Answers for Some Questions

International Business Answers

Q1. What are the various entry methods for International Business?

Export

Exporting is the most traditional way of entering into International Business.

Export can be done in two ways:

1. Direct Export – Products are sold directly to buyers in target markets either

through local sales representatives or distributors. Sales representatives

promote their company’s products and do not take title to the merchandise.

Distributors take ownership of the goods (and the accompanying risk) and

usually on-sell through wholesalers and retailers to end-users.eg. basket

robbins initially used to export ice cream to russisa but later open outlet with

Russian partner. Finally it started its icecream plant in Moscow.

Advantages of Direct Exports:

A. Give a higher return on your investment than selling through an agent or

distributor

B. Allows the exporting company to set lower prices and be more competitive

C. Gives the company a close contact with its customers

Disadvantages of Direct Exports:

A. The company may not have the services of a foreign intermediary, so it may

need more time to become familiar with the market

B. The customers or clients may take longer to get to know the company and its

products, and such familiarity is often important when doing business

internationally

2. Indirect Export - Products are sold through intermediaries such as agents and

trading companies. Agents may represent one or more indirect exporters in

return for commission on sales. Himalaya publishing house sell their products

to various exporters to india which in turn export this books to various foreign

country

Foreign direct Investment.

IT can be without alliance or with strategic alliance. Without example Baskin

Robbins. With example Xerox of USA and fuji of japan collaborated to explore new

market.

FDI are investments made to acquire a lasting interest by a resident entity in one

economy in an enterprise resident in another economy. FDI has come to play a

major role in the internationalization of business. This has happened due to

changes in technologies, improved trade and investment policies of governments,

regulatory environment in terms of liberalization and easing of restrictions on

foreign investments and acquisitions, and deregulation and privatization of many

industries.

Advantages:

A. It can provide a firm with new markets and marketing channels, cheaper

production facilities, access to new technologies, capital process, products,

organizational technologies and management skills.

B. FDI can provide a strong impetus to economic development of the host country.

This is all the more true when large MNCs enter developing nations through FDI.

C. FDI allows companies to avoid foreign government pressure for local

production.

D. It allows making the move from domestic export sales to a locally based national

sales office.

E. Capability to increase total production capacity.

Depending on the industry sector and type of business, a foreign direct investment

may be an attractive and viable option. With rapid globalization of many industries

and vertical integration rapidly taking place on a global level, at a minimum a firm

needs to keep abreast of global trends in their industry. From a competitive

standpoint, it is important to be aware of whether a company’s competitors are

expanding into a foreign market and how they are doing that. Often, it becomes

imperative to follow the expansion of key clients overseas if an active business

relationship is to be maintained. Eg.air asia investing as fdi in india upto 49% in

airline industry.

New market access is also another major reason to invest in a foreign country. At

some stage, export of product or service reaches a critical mass of amount and

cost where foreign production or location begins to be more cost effective. Any

decision on investing is thus a combination of a number of key factors including:

A. Assessment of internal resources

B. Competitiveness

C. Market Analysis

D. Market expectations

Licensing

Licensing is a legal agreement between the owner of intellectual property such as

a copyright, patent or trademark and someone who wants to use that IP. The

licensee pays “rent” to the licensor for the use of an idea/product/process that is

otherwise protected by IP law. Like a lease on a building, the license is for a

specific period of time. The licensee uses that idea/product/process to sell products

or services and earns money.eg. pepsi-cola license to Heineken of Netherlands

with exclusive rights of production and selling of pepsi-cola in Netherlands.

Eg.ranbaxy labgot an exclusive license from K S Biomedix ltd, to sell pharma

products for

treatment of brain cancer. Eg. When you purchase Microsoft office you pay them

license fee and don’t purchase it.

LICENSOR LICENSOR

• leases the right to use the ip receives

royalty

• uses the ip to produce products for sale in his country pay royalty

LISCENSEE LISCENSEE

Advantages:

A. Licensing appeals to prospective global players because it does not require

large capital investment not detailed involvement with foreign customers. By

generating royalty income, licensing provides an opportunity to exploit research

and development already conducted. After initial costs, the licensor can reap

benefits until the end of license contract period.

B. It reduces the risk of expropriation because the licensee is a local company that

can provide leverage against government action.

C. Helps avoid host country regulations that are more prevalent in equity ventures.

D. Provides a way of testing foreign markets without significant resources.

E. Can be used as a preemption major in new market before the entry of

competition.

Limitations:

Limited form of market entry which does not guarantee a basis for

expansion.

Licensor may create more competition in exchange of royalty.

Determination of royalty.

Determining rights, privileges and constraints.

Franchising

Franchising involves granting of rights by a parent company to another

(franchisee) to do business in a prescribed manner. This right can take the form of

selling the franchiser’s products, using its name, production and marketing

techniques or using its general business approach.eg.KFC,reebok, nike, nIIT,

MAriott,

It allows provides a network of interdependent business relationships that allows a

number of people to share:

A. Brand identification

B. Successful method of doing business

C. Proven marketing and distribution system

Franchise agreement typically requires the payment of a fee upfront and then a

percentage on sales. In return, the franchiser provides assistance and at times may

require the purchase of goods or supplies to ensure the same quality of goods or

services worldwide.

Franchising is adaptable to international arena and requires minor modification for

the local market. It can be beneficial to both groups. Franchiser has a new stream

of income and the franchisee gets time proven concept/product which can be

quickly bought to the market.

Major Forms of Franchising:

- manufacturer-retailer system (e.g. car dealership) toyota

- manufacturer-wholesaler system (e.g. soft-drink companies).

- service firm – retailer system (fast-food, hotel) e,g, McDonald’s, Burger King

advantage:

1. franchiser-low investment and low risks.

2. Info about host market.

3. More lessons learned from experience.

4. Franchisee needs less capital and less risk as its proven product.

5. No risks of product failure.

Disadvantages:

1. Difficult to control the international franchisee.

2. Franchising agent may reduce opportunity for both franchisor and

franchisee.

3. Maintaining product quality and assurance.

4. Problem of leakage of trade secrets.

Joint Ventures

A joint venture is an agreement involving two or more organizations that arrange

to produce a product or service through a collectively owned enterprise. It has

been one of the most popular way of entering a new market.

Typically, it is a 50-50 joint venture in which each of the party holds 50%

ownership stake and contributes a team of managers to share operating control. At

times, this stake can be a majority one so as to ensure tighter control.eg.sony-

ericsson betwn sony coorp (japan) and Swedish co. ericsson.various environmental

factors like social, economical, technological, and political encourage the formation

of j.v. it requires strength in terms of required capital, latest technology required

human talent.

Advantages:

A. Domestic company brings in the knowledge of the domestic market.

B. The risk is divided between joint-venture partners.

C. Normally, foreign partner has an option to sell its stake in the venture to

another entity.

D. Provide Large capital funds.

E. Suitable for major projects.

F. Makes large project feasible.

G. Synergy provided.

Limitations:

Limited control over business approach for foreign entity.

Profits have to be shared.

o e.g. Danone-Brittania, Hero Honda, Maruti Suzuki

potential for conflict.

Decision making slow.

Wholly Owned Subsidiaries

In a wholly owned subsidiary, the company owns 100% of the equity. Establishing

a wholly owned subsidiary in a foreign market can be done in 2 ways:

1. Set up of new operation

2. Acquisition of established firm.

WOS allows a foreign firm complete control and freedom to execute its business

strategy in the foreign country. This freedom is accompanied by a greater risk due

to lack of knowledge of the market. Acquisition of an established company can

reduce this risk to an extent.

Q2. Influence of PEST Factors on International Business.

Any business is affected by its external environment. The major macroeconomic

factors in the external environment that affect the business are political,

environmental, social and technological.

A. Political Environment

The political environment of a country greatly influences the business operating in

those countries or business trading with those countries. The success and growth

Pest

politicaltax policygovt supportlabour lawenvt policytraiff and duty structure.political stability.

Economicaleconomical system.int rate.exchange rate.income level and spending.

socialage distributinfamily sytem.culture aspects.carrer attitudes.

TechnologicalR&dTechnology transfer.

of international business depends on the stable, collaborative, conducive and

secure political system in the country.

The following factors affect the political environment in a country.

1. Tax Policy : The tax policy of a country affects the profitability of the

business there. The Corporate Taxation laws affect the profitability directly.

The direct taxation laws also affect the business because it influences

consumer spending. The structure of indirect taxation in a country like its

excise duty structure, customs and sales tax greatly affects the input costs

of a business.

For e.g. Countries like UAE have very low direct taxation levels inducing great

spending and hence trading and marketing based business are successful. But due

to very high indirect taxation levels the manufacturing business is not very

successful.

2. Government support : One of the most important political factor is the

Government support to international businesses. Business can be successful

only if the local government provides support in terms o infrastructure,

license clearing if required, transparent policy and quick dispute resolution

mechanism. Also the nature of the political system i.e. democracy,

communism etc. in the country influences the Government support.

For e.g. the RBI has provided single window clearance for FDI and hence has

greatly increased the FDI levels in our country.

3. Labor Laws : the labor laws in a country affect the viability of a business in

that country. The pension laws also play a critical role especially in cross

border acquisitions. Many businesses had to be withdrawn or closed

because of the labor unrest in the country.

For e.g.: Withdrawal of Premier Automobiles due to union strikes in our country.

The problems faced by doctors and nurses in UK due to the restrictive laws in that

country.

4. Environmental policy : The countries environmental policy (under the Kyoto

Protocol or otherwise) affects many business like chemicals, refineries and

heavy engineering.

5. Tariffs and duty structure : The level of duties and tariffs that are imposed

by the country influence its imports and exports greatly. Some countries

follow a protectionist policy to the domestic industry by raising import

barriers For e.g. India in the pre liberalization era, Russia.

6. Political stability and political milieu : Political stability greatly affects the

longevity of the businesses in a country. Political risk assessment should be

done to determine the country risk on the basis of following parameters :

a. Confiscation: the nationalization of businesses without compensation. For

e.g. India during the nationalist wave during Indira Gandhi’s tenure.

b. Nationalization : Resource nationalization is a major risk for businesses

involving local resources like oil, minerals etc. For e.g. the resource

nationalization in Columbia.

c. Instability risk : The possibility of military takeovers or huge government

changes. For e.g. the coups in Thailand or in Fiji has affected the profits

of businesses there by as much as 60% due to work stoppage and

property destruction.

d. Domestication : The global company relinquishing control in favor of

domestic investors. For e.g. Barclays bank in South Africa

B. Economic factors

The economic factors in a country greatly influence the business in that country.

The following factors are important in the macroeconomic environment.

1. Economic system : the economic system in a country i.e. capitalism/

communism/ mixed economy (India) is important for deciding the nature of

the businesses. The nature of the system decides the allocation of resources.

Due to globalization there is a gradual shift toward market forces to allocate

resources even in the communist countries like China.

2. Interest rates : The interest rates in the country affect the cost of capital (if

raised locally) and the operational costs. Interest rates also determine the

confidence of the Government in the economy and consumer spending.

3. Exchange rates : The exchange rates affect international trade and capital

inflows in the country.

4. Income levels and spending pattern : Though it is more of a demographic

parameter has is very important bearing on the sell side of all international

businesses. For e.g. In a country like India, with rising aspirer population

there is a market opportunity for products like IPod (considered luxury items

till now)

C. Social factors

Businesses are driven by people both as human capital and as consumers. It is

necessary for an international businessman to understand the social and cultural

aspects of the country they operate in. The following are the important social

factors.

1. Age distribution : the age distribution of the population is important to

consider the consumption patterns in the markets. Age distribution also

determines the mindset of the market and helps segmentation of the market

accordingly. It also has a bearing on the employee quality. A young

population also determines a workforce.

2. Family system : the family system has a bearing on the decision makers in

consumption. For e.g. in Islamic countries women have a less say in making

consumption decisions. In emerging economies like India children are

gaining important role in consumption. This helps in positioning of products.

3. Cultural aspects : The cultural aspects influence the way the business is

conducted in countries. In Japan there is a different way in which contracts

are signed and executed. In Russia being a communist oriented mindset the

business is conducted in a closed manner. Italians have a seemingly lazy way

of doing business and hence it is very difficult to conduct business in the

pacy US way.

4. Career attitudes : the career attitude of the workforce is important social

aspect.

D. Technological Factors

Technology has a very important role to play in determining the success of

international businesses because technology has made international business

possible. The following are the technological factors that influence the business.

1. R&D : the support that the Government gives to R&D encourages setting up

R&D business levels. Also the ease of a qualified local workforce influence

business. For e.g. the semiconductor industry in Taiwan

2. Technology transfer : The ease of technology transfer influences the business

climate. The environment where the technology transfer is not viable

gradually loses out on business from emerging countries that seek

technology transfers. For e.g. in the early 40s countries like Czechoslovakia

(the Czech Republic) was a very technologically advanced country but had

very low business interest due to the less chances of technology transfers.

For e.g. GE withdrew operations from a JV as there as they could not access

local expertise)

0Q3. Trade Theories

1. Classical Country-Based Theories

1.1. Mercantilism (pre-16th century)

This theory takes an “us-versus-them” view of trade; other country’s gain is

our country’s loss.

Specifies that country should export>import and receive the value of surplus

in form of gold from those countries which experience trade deficits.

Neo-mercantilism views persist today.caz the decay of gold standard

reduced the validity of this theory.

A nation’s wealth depends on accumulated treasure.

Theory says you should have a trade surplus.

Maximize exports through subsidies.

Minimize imports through tariffs and quotas.

Eg. Colonial powers like British used to trade with their colonies like India,

Sri Lanka etc. by importing the raw materials form and exporting the

finished goods to colonies. This allowed colonial powers to enjoy surplus and

forced the colonies to experience trade deficits.

1.2. Free Trade supporting theories

This theory shows that specialization of production and free flow of goods grow all

trading partners’ economies

1.2.1.Absolute Cost Advantage (Adam Smith, The Wealth of Nations,

1776)

Mercantilism weakens a country in the long run and enriches only a few

segments; it robs individuals of the ability to trade freely.

Adam Smith claimed market forces, not government controls, should

determine the direction, volume and composition of international

trade.

Under free (unregulated) trade each nation should specialize in producing

those goods it could produce most efficiently.

This theory states that a country is capable of producing more of a good with

the same input than another country. Hence, a country should specialize in

and export products for which it has absolute advantage; import others.

A country has absolute advantage - either natural or acquired when it is

more productive than another country in producing a particular product.

Trade between countries is, therefore, beneficial.

Assume that there are just two countries in the world, the India and Japan. 

Pretend also that they produce only two goods, shoes and shirts.  The resources of

both countries can be used to produce either shoes or shirts.  Both countries make

both products, spending half of their working hours on each.  But India makes

more shoes than shirts, and Japan makes more shirts than shoes. 

TABLE A

Shoes Shirts

India 100 75

Japan 80 100

Total 180 175

What will happen when each country specializes and spends all its working hours

making one product?  It will make twice as much of that product and none of the

other, as shown in Table B.

TABLE   B

Shoes Shirts

India 200 0

Japan 0 200

Total 200 200

The world now has both more shoes and more shirts.  India can trade 100 units of

shoes for 100 units of shirts, and both countries will benefit.

In this example, India could make more shoes than Japan with the same resources. 

It has an absolute advantage at shoemaking.  Japan, on the other hand, had an

absolute advantage at shirt making.

Assumptions:

Perfect competition and no transportation costs in a world of two countries

and two products

The only element of cost of production is labour.

Only 2 commodities are traded.

Free trade exists between the countries.

1.2.2.Comparative cost Advantage (David Ricardo, Principals of

Political Economy, 1817) – Also known as Opportunity Cost

Theory

David Ricardo, in his theory of comparative costs, suggested that countries

will specialize and trade in goods and services in which they have a

comparative advantage.

A country has a comparative advantage in the production of a good or

service that it produces at a lower opportunity cost than its trading partners.

The theory of comparative costs argues that, put simply, it is better for a

country that is inefficient at producing a good to specialize in the production

of that good it is least inefficient at, compared with producing other goods.

Now suppose one country has an absolute advantage in both products.  Table C

shows what production might be like if India had an absolute advantage at making

both shoes and shirts.

TABLE C

India CHina

Shoes 100 80

Shirt 80 75

In this case, the India can produce more of each good with the same set of

resources than China can. The India could produce either 200 units of shoes or 160

units of shirts. China could produce either 160 units of shoes or 150 units of

shirts. If the India produces only shoes, it gives up 80 units of shirts to gain 100

units of shoes. If China produces only shoes, it gives up 75 units of shirts to gain

80 units of shoes. For India, the opportunity cost of producing shirts is higher and

the opportunity cost of producing shoes is lower; vice-versa for China. Hence, India

has a comparative advantage in shoemaking and China has a comparative

advantage in shirt making. 

For India:100/80=1.2 80/75=1.067

China=80/100=0.8 75/80=0.9375

Table D shows what happens when each country specializes in the product in

which it has a comparative advantage.

India 1 shirt =1.25 shoes. 1 shirt=1.1585 shoes

Japan 1 shirt =1.067 shoes. 1 shirt=1.1585 shoes

Japan offers 1 shirt for 1.1585 shoes, This offer is beneficial to India as the price of

1 shirt is 1.25 shoes in india. This offer is advantageous to japan.

Summary

Country should specialize in the production of those goods in which it is

relatively more productive, even if it has absolute advantage in all goods it

produces.

This extends free trade argument.

Efficiency of resource utilization leads to more productivity.

1.3. Free Trade refined

1.3.1.Factor-proportions (Heckscher-Ohlin, 1919)

Eli Heckscher and Bertil Ohlin developed the theory of relative factor

endowments, now often referred to as the Heckscher-Ohlin theory. The

theory states that the pattern of international trade depends on differences

in factor endowments not on differences in productivity.

Relative endowments of the factors of production (land, labour, and capital)

determine a country's comparative advantage.

Countries have comparative advantage in those goods for which the

required factors of production are relatively abundant. This is because the

prices of goods are ultimately determined by the prices of their inputs.

Goods that require inputs that are locally abundant will be cheaper to

produce than those goods that require inputs that are locally scarce.

For example, 1. USA is rich in capital sources and india is rich in labour. South

Arabia is rich in oil. India has advantage in textile

a country where capital and land are abundant but labour is scarce will have

comparative advantage in goods that require lots of capital and land, but little

labour - grains, for example.

Since capital and land are abundant, their prices will be low. Those low prices will

ensure that the price of the grain that they are used to produce will also be low -

and thus attractive for both local consumption and export.

Labor intensive goods on the other hand will be very expensive to produce since

labor is scarce and its price is high. Therefore, the country is better off importing

those goods.

Summary

Factor endowments vary among countries

Products differ according to the types of factors that they need as inputs

A country has a comparative advantage in producing products that

intensively use factors of production (resources) it has in abundance

Assumptions

A given technology was universally available.

Relative factor endowments are different in each country

Tastes and preferences are identical in both countries

A given product was either labor- or capital-intensive

The theory ignored transportation costs.

1.3.2.Product Life Cycle (Ray Vernon, 1966)

As products mature, both location of sales and optimal production changes

Affects the direction and flow of imports and exports

Globalization and integration of the economy makes this theory less valid

Classic Theory Limitations:

All the classical theories are based on the following assumptions that no longer

hold true –

Simple world (two countries, two products)

No transportation costs

No price differences in resources

Resources immobile across countries

Constant returns to scale

Each country has a fixed stock of resources & no efficiency gains in resource

use from trade

Full employment

2. Modern Trade Theory

In industries with high fixed costs:

Specialization increases output, and the ability to enhance economies of

scale increases

Learning effects are high.

These are cost savings that come from “learning by doing”

New Trade Theory-Applications

Typically, requires industries with high, fixed costs

o World demand will support few competitors

o Competitors may emerge because of “ First-mover advantage”

Economies of scale may preclude new entrants

o Role of the government becomes significant

Some argue that it generates government intervention and strategic trade

policy

Theory of National Competitive Advantage

The theory attempts to analyze the reasons for a nation’s success in a

particular industry

Porter studied 100 industries in 10 nations

- Postulated determinants of competitive advantage of a nation were

based on four major attributes

Factor endowments

Demand conditions

Related and supporting industries

Firm strategy, structure and rivalry

Factor endowments: A nation’s position in factors of production such as skilled

labor or infrastructure necessary to compete in a given industry

Basic factor endowments

Advanced factor endowments

Basic Factor Endowments

Basic factors: Factors present in a country

- Natural resources

- Climate

- Geographic location

- Demographics

While basic factors can provide an initial advantage they must be

supported by advanced factors to maintain success

Advanced Factor Endowments

Advanced factors: The result of investment by people, companies, and

government are more likely to lead to competitive advantage

If a country has no basic factors, it must invest in advanced factors

- Communications

- Skilled labor

- Research

- Technology

- Education

Porter’s Theory-Predictions

Porter’s theory should predict the pattern of international trade that we

observe in the real world.

Countries should be exporting products from those industries where all four

components of the diamond are favorable, while importing in those areas

where the components are not favorable

3. Other Theories:

3.1. The productivity theory by H. Myind

It is criticized that the comparative cost theories are not applicable to

developing countries. Hence, H. Myint proposed productivity theory and the

vent for surplus theory.

The productivity theory points toward indirect and direct benefits. This

theory emphasizes that the process of specialization involves adapting and

reshaping the production structure of a trading country to meet the export

demands.

Countries increase productivity in order to utilize the gains of exports. This

theory encourages the developing countries to go for cash crops, increase

productivity by enhancing the efficiency of human resources, adapting latest

technology etc.

Limitations:

Labor productivity did not increase after certain level

Increase in working hours

Increase in proportion of gainfully employed labour in proportion to

disguised unemployed labour

3.2. The vent for surplus theory

International trade absorbs the output of unemployed factors.

If the countries produce more than the domestic requirements, they have to

export the surplus to other countries. Otherwise, a part of the productive

labour of the country must cease and the value of its annual Produce

diminishes.

In the absence of foreign trade, they would be surplus productive capacity in

the country. This surplus productive capacity is taken by another country

and in turn gives the benefit under international trade.

Appropriateness of this Theory for Developing Countries:

According to this theory, the factors of production of developing countries

are fully utilized.

The unemployed labour of the developing countries is profitably employed

when the vent for surplus is exported.

3.3. Mills’ theory of reciprocal demand

Comparative cost advantage theories do not explain the ratios at which

commodities are exchanged for one another. J.S. Mill introduced the concept

of ‘reciprocal demand’ to explain the determinations of the equilibrium

terms of trade.

Reciprocal demand indicates a country’s demand for one commodity in

terms of the other commodity; it is prepared to give up in exchange. It

determines the terms of trade and relative share of each country.

Equilibrium:

Quality of a product exported by country A = Quality of another product exported

by country B

Assumptions:

Existence of two countries

Trade in only two goods – both the goods are produced under the law of

constant returns

Absence of transportation Costs.

Existence of perfect competition

Existence of full employment

Q4. Ten reasons why FDI happens

1. Foreign Direct Investments (FDI) as defined in the BOP Manual, are

investments made to acquire a lasting interest by a resident entity in one

economy in an enterprise resident in another economy. The purpose of the

investor is to have a significant influence, an effective voice in the management

of the enterprise. The definition of the Organization for Economic Cooperation

and Development (OECD) which considers as direct investment enterprise an

incorporated or unincorporated enterprise in which a direct investor who is

resident in another economy owns ten percent or more of the ordinary shares

or voting power (for incorporated enterprise) or the equivalent (for an

unincorporated enterprise).

2. It provides a firm with new markets and marketing channels, cheaper

production facilities, access to new technology, products, skills and financing.

For a host country or the foreign firm which receives the investment, it can

provide a source of new technologies, capital, processes, products,

organizational technologies and management skills, and as such can provide a

strong impetus to economic development.

3. FDI inflows are considered as channels of entrepreneurship, technology,

management skills, and of resources that are scarce in developing countries.

Hence, they could help their host countries in their industrialization.

4. For small and medium sized companies, FDI represents an opportunity to

become more actively involved in international business activities. In the past

15 years, the classic definition of FDI as noted above has changed considerably,

over 2/3 of direct foreign investment is still made in the form of fixtures,

machinery, equipment and buildings.

5. FDI is viewed as a basis for going “global”. FDI allows companies to accomplish

following tasks:

Avoiding foreign government pressure for local production

Circumventing trade barriers, hidden and otherwise

Making the move from domestic export sales to a locally-based national

sales office

Capability to increase total production capacity.

Opportunities for co-production, joint ventures with local partners, joint

marketing arrangements, licensing, etc

6. Foreign direct investment is viewed as a way of increasing the efficiency with

which the world's scarce resources are used. A recent and specific example is

the perceived role of FDI in efforts to stimulate economic growth in many of the

world's poorest countries. Partly this is because of the expected continued

decline in the role of development assistance (on which these countries have

traditionally relied heavily), and the resulting search for alternative sources of

foreign capital.

7. FDI enables the firm owns assets to be profitably exploited on a comparatively

large scale, including intellectual property (such as technology and brand

names), organizational and managerial skills, and marketing networks. And it is

more profitable for the production utilizing these assets to take place in

different countries than to produce in and export from the home country

exclusively.

8. FDI may result in a greater diffusion of know-how than other ways of serving

the market. While imports of high-technology products, as well as the purchase

or licensing of foreign technology, are important channels for the international

diffusion of technology, FDI provides more scope for spillovers. For example,

the technology and productivity of local firms may improve as foreign firms

enter the market and demonstrate new technologies, and new modes of

organization and distribution, provide technical assistance to their local

suppliers and customers, and train workers and managers who may later be

employed by local firms.

9. FDI increases employment in host country. Inflows of FDI also increase the

amount of capital in the host country. Even with skill levels and technology

constant, this will either raise labor productivity and wages, allow more people

to be employed at the same level of wages, or result in some combination of the

two.

10.Proponents of foreign investment point out that the exchange of investment

flows benefits both the home country (the country from which the investment

originates) and the host country (the destination of the investment). Opponents

of FDI note that multinational conglomerates are able to wield great power over

smaller and weaker economies and can drive out much local competition. The

truth might lie somewhere in between but they surely become reasons for

companies to invest in foreign markets.

Q5. WTO Rounds wrt India

The WTO came into being on January 1, 1995, and is the successor to the General

Agreement on Tariffs and Trade (GATT), which was created in 1948. India was one

of the 76 countries that signed the accession to the WTO and is one of the founder

members of the WTO.

Trade implications of signing the WTO for India:

The implications of signing the WTO agreement for Indian trade have been mixed.

India has benefited in the areas of garment exports, agricultural products exports

and in market access to foreign markets in automobiles and electronics. India has

a disadvantage mainly in areas of TRIPs, drug prices, patents in agriculture, TIS

( trade in services ) and TRIMS especially in biomedical areas, AoA export

subsidies etc.

Benefits:

1. Garment exports : The Multi Fiber Arrangement (MFA) that required Indian

garment exporters to have quotas for exporting to developed countries was

phased out in 2005. The readymade garment exports from India has reached

Rs 800 crores in 2007 and expected to reach Rs 1000 crores in 2008. This is

thrice the exports in 2004-05.

2. Market access : as a signatory to the WTO India automatically gets the MFN

( most favored nation ) status. This gives India access to markets in Europe and

US in sectors like automobiles and engineering. India also benefits from the

clauses related to trade without discrimination and benefit from capital good

exports.

3. Anti Dumping measures : India suffered from persistent dumping by Romanian

and Russian steel majors in the areas of steel casings, pipes affecting Indian

domestic industry greatly. Also India suffered from dumping by Chinese steel

industry. The anti dumping provisions and countervailing duties lend security to

India’s domestic industries.

4. The Agreement on Agriculture : the AoA stipulates that the developed countries

will reduce tariffs on agriculture imports (up to 35%) thus helping India’s

agriculture exports. It also promises reduction of domestic subsidies in the

developed countries helping exports from India.

5. Competitive advantage : India has competitive advantage in the areas of

merchandise trade. India can utilize its competitive advantage in processing,

beverages, gems and jeweler compared to the traditional centers in Europe like

Amsterdam or Manchester etc increasing its trade with both the Euro region

and the US.

Disadvantages:

1. TRIPS : the Indian Patent Act is not compatible with the TRIPS agreement under

the WTO. The Indian Patent Act allows only process patents in areas of foods,

chemicals and medicines. Under the TRIPS the IPA will have to modify to allow

product patents also. Also products developed outside India can claim

international patents applicable to India. This will hurt our agriculture foods.

E.g. the Alphanso mango and the Basmati strand controversy.

2. Drug prices : the granting of the product patents in India will hurt the Indian

generic drugs industry and benefit the foreign pharma companies that own the

formulation patents. This will lead to increase in drug prices in India. (This

resulted in regulatory intervention in the recent budget in life saving drugs)

e.g. the Pfizer controversy

3. Genetics : Indian seed and genetic research organizations are Government

funded and will not be able to compete with the MNCs like Montessanto etc

that have economies of scale. This will increase seed prices for Indian farmers

and also lend our genetic resources to the MNCs

4. Services : the opening up of the banking sector in 2009 will affect Indian banks

due to the foreign banks with huge balance sheets.

5. TRIMS : the Trade Related Investment Measures resulted in problems in trade

in investment issues like transit charges, formalities etc. together called as

Singapore issues. Indian companies would have to lose in the differential

charges that are applied. These issues were dropped in the Chachun ministerial

conferences.

6. Anti dumping: the anti dumping rules were imposed on Indian linen in EU.

Similarly Indian textiles faced anti dumping regulations in US. There is no

mechanism to resolve anti dumping duties issues.

India’s stand in the Doha round and the following ministerial conferences:

1. Doha round: The Doha Development Round commenced at Doha, Qatar in

November 2001 and is still continuing. Its objective is to lower trade barriers

around the world, permitting free trade between countries of varying

prosperity. As of 2008, talks have stalled over a divide between the developed

nations led by the European Union, the United States and Japan and the major

developing countries (represented by the G20 developing nations), led and

represented mainly by India, Brazil, China and South Africa.

Issues: Singapore issues: the issues related to the trade facilitation and

differential charges in investment vehicles affected Indian investment and venture

companies. This affected the Indian services.

Agricultural subsidies: the EU, US and Japan support domestic agriculture by

subsides. This was opposed by countries like India and Brazil.

2. Cancun conference 2003 :

The objective of this conference was to forge the agreement discussed in Doha.

Issues: market access to foreign markets. This agreement on market access for the

developing countries in capital and industrial goods increased strength of G20

countries.

India benefited greatly in the capital goods export.

The Singapore issues were resolved that resulted in removing the undue

advantage for countries like US and Japan in investment arena. This also benefited

the Indian financial sector internationally.

3. Geneva 2004: In Geneva conference the developed nations reduced

subsidiaries on manufactured goods. This resulted in Indian small

manufacturers like steel forging, casting to export largely and benefit from the

construction boom in US.

4. Paris 2005: France reduced subsidies on farm products. However US and

Japan did not relent.

Hong Kong 2006 and Potsdam 2007 talks failed in resolving the farm subsidies. So

the recent rounds are in a stalemate situation from India’s point of view.

Q6. Discuss NAFTA/ EU/ ASEAN/ SAARC/ MERCUSOR

Mercosur

Mercosur is a regional trade agreement among Argentina, Brazil ,Paraguay &

Uruguay founded in 1991 by the Treaty of Asunción, which was later amended and

updated by the 1994 Treaty of Ouro Preto. Its purpose is to promote free trade and

the fluid movement of goods, people, and currency. Bolivia, Chile, Colombia,

Ecuador and Peru currently have associate member status. Venezuela signed a

membership agreement on 17 June 2006, but before becoming a full member its

entry has to be ratified by the Paraguayan and the Brazilian parliaments.

The bloc comprises a population of more than 263 million people, and the

combined Gross Domestic Product of the full-member nations is in excess of

US$2.78 trillion a year (Purchasing power parity, PPP) according to International

Monetary Fund (IMF) numbers, making Mercosur the fifth largest economy in the

World.

Objectives of MERCOSUR

Free transit of production goods, services and factors between the member

states with inter alia, the elimination of customs rights and lifting of nontariff

restrictions on the transit of goods or any other measures with similar effects;

Fixing of a common external tariff (TEC) and adopting of a common trade policy

with regard to nonmember states or groups of states, and the coordination of

positions in regional and international commercial and economic meetings;

Coordination of macroeconomic and sectorial policies of member states relating

to foreign trade, agriculture, industry, taxes, monetary system, exchange and

capital, services, customs, transport and communications, and any others they

may agree on, in order to ensure free competition between member states; and

The commitment by the member states to make the necessary adjustments to

their laws in pertinent areas to allow for the strengthening of the integration

process. The Asuncion Treaty is based on the doctrine of the reciprocal rights

and obligations of the member states.

MERCOSUR initially targeted free-trade zones, then customs unification and,

finally, a common market, where in addition to customs unification the free

movement of manpower and capital across the member nations' international

frontiers is possible, and depends on equal rights and duties being granted to all

signatory countries. During the transition period, as a result of the chronological

differences in actual implementation of trade liberalization by the member states,

the rights and obligations of each party will initially be equivalent but not

necessarily equal. In addition to the reciprocity doctrine, the Asuncion Treaty also

contains provisions regarding the most-favored nation concept, according to which

the member nations undertake to automatically extend--after actual formation of

the common market--to the other Treaty signatories any advantage, favor,

entitlement, immunity or privilege granted to a product originating from or

intended for countries that are not party to ALADI.

SAARC

The South Asian Association for Regional Cooperation (SAARC) is an economic and

political organization of eight countries in Southern Asia. It was established on

December 8, 1985 by India, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives and

Bhutan. In April 2007, at the Association's 14th summit, Afghanistan became its

eighth member.Sheelkant Sharma is the current secretary & Mahinda Rajapaksa is

the current chairman of SAARC which is headquartered at Kathmandu.

Objectives of SAARC:

to promote the welfare of the peoples of South Asia and to improve their

quality of life;

to accelerate economic growth, social progress and cultural development in

the region and to provide all individuals the opportunity to live in dignity

and to realize their full potential;

to promote and strengthen collective self-reliance among the countries of

South Asia;

to contribute to mutual trust, understanding and appreciation of one

another's problems;

to promote active collaboration and mutual assistance in the economic,

social, cultural, technical and scientific fields;

to strengthen cooperation with other developing countries;

to strengthen cooperation among themselves in international forums on

matters of common interest; and

to cooperate with international and regional organizations with similar aims

and purposes.

Free Trade Agreement

Over the years, the SAARC members have expressed their unwillingness on signing

a free trade agreement. Though India has several trade pacts with Maldives,

Nepal, Bhutan and Sri Lanka, similar trade agreements with Pakistan and

Bangladesh have been stalled due to political and economic concerns on both

sides. India has been constructing a barrier across its borders with Bangladesh

and Pakistan. In 1993, SAARC countries signed an agreement to gradually lower

tariffs within the region, in Dhaka. Eleven years later, at the 12th SAARC Summit

at Islamabad, SAARC countries devised the South Asia Free Trade Agreement

which created a framework for the establishment of a free trade area covering 1.4

billion people. This agreement went into force on January 1, 2006. Under this

agreement, SAARC members will bring their duties down to 20 per cent by 2007.

The last summit (15th) was held in Colombo where four major agreements - the

SAARC development fund, the establishment of a SAARC standard organization,

the SAARC convention on mutual legal assistance in criminal matters, and the

protocol on Afghanistan's admission to the South Asia Free Trade Agreement

(SAFTA) were adopted with emphasis on region-wide food security.

NAFTA

The North American Free Trade Agreement (NAFTA) is a trilateral trade bloc in

North America created by the governments of the United States, Canada, and

Mexico. In terms of combined purchasing power parity GDP of its members, as of

2007 the trade bloc is the largest in the world and second largest by nominal GDP

comparison. It also is one of the most powerful, wide-reaching treaties in the

world.

The North American Free Trade Agreement (NAFTA) has two supplements, the

North American Agreement on Environmental Cooperation (NAAEC) and the North

American Agreement on Labor Cooperation (NAALC).

Implementation of the North American Free Trade Agreement (NAFTA) began on

January 1, 1994. This agreement will remove most barriers to trade and

investment among the United States, Canada, and Mexico.

Under the NAFTA, all non-tariff barriers to agricultural trade between the United

States and Mexico were eliminated. In addition, many tariffs were eliminated

immediately, with others being phased out over periods of 5 to 15 years.  This

allowed for an orderly adjustment to free trade with Mexico, with full

implementation beginning January 1, 2008. 

The agricultural provisions of the U.S.-Canada Free Trade Agreement, in effect

since 1989, were incorporated into the NAFTA. Under these provisions, all tariffs

affecting agricultural trade between the United States and Canada, with a few

exceptions for items covered by tariff-rate quotas, were removed by January 1,

1998.

Mexico and Canada reached a separate bilateral NAFTA agreement on market

access for agricultural products. The Mexican-Canadian agreement eliminated

most tariffs either immediately or over 5, 10, or 15 years.

U.S. trade with Mexico and Canada has grown more rapidly than total U.S. trade

since 1994. The automotive, textile, and apparel industries have experienced the

most significant changes in trade flows, which may also have affected employment

levels in these industries. The five major U.S. industries that have high volumes of

trade with Mexico and Canada are automotive industry, chemicals and allied

products, computer equipment, textiles and apparel, and microelectronics.

The effects of NAFTA, both positive and negative, have been quantified by several

economists. Some argue that NAFTA has been positive for Mexico, which has seen

its poverty rates fall and real income rise (in the form of lower prices, especially

food), even after accounting for the 1994–1995 economic crisis. Others argue that

NAFTA has been beneficial to business owners and elites in all three countries, but

has had negative impacts on farmers in Mexico who saw food prices fall based on

cheap imports from U.S. agribusiness, and negative impacts on U.S. workers in

manufacturing and assembly industries who lost jobs. Critics also argue that

NAFTA has contributed to the rising levels of inequality in both the U.S. and

Mexico.

EU

The European Union (EU) is a political and economic union of 27 member states,

located primarily in Europe. The EU generates an estimated 30% share of the

world's nominal gross domestic product (US$16.8 trillion in 2007). Thus EU

presents an enormous export and investor market that is both mature and

sophisticated.

The EU has developed a single market through a standardised system of laws

which apply in all member states, guaranteeing the freedom of movement of

people, goods, services and capital. It maintains a common trade policy. Fifteen

member states have adopted a common currency, the euro.

Objectives of the EU: Its principal goal is to promote and expand cooperation

among members’ states in economics, trade, social issues, foreign policies,

security, defense, and judicial matters. Another major goal of the EU is to

implement the Economic and Monetary Union, which introduced a single currency,

the Euro for the EU members.

The single market refers to the creation of a fully integrated market within the EU,

which allows for free movement of goods, services and factors of production. The

EU, in conjunction with Member States, has a number of policies designed to assist

the functioning of the market. Some of the policies are given below:

Competition Policy: The main competition lied in energy and transport sector. The

union designed this strategy to prevent price fixing, collusion (secret agreement),

and abuse of monopoly.

Free movement of goods: A custom union covering all trade in goods was

established and a common customs tariff was adopted with respect to countries

outside the union.

Services: Any member nation has a right to provide services in other Member

States.

Free movement of persons: Any citizen of EU member state can live work in any

other EU member state

Capital: There are no restrictions on the movement of capital and on payments

with the EU and between member states and third countries.

Trade between the European Union and India

India was one of the first Asian nations to accord recognition to the European

Community in 1962. The EU is India’s largest trading partner and biggest source

of FDI. It is a major contributor of developmental aid and an important source of

technology. Over the years, EU – India trade has grown from 4.4 bn to 28.4 bn

US$.

Top items of trade between India and EU

India’s exports to EU % India’s Imports from EU %

Textile and clothing 35 Gemstones and jewellery 31

Leather and leather products 25 Power generating equipment 28

Gemstones and jewelery 12 Chemical products 15

Agriculture products 10 Office machinery 10

Chemical products 9 Transport equipment 6

India is EU’s 17th largest supplier and 20th largest destination for exports.

Tariff and non-tariffs have been reduced, but compared to International

standards they are still high.

Under the Bilateral trade between India and EU, it accounts for 26% of India’s

exports and 25% of its imports.

The European Union (EU) and India agreed on September 29,2008 at the EU-

India summit in Marseille, France's largest commercial port, to expand their

cooperation in the fields of nuclear energy and environmental protection and

deepen their strategic partnership.

Trade between India and the 27-nation EU has more than doubled from 25.6

billion euros ($36.7 billion) in 2000 to 55.6 billion euros last year, with further

expansion to be seen.

ASEAN

The Association of Southeast Asian Nations or ASEAN was established on 8 August

1967 in Bangkok by the five original Member Countries, namely, Indonesia,

Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined on 8

January 1984, Vietnam on 28 July 1995, Laos and Myanmar on 23 July 1997, and

Cambodia on 30 April 1999.

OBJECTIVES

The ASEAN Declaration states that the aims and purposes of the Association are:

(i) To accelerate the economic growth, social progress and cultural

development in the region through joint endeavors.

(ii) To promote regional peace and stability through abiding respect for justice

and the rule of law in the relationship among countries in the region and

adherence to the principles of the United Nations Charter.

(iii) To maintain close cooperation with the existing international and regional

organizations with similar aims.

WORKING OF ASEAN

The member countries of ASEAN have Preferential Trading Arrangements (PTA),

which reduces tariffs on products traded among member countries. In 1992,

ASEAN developed a Common Effective Preferential Tariffs (CEPT) plan to reduce

tariffs systematically for manufactured and processed products.

The members have also established a series of co-operative efforts to encourage

joint participation in industrial, agricultural and technical development projects

and to increase foreign investments in their economies. These efforts include an

ASEAN finance corporation, the ASEAN Industrial Joint Ventures Programme

(AJIV) etc. ASEAN nations have introduced some programmes for greater

diversification in their economies.

India and ASEAN

India is interested in maintaining close economic relations with the members of

ASEAN, as these countries are closer to India. The ASEAN countries are offering

co-operation to India in the field of trade, investment, science and technology and

training of personnel. Also, India’s trade with ASEAN countries is satisfactory in

recent years.