

 “An expatriate is an employee that is temporarily working and living in a country or region
that is not his or her home country”.

The Three Faces of Expatriation

 Dowling and Welch (2004) define PCNs as employees, in the parent company, that are
transferred to a host country subsidiary. PCN’s role today is changing. Evans et al. (2002)
state that traditional expatriates was sent abroad only to fix a problem or control the foreign
organization.
 Today, more and more companies recognize that cross-border mobility is a potential
learning toll, thus it increases the number of assignments in which the primary drive is to
support individual or organizational learning.
 Except for PCNs, there are two more kinds of employees that are considered to be
expatriates, namely:
o Host - Country Nationals (HCN) and
o Third - Country Nationals (TCN)

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 HCN are employees sent from the host subsidiary to the parent company. TCN are
employees sent from one foreign subsidiary to another foreign subsidiary that are both
owned by the same parent company (Dowling & Welch, 2004).

 For example, the Swedish multinational company employs Chinese citizens in its Swedish
operations (HCNs), or a Swedish company sends some of its Japanese employees on
assignment to China (TCNs). Below in Figure 2-1 is an illustration by Dowling and Welch
(2004) on the different kind of expatriates created by international assignments.

 As stated in the purpose, our research will only be focused upon gaining an understanding
of how three Swedish multinational companies select and train their Parent-Country Na-
(PCN) expatriates before the international assignment in China. Therefore, when we refer
to the word expatriate in the rest of this thesis will automatically refer to PCN expatriate.

 The reason why we chose to look upon PCN expatriate is because, today it is still the most
common way to send an employee to work in a foreign environment. A PCN
expatriate does not only help the head quarter to bring in new knowledge, but also transfer
new ways of doing things to the subsidiaries (Evans et al., 2002).
Motives and Roles of Expatriation
 After having decided that PCN expatriates are the most suitable employees for us to look at
we will now describe the different roles that an expatriate can take and the motives be-
hind it. Dowling and Welch (2004) have identified several reasons for using expatriates.
1. Agent of Socialization:

 The person that performs the task knows and is familiar with the “values and beliefs” of the
parent firm. Dowling and Welch (2004) call the transfer of values and beliefs socialization.
An example is that the parent firm has values and beliefs, visions and strategies that they
want to communicate through the whole organization. The best way to transfer these
factors is through someone that has a clear understanding of the parent company.
2. Network Builder
 International assignments are viewed as a way of conducting interpersonal linkages that can
be used for informal control and communication purposes. An expatriate that works as a
network builder will possess knowledge that is of value for the company. Knowing people
from different key positions and what they need as well as these people know what the
expatriate is credible for, when performing a task, there is a mutual dependence between
both parts (Dowling & Welch, 2004).
3. Agent of Direct Control
• The parent company wants to have an overview and con-trol over the host
company (Ström, Bergren, Carle & Polgren, 1995).
• The use of expatriate in this context can be regarded as a bureaucratic control
mechanism since the primary role is to ensure compliance through direct supervision
(Dowling & Welch, 2004).

Boundary Spanners:

• Boundary Spanning refers to the activities that an expatriate conduct, such as gathering
information that bridge internal and external organizational contexts.
• Visiting the foreign country, the expatriate has the function to promote its own firm to a
high level but also at the same time able to collect host country information.
• The expatriate will also have the opportunity to gather mar-kets intelligence for the firm
(Dowling & Welch, 2004).

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Expatriate Failure
• Expatriate failure is a term that is defined as the premature return of an expatriate which
means that the expatriate is returning home before completing the assignment.
• If the expatriate remains during the whole assignment and have done what was intended,
the assignment will then count as a success.
• Today, expatriate failure rate is between 25 and 40 percent of when an expatriate is as-
signed a task in a developed country compared with 70 percent in still developing coun-
tries (Shay & Tracey, 1997).
Culture
• Every country has at least some differences compared with other countries, e.g., its history,
government and laws (Briscoe & Shuler, 2004).
• There are distinguishable differences between cultures such as in how a person dress and
behaves but also discrete differences such as values and beliefs (Harzing & Ruysseveldt,
2004).
• Today, it is generally recognized that culturally insensitive attitudes and behaviors stemming
from ignorance or from misguided beliefs not only are inappropriate, but often cause
international business failure (Dowling & Welch, 2004).

• Managers, as well as the people they work with, are part of national societies. If the
managers want to understand the behavior of people in a different culture, they have to
understand their society (Hofstede & Hofstede, 2005).
• Multinational companies need to learn to cope internationally with issues like selecting and
preparing people for working and managing in other countries, how to negotiate and con-
duct businesses in a foreign country, to be able to capitalize and absorb the learning
throughout the international operations. In order to succeed in these activities, one has to
understand the effects of culture on day-to-day business operations (Briscoe & Shuler,
2004).
• The cultural aspects of this thesis will only be dealt in a general level with the aim to make
the reader aware of the contrast between Sweden and China.
Selection
• Today, research within how to select an expatriate is heavily oriented.
• According to Evans et al. (2002) this has led to lists of competences and characteristics that
an expatriate should have. Selection is thus about how to make a fair and relevant choice
among the applicants by accessing their strengths and weaknesses (Boxall & Purcell, 2003).
Selection Criterions
• A lot of research has focused on understanding selection criterions (Evans et al., 2002).
• According to Briscoe and Schuler (2004) errors in the selection process can have a negative
impact on the success of an organization’s overseas operations and therefore it is crucial to
select the right person for the assignment.
• Dowling and Welch (2004) have identified six criterions that a manager evaluates when
selecting an employee for an international assignment, they are:

Technical Ability –
 The candidate needs to know how to perform the required technical and managerial tasks
while abroad (Dowling & Welch, 2004).
 According to a study by McEnery and DesHarnais (1990) most managers and other
professionals involved in inter-national work, regard functional expertise to be the most
important criteria when selecting and training an expatriate.
 Companies emphasize on the technical and managerial skills since these can be evaluated
by looking at past performance of the candidate (Dowling & Welch, 2004).

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 However, past performance has little or no bearing on how the candidate will perform in a
different culture (Dowling & Welch, 2004).

Cross-Cultural Suitability –

• Allows the candidate to operate in a new culture. Some of the abilities that should be
included are; cultural empathy, adaptability, diplomacy, language Situation Individual i
emotional stability, and maturity.
• Even though cross-cultural abilities are said to be important, very few senior managers will
actually test the candidate for these, since they are difficult to determine.

• Even if a candidate possess a number of cross-cultural abilities the candidate’s personality

might still make him/her unsuitable for international assignments, for instance; attitude
towards foreigners, and the inability to relate to people from another cultural group
(Dowling & Welch, 2004).

Family Requirements –
• Since the candidate might have a family which he/she needs to take into consideration,
such as; the spouse/partner especially in dual-career families, the adolescent children
especially considering schooling, health issues, dependent parents, and psychological
difficulties like for instance phobia of flying (Briscoe & Schuler, 2004).
• Gooderham and Nordhaug (2003) refers to Tung (1982) who in a study on expatriate
failure of American, Japanese, and European expatriates shows that not only is the inability
of the spouse to adjust the number one reason among the Americans, it is also the only
consistent reason among the European expatriate.
• The spouse/partner might not work during the international assignment however, their
workload is quite extensive, starting with settling the family into the new home, and perhaps
even employing servants, caring for the wellbeing as well as arranging with the schooling for
the children, and all of this comes at a time when the spouse/partner has left their career
behind them as well as their friends and relatives (Dowling & Welch, 2004).

Country/Cultural Requirements –
• It may sometimes be difficult for the companies to get work permits for their expatriate,
not to mention their spouse, which may in a dual career relationship add hardship on the
expatriate and hence, increasing the risk of expatriate failure.
• Also it seems that some companies prefer not to send women to certain conservative
countries or regions, such as parts of the Middle East and South East Asian (Dowling &
Welch, 2004).
• Although this is common among companies, research has shown that even in traditionally
male dominated countries, such as Japan and Korea, female expatriates do as good as the
male ones. In fact, the locals sees a female expatriate as a representative for the company
first, a foreigner second and as a women third (Stroh et al., 2004).
• Lastly, it is also important that the company keeps up-to-date on the legislation in the
countries that they operate in (Dowling & Welch, 2004).

The Multinational Enterprise (MNE) Requirements –

• A company might try to keep a certain proportion of expatriates compared to their local
staff, hence choosing to hire Host Country Nationals (HCN) instead.
Language –
 The ability to speak a local language is considered to be more important in some countries
than others. For instance in certain countries using an interpreter may be a much better
choice since learning that language would take to long. Since there is a risk
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that a candidate might be removed from the pool of possible expatriates because of lack of
speaking the language, the company might oversee a person whom would have been per-
fect for the job, and hence increase the risk of failure for the company (Dowling & Welch,
2004).
 Dowling and Welch (2004) believes that technical ability, cross-cultural suitability, and fam-
ily requirements are all based upon the individual meanwhile country/cultural require-
ments, language and multinational company requirements are different depend on the host
country and culture. Companies usually choose to hire their expatriates from

within the or-ganization since it is generally easier for the company to observe an
individual’s ability and efforts that is already employed, compared with a candidate from
an external job market (Baron & Kreps, 1999).
Competences of an Expatriate
• Another way for firms to avoid the phenomenon of expatriate failure is to select expatriate,
with their families, that will be most able to adapt overseas and also at the same time pos-
sess the necessary skills to have the job done in the foreign environment (Briscoe & Shuler,
2004).
• According to Schneider and Barsoux (1997) there are nine competences that are sig-
nificant for an expatriate in order to cope with differences abroad, they are:
Interpersonal Skills –
• An expatriate needs to be able to form relationships so that they can integrate into the
social fabric of the host country.
• Thus, satisfying both the personal need for friendship and intimacy, as well as smoothing
the progress of transferring knowledge, and improving coordination and control between
the parental company and the host subsidiary.

Linguistic Ability –
• Is a competence that helps the expatriate in establishing contact with the locals. Having
total command of the language is not necessary, however efforts to speak the language,
even if only parts of local phrases, shows that the expatriate is making a symbolic effort to
communicate and to connect with the host nationals. The opposite, a resolute
unwillingness to speak the language may be seen as a sign of contempt to the host nationals.

Motivation to Work and Live Abroad

 This has shown to be important in order for the expatriate and his/her family to
successfully adapt to the new culture. Selecting expatriates and their families should be
based on a genuine interest in new experiences and other cultures.

Ability to Tolerate and Cope with Uncertainty –

 Since circumstances might unexpectedly change, or that the behaviors and reactions of the
local employees may be unpredictable, the expatriate needs to be able to show the
capability of quick adaptation to the new situation. It is good if the expatriate knows, in
advance, that uncertainty and ambiguity exists, that people might have different
perspectives, and that not everything is as straight-forward as it might appear (Schneider &
Barsoux, 1997).
Flexibility –
 When something unexpected occurs, the expatriate might need to let go of the control, in
order to let the company adapt to the event and use it as an opportunity to grow. This may
be especially difficult, since managers are generally rewarded for staying on top of things.

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Patience and Respect –

 The expatriate needs to remember that different cultures have other ways of doing things,
which is why patience is so important when dealing with a new culture.

 An expatriate needs to be careful so that he/she does not always use their own culture as a
benchmark for the new culture, but instead try to make sense of the reasoning be-hind the
way the locals think and act. Patience and respect is the golden rule of international
business, but it seems that this rule is the one to be most often broken.

Cultural Empathy –
 An expatriate should be able to respect the ideas, values, and behav-iors of others.
Listening with a non-judgmental approach helps the expatriate understand the thoughts,
feelings, and experiences of the locals. However, this ability is deeply rooted in a person’s
characteristics and may not be acquired easily.
Strong Sense of Self (ego strength) –
 Having a strong sense of self enables a person to in-teract with other cultures without losing
one’s own identity, as well as allowing the expatri-ate to be self-critical and open to
feedback. It also makes the expatriate treat failures as a learning experience and not as an
injury to their self-image, which would undermine their self-confidence. When the
expatriate has a strong ego, the ability to handle stress becomes better.

A Sense of Humor –
 Is needed for two reasons. Firstly, it is a way to deal with frustration, uncertainty, and
confusion that the expatriate might encounter. It also helps him/her distancing from the
situation, in order to regain some perspective. Secondly, if used correctly humor can work
as an ice breaker, a way of establishing a relationship with others. Or, it can be used to put
people at ease, to break the tension, and allow a more open and constructive discussion.

 Having gained an understanding of the different criterions that firms use and the different
competences that an expatriate can possess, the next step is to use different selection tools,
and based on the selection criterions; find the appropriate expatriate for the international
assignment.

The Different Selection Processes

 Today, organizations rely on different procedures in their selection of individuals for inter-
national assignments. There are, according to Briscoe and Schuler (2004), a number of
procedures to choose from when selecting an expatriate.
Interviews –
 According to Briscoe and Schuler (2004) interviews with the candidate and possibly
his/her spouse should be conducted in order to find out if they have the ability to adjust to
the foreign culture. The interview in itself should be focused on the candidate’s past behaviors that
might provide evidence of the presence or absence of the characteristics the interviewer favor
(Stroh et al., 2004). Interviews can be most useful when assessing a candidate’s communication and
interpersonal skills, and also, sometimes, general intelligence.
Formal Assessment Tests –
 Evaluates the candidate’s personal traits found to be important in adjusting to the new
culture; these include adaptability, flexibility, a liking for new experiences, and good
interpersonal skills (Briscoe & Schuler, 2004).
 Testing to see if the candidate has competences related to managing diversity is as
important if not more important than the candidate’s technical competences.

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Career Planning –
 Is another reason for multinational companies to send an individual for an international
assignment. Managers see that international assignment may be a step for an employee in
his/her career development (Briscoe & Schuler, 2004).
Self-Selection –
• Many multinational companies use one or more of the above processes. However, at the
end it is usually up to the candidate to decide if he/she is ready or have the necessary skills,
experiences, or attitudes to go on an international assignment (Briscoe & Schuler 2004).
• It is as important for the expatriate as it is for the company that he/she fits the assignment
in question since the expatriate would suffer from a bad fit. The general idea is that the
longer a worker is happily employed, the greater will the worker’s commit-ment and loyalty
to the firm be (Baron & Kreps, 1999).
Training of the Expatriate
• Once an employee has been selected for an expatriate position, pre-departure training is
considered to be the next critical step in attempting to ensure that the expatriate’s
effectiveness and success abroad, especially where the destination country is considered to
be culturally tough (Dowling & Welch, 2004).

• It is said that good preparation can go a long way to reduce the time it takes to adjust to the
new environment (Evans et al., 2002).

• Strong evidence shows that pre-departure cross-cultural training reduces expatriate failure
rates and increases expatriate job performances (Cullen & Parboteeah, 2004).

• Evans et al. (2002) describe three main issues that concern training and development of the
expatriates. The first one concerns the different training methods, second the timing of
training and the third issue concerns preparing the spouse and family when accompanying
the expatriate during the international assignment.

(1) Preparatory training for expatriates: once a person has been appointed for an international
assignment, pre-departure training is normally used to ensure the candidate has adequate skills
and knowledge that are necessary for working abroad effectively.
(2) Post-arrival training for expatriates: after an expatriate has gone abroad, further on-site
training is often used to familiarize the expatriate with the local working environment and
procedures.
(3) Training for host-country nationals (HCNs) and third-country nationals (TCNs): Training
should be provided to HCNs and TCNs to facilitate understanding of corporate strategy,
corporate culture and socialization.
(4) Preparatory training for expatriates has received most attention in the international literature
as expatriate failure (i.e. the premature return of an expatriate manager before the period of

Training Methods
According to Dowling and Welch (2004), studies indicate that the essential components of
pre-departure training programs that contribute to a smooth transition to a foreign location
include Cross-Cultural Training (CCT), preliminary visits, language training and assistance with
practical day-to-day matters.
Cross-Cultural Training
It is generally accepted that, to be effective, the expatriate employee must adapt to and not
feel isolated from the host country. Without an understanding of the host country’s culture,
the expatriate is likely to face some difficulties during the international assignment. There-
fore, cultural awareness training remains the most common form of pre-departure training
(Dowling & Welch, 2004).
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 Become aware that behaviors differ across cultures and the importance of observing
these cultural differences carefully.

 Build cognitive cultural maps so that expatriates understand why the local people
value certain behaviors, how these appear to be and how these can be appropriately
reproduced.

 Practice the behaviors they will need to reproduce in order to be efficient in their
international assignments.
• The processes mentioned above reflect back upon the importance for expatriates to be
able to deal with cultural differences that he/she may confront. It builds the foundation of
de-signing cross-cultural training for the managers (Stroh et al., 2004).

• According to Stroh et al. (2004), Evans et al. (2002) as well as Dowling and Welch (2004),
the success factor of a training program is the level of rigor of the training.

• Stroh et al. (2004) state that rigor is the degree of mental involvement and effort that the
trainer and the trainee need to get use of in order for the trainee to learn the required
concepts.

Rigor Training (information giving approach) –

 Training that last for a short period of time and includes activities such as area briefings and
cultural briefings (lectures), watching videos, reading books and language training at a
survival level.
Moderate Rigor Training (affective approach) –
The training last about 4 weeks and con-tain activities such as culture assimilator training,
role playing, cases, stress reduction train-ings and moderate language training.

High Rigor Training (immersion approach) –

Are often planned to endure more than a month and it contains more experimental
training such as assessment centers, field experiments (the employee is sent to work abroad
for a short period of time), simulations, sensitivity training as well as extensive language
training.

ADVANTAGES DISADVANTAGES OF INTERNATIONAL BUSINESS:

Though international business are most important for a country’s economy but there are
some advantages and disadvantages of international business which are described in detail below
Following are the advantages of international business:
1. Earning valuable foreign currency: A country is able to earn valuable foreign currency
by exporting its goods to other countries.
2. Division of labor: International business leads to specialization in the production of
goods. Thus, quality goods for which it has maximum advantage.
3. Optimum utilization of available resources: International business reduces waste of
national resources. It helps each country to make optimum use of its natural resources.
Every country produces those goods for which it has maximum advantage.
4. Increase in the standard of living of people: Sale of surplus production of one country
to another country leads to increase in the incomes and savings of the people of the
former country. This raises the standard of living of the people of the exporting country.
5. Benefits to consumers: Consumers are also benefited from international business. A
variety of goods of better quality is available to them at reasonable prices. Hence,
consumers of importing countries are benefited as they have a good scope of choice of
products.
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6. Encouragement to industrialization: Exchange of technological know-how enables

underdeveloped and developing countries to establish new industries with the assistance
of foreign aid. Thus, international business helps in the development of industry.
7. International peace and harmony: International business removes rivalry between
different countries and promotes international peace and harmony. It creates dependence
on each other, improves mutual confidence and good faith.
8. Cultural development: International business fosters exchange of culture and ideas
between countries having greater diversities. A better way of life, dress, food, etc. can be
adopted form other countries.
9. Economies of large-scale production: International business leads to production on a
large scale because of extensive demand. All the countries of the world can obtain the
advantages of large-scale production.
10. Stability in prices of products: International business irons out wide fluctuations in the
prices of products. It leads to stabilization of prices of products throughout the world.
11. Widening the market for products: International business widens the market for
products all over the world. With the increase in the scale of operation, the profit of the
business increases.
12. Advantageous in emergencies: International business enables us to face emergencies. In
case of natural calamity, goods can be imported to meet necessaries.
13. Creating employment opportunities: International business boosts employment
opportunities in an export-oriented market. It raises the standard of living of the countries
dealing international business.
14. Increase in Government revenue: The Government imposes import and export duties
for this trade. Thus, Government is able to earn a great deal of revenue from international
business.
15. Other advantages:
 Effective business education
 Improvement in production systems.
 Elimination of monopolies, etc.

DISADVANTAGES OF INTERNATIONAL BUSINESS ARE AS FOLLOWS:

1. Adverse effects on economy: One country affects the economy of another country
through international business. Moreover, large-scale exports discourage the industrial
development of importing country. Consequently, the economy of the importing country
suffers.
2. Competition with developed countries: Developing countries are unable to compete
with developed countries. It hampers the growth and development of developing
countries, unless international business is controlled.
3. Rivalry among nations: Intense competition and eagerness to export more commodities
may lead rivalry among nations. As a consequence, international peace may be
hampered.
4. Colonization: Sometimes, the importing country is reduced to a colony due to economic
and political dependence and industrial backwardness.
5. Exploitation: International business leads to exploitation of developing countries the
developed countries. The prosperous and dominant countries regulate the economy poor
nations.
6. Legal problems: Varied laws regulations and customs formalities followed different
countries, have a direct b earring on their export and import trade.
7. Publicity of undesirable fashions: Cultural values and heritages are not identical in all
the countries. There are many aspects, which may not be suitable for our atmosphere,
culture, tradition, etc. This, indecency is often found to be created in the name of cultural
exchange.

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8. Language problems: Different languages in different countries create barriers to

establish trade relations between various countries.
9. Dumping policy: Developed countries often sell their products to developing countries
below the cost of production. As a result, industries in developing countries of the close
down.
10. Complicated technical procedure: International business in highly technical and it has
complicated procedure. It involves various uses of important documents. It required
expert services to cope with complicate procedures at different stages.
11. Shortage of goods in the exporting country: Sometimes, traders prefer to sell their
goods to other countries instate of in their own country in order to earn more profits. This
results in the shortage of goods within the home country.
12. Adverse effects on home industry: International business poses a threat to the survival
of infant and nascent industries. Due to foreign competition and unrestricted imports
upcoming industries in the home country may collapse.

CONFLICT IN INTERNATIONAL BUSINESS:

CONFLICT
Conflict is actual or perceived opposition of needs, values and interests. A conflict can be internal
(within oneself) e individuals). Conflict as a concept can help explain many aspects of social life
such as social disagreement, conflicts of interests, and fights between individuals, groups, or
organizations. In political terms, "conflict" can refer to wars, revolutions or other struggles, which
may involve the use of force as in the term armed conflict.
Key elements
o Interdependence with another party
o Perception of incompatible goals

Conflict events
o Disagreements
o Debates
o Disputes
o Preventing someone from reaching valued goals
Functional and Dysfunctional Conflict
Functional conflict: works toward the goals of an organization or group
Dysfunctional conflict: blocks an organization or group from reaching its goals
1. Dysfunctional high conflict: what you typically think about conflict
2. Dysfunctional low conflict: A typical view. Levels vary among groups

Functional conflict
 “Constructive Conflict”
 Increases information and ideas
Encourages innovative thinking
 Unshackles different points of view
 Reduces stagnation

Dysfunctional high conflict

 Tension, anxiety, stress
 Drives out low conflict tolerant people
 Reduced trust
 Poor decisions because of withheld or distorted information
 Excessive management focus on the conflict
Dysfunctional low conflict
 Few new ideas

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 Poor decisions from lack of innovation and information

 Stagnation
 Business as usual

Conflict Management
Conflict management refers to the long-term management of intractable conflicts. It is the label for
the variety of ways by which people handle grievances—standing up for what they consider to be
right and against what they consider to be wrong. Those ways include such diverse phenomena as
gossip, ridicule, lynching, terrorism, warfare, feuding, genocide, law, mediation, and avoidance.
Which forms of conflict management will be used in any given situation can be somewhat
predicted and explained by the social structure—or social geometry—of the case.
Types Of Conflict
• Community conflict
• Diplomatic conflict
• Environmental resources conflict
• External conflict
• Interpersonal conflict
• Organizational conflict
• Intra-societal conflict
• Military conflict
• Religious-based conflict
• Workplace conflict
• Relationship conflict

Conflict also defines as natural disagreement resulting from individuals or groups that
differ in beliefs, attitudes, values or needs. It can also originate from past rivalries and personality
differences. Other causes of conflict include trying to negotiate before the timing is right or before
needed information is available.
Causes Of Conflict:
• Communication failure
• Personality conflict
• Value differences
• Goal differences
• Methodological differences
• Substandard performance
• Lack of cooperation
• Differences regarding authority
• Differences regarding responsibility
• Competition over resource
• Non-compliance with rules

Ways Of Addressing Conflict

• Accommodating: Individuals who enjoy solving the other party‘s problems and preserving
personal relationships. Accommodators are sensitive to the emotional states, body language,
and verbal signals of the other parties. They can, however, feel taken advantage of in
situations when the other party places little emphasis on the relationship.
• Avoiding: Individuals who do not like to negotiate and don‘t do it unless warranted. When
negotiating, avoiders tend to defer and dodge the confrontational aspects of negotiating;
however, they may be perceived as tactful and diplomatic.

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• Collaborating: Individuals who enjoy negotiations that involve solving tough problems in
creative ways. Collaborators are good at using negotiations to understand the concerns and
interests of the other parties. They can, however, create problems by transforming simple
situations into more complex ones.
• Competing: Individuals who enjoy negotiations because they present an opportunity to win
something. Competitive negotiators have strong instincts for all aspects of negotiating and are
often strategic. Because their style can dominate the bargaining process, competitive negotiators
often neglect the importance of relationships.
• Compromising: Individuals who are eager to close the deal by doing what is fair and equal for
all parties involved in the negotiation. Compromisers can be useful when there is limited time to
complete the deal; however, compromisers often unnecessarily rush the negotiation process and
make concessions too quickly.
Counseling
When personal conflict leads to frustration and loss of efficiency, counseling may prove to be a
helpful antidote. Although few organizations can afford the luxury of having professional
counselors on the staff, given some training, managers may be able to perform this function.
Nondirective counseling, or "listening with understanding", is little more than being a good
listener—something every manager should be.
Conflict Resolution
Conflict resolution is a range of methods for alleviating or eliminating sources of conflict. The term
"conflict resolution" is sometimes used interchangeably with the term dispute resolution or
alternative dispute resolution. Processes of conflict resolution generally include negotiation,
mediation, and diplomacy. The processes of arbitration, litigation, and formal complaint processes
such as ombudsman processes, are usually described with the term dispute resolution, although
some refer to them as "conflict resolution." Processes of mediation and arbitration are often
referred to as alternative dispute resolution.
Methods Of Dispute Resolution Include:
1.lawsuits (litigation)
2.arbitration
3.collaborative law
4.mediation
5.conciliation
6.many types of negotiation
7.facilitation
One could theoretically include violence or even war as part of this spectrum, but
dispute resolution practitioners do not usually do so; violence rarely ends disputes effectively,
and indeed, often only escalates them. Some individuals, notably Joseph Stalin, have stated that
all problems emanate from man, and absent man, no problems ensue. Hence, violence could
theoretically end disputes, but alongside it, life.
Dispute resolution processes fall into two major types:
1.Adjudicative processes, such as litigation or arbitration, in which a judge, jury or arbitrator
determines the outcome.
2.Consensual processes, such as collaborative law, mediation, conciliation, or negotiation, in which
the parties attempt to reach agreement.
A LAWSUIT is a civil action brought before a court of law in which a plaintiff, a party who
claims to have received damages from a defendant's actions, seeks a legal or equitable remedy. The
defendant is required to respond to the plaintiff's complaint. If the plaintiff is successful, judgment
will be given in the plaintiff's favor, and a range of court orders may be issued to enforce a right,
award damages, or impose an injunction to prevent an act or compel an act.
ARBITRATION, a form of alternative dispute resolution (ADR), is a legal technique for the
resolution of disputes outside the courts, wherein the parties to a dispute refer it to one or more
persons (the "arbitrators", "arbiters" or "arbitral tribunal"), by whose decision (the "award") they agree
to be bound. It is a settlement technique in which a third party reviews the case and imposes a
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decision that is legally binding for both sides. Other forms of ADR include mediation (a form of
settlement negotiation facilitated by a neutral third party) and non-binding resolution by experts.
COLLABORATIVE LAW (also called Collaborative Practice, Collaborative Divorce, and
Collaborative Family Law) was originally a family law procedure in which the two parties agreed
that they would not go to court, or threaten to do so.
MEDIATION, a form of alternative dispute resolution (ADR) or "appropriate dispute resolution",
aims to assist two (or more) disputants in reaching an agreement. The partiesthemselves determine
the conditions of any settlements reached— rather than accepting something imposed by a third
party. The disputes may involve (as parties) states, organizations, communities, individuals or other
representatives with a vested interest in the outcome.
CONCILIATION is an alternative dispute resolution (ADR) process whereby the parties to a
dispute (including future interest disputes) agree to utilize the services of a conciliator, who then
meets with the parties separately in an attempt to resolve their differences. He does this by
lowering tensions, improving communications, interpreting issues, providing technical assistance,
exploring potential solutions and bringing about a negotiated settlement.
NEGOTIATION
Negotiation is a dialogue intended to resolve disputes, to produce an agreement upon courses of
action, to bargain for individual or collective advantage, or to craft outcomes to satisfy various
interests. It is the primary method of alternative dispute resolution.
Negotiation occurs in business, non-profit organizations, government branches, legal
proceedings, among nations and in personal situations such as marriage, divorce, parenting, and
everyday life.
ETYMOLOGY
The word "negotiation" is from the Latin expression, "negotiatus", past participle of negotiare which
means "to carry on business". Another view of negotiation comprises 4 elements:
Strategy, process and tools, and tactics. Strategy comprises the top level goals - typically including
relationship and the final outcome. Processes and tools include the steps that will be followed and
the roles taken in both preparing for and negotiating with the other parties. Tactics include more
detailed statements and actions and responses to others' statements and actions.

APPROACHES TO NEGOTIATION
The advocate's approach
In the advocacy approach, a skilled negotiator usually serves as advocate for one party to the
negotiation and attempts to obtain the most favorable outcomes possible for that party. In this
process the negotiator attempts to determine the minimum outcome(s) the other party is (or
parties are) willing to accept, then adjusts their demands accordingly. A "successful" negotiation in
the advocacy approach is when the negotiator is able to obtain all or most of the outcomes their
party desires, but without driving the other party to permanently break off negotiations, unless the
best alternative to a negotiated agreement (BATNA) is acceptable.
Indeed, the ten new rules for global negotiations advocated by Hernandez and Graham.
• Accept only creative outcomes
• Understand cultures, especially your own.
• Don‘t just adjust to cultural differences, exploit them.
• Gather intelligence and reconnoiter the terrain.
• Design the information flow and process of meetings.
• Invest in personal relationships.
• Persuade with questions. Seek information and understanding.
• Make no concessions until the end.
• Use techniques of creativity

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Stages In The Negotiation Process.

Following are crucial steps to be followed in international negotiations to reach the final
outcome:
1. Preparation
Proper preparation for your international negotiation requires studying in-depth material about the
target culture and/or engaging a coach who commands extensive knowledge of the country and its
business practices. Successful international negotiators never engage without careful preparation.
2. Set Objectives
It is important not to assume that the objectives of the foreign side will be identical with those you
would expect in a domestic negotiation. Spending the time and effort to learn about them prior to
engaging will give you a strong advantage.
3. Maintaining Relationships
Successful negotiations abroad usually require a lot of up-front relationship building. To varying
degrees, people will want to learn about your company background and capabilities, prior
experiences, strategies and objectives, long-term plans, and so on. They also want to get to know
you personally before they decide to trust you. In several cultures, people don’t want to conduct
business with you unless you convinced them that you are seeking a long-term engagement rather
than just ‘pursuing a deal.’
4. Decision making authority
Since group decisions require a series of interactions between all stakeholders to form opinions
and establish consensus, they cannot be made right at the negotiation table. Sufficient time needs
to be given between negotiation rounds for the group to go through iterations of the process and
reach their conclusions. Gaining insight into this process is difficult, so it is pivotal to identify
relevant members of the group making the decision in order to try to influence each of them in
your favor.
5. Techniques
People around the world are very creative when it comes to negotiating, bargaining, and haggling.
Numerous negotiation techniques are used across the world. Some of them includes:
• Deception, False Demands, and False Concessions
• Extreme Openings
• Aggression and Strong Emotions
• Silence
• Best-Offer Pressure
• Time Pressure
6. Closure and Implementation
Once an agreement has been met, this is the stage in which procedures need to be developed to
implement and monitor the terms of the agreement. They put all of the information into a format
that’s acceptable to both parties, and they formalize it.
Formalizing the agreement can mean everything from a handshake to a written contract.
Emotion In Negotiation
Emotions play an important part in the negotiation process, although it is only in recent years that
their effect is being studied. Emotions have the potential to play either a positive or negative role in
negotiation. During negotiations, the decision as to whether or not to settle rests in part on
emotional factors. Negative emotions can cause intense and even irrational behavior, and can
cause conflicts to escalate and negotiations to break down, while positive emotions facilitate
reaching an agreement and help to maximize joint gains.

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BASIC NEGOTIATION STRATEGIES:

Competitive
o The negotiation as a win-lose game
 Problem solving
o Search for possible win-win situations

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ROLE OF INTERNATIONAL AGENCIES:

1. The ‘Hand-Shake’
Many New Zealand exporters confirm their agent or distributor’s appointment and the terms of
their relationship on the strength of a handshake. New Zealand Trade and Enterprise does not
recommend this approach. If there is no written document the relationship can run into difficulties
in areas such as measuring performance, sorting out differences of opinion, or terminating the
arrangement. It is important to have a written agreement that covers the key components of your
relationship.
2. Heads of Agreement/Exchange of Letters
In the majority of cases, a Heads of Agreement or Exchange of Letters is the best starting point in
terms of an export and agent/distributor agreement. Such an agreement implies trust and a formal
relationship and is a good mechanism to protect your interests. However, it does not involve the
time and cost of working through lawyers. The Heads of Agreement should include the following:
 Products involved – description
 Territory covered by the representative
 The timeframe of the agreement
 Termination clauses – it is important to think about these at the start of the relationship
 when you and your representative are on good terms.
 Review Clauses – when you want to review the agreement and what you want to review
 Performance targets – these could cover such things as amount of sales, number of
 customers, number of advertising campaigns etc.

3. Formal Agent/Distributor Agreement

This is a formal agreement that requires the services of a lawyer, as well as considerable time
and money on your behalf. Just as too many New Zealand exporters rely on the handshake
agreement, too many also jump in at this stage. While the handshake is too flimsy, the formal
agreement at the outset can be a waste of time and money if the relationship only lasts for a few
months. It is usually better to start with a Heads of Agreement or Letters of Exchange and progress
to this stage once the relationship has proved itself to be ongoing. Be aware, however, that formal
agent/distributor agreements should not be seen as legally binding, except perhaps for Australia. It
would normally be too expensive for a New Zealand company to sue an offshore partner who
breaks such an agreement, despite its legal basis. The key advantage of a formal agreement is that it
is a written statement of intent that ensures everyone understands the rules and is working to the
same objectives. A checklist of items that should be included in an agent/distributor agreement can
be found at the end of this document.

4. Joint Venture
Once you have an established and successful relationship with your representative, you could
consider entering into a joint venture with them. This is a public show of your commitment to
each other and sends good market signals. For information on joint ventures, see the New Zealand
Trade and Enterprise.
Measure the agent or distributor’s performance:
While the sales figures and trends will give you a good indication of how well your product and
your distributor or agent is performing, it makes good sense to have a more formal performance
arrangement in place so you can quickly and easily identify areas for attention.
 Request regular reports on a monthly, quarterly and annual basis. These reports should
cover such things as sales, inventory after-sales service, distribution and warehousing,
freight, competitor activity, new products, consumer and audience trends.
 Regular visits to the market should be part of a performance review.
 Encourage open, two-way communication so problems can be highlighted and dealt with
quickly and constructively.
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 Talk to customers to find out how they think your representative is performing.
 Use your time in the market to ascertain how quickly and accurately your representative
is reporting back market trends.

ETHICS IN INTERNATIONAL BUSINESS

Business Ethics:
Business ethics are principles of right or wrong governing the conduct of business people.
The text says, “The accepted principles of right and wrong” But there are many differences of
opinion among highly ethical business people.
Ethical Issues in International Business
 Many ethical issues and dilemmas are rooted in differences in political systems, law,
economic development, and culture. Some key ethical issues in international business
 Employment Practices
When work conditions in a host nation are clearly inferior to those in a multinational’s
home nation, what standards should be applied? How much divergence is acceptable?

Determinants of Ethical Behavior:

 Organization culture
 Personal ethics
 Decision making processes
 Leadership
 Unrealistic / realistic performance goals

Ethical issues in international business include:

• Child labor
• Workplace diversity
• Working standards
• Human rights
• Equal employment opportunity
• Trust and integrity
• Environmental preservation
Multinational corporations are constantly confronted with moral dilemmas concerning these
ethical issues. At times there is an apparent right course of action that such organizations might
choose. Still, the situation in the area of operations might make it difficult to determine what is
ethically acceptable.
For example, it is ethical to avoid gender discrimination and give women equal employment
opportunities worldwide. But an organization operating in the Middle East may face a dilemma
between upholding ethical standards and risking rejection from the local societies. Adhering to the
local societies' customs that do not allow equal employment opportunities could risk the
organization getting into global scandals. To explain why ethical issues frequently arise in
international business, consider a company that operates within the United States, say in California.
Most of the company's employees are likely to be from within. The same can be said for the
customers and the stakeholders. It can also be said that people working in this hypothetical
company exhibit similar or nearly similar societal norms. Most importantly, well-known state and
federal laws regulate the company's activities. In such a case, all the players know the labor, wages,
and environmental protection laws and have the same integrity perspective. The company is
improbable to face ethical issues since all the ethics and regulations are well known.
However, suppose the company was to expand its operation to a country in Asia, like Japan. In
that case, it will be expected to hire Japanese locals who have different cultural norms from
Americans. Besides, Japan has different laws concerning environmental conservation, minimum
wages, or an outlook on trust and integrity. The environmental laws and minimum wages in the US
are superior to those in Japan. In such a case, the company will be torn between adhering to local
laws, which might be less costly to comply with, or adhering to the parent country's law. However,
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the former might render the company competitively disadvantaged to other players in the host
country.
At the same time, if the company chooses to work under norms established in the parent country,
the locals might not feel so good about it as such norms do not align with theirs. This issue
becomes even more complicated if the company has more subsidiaries in other regions such as
Africa and South America. The bottom line is that every country has different cultural norms and
regulations. What might be seen as normal in one country might be unacceptable in another.
Besides, unethical practices in international business can be inviting to organizations as they
present an advantage over expensive compliance needs.
Ethics in international business, act as a way for multinational corporations to strike a balance
between doing what is correct from a global perspective and respecting the customs of local society.
Organizations need to identify and counter ethical issues in the world since customers are growing
more concerned about how businesses manage their operations rather than only focusing on
product quality.

Ethical Decision Making

Five things that an international business and its managers can do to make sure ethical issues are
considered
o Favor hiring and promoting people with a well-grounded sense of personal ethics
o Build an organizational culture that places a high value on ethical behavior
o Make sure that leaders within the business not only articulate the rhetoric of
 ethical behavior, but also act in a manner that is consistent with that rhetoric
o Implement decision-making processes that require people to consider the ethical
 dimension of business decisions
o Develop moral courage
What is culture?
“A system of values and norms that are shared among a group of people and that when taken
together constitute a design for living.”

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Different components of culture:

 Values: Abstract ideas/assumptions about what a group believes to be good, right and
desirable
 Norms: social rules and guidelines that prescribe appropriate behavior in particular
situations
 Folkways: Routine conventions of everyday life.
o Little moral significance
o Generally, social conventions such as dress codes, social manners, and neighborly
behavior
 Mores: Norms central to the functioning of society and its social life
o Greater significance than folkways
o Violation can bring serious retribution, Theft, adultery, incest and cannibalism
Determinants of culture

Improving Global Business Ethics

Seven Moral Guidelines for MNCs
 Inflict no intentional or direct harm
 Produce more good than bad for the host country
 Contribute to host country’s development
 Respect the human rights of their employees
 Pay their fair share of taxes
 Respect local cultural beliefs that do not violate moral norms
 Cooperate with the government to develop and enforce background institutions

The Role of Ethics in International Business

International business ethics has a number of open questions and dilemmas. Today it is
characterized by the following elements: Every culture and nation has its own values, history,
customs and traditions, thus it has developed own ethical values and understanding of ethical
principles; There is no international ethical code of conduct, accepted and followed by all the
countries; There is a lack of governments’ initiative to create ethical cooperation framework and
thus to enhance ethical behavior in international business; It is hard to outline those ethical
values which would be understandable, acceptable and important for representatives of all the
continents simultaneously within different types of international cooperation projects.
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Following approach to international business ethics:

Every individual and every corporate body must outline its ethical values; Every
individual and company should ensure understanding of ethical values and belief in their
effectiveness and importance;
Employees of every organization must participate in creating a corporate code of conduct,
which in this case definitely represents corporate culture, rather than only personal views of a
company’s leader; Every individual and company must monitor compliance with the outlined
values at all times.
All the ethical values must be divided in two categories – rigid and flexible. Rigid are those
values which cannot be renounced under any circumstances (honesty, integrity, professionalism),
and flexible ones, which are those moral principles which may be interpreted in different ways in
different situations (will to understand other cultures’ values, remuneration policies).

ETHICAL DECISIONS IN INTERNATIONAL BUSINESS

Positive effect in negotiation

Even before the negotiation process starts, people in a positive mood have more confidence, and
higher tendencies to plan to use a cooperative strategy. During the negotiation, negotiators who are
in a positive mood tend to enjoy the interaction more, show less contentious behavior, use less
aggressive tactics and more cooperative strategies. This in turn increases the likelihood that parties
will reach their instrumental goals, and enhance the ability to find integrative gains. Indeed,
compared with negotiators with negative or natural affectivity, negotiators with positive affectivity
reached more agreements and tended to honor those agreements more. Those favorable
outcomes are due to better Decision Making processes, such as flexible thinking, creative Problem
Solving, respect for others' perspectives, willingness to take risks and higher confidence. Post
negotiation positive affect has beneficial consequences as well. It increases satisfaction with
achieved outcome and influences one‘s desire for future interactions. The PA aroused by reaching
an agreement facilitates the dyadic relationship, which result in affective commitment that sets the
stage for subsequent interactions. PA also has its drawbacks: it distorts perception of self
performance, such that performance is judged to be relatively better than it actually is. Thus,
studies involving self reports on achieved outcomes might be biased.
Negative effect in negotiation
Negative effect has detrimental effects on various negotiation
Research indicates that negotiator‘s emotions do not necessarily affect the negotiation process.
Albarracın et al. (2003) suggested that there are two conditions for emotional effect, both related to
the ability (presence of environmental or cognitive disturbances) and the motivation:
1.Identification of the affect: requires high motivation, high ability or both.
2.Determination that the affect is relevant and important for the judgment: requires that either the
motivation, the ability or both are low.
According to this model, emotions are expected to affect negotiations only when one is high
and the other is low. When both ability and motivation are low the affect will not be identified, and
when both are high the affect will be identify but discounted as irrelevant for judgment. A possible
implication of this model is, for example, that the positive effects PA has on negotiations (as
described above) will be seen only when either motivation or ability are low.
Cultural differences cause four kinds of problems in international business negotiations, at the
levels of:
1.Language
2.Nonverbal behaviors
3.Values
4.Thinking and decision-making processes

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The order is important; the problems lower on the list are more serious because they are more
subtle. For example, two negotiators would notice immediately if one were speaking Japanese and
the other German. The solution to the problem may be as simple as hiring an interpreter or
talking in a common third language, or it may be as difficult as learning a language. Regardless of
the solution, the problem is obvious.

NONVERBAL BEHAVIORS

Anthropologist Ray L. Birdwhistell demonstrated that less than 35% of the message in
conversations is conveyed by the spoken word while the other 65% is communicated nonverbally.
Albert Mehrabian, a UCLA psychologist, also parsed where meaning comes from in face-to-face
interactions. He reports:

1.7% of the meaning is derived from the words spoken

2.38% from paralinguistic channels, that is, tone of voice, loudness, and other aspects of how things
are said
3.55% from facial expressions

Of course, some might quibble with the exact percentages (and many have), but our work also
supports the notion that nonverbal behaviors are crucial – how things are said is often more
important than what is said.

Differences in managerial values as pertinent to negotiations

Four managerial values—objectivity, competitiveness, equality, and punctuality—that are held

strongly and deeply by most Americans seem to frequently cause misunderstandings and bad
feelings in international business negotiations.

Objectivity
Americans make decisions based upon the bottom line and on cold, hard facts.ǁ ―Americans
don‘t play favorites.‖ ―Economics and performance count, not people.‖ ―Business is business.ǁ
Such statements well reflect American notions of the importance of objectivity.

The single most successful book on the topic of negotiation, Getting to Yes,[33] is highly
recommended for both American and foreign readers. The latter will learn not only about

negotiations but, perhaps more important, about how Americans think about negotiations. The
authors are quite emphatic about ―separating the people from the

Competitiveness and Equality

Simulated negotiations can be viewed as a kind of experimental economics wherein the values of
each participating cultural group are roughly reflected in the economic outcomes. The simple
simulation used in this part of our work represents the essence of commercial negotiations—it has
both competitive and cooperative aspects. At least 40 businesspeople from each culture
played the same buyer-seller game, negotiating over the prices of three products. Depending on
the agreement reached, the ―negotiation pieǁ could be made larger through cooperation (as high
as $10,400 in joint profits) before it was divided between the buyer and seller.

Time

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―Just make them wait.ǁ Everyone else in the world knows that no negotiation tactic is more useful
with Americans, because no one places more value on time, no one has less patience when things
slow down, and no one looks at their wristwatches more than Americans do. Edward T. Hall in his
seminal writing is best at explaining how the passage of time is viewed differently across cultures
and how these differences most often hurt Americans.

Differences in thinking and decision-making processes

When faced with a complex negotiation task, most Westerners (notice the generalization here)
divide the large task up into a series of smaller tasks. Issues such as prices, delivery, warranty, and
service contracts may be settled one issue at a time, with the final agreement being the sum of the
sequence of smaller agreements. In Asia, however, a different approach is more often taken
wherein all the issues are discussed at once, in no apparent order, and concessions are made on all
issues at the end of the discussion. The Western sequential approach and the Eastern holistic
approach do not mix well.

NEGOTIATION THEORY

Common Assumptions of Most Theories

Negotiation is a specialized and formal version of conflict resolution most frequently employed
when important issues must be agreed upon. Negotiation is necessary when one party requires the
other party's agreement to achieve its aim. The aim of negotiating is to build a shared environment
leading to longterm trust and often involves a third, neutral party to extract the issues from the
emotions and keep the individuals concerned focused. It is a powerful method for resolving
conflict and requires skill and experience. Zartman defines negotiation as "a process of combining
conflicting positions into a common position under a decision rule of unanimity, a phenomenon in
which the outcome is determined by the process."

However, most theories of negotiations share the notion of negotiations as a process. Yet, they
differ in their description of the process. Structural Analysis considers this process to be a power
game. Strategic analysis thinks of it as a repetition of games (Game Theory). Integrative Analysis
prefers the more intuitive notion of process, in which negotiations undergo successive stages, e.g.
pre-negotiation, stalemate, settlement. Especially structural, strategic and procedural analysis build
on rational actors, who are able to prioritize clear goals, are able to make trade-offs between
conflicting values, are consistent in their behavioral pattern, and are able to take uncertainty into
account.

Negotiations differ from mere coercion, in that negotiating parties have the theoretic possibility to
withdraw from negotiations. It is easier to study bi-lateral negotiations, as opposed to multilateral
negotiations.

Structural Analysis

Structural Analysis is based on a distribution of empowering elements among two negotiating

parties. Structural theory moves away from traditional Realist notions of power in that it does not
only consider power to be a possession, manifested for example in economic or military resources,
but also thinks of power as a relation.

Based on the distribution of elements, in structural analysis we find either power- symmetry
between equally strong parties or power-asymmetry between a stronger and a weaker party. All
elements from which the respective parties can draw power constitute.

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Business Ethics & Social Responsibility

A. Definitions

The term “ethics” is derived from the Greek word “ethos” which means “character and from the
Latin word “mores” which means “customs”; the following definitions should also be helpful in
understanding the concept:

Ethics can be defined as the reflective process by which individuals, social groups and social
institutions evaluate their actions from the perspective of moral principles and values; or

The branch of philosophy that defines what is good for individuals and society and establishes the
nature of obligations that members of society owe to themselves and other members of society.

Business Ethics: The reflective process whereby businesses evaluate their actions, policies and
decision-making processes.

Managers regularly face two types of ethical issues:

Micromanagement issues including conflicts of interest, accepting or giving gifts and the fairness of
performance appraisals.

Macromanagement issues including layoffs and down-sizings, employee screening tests and
employee privacy rights. .

Categories of Ethical Dilemmas

• Taking things that don't belong to you

• Saying things you know are not true
• Giving or allowing false impressions
• Buying influence or engaging in conflict of interest
• Hiding or divulging information
• Taking unfair advantage
• Committing personal decadence
• Perpetrating interpersonal abuse
• Permitting organizational abuse
• Violating rules
• Condoning unethical actions
• Balancing ethical dilemmas

The Language of Ethical Dilemmas

1."Everybody else does it."
2."If we don't do it, someone else."
3."That's the way it has always been done."
4."We'll wait until the lawyers tell us it's wrong."
5."It doesn't really hurt anyone."
6."The system is unfair."
7."I was just following orders."

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Approaches to Ethical Decision Making

While a wide variety of approaches exist to provide guidance on how to make ethical decisions,
those approaches can be placed in the following categories:

Philosophy based approaches to ethical decision making.

Teleological Theories: These approaches emphasize the consequences of actions and policies;

Often associated with philosophers Jeremy Bentham (1748-1832) and John Stuart Mill

(1806-1873) and utilitarianism.

Utilitarianism posits that a decision is ethical to the degree that it promotes the greatest good for
the greatest number of stakeholders; "good" includes material goods as well as various forms of
pleasure.

Each stakeholder counts once and only This approach allows for degrees of right and wrong.

The shortcomings of utilitarianism include:

It is difficult and quite subjective to quantify pleasures in a cost/ benefit analysis.

It is not always clear beforehand what the outcome of a decision will be, nor who will be affected
by it.

The calculation required to determine what is right is both complicated and time consuming;
many occasions will not permit the time and many individuals may not even be capable of the
calculations.

The greater good may be achieved under conditions that are harmful to some individuals as long
as that harm is balanced by a greater good.

The theory's tendency to condone inequitable distributions and even abuse of minorities has led it
to be labeled as elitist.

Deontological Theories: These theories are often associated with philosopher Immanuel Kant
(1724-1804) who attempted to discover the "categorical imperatives" against which all other ethical
decisions would be evaluated.

The categorical imperatives applied the following two concepts:

Universalizable: Always act in such a way that you can also will that the maxim of your action
should become universal law.

2)-Respect for persons: Always act so that you treat humanity, both in your own person and in that
of another, always as an end and never merely as a means (similar to the golden rule).
b)This approach identifies certain interests or rights that must be respected;

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These rights include many of the freedoms recognized in the U.S. Constitution.

Simplified this approach says an action or policy is morally right only

if those persons affected by the action or policy are not used as instruments for advancing some
goal, but are fully informed and have their fundamental human rights honored and protected.

Shortcomings of Kant’s approach include:

It creates moral dilemmas when duties come into conflict but provides no mechanism for resolving
such conflicts.

It yields only absolutes and thus recognizes no gray areas; rigid lines often result (i.e. lying is
unethical so that even a "polite lie" is wrong).

In deontology it’s how you play the game and not whether you win or lose (i.e. the
Decision making process is more important than the outcome of the process); while in

Utilitarianism winning is everything (i.e. outcomes are more important than processes).

Virtue ethics theory: This theory is normally associated with the Greek philosophers Aristotle and
Plato. This theory suggests a way of being rather than a rule for doing.

Virtue ethics theory posits that what one needs to do to make ethical decisions is to cultivate
virtuous character traits since virtuous people are more inclined to both be ethical and to make
ethical decisions.

This theory defines virtues as fixed traits or habits to do what is morally commendable.

Aristotle’s list of virtues included courage, self-discipline and honesty.

Criticism’s of the virtue ethics approach include:

It is not practical in a society like ours in which wealth and success are so highly valued.

is not useful for evaluating the desirability of actions (i.e. are they right or wrong).

The fact that a virtuous person chooses a certain course of action does not guarantee that the
action is ethical since even saints are fallible.

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Religious based approaches such as the Golden Rule which posits an action or policy is ethical
to the it treats the other stakeholders the way the decision makers would want to be treated (i.e.
do unto others as you would have them do unto you.

Business based approaches such as Warren Buffet’s “Front-Page-of-the-Newspaper Test”

in which he suggests:

When contemplating any business act, an employee should ask him/herself whether he/she
would willing to see it immediately described by an informed and critical reporter on the front
page of his/her local newspaper, there to be read by his/her spouse, children and friends.

Ethical relativism is the theory that holds that morality is relative to the norms of one's culture.
That is, whether an action is right or wrong depends on the moral norms of the society in
which it is practiced. The same action may be morally right in one society but be morally wrong
in another.

For the ethical relativist, there are no universal moral standards.

Most ethicists reject the theory of ethical relativism.

Perhaps the strongest argument against ethical relativism comes from those who assert that
universal moral standards can exist even if some moral practices and beliefs vary among
cultures. In other words, we can acknowledge cultural differences in moral practices and beliefs
and still hold that some of these practices and beliefs are morally wrong.

E. Key reasons why managers act ethically (per HBS survey results)
1.Personal moral values prevent doing it;
2.The action would hurt the organization or someone in it;
3.Not doing it enhances personal satisfactions;
4.The organization is fair, so why take advantage of it;
5.The punishment if caught is severe;
6.There is a high risk of getting caught

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QUESTION BANK
UNIT I
PART - A
1. Why do business firm go international?
• To Increase Profit
• Expanding the production capacities
• Severe Competition in the home country
• Limited home market

2. Explain the nature of international trade.

• Heterogeneous market
• Different national groups
• Different political unit
• Different national policies

3. What are various types of foreign investment ?

• Exporting - Indirect exports,Direct exports ,Intra-corporate transfers
• Licensing
• Franchising
• Contract Manufacturing
• Management Contract
• Turnkey Project
• Green field strategy
• Mergers & Acquisitions
• Joint ventures

4. Bring out the reasons of foreign investment.

1. High transport costs in exporting.
2. Problems with licenses and the need to protect intellectual
property.
3. Availability of investment grants from foreign governments.

5. Explain turnkey project?

A turnkey project is a contract under which a firm agrees to fully design , construct and
equip a manufacturing/ business/services facility and turn the project over to the purchase
when it is ready for operation for a remuneration like a fixed price , payment on cost plus
basis.

6. What is joint venture ?

Two or more firm join together to create a new business entity that is legally separate and
distinct from its parents. It involves shared ownership. Various environmental factors like
social , technological economic and political encourage the formation of joint ventures.

7. How do the contract manufacturing differ from the management contract?

Contract manufacturing :Some companies outsource their part of or entire production and
concentrate on marketing operations. This practice is called the contract manufacturing or
outsourcing.

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Management Contract: The companies with low level technology and managerial expertise
may seek the assistance of a foreign company. Then the foreign company may agree to
provide technical assistance and managerial expertise. This agreement between these two
companies is called the management contract.

8. What is franchising?
Under franchising an independent organization called the franchisee operates the business
under the name of another company called the franchisor under this agreement the franchisee
pays a fee to the franchisor. The franchisor provides the following services to the franchisee.
1. Trade marks
2. Operating System
3. Product reoutation
4. Continuous support system like advertising , employee training , etc.

9. Define Internalization.
It is the control through self handling of foreign operations, primarily because it is less
expensive to deal with in the same corporate family than to contract with an external
organization.

10.What is opportunity Cost?

The opportunity cost is the value of alternative which have to be foregone in order to obtain a
particular thing. This concept was proposed by Gottfried Haberler in 1959. This theory
provides the basis for international.

11. List any four factors causing globalization of Business.

(a) Technological advancement allows ideas to cheaply travel faster, further and to
more people
(b) Mass transport allows people and goods also to cheaply travel faster and further
(c) Education around the world skills workers to do the work previously limited to
the developed world
(d) Increase in global competition.

12. What are the factors to be considered to calculate ‘country attractiveness’?

(NOVEMBER/ DECEMBER 2011)
Country attractiveness depends on the balancing the benefits, costs, and risk
associated with doing business in a foreign country.

13. What are the perils of liberalization?

a. Dumping
b. Concentration on developed countries

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14. What is ethnocentricism?

The domestic company normally formulates their strategies, their product design and
their operations towards the national markets, customers and competitors. But the
excessive production more than the demand for the product , either due to competition
or due to changes in customer preferences push the company to export the excessive
production to foreign countries. This organization is suitable for smaller companies.

Managing Director

Mgr – R& D Mgr- Finance Mgr- Production Mgr-HR

Asst Mgr- North Asst Mgr - South Asst Mgr - Export

15.What is International Business?
International business is a term used to collectively describe all commercial
transactions that take place between two or more nations. Usually, private companies
undertake such transaction for profit; governments undertake them for profit and for
political reasons.

16. What is meant by cultural Environment? (NOVEMBER/ DECEMBER 2010)

Culture consists of specific learned norms based on attitudes, values, and beliefs, all of which
exist in every society. Culture cannot easily be isolated from such factors as economic and
political conditions. The cost of ignoring the customs, traditions, taboos, tastes and
preferences, etc., of people could be very high.

17. What is Balance Of Payment ?

A systematic record of a nation's total payments to foreign countries, including the
price of imports and the outflow of capital and gold, along with the total receipts
from abroad, including the price of exports and the inflow of capital and gold

18. What is free Trade?

Free trade is a type of trade policy that allows traders to act and transact without
interference from government. Thus, the policy permits trading partners mutual gains
from trade ,with goods and services produced according to the theory of comparative
advantage.

19. Shortly write any two important political climates in India that attracts foreign
investment in the country.
Relaxation In FDI
Free Licensing
Promotion & Incentives For Investors

20. What is culture? Give your own definition.

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The set of shared attitudes, values, goals, and practices that characterizes an
institution, organization or group.

21. Write shortly about the experience curve effect on companies competing on
many countries.
The rule used for representing the learning curve effect states that the more times a
task has been performed, the less time will be required on each subsequent iteration.
and lower will be the cost of doing it. The task can be the production of any good or
service. Each time cumulative volume doubles, value added costs (including
administration, marketing, distribution, and manufacturing) fall by a constant and
predictable percentage.

22. Draw an appropriate organizational chart for reducing costs of control to an

MNC like Unilever.

CHIEF EXECUTIVE OFFICER

EUROPE ASIA AMERICA Other countries

Product A

23.B What is the role of incentives in control systems? Explain in the context of an
Product
MNC.
Product C
Incentives plays an motivating tool in the control.

24. Give meaning for TQM.

Total Quality Management (TQM) is a business management strategy aimed at
embedding awareness of quality in all organizational processes. TQM has been
widely used in manufacturing, education, hospitals, call centers, government, and
service industries, as well as NASA space and science programs.

25. What is the role of non verbal behavior in negotiation?

Because negotiating is an interpersonal process, it can be affected by factors which
are beneath the surface – for example, emotions, attitudes, motives. These factors can
show through the surface in the form of ‘messages’ from non-verbal and verbal
behaviours. Effective negotiators need to know what these non-verbal and verbal
messages might imply so that they can work with them. They also need to be aware of
the signals they themselves transmit through their own non-verbal and verbal
behaviours.

25. What is renegotiation? Give an Indian example.

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It refers to second negotiations. It happens, that even when a project is on stream, the
changed political guards may press for a renegotiation, when they solidly prove
national interests are better served with a fresh look. This happened to the Enron’s
Dhabol power project in Maharastra.

PART - B
1. Bring out the trends in international trade.
2. Elucidate the stages in internalizations and it’s orientation.
3. State the recent trend in FDI and foreign investment by Indian companies.
4. Why international business not a bed of roses? Elucidate your answer with suitable
examples.
5. Explain the traditional theories of international business.
6. What are the assumption ,merits and derivatives of modern theory
Hecksher-ohlin factor price -equalization theory?
7. List out the various forms of international business . Suggest a best form for an Indian
based companies.
8. What are the reactive and proactive reasons for companies going
international?
9. “ Doctrine of comparative advantage” – discuss.
10. What are the methods of entering foreign markets? Explain the reasons for increased
interest in international marketing.
11. Write about the growth and development of international business. What are the
option introduced in FDI? What is the purpose of trade
agreements?
12. Write about the growth and development of international business.
13. What are the methods entering foreign markets? Explain the reasons for increased
interest in international marketing.
14. Explain the fundamentals of foreign exchange.
15. Identify the major characteristics of the foreign exchange market and
how governments control the flow of currencies across national borders.
16. Identify the key elements of export strategies.
17. Compare direct and indirect selling of exports.
18. Discuss the role of counter trade in international business.
.
UNIT - II
PART – A

1. Explain globalisation . State the feature of globalisation.

IMF defines Globalization as “ the growing economic

interdependence of countries worldwide through increasing volume and variety of
cross border transactions in goods and services and of internal capital flows and also
through the more rapid and widespread diffusion of technology”.

2. What are the essential condition for globalisation?

 Liberalizing the rules and regulation of control.
 Removal of Quotas & Tariffs.
 Providing freedom to the business and industry.
 Providing infrastructural facilities.
 Removal of bureaucratic hurdles.
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 Encouraging research and development.

 Encouraging the competitiveness based on quality, price etc.
 Providing administrative and governmental support.


3. What are the pros and cons of globalisation?

Pros Of Globalisations
 Free Flow of Capital
 Free Flow of Technology
 Increase in Industrialization
Cons Of Globalisations:
 Globalization kills domestic business:
 Exploits Human Resources:
 Leads to Unemployment & Underemployment:

4. What is dumping?
It Means selling the products less than the on going price in the market or less than
the cost of production. Dumping is used to sell the excess production or to earn
foreign exchange.

5. How is economic union is formed?

It is formed when the member countries create greater economic harmonization
through the adoption of common economic policies.

6. What are the different kinds of economic integration?

There are four types of regional economic ntegration:
 Free trade Area: No internal Tariff
 Customs union: Common external tariff
 Economic integration: Coordinate fiscal and monetary policy.

7. What is cartel?
It is an agreement to restrict competition between production of the same commodity
in one country or between many countries. Eg OPEC

8. What is counter trade?

It is an arrangement to pay for import of goods and services with something other
than cash. Thus counter trade is goods for goods deal. The different types of counter
trade include : barter, counter purchase, compensation trade, switch trading, offsets
and clearing agreement.

9. What is GATS?
General Agreement on trade in services provides a multi lateral framework of
principles on services. Trade in services like insurance, travel, tourism, hotel banking,
maritime, transportation, mobility of human resources etc. has been brought within
the purview of GATS.

10. What is TRIMS ?

It refers to certain condition or restriction imposed by an government in respect of
foreign investment in the country. TRIMS agreement provides that no contracting
party shall apply any trim which is inconsistent with the WTO articles.
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11. State any two advantages of regional trade block. (NOVEMBER/ DECEMBER 2011)
a. Faster way to remove trade and investment barriers within trade blocs
b. Increasing interdependency of neighboring countries on one another.
c. Greater weight and voice on world's political and economic stage when
represented as a group.
d. Definite cost advantage.

12. List any four theories of international trade. (NOVEMBER/ DECEMBER 2011)
1. Absolute cost theory
2. Comparative Cost theory
3. Opportunity cost theory
4. Ricardo’s theory

13. State the advantages of RTB. (APRIL/ MAY 2011)

i. Faster way to remove trade and investment barriers within trade blocs
ii. Increasing interdependency of neighboring countries on one another.
iii. Greater weight and voice on world's political and economic stage when
represented as a group.
iv. Definite cost advantage.

14. What are the features of multilateral agreement? (APRIL/ MAY 2011)
i. Include individual countries commitment to lower custom tariff and other
trade barriers, and to open and keep open the services markets.
ii. Set procedures for settling disputes.
iii. Prescribe special treatment for developing counties.
iv. Require government to make their trade policies transparent by notifying the
WTO about laws in force and measures adopted and through regular reports to
the secretariat on the countries trade policies.

15. Briefly write on WTO. (NOVEMBER/ DECEMBER 2010)

The WTO was established on January 1, 1995. It is the embodiment of the
Uruguay Round results and the successor to GATT. 76 Governments became
members of WTO on its first day. It has now 146 members, India being one of the
founder members.
Objectives
• To raising standards of living, ensuring full employment and large and
steadily growing volume of real income and effective demand
• To secure a share in the growth particularly for least developed
countries
• To achieve these objectives by entering into reciprocal and mutually
advantageous arrangements
• To develop an integrated, more viable and durable multilateral trading
system

16. What is Regional Trade Block? (NOVEMBER/ DECEMBER 2010)

Trade blocks are free trade Zones designed to encourage trade activities across
nations. The formation of trade blocks involves a number of agreements on tariff,
trade and tax. The activities of trade blocks have huge importance in the economic

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and political scenarios of the contemporary world. Over the years trading blocs have
played a major role in regulating the trend and pattern of international trade.

17. Define International orientation.

EPRG Framework – Ethnocentrism(home country orientation) – polycentrism (host
country orientation)- Regiocentrism ( Regioanl orientation)- Geocentrism ( world
orientation).

18. What is exchange risk?

The risk that a business' operations or an investment's value will be affected by
changes in exchange rates. For example, if money must be converted into a different
currency to make a certain investment, changes in the value of the currency relative to
the American dollar will affect the total loss or gain on the investment when the
money is converted back. This risk usually affects businesses, but it can also affect
individual investors who make international investments. also called currency risk.

19. What are the different types of international business?

Exporting - Indirect exports, Direct exports, Intra-corporate transfers
Licensing , Franchising ,Contract Manufacturing ,Management
Contract,Turnkey Project,Green field strategy, Mergers &
Acquisitions,Joint ventures

20. Define cultural environment of international business.

It emcompasses the religious aspects , language, customs, traditions and beliefs, tastes
and preferences , social stratification, social institutions, buying and consumption
habits etc.

21. What is BOP?

Balance Of payment is a systematic record of a nation's total payments to foreign
countries, including the price of imports and the outflow of capital and gold, along
with the total receipts from abroad, including the price of exports and the inflow of
capital and gold.

22. Give two merits of MNCs.

 Increase in job oppurtunities
 Better and cheaper products will be available to the consumers
 The govt will also benefit by earning more in taxes etc
 It will lead to an increase in infrastucture improvement

23. Define Diversification.

It involues spreading investments around into many types of investment, including
stocks, mutual funds, bonds, and cash- geographic diversification involves a mixture
of domestic and international investments- diversification reduces the risk of a
portfolio.

24. What is ICT?

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Information and communication Technology, changing the tradability of the

information – centered set of services , information stored by digitization – cheaper
and faster around the globe- customs and traditions are broken- acquire services.

25. Define cross national conflict.

Constituencies work for own rather than global objectives, decuisions in one country
have repercussions elsewhere.

26. What is tariff in international business?

A duty/tax which government levied on goods shipped internationally may be on
goods entering, leaving or passing through a country.

PART - B

1. What has been the impact of globalisation in India?

2. Explain the stand of Indian in WTO. And WTO’s role in Indian socio -economic
development.
3. What are the agenda of the next round of ministerial meeting of the WTO in the light of
failure of the third round?
4. What are the implications of WTO agreement in developing countries?
5. State the objectives of EEC. Explain achievement of EEC in integration its member of
countries.
6. Describe the steps taken by NAFTA in bringing economic integration among Canada and
Mexico
7. Why ASEAN is next to EEC in achieving economic integration?
8. Explain the different kinds of economic integration.
9. Discuss the issues and measures introduced in the recent WTO meet. What are the
preferential treatments provided in the trade agreement?
10. What are the preferential treatments provided in the trade agreements?
11. Explain the role of Indian in WTO & WTO’s role in Indian soci economic development.
12. What do you mean by trade blocks? Explain the various regional trade blocks and their
implications on business.
13. Discuss the purpose of establishing regional blocs and various types of Regional Trade
Blocks
.

UNIT - III

PART - A

1. What is technology diffusion?

Is the spreading of technology to underdeveloped countries. The developed countries
spread to technical know – how to the under develop in order to facilitate the
industrial development in these countries.

2. Define Mutlinational Enterprises

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Is an organization which produces, markets, invest and operates across the world.
MNEs have world wide involvement and a global perspective. A MNE is also defined
as an organization doing business in more than one country.

3. Define World class organization?

It is defined as enterprises that are able to compete with anybody, any where, any
time. WCO operates across the world and can compete effectively against all corners,
foreign and domestic.
Eg Sony, GE

4. How does creativity and innovation help in global competitiveness?

It is defined as enterprises that are able to compete with anybody, any where, any
time. WCO operates across the world and can compete effectively against all corners,
foreign and domestic.

5. State the characteristics Of MNE’s

Invest considerable portion of their assets internationally- Engage in international
production and operate in a number of countries. Take managerial decisions based on an
global perspective.

6. What is ethno centric approach of international business?

A nationalistic philosophy of management whereby the values and interests of the
parent company guide the strategic decisions.

7. What are the reasons for MNEs success global sourcing strategies?
The success of a global sourcing strategies depends on four key factors; Compatibilty
,Configuration, Coordination, Control.

8. What is technical paradox?

The situation where high tech business can thrive at the very moment that their prices
are failing the fastest.

9. What is virtual organization?

An organization that is able to conduct business as if it were a very large enterprise
when, infact it is much smaller made up of core business. Competencies and the rest
outsourced or partnered.

10. What is learning Organisation?

Organisation that are able to transform themselves by anticipating change and
discovering new ways of creating products and services it has learned how to learn.
Eg Kodak.

11. What are the different forms of international business? (NOVEMBER/ DECEMBER
2011)
a) Importing and Exporting
b) Licensing and Franchising
c) Turnkey operations,
d) Management Contracts,
e) Green field strategy

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12. What are the different organizational structures adopted for international business.
(NOVEMBER/ DECEMBER 2011)
a. International Division Structure
b. Global Structural Arrangement
i. Global Product Division
ii. Global Functional Structure
iii. Global Area Structure
iv. Global Functional Structure
v. Global Mixed/ Organizational Structure
vi. Global Matrix Structure
vii. Global customer structure

13. What are the various global entry strategies? (APRIL/ MAY 2011)
a. International strategy.
b. Multidomestic strategy.
c. Global strategy.
d. Transnational strategy.

14. What are the advantages of differentiation strategy? (APRIL/ MAY 2011)
i. Differentiation can be a source of competitive advantage
ii. Successful product differentiation leads to monopolistic competition and is
inconsistent with the conditions for perfect competition
iii. Differences in quality which are usually accompanied by differences in price

15. Give the global entry strategy. (NOVEMBER/ DECEMBER 2010)

 Best use of the experience curve and location economies.
 This is the low cost strategy.
 Utilize product standardization.
 Not good where local responsiveness demand is high.
• Product is the same in all countries.
• Centralized control - little decision-making authority on the local level
16. What are the advantages of a firm derives in International Trade? (NOVEMBER/
DECEMBER 2010)
 Enhances the domestic competitiveness
 Takes advantage of international trade technology
 Increase sales and profits
 Extend sales potential of the existing products
 Maintain cost competitiveness in your domestic market

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17. What is international trade?

International trade is exchange of capital, goods, and services across international
borders or territories. In most countries, it represents a significant share of gross
domestic product (GDP).

18. What is exportable surplus?

To send or transport (a commodity, for example) abroad, especially for trade or sale.

19. Write your idea on culture.

The set of shared attitudes, values, goals, and practices that characterizes an
institution, organization or group.

20. What is trade block?

Trade bloc is a type of intergovernmental agreement, often part of a regional
intergovernmental organization, where regional barriers to trade (tariffs and non-tariff
barriers) are reduced or eliminated among the participating states.

21. What is MNC?

A multinational corporation (MNC) or transnational corporation (TNC), also called
multinational enterprise (MNE), is a corporation or enterprise that manages
production or delivers services in more than one country. It can also be referred to as
an international corporation.

22. What is competitiveness?

Competitiveness is a comparative concept of the ability and performance of a firm,
sub-sector or country to sell and supply goods and/or services in a given market.

23. What is conflict?

Conflict is Disagreement through which the parties involved
perceive a threat to their needs, interests or concerns’. Conflict is a
state of discord caused by the actual or perceived opposition of
needs, values and interests.

24. What is negotiation?

Negotiation is an interaction of influences which include the process of resolving
disputes, agreeing upon courses of action, bargaining for individual or collective
advantage, or crafting outcomes to satisfy various interests. Negotiation is thus a
form of alternative dispute resolution.

25. What is evaluation?

Evaluation is systematic determination of merit, worth, and significance of something
or someone using criteria against a set of standards. Evaluation often is used to
characterize and appraise subjects of interest in a wide range of human enterprises,
including the arts, criminal justice, foundations and non-profit organizations,
government, health care, and other human services.

26. What is MIS?

A management information system (MIS) is a subset of the overall internal controls of
a business covering the application of people, documents, technologies, and
procedures by management accountants to solving business problems such as costing
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a product, service or a business-wide strategy. Management information systems are

distinct from regular information systems in that they are used to analyze other
information systems applied in operational activities in the organization.
Academically, the term is commonly used to refer to the group of information
management methods tied to the automation or support of human decision making,
e.g. Decision Support Systems, Expert systems, and Executive information systems.

PART- B
1. What are the various type of organization structure?
2. State the various approaches in formulation of organizational structure.
3. Elucidate the steps in implementation of a organizational structure.
4. List out the stages of formulating a organizational structure.
5. Is total quality remains a major issue for MNE’s today - justify.
6. Bring out the role of functional areas in implementation.
7. Compare the models of international strategy.
8. What are issues and international dimensions of technology rest with
MNCs ? Discuss the R& D strategies of MNCs.
9. Compare the competitiveness of firms at the national & global level.
10. What are the avenues and strategies proposed for international trade
management?
11. Explain the structural design of MNEs.
12. Discuss the strategic choice of entry modes and factors affecting choice of
international entry mode.
13. What are the different strategies of internalization? Rate the best method of
international operations.
14. What are indicators of establishing MNEs?

UNIT- IV
PART - A

1. Explain Control:
Control is the process of establishing standards and targets, monitoring activities
and comparing actual implementing measures to remedy deficiencies. It links inputs
to outputs and provides feedbacks to those in command.

2. Mention Different approaches to control the MNCs.

Working within control parameters - Focus on the quantifiable &qualitative
aspects of a foreign subsidiary - To be exercised on a unit by unit basis - Requires
decentralized of operating decisions.

3. What are the factors that affect the controlling of MNEs ?

 Distance- it takes more time & expense to communicate.
 Diversity – Country differences make it hard to compare operations.
 Uncontrollable- There is often rapid changes in the information and data
problems.

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4. Narrate the various Methods Of controlling MNEs,

 Internal Control
 External Control
 Direct Control
 Indirect Control.

5. Why should host country control MNE’s?

The home country government has a number of problems when attempting to
prevent firms shifting operations to other countries. The control & restrictions on
MNC’s foreign operations include;
 Prohibitions on the transfer of technology to certain nations.
 Preventing firms from using money raised in the home country for foreign
investment.
 Creation of tax regimes not conducive to FDI.

6. Mention the five aspects of the international control process?

They are:
 Planning
 Organisational Structure
 Location Of Decision making
 Control mechanisms
 Special situations.

7. What are the various challenges in ‘product development’ for global markets?
(NOVEMBER/ DECEMBER 2011)
As manufacturers know, product development is increasingly competitive,
increasingly complex, and increasingly challenging. Despite customer demands for a
growing number of specialised products, companies still need to keep up with
aggressive launch cycles, rapid technology innovation and constantly changing
requirements. This makes effective management of product programmes and
portfolios increasingly important.

8. How cost of production could be manipulated in the global production process? (APRIL/
MAY 2011)
i. Currency exchange rates between various nations
ii. Production costs in different locations.
iii. How quickly inputs need to be delivered.
iv. Comparisons of foreign and local firms prices, product features, technical
support etc.
v. Local content requirements.
vi. Whether internal economies of scale in the production of inputs are possible.

9. Why are buy decisions preferred, over make decisions? (APRIL/ MAY 2011)
i. Wide Choice
ii. Release of capital, managerial and other resources
iii. Benefit of concentration on core activities.
iv. Scope for bargaining
v. Benefits of technological and product development outside the firm.
vi. Lower impact of recession
vii. Ease of exit
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10. List any four global supply chain issues in international business. (NOVEMBER/
DECEMBER 2011)
a. Customer service requirements,
b. Plant and distribution centre network design,
c. Inventory management,
d. Outsourcing,
e. Key customer and supplier relationship.
f.
11. Explain what is F.O.B? (NOVEMBER/ DECEMBER 2010)
FOB stands for Free On Board which means the shipper/trader pays only costs up to
the ship and insurance cost, but freight charges are payed by the Buyer/Consignee.

12. Briefly give details on C.I.F. (NOVEMBER/ DECEMBER 2010)

These are global shipping terms which are used in international trade. CIF means Cost
Insurance and Freight. That means the shipper/trader has to pay the cost of shipment
up to the ship, insurance cost of cargo and freight cost up to destination port.

13. What are controllable and uncontrollable factors in international marketing?

Control will have to be defined with reference to a company’s management The Company is
in a position to control and design marketing mix element, namely, product, price, place and
promotion.
But the total environment in which the marketing mix elements will operate is beyond the
control of the company. Median has identified 13 uncontrollable factors which can be
classified under the following heads: anthropological, economic, competitive, risk and
distance factors.

14.What is the scope of international marketing?

Through international marketing is in essence export marketing, it has a broader connotation
in marketing literature It also means entry into international markets by:
(a) Opening a branch/subsidiary abroad for processing, packaging, assembly or even
complete manufacturing through direct investment.
(b) Negotiating licensing/franchising arrangements whereby foreign enterprises are granted
the right to use the exporting company’s know-how, viz patents processes or trademarks,
with or without financial investment;
(c) Establishing joint ventures in foreign countries for manufacturing and/or marketing; and
(d) Offering consultancy services and undertaking turnkey projects abroad.
Depending upon the degree of a firm s involvement, there may be several variations of these
arrangements.

15. Point out the similarities between domestic marketing and international marketing.
There are three basic points of similarities between domestic marketing and international
marketing:
1. Both in domestic marketing as well as in international marketing, success depends upon
satisfying the basic requirements of the consumers. This necessarily involves finding out
what the buyers want and meeting their needs accordingly.
2. It is necessary to build goodwill both in the domestic market as well as in the international
market.
3. Research and development for product improvement and adaptation is necessary both for
international marketing and domestic marketing.
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16. Which characteristics of a non-exporting firm influence its decision to go in for export
business?
These characteristics include (a) product characteristics, (b) size and growth of the domestic
market, (c) optimal scale of production, and (d) potential export markets. If the firm is
manufacturing a product which is internationally marketable and the present and future
market prospects in the domestic market are riot encouraging, the motivation of the firm to
get involved in export business will be considerable.

17. What factors fall under perceived external export stimuli which influences firm’s decision
to go in for export business?
Under this fall’s the management’s recognition of the external market conditions. This will
include (a) fortuitous order, (b) market opportunity and (c) government’s
stimulation/assistance.

18. What is meant by perceived internal export stimuli?

These refer to the management’s expectations about the effects of exports on the firm’s
business. This covers (a) the level of capacity utilization, (b) higher level of profits and (c)
the growth objectives of the firm.

19. What is comparative advantage theory of international business?

A country tends to specialise in the production of commodities for which it has got a
comparative cost advantage, or in other words, where its costs are lower than in other
countries. It is the comparative advantage and not the absolute advantage which determines
whether international trade will take place or not.

20. What is factor proportions theory of international business?

The factor proportions theory, also known as factor endowment theory was developed by
Heckscher and Ohlin. This theory was further developed by Samuelson The Heckscher-Ohlin
theorem is basically a two-country two-commodity and two-factor model. The conclusion of
the theorem is that a country will specialise and export that product whose factors of
production are more abundant. It will import those goods which, on the other hand, are more
intensive in that factor of production which is scarce in that country.

21. Write a short note on human capital approach to international business

This theory, which is also sometimes known as ‘skills theory of international trade, ‘has been
advocated by a number of economists, especially Becker, Kennen and Kessing Whereas the
Factor Proportions theory considers labour as a homogeneous factor, it is not so in the real
world.
In fact, for export of manufactures the skill level of labour is a very important determinant.
Labour can be basically divided into skilled and unskilled labour. On the basis of empirical
testing, Kessing concluded that patterns of international trade and location were
predetermined for a broad group of manufactures by the relative abundance of skilled and
unskilled labour.
For example, a developing country which has more abundant supply of unskilled labour will
specialise and export those goods which are relatively more intensive in unskilled labour.
Imports, on the other hand, will consist of those goods which are skill-intensive

22. Write down the basic hypothesis of the natural resources theory of international business.

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This theory was first proposed by Vanek. This theory includes resources of a country also in
the explanation of its trade structure. The basic hypothesis of this theory is that the country
will export those products which are more intensive in that natural resource with which it is
relatively more endowed and will import those items which use relatively more of those
natural resources which are scarce.

22. Write a short note on R & D and product life cycle theories of international business.
According to these theories the commodity compositions of trade can be explained in terms
of relative research efforts and the consequent technological gaps between the trading
partners. It is argued that the industrialised countries commit more resources to research and
development efforts and as a result develop new products.
In the initial stage of manufacture, these countries will be monopolists and will enjoy easy
access to foreign markets. Subsequently, a process of imitation will start and other countries
will start manufacturing the same product.
The initial comparative advantage will start disappear and the manufacturing centres in fact
can move from the developed to the developing countries which have low labour cost. This
has already happened in the case of mature manufactured products with low labour skills
intensity, like textiles.

23. What is meant by scale economies theory of international business?

According to this theory, there is a relationship between the size of the internal market,
average unit cost of production and export competitiveness. A firm operating in a country
where the domestic market is large will be able to reach a high output level, thereby reaping
the advantages of large-scale production.
The lower cost of production will increase its competitiveness enabling the firm to make an
easy entry into export markets. While prima facie this logic appears to be valid, this
hypothesis cannot be generalised because it is possible that the pull of the domestic market
will be so strong that export would not promoted, as in the case in India for certain products.
24. Briefly describe identical preferences theory of international business.
A domestic industry can flourish and reach technologically and commercially optimal level
of production, if and only if the domestic demand is large enough. Also it is found that
countries at similar levels of economic development have similar demand characteristics.
It is, therefore, postulated that trade opportunities are more among countries at similar stage
of development with similar demand structure In general, this theory provides an explanation
for the rapid growth in trade among the industrialised countries themselves.

25. What is synthesis theory of international business?

According to this theory, whether a country would export certain types of products would
depend upon a number of factors—natural resources, availability of labour and its
productivity, technical skill and equipment, adequacy of capital, enterprise and industrial
traditions. Comparative advantage is the combined result of all these factors.

PART -B

1. Bring out the steps in control process.

2. Elaborately explain the various approaches in control.What are the various types of control
?
3. Explain the control procedure and performance evaluation of MNC’s
4. What are the requirements of MNCs to create organizationalcapabilities?
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5. Explain the major financial measures used to evaluate foreign subsidiaries and the
managers.
6. What are the different aspects of international control process? Discuss in detail.
7. State the problems in planning. Explain them in detail.
8. What is the role of MIS in international Business?
9. How does a manager in international business measure

UNIT – V
PART - A
1. Define conflict.
Conflict is Disagreement through which the parties involved perceive a threat to their
needs, interests or concerns’. Conflict is A state of discord caused by the actual or
perceived opposition of needs, values and interests.

2. List out the reasons behind the conflict.

 Sharing Common Resources
 Goal Differences
 Communication barriers
 Cultural Differences
 Behavioral Factors
 Poor Governance, Weakest Economies, Poverty and Highest Corruption

3. What do you understand by negotiation?

Negotiation is an interaction of influences which include the process of resolving
disputes, agreeing upon courses of action, bargaining for individual or collective
advantage, or crafting outcomes to satisfy various interests. Negotiation is thus a
form of alternative dispute resolution.

4. Define Arbitration.
Arbitration is the process by which parties voluntarily agree to refer a future or a
present dispute to an individual or individuals who after hearing submissions from
the parties will issue a legally binding decision ("an award") determining the issues
between the parties of liability and quantum of damages or giving other specific
remedies.

5. What are the factors that affect the bargaining strength?

 Technology (eg) IBM
 Marketing (eg) Coco-cola
 Ability to export output
6. What is renegotiation?
It refers to second negotiations. It happens, that even when a project is on stream, the
changed political guards may press for a renegotiation, when they solidly prove
national interests are better served with a fresh look. Of course, damage to national
culture might happen. In the early years of foreign investments in emerging
economies the MNEs were iven many concessions. In the middle things did change.
MNEs were forced to accept a renegotiation to their disadvantage. This happened to
the Enron’s Dhabol power project in Maharastra.
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7. List any four international agencies related to conduct of business at global level.
(NOVEMBER/ DECEMBER 2011)
a. London Court of International Arbitration
b. Singapore International Agencies
c. International Centre for Settlement of Investment Disputes
d. United Nations Commission on International Trade Law (UNCITRAL)

8. What are the various ‘conflict resolution’ measures in international business?

(NOVEMBER/ DECEMBER 2011)
a. Compromise
b. Competition and authoritative command
c. Collaboration and problem solving

9. What are the sources of International Business conflict? (APRIL/ MAY 2011)
i. Disagreements exist in a social situation over issues of substance.
ii. Emotional antagonisms cause frictions between individuals or groups.

10. What is the role of negotiation in resolving the conflict? (APRIL/ MAY 2011)
i. Arbitration: A third party acts as a “judge” and has the power to issue a
decision that is binding on all disputing parties.
ii. Mediation: A neutral third party tries to engage the disputing parties in a
negotiated solution through persuasion and rational argument.

11. Write on the Conflict in International Business. (NOVEMBER/ DECEMBER

2010)
Conflict occurs whenever
o Disagreements exist in a social situation over issues of substance.
o Emotional antagonisms cause frictions between individuals or groups.
Types of Conflict
1. Inter-organizational conflict
2. Functional (or constructive) conflict
3. Dysfunctional (or destructive) conflict

12. What is ethical decision making? (NOVEMBER/ DECEMBER 2010)

Making good ethical decisions requires a trained sensitivity to ethical issues and a
practiced method for exploring the ethical aspects of a decision and weighing the
considerations that should impact our choice of a course of action. Having a method
for ethical decision making is absolutely essential. When practiced regularly, the
method becomes so familiar that we work through it automatically without consulting
the specific steps.

13. Point out the similarities between domestic marketing and international marketing.
There are three basic points of similarities between domestic marketing and international
marketing:
1. Both in domestic marketing as well as in international marketing, success depends upon
satisfying the basic requirements of the consumers. This necessarily involves finding out
what the buyers want and meeting their needs accordingly.

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2. It is necessary to build goodwill both in the domestic market as well as in the international
market.
3. Research and development for product improvement and adaptation is necessary both for
international marketing and domestic marketing.

14. What does the balance of trade denote?

The balance of trade denotes the difference between merchandise exports and merchandise
imports of a country. The excess of exports over imports denotes favourable balance of trade
while an excess of imports of imports over exports denotes adverse balance of trade.

15. Define balance of payments. For what period is the balance of payments prepared?
Balance of payments of a country has been defined as a “systematic record of all economic
transactions between the residents of the reporting country and residents of foreign
countries”. Thus balance of payments includes both visible and invisible transactions.
Ordinarily balance of payments is prepared for a period of one year, but quarterly balance of
payments is also common.

15. What are human values?

Human values are basic moral values a person is ought to possess to live as a citizen or as
a person. Values are internalized and is exposed through the persons perception and
behavior.

16. Distinguish values from ethics and culture.

Values reflect a person’s sense of what is right and wrong or what ought to be done. Ehics
is a set of standards on the behavior of a person. These are the foundation of personal
values. Culture reflects the moral values and ethical norms governing how people should
behave and interact with others.

17. What is integrity?

Integrity refers to the quality of a person’s character – openness and honesty with
themselves and with others. It involves the discovery and communication of the truth.

19. Define work ethics.

The work ethics is a cultural norm that advocates being personally accountable and
responsible for the work that one does and is based on a belief that work has intrinsic
value.

20. What is service learning?

Service learning is a teaching and learning strategy that integrates meaningful community
service with instruction and reflection to enrich the learning experience,teach civic
responsibility and strengthen communities.

21.What is code of ethics?

A code of ethics is a document, usually issued by a board of directors, that outlines a
set of principles that affect decision-making. It is the “Constitution” of the
organisation that communicates a self imposed standard for ethical behavior to all
stakeholders.

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22. Mention the content in code of ethics.

Content of the code of ethics:
• Rationale
– Justification for existence of Code
– Explains reason for and purpose of Code
– Intends to persuade readers of importance
• Values
– Norms to guide and tailor organisation’s behaviour
• Guidelines for conduct
– Prescribe acceptable or prohibit unacceptable actions/practices
– Provide explicit directions
• Guidelines for ethical decision-making
– Guidance on how to apply values, principles
– Decision-making procedure
• Sanctions
– Stipulate consequences of transgressing the Code
– Might specify disciplinary procedures
• Reference to sources
– Reporting mechanism
– Ethics advice resource
– Relevant policies / documents

23. Give the limitations of codes?

Limitations of Code of ethics:
Code of ethics are broad guidelines, restricted to general and vague phrases. The
codes cannot be applied directly to all situations. Also it is impossible to predict all
aspects of moral problems that can arise in a complex, dynamic business environment.
Codes have internal conflicts, which may result in moral dilemmas. Several codes
overlap with each other, but codes do not provide a method for resolving these
conflicts.
The codes cannot serve as a final moral authority for professional conduct

24. What are Issuing Procedures?

Issuing procedures have evolved since the Eurobond market’s inception. At
the beginning, the traditional issuing procedure, called “European”, was cumbersome.
Syndicates often contained as many as several hundred members for the jumbo loans of USD
1 billion or more. Final investors were institutions like pension funds, investment
funds and insurance companies, as well as private individuals attracted by the absence of
withholding tax and the anonymity of bearer certificates.

25. What is exchange risk?

Foreign exchange risk (also known as FX risk, exchange rate risk or currency risk)
is a financial risk that exists when a financial transaction is denominated in a currency
other than that of the base currency of the company.

PART -B

1. Explain in detail the steps in bargaining process.

2. What are the behavioural characteristic that affect the outcome of
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negotiation process?
3. Describe the role of public affairs in negotiations.
4. What are the possible causes for conflict? Explain the role of third party in settling the
dispute between two countries.
5. Discuss the intellectual property rights in detail. Discuss the critical
issues in international trade brought out by policy makers in India.
6. Explain the multinational agreement in negotiations in relation to
international business.
7. What are the various factors causing conflict in the international market?
8. What are the components of international negotiation? What are the
functions of the conflict resolution committee at the WTO?
9. Draw a scheme of contract resolution system.
10. What is the role of international agencies in the conflict resolution?
11. Bring out the culturally responsive strategies of negotiations.
12. What is the role of cultural factors in the negotiations?

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