International Business

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INTERNATIONAL BUSINES

INTERNATIONAL BUSINESS

VARIOUS ORGANISATIONAL STRUCTURES IN IB

ORGANIZATION ARCHITECTURE AND PROFITABILITY

Totality of a firm’s organization, including structure, control systems, incentives,

processes, culture and people.

Superior organization profitability requires three conditions:

An organization’s architecture must be internally consistent.

Strategy and architecture must be consistent.

Strategy, architecture and competitive environments must be consistent.

ORGANIZATIONAL ARCHITECTURE

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Organizational structure

Location of decision making responsibilities within the structure (vertical

differentiation)

Formal division of the organization into subunits e.g. product divisions (horizontal

differentiation)

Establishment of integrating mechanisms including cross-functional teams and or

pan-regional committees

Control systems

Metrics used to measure performance of subunits and judge managerial

performance

Incentives

Devices used to reward appropriate employee behaviour

Closely tied to performance metrics

Processes

Manner in which decisions are made and work is performed

Organizational culture

Values and norms shared among employees of an organization

Strategy used to manage human resources

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People (Employees)

Strategy used to recruit, compensate, and retain individuals with necessary skills,

values and orientation

PURPOSE OF ORGANIZATIONAL STRUCTURE

To exercise control

To establish division of labour

To facilitate communications

To facilitate coordination & integration

To establish accountability

To delegate responsibility

To establish lines of authority and chain of command

To establish rules and regulations

VERTICAL DIFFERENTIATION

Concerned with where decisions are made.

Two Approaches

Centralization

Decentralization

CENTRALIZATION

Facilitates coordination.

Ensure decisions consistent with organization’s objectives.

Top-level managers have means to bring about organizational change.

Avoids duplication of activities.

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DECENTRALIZATION

Overburdened top management.

Motivational research favours decentralization.

Permits greater flexibility.

Can result in better decisions.

Can increase control.

STRATEGY AND ORGANIZATION STRUCTURE

Major strategic decisions are centralized at the firm’s headquarters while operating

decisions are decentralized

GLOBAL STRATEGY

Aim to realize location and experience economies

Centralization of some operating decisions

Multi-domestic firms: aim for local responsiveness

Decentralizing operating decisions to foreign subsidiaries

INTERNATIONAL FIRMS

Maintain centralized control over their core competency and decentralize other decision to

foreign subsidiaries.

TRANSNATIONAL FIRMS

Aim to realize location and experience curve economies

Centralized control over global production centers

Need to be locally responsive

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COMPANY’S INTERNATIONAL DIVISION STRUCTURE

Adopted in early stages of international business operations

Coordinate all IB activities

Develop international expertise & skills

Develop a global/international mindset

Champion of foreign business

DISADVANTAGES OF INTERNATIONAL DIVISION

Dependent on domestic product divisions for R&D, engg., etc.

Conflict over pricing and transfer pricing

Power struggles in firm: intl Vs. domestic

Cannot handle too many products

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Not appropriate if foreign sales over 25%

Heads of foreign subsidiaries relegated to second-tier position

WORLDWIDE AREA STRUCTURE

Favoured by firms with low degree of diversification

Area is usually a country

Facilitates local responsiveness

Favoured by firms with low degree of diversification & domestic structure based on

function

World is divided into autonomous geographic areas

Operational authority decentralized

Facilitates local responsiveness

Fragmentation of organization can occur

Consistent with multi domestic strategy

A WORLDWIDE AREA STRUCTURE

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PRODUCT DIVISION

Adopted by firms that is reasonably diversified

Original domestic firm structure based on product division

Value creation activities of each product division coordinated by that division

worldwide

Help realize location and experience curve economies

Facilitate transfer of core competencies

Problem: area managers have limited control, subservient to product division

managers, leading to lack of local responsiveness

A WORLDWIDE PRODUCT DIVISION STRUCTURE

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MATRIX STRUCTURE

Helps to cope with conflicting demands of earlier strategies

Two dimensions: product division and geographic area

Product division and geographic areas given equal responsibility for operating

decisions

PROBLEMS

Bureaucratic structure slows decision making

Conflict between areas and product divisions

Difficult to make

Attempts to meet needs of transnational strategy

A GLOBAL MATRIX STRUCTURE

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THE INTERNATIONAL STRUCTURAL STAGES MODEL

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ADR & GDR

HOW DO WE RAISE FUNDS FROM INTERNATIONAL MARKET?

WHAT IS AN ADR / GDR?

There are some very good proxies that can be used by Non Resident Indians (NRIs)

and non-Indians for making investments in India.

ADR stands for American Depository Receipt. Similarly, GDR stands for Global

Depository Receipt.

Every publicly traded company issues shares – and these shares are listed and

traded on various stock exchanges. Thus, companies in India issue shares which

are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE

(National Stock Exchange), etc.

These shares are sometimes also listed and traded on foreign stock exchanges like

NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities

Dealers Automated Quotation).

But to list on a foreign stock exchange, the company has to comply with the

policies of those stock exchanges. Many times, the policies of these exchanges in

US or Europe are much more stringent than the policies of the exchanges in India.

This deters these companies from listing on foreign stock exchanges directly.

But many companies get listed on these stock exchanges indirectly- using ADRs

and GDRs.

The company deposits a large number of its shares with a bank located in the

country where it wants to list indirectly.

The bank issues receipts against these shares, each receipt having a fixed number

of shares as an underlying (Usually 2 or 4).

These receipts are then sold to the people of this foreign country (and anyone who

are allowed to buy shares in that country).

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These receipts are listed on the stock exchanges. They behave exactly like regular

stocks- their prices fluctuate depending on their demand and supply, and

depending on the fundamentals of the underlying company.

These receipts, which are traded like ordinary stocks, are called Depository

Receipts.

Each receipt amounts to a claim on the predefined number of shares of that

company.

The issuing bank acts as a depository for these shares- that is, it stores the shares

on behalf of the receipt holders.

WHAT IS THE DIFFERNCE BETWEEN ADR AND GDR?

Both ADR and GDR are depository receipts, and represent a claim on the

underlying shares. The only difference is the location where they are traded.

If the depository receipt is traded in the United States of America (USA), it is called

an American Depository Receipt (ADR).

If the depository receipt is traded in a country other than USA, it is called a Global

Depository Receipt (GDR).

Since ADRs and GDRs are traded like any other stock, NRIs and foreigners can buy

these using their regular equity trading accounts.

INDIAN COMPANIES HAVING ADRs & GDRs

Company ADR GDR

Bajaj Auto No Yes

Dr. Reddys Yes Yes

HDFC Bank Yes Yes

Hindalco No Yes

ICICI Bank Yes Yes

Infosys Technologies Yes Yes

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ITC No Yes

L&T No Yes

MTNL Yes Yes

Patni Computers Yes No

Ranbaxy Laboratories No Yes

FUTURE OF ADRs AND GDRs

If you look across the spectrum of companies in Central Europe (CE), GDR

programmes are becoming less popular because overall institutions are investing

directly.

For a newly listed CE company, a GDR programme still makes sense: the costs are

marginal, there are no extra efforts in terms of compliance and it’s a good way to get

exposure.

I’m not sure if having an ADR programme is really beneficial given the amount of

paperwork and additional lawyers time needed to comply with the Sarbanes Oxley

Act.

There is good empirical evidence to show that, on average, there is a 10 to 15 per

cent increase in stock price when a foreign company lists an American depositary

receipt.

The reason is that it has become a new company by agreeing voluntarily to play by a

different set of rules.

Terminating an ADR programme sends the reverse signal. It says to investors: ‘We, as

management, no longer want to be subjected to this additional layer of regulation

and scrutiny.’

There have been a lot of good names delisting over the past few months since the

rule change that allowed companies to exit if their ADR trading fell below five per

cent.

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The US brokerage system, besides the large institutional system, is still dollar based.

Investors don’t want multiple brokerage accounts, which is why an ADR offers such

value because it’s a US dollar security.

With an ADR, you don’t face custody costs, tax issues or get your dividends in

another currency.

ADR programmes can either be in Pink Sheets, which means the issuer has no

relationship with us or they can apply for and go through the process of joining

International OTCQX.

RBI RULES FOR ADRs & GDRs

Indian companies are allowed to raise equity capital in the international market

through the issue of GDR & ADRs.

An applicant company seeking Government's approval in this regard should have a

consistent track record for good performance (financial or otherwise) for a minimum

period of 3 years.

This condition can be relaxed for infrastructure projects such as power generation,

telecommunication, petroleum exploration and refining, ports, airports and roads.

There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a

company or a group of companies in a financial year.

There is no such restriction because a company engaged in the manufacture of items

covered under Automatic Route is likely to exceed the percentage limits under

Automatic Route, whose direct foreign investment after a proposed

GDRs/ADRs/FCCBs is likely to exceed 50 % / 51 % / 74 %.

There are no end-use restrictions on GDRs/ADRs issue proceeds, except for an

express ban on investment in real estate and stock markets.

ADR & GDR NORMS FURTHER RELAXED

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Indian bidders allowed raising funds through ADRs, GDRs and external commercial

borrowings (ECBs) for acquiring shares of PSEs in the first stage and buying shares

from the market during the open offer in the second stage.

Conversion and reconversion (a.k.a. two-way conversion or fungibility) of shares of

Indian companies into depository receipts listed in foreign bourses, while extending

tax incentives to non-resident investors, allowed. The re-coversion of ADRs/GDRs

would, however, be governed by the Foreign Exchange Management Act notified by

the Reserve Bank of India in March 2001.

Permission to retain ADR/GDR proceeds abroad for future foreign exchange

requirements, removal of the existing limit of $20,000 for remittance under the

employees stock option scheme (ESOP) and permitting remittance up to $ 1 million

from proceeds of sales of assets here.

Companies have been allowed to invest 100 per cent of the proceeds of ADR/GDR

issues (as against the earlier ceiling of 50%) for acquisitions of foreign companies and

direct investments in joint ventures and wholly-owned subsidiaries overseas.

Any Indian company which has issued ADRs/GDRs may acquire shares of foreign

companies engaged in the same area of core activity upto $100 million or an amount

equivalent to ten times of their exports in a year, whichever is higher. Earlier, this

facility was available only to Indian companies in certain sectors.

FIIs can invest in a company under the portfolio investment route upto 24 per cent

of the paid-up capital of the company. It can be increased to 40% with approval of

general body of the shareholders by a special resolution. This limit has now been

increased to 49% from the present 40%.

Two way fungibility in ADR/GDR issues of Indian companies has been introduced

subject to sectoral caps wherever applicable. Stock brokers in India can now

purchase shares and deposit these with the Indian custodian for issue of ADRs/GDRs

by the overseas depository to the extent of the ADRs/GDRs that have been

converted into underlying shares.

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http://www.kshitij.com/govt/gdr.shtml#sectoral


FOR EXAMPLE

Cipla to raise funds from international market

Cipla on Fridiay said it would raise Rs. 1,500 crore from the international market by issuing

non-convertible debentures, foreign currency convertible bonds, American Depository

Receipts and Global Depository Receipts, Cipla said in a filing to the Bombay Stock Exchange.

INTERNATIONAL LOGISTICS AND ITS IMPORTANCE IN IB

INTERNATIONAL LOGISTICS

An important dimension of the supply chain is logistics, also sometimes called

materials management.

According to the Council of Logistics Management, USA, logistics management is the

“process of planning, implementing and controlling the efficient, cost effective flow

and storage of raw materials, in process inventory, finished goods, and related

information from point of origin to point of consumption for the purpose of

conforming to customer requirements.”

The difference between supply chain management and materials management is on

degree. Materials management, or logistics, focuses much more on the transport

and storage of materials and final goods, whereas supply chain management extends

beyond that to include the management of supplier and customer relations.

Logistics, also known by such other names as marketing logistics, industrial logistics/

business logistics/ distribution/ channels of distribution logistics/ distribution

engineering materials logistics management supply chain management is a very

important component of operations management.

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COMPONENTS OF LOGISTICS

Logistics encompasses the total movement concept, covering the entire range of

operations concerned with the movement of materials and products to, through,

and out of the firm to the consumer.

It includes a variety of activities such as inventory management, warehousing and

storage, transportation, materials handling, order processing, distribution,

communications, packaging, salvage and scrap disposal, returned goods handling,

customer service etc.

Some of the major components of logistics are the following:

FIXED FACILITIES LOCATION

The major consideration is the location of fixed facilities like production and

warehousing in such a way as to maximize the total efficiency of the logistics system.

Factors like future potential of the markets, future plans of the company,

competitive factors, political stability, etc. are also important considerations.

INVENTORY MANAGEMENT

The main objective of inventory management is to minimize the cost of the

inventory while ensuring smooth supplies.

Developments in inventory management by the customer’s order processing and in

the total logistics system have made inventory management both challenging and

efficient.

ORDER PROCESSING

The efficiency of order processing by the client as well as the company have

important implications for inventory levels and other aspects of the logistics. Rapid

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order processing shortens the order cycle and allows for lower safety stocks on the

part of the client. Exporters from developing countries like India face the challenge

of coping up with such situations.

Material Handling and Transportation: Material handling and transportation are also

an important part of the logistics management. The technologies in use in material

handling and transportation affect the efficiency of logistics.

IMPORTANCE OF INTERNATIONAL LOGISTICS IN IB

Firms have begun to explore how the logistics function can provide certain strategic

advantages: more efficient distribution networks, improved quality, reduced total

cycle time, better post sale service, and efficient response to customer needs.

When a firm becomes heavily involved in international business, logistics is seen as a

critical part of the strategic planning process.

An effective international logistics strategy not only offers significant cost savings but

also can help firms penetrate new foreign markets.

Indeed, international logistics is recognized as an integral part of the marketing mix

that furthers the global marketing process.

With the assistance of an efficiently managed international logistics function, firms

can gain economies of scale from increased production, obtain technological

advantages from other countries, and expand their markets.

As logistics activities become a substantial part of a firm's international operations,

the role played by international logistics managers also increases in importance.

In order to obtain a competitive advantage through such operations, a

comprehensive and complex logistics system (including infrastructure and control

systems) must be established. Various barriers in international markets, however,

tend to offset a firm's efforts to establish an efficient logistics system.

These often lead to higher total logistics costs and decreased flexibility, all of which

adversely affects the competitive position of the firm.

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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.

Advantages of Direct Exports

o Give a higher return on your investment than selling through an agent or distributor

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

o Gives the company a close contact with its customers

Disadvantages of Direct Exports

o The company may not have the services of a foreign intermediary, so it may need

more time to become familiar with the market

o 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.

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FOREIGN DIRECT INVESTMENT

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:

o 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.

o 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.

o FDI allows companies to avoid foreign government pressure for local production.

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

office.

o 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.

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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:

o Assessment of internal resources

o Competitiveness

o Market Analysis

o 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.

Advantages:

o 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.

o It reduces the risk of expropriation because the licensee is a local company that can

provide leverage against government action.

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

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

o Can be used as a pre-emption major in new market before the entry of competition.

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Limitations:

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

o Licensor may create more competition in exchange of royalty.

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.

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

of people to share:

o Brand identification

o Successful method of doing business

o 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)

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

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

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.

Advantages:

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

o The risk is divided between joint-venture partners.

o Normally, foreign partner has an option to sell its stake in the venture to another entity.

Limitations:

o Limited control over business approach for foreign entity.

o Profits have to be shared.

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

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.

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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.

INFLUENCE OF PEST FACTORS ON INTERNATIONAL BUSINESS

OR

RISK ANALYSIS IN 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 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.

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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. Labour Laws :

The labour 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 :

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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 :

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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 a

spirer 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.

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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)

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INTERNATIONAL 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.

Neo-mercantilism views persist today.

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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.

Flaw: “Zero-sum game”.

Mercantilism- Zero-Sum Game

In 1752, David Hume pointed out that:

Increased exports lead to inflation and higher prices

Increased imports lead to lower prices

Result: Country A sells less because of high prices and Country B sells more

because of lower prices

In the long run, no one can keep a trade surplus

1.2. Free Trade supporting theories

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

partners’ economies

Absolute 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.

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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

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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

One unit of input (combination of land, labor, and capital)

Each nation has two input units it can use to produce either rice or automobiles

Each country uses one unit of input to produce each product

Comparative 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

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Shoes Shirts

India 100 80

China 80 75

Total 180 155

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.

Table D shows what happens when each country specializes in the product in which it has a

comparative advantage.

TABLE D

Shoes Shirts

India 200 0

China 0 150

Total 200 150

By specializing in this way, the India and China have increased the production of shoes by

twenty units over what they produced before, from 180 to 200. But the world has lost five

units of shirts, going from 155 to 150.

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Production in the India could be adjusted to make up the difference. For example, if the

India gave up 10 units of shoes, it could produce 8 units of shirts. Table E shows the results

of such a tradeoff.

TABLE E

Shoes Shirts

India 190 8

China 0 150

Total 190 158

In this way, the total production of both goods could be increased.

For India, the opportunity cost of choosing to produce 80 units of shirts was the 100 units of

shoes that could have been produced with the same resources. In the like manner, China's

opportunity cost of producing 80 units of shoes was 75 units of shirts.

In the terms of trade each reduce each country's opportunity cost of acquiring the good

traded for, trade will take place. In this example, China will not accept fewer than 80 units

of shoes for 75 units of shirts and the India will not pay more than 100 units of shoes for 80

units of shirts. Both countries must benefit for trade to occur.

The real world is much more complex than this two-country, two-product mode. Trade

involves many different countries and products. And it is not always clear where a country's

comparative advantage lies.

Summary

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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, 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.

Labour 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

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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

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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

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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

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- 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 favourable, while importing in those areas where

the components are not favourable

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:

Labour 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.

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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:

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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

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.

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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

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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 labour 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.

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 :

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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

jeweller 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

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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.

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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.

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.

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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.

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

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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 non member 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

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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

49


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.

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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.

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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.

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$.

52


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 jewellery 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.

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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.

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EFFECT OF CURRENT ECONOMIC MELTDOWN ON INTERNATIONAL BUSINESS

1. Slower global growth: Global growth stood at 5 percent in 2007, but the IMF expects

world growth to slow to 3 percent in 2009 - 0.9 percentage points lower than forecasted

in July 2008.

2. Economic contraction in some countries: In G7 countries except for the United States

and Canada, GDP growth was slower in Q2 of 2008 compared to Q1. Three major

European economies (Italy, France and Germany) experienced negative GDP growth in

Q2, and forecasts are for a continued decline in Q3. The IMF forecasts around 0 percent

growth for advanced economies in 2009.

3. Depth of slowdown: It is observed that economic slowdowns, preceded by financial

stress tend to be more severe. Although employment has contracted in several

countries in recent months, it has not been as severe as that during 1990-91.

4. Financing challenges for governments: State and local governments may be faced with

financial crisis. Even administrative costs may be difficult to come by. The governments

would be hard pressed for funds for guarantees and development work. For e.g. In the

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case of Iceland the banking sector has assets of around 300% of GDP, something no

government could ever guarantee, at least not on a short-term basis.

5. Rising unemployment: According to IMF, unemployment in the advanced economies

will rise from 5.7 percent in 2008 to 6.5 percent in 2009.

6. Large employment losses in sectors: Some sectors like construction, real estate services

will experience disproportionate employment declines. In addition there will be

significant job losses in the financial sector.

7. Reduced world trade volume: According to the IMF, the world trade will grow only at

the rate of 1.9% as against the earlier estimate of 4.1% for 2009. A drop in exports, as

well as capital inflow, may trigger a falloff in investments.

8. Rising income insecurity and disproportionate impact on low-income groups: As stock

markets around the world have eroded trillions of dollars in wealth and rolled back some

of the investment gains of the past 5 years, the investment and retirement savings of

many individuals have lost significant value. There is a risk that low-income countries

and lower-income groups within countries will bear the brunt of challenges, as “the

most poor are the most defenseless,” says World Bank President Robert Zoellick.

9. Return to Tariff and Non-Tariff Barriers: Developed economies in order to ward off

unemployment and financial crisis may erect barriers to free trade. This might start a

local business environment. For e.g. President-elect Barrack Obama has already

announced his intention to reduce outsourcing from US by 30%.

10. Surplus Production Capacities: In line with demand destruction, many branded products

may face surplus capacities. For e.g. Car, Steel & Aircrafts manufacturers are already

staring at excess capacity.

11. Increase in Government Controls: In order to bail out sinking Corporates the

governments, would buy out or control the operations of large companies. For e.g. AIG

and Citibank

12. Impact on India:

a. BPO Operations: India is likely to face a severe crunch on the IT and ITes services,

rendered by Indian BPO Companies.

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b. Increase in Trade Deficit: Already in the last quarter, India’s trade deficit has grown

where exports are not meeting the set targets while imports continue to grow.

c. Falling Currency: as the demand for dollars increases the Indian rupee is likely to

weaken. The rupee has already depreciated to Rs. 50 a dollar.

d. Pressure on Services Sector: As the demand for services is destroyed, these sunshine

industries such as BPOs, Airlines, and Telecommunication etc. will face salary and

employment cutbacks.

DISCUSS SWAPS, OPTIONS, FUTURES

SWAPS

a) A swap is a derivative in which two counterparties agree to exchange one stream of cash

flows against another stream. These streams are called the legs of the swap.

b) The cash flows are calculated over a notional principal amount, which is usually not

exchanged between counterparties. Consequently, swaps can be used to create

unfunded exposures to an underlying asset, since counterparties can earn the profit or

loss from movements in price without having to post the notional amount in cash or

collateral.

c) Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on

changes in the underlying prices.

d) Most swaps are traded over-the-counter (OTC), "tailor-made" for the counterparties.

Some types of swaps are also exchanged on futures markets such as the Chicago

Mercantile Exchange Holdings Inc., the largest U.S. futures market, the Chicago Board

Options Exchange and Frankfurt-based Eurex AG.

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e) The five generic types of swaps, in order of their quantitative importance, are: interest

rate swaps, currency swaps, credit swaps, commodity swaps and equity swaps.

FUTURES

a) A futures contract is a standardized contract, traded on a futures exchange, to buy or

sell a standardized quantity of a specified commodity of standardized quality at a certain

date in the future, at a price determined by the instantaneous equilibrium between the

forces of supply and demand among competing buy and sell orders on the exchange at

the time of the purchase or sale of the contract.

b) The future date is called the delivery date or final settlement date. The official price of

the futures contract at the end of a day's trading session on the exchange is called the

settlement price for that day of business on the exchange.

c) A futures contract gives the holder the obligation to make or take delivery under the

terms of the contract,

d) Both parties of a "futures contract" must fulfill the contract on the settlement date. The

seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures

contract, then cash is transferred from the futures trader who sustained a loss to the

one who made a profit. To exit the commitment prior to the settlement date, the holder

of a futures position has to offset his/her position by either selling a long position or

buying back (covering) a short position, effectively closing out the futures position and

its contract obligations.

e) Futures contracts, or simply futures, are exchange traded derivatives. The exchange's

clearinghouse acts as counterparty on all contracts, sets margin requirements, and

crucially also provides a mechanism for settlement.

OPTIONS

a) An option is a contract written by a seller that conveys to the buyer the right — but not

the obligation — to buy (in the case of a call option) or to sell (in the case of a put

option) a particular asset, such as a piece of property, or shares of stock or some other

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underlying security, such as, among others, a futures contract. In return for granting the

option, the seller collects a payment (the premium) from the buyer.

b) For example, buying a call option provides the right to buy a specified quantity of a

security at a set strike price at some time on or before expiration, while buying a put

option provides the right to sell. Upon the option holder's choice to exercise the option,

the party who sold, or wrote, the option must fulfill the terms of the contract.

c) The theoretical value of an option can be evaluated according to several models. These

models, which are developed by quantitative analysts, attempt to predict how the value

of the option will change in response to changing conditions. Hence, the risks associated

with granting, owning, or trading options may be quantified and managed with a greater

degree of precision, perhaps, than with some other investments.

d) Exchange-traded options form an important class of options which have standardized

contract features and trade on public exchanges, facilitating trading among independent

parties. Over-the-counter options are traded between private parties, often well-

capitalized institutions that have negotiated separate trading and clearing arrangements

with each other.

e) Another important class of options, particularly in the U.S., are employee stock options,

which are awarded by a company to their employees as a form of incentive

compensation

f) Other types of options exist in many financial contracts, for example real estate options

are often used to assemble large parcels of land, and prepayment options are usually

included in mortgage loans.

INTERNATIONAL HUMAN RESOURCE MANAGEMENT

International human resource management (HRM) involves ascertaining the

corporate strategy of the company and assessing the corresponding human resource

needs; determining the recruitment, staffing and organizational strategy; recruiting,

inducting, training and developing and motivating the personnel; putting in place the

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performance appraisal and compensation plans and industrial relations strategy and

the effective management of all these.

“The strategic role of HRM is complex enough in a purely domestic firm, but it is

more complex in an international business, where staffing, management

development, performance evaluation, and compensation activities are complicated

by profound differences between countries in labour markets, culture, legal systems,

economic systems, and the like.”

It is not enough that the people recruited fit the skill requirement, but it is equally

important that they fit in to the organizational culture and the demand of the

diverse environments in which the organization functions.

FACTORS AFFECTING INTERNATIONAL HRM

The following are some of the important factors, which make international HRM complex

and challenging:

DIFFERENCES IN LABOUR MARKET CHARACTERISTICS

The skill levels, the demand and supply conditions and the behaviour characteristics

of labour vary widely between countries. While some countries experience human

resource shortage in certain sectors, many countries have abundance.

In the past, developing countries were regarded, generally, as pools of unskilled

labour. Today, however, many developing countries have abundance of skilled and

scientific manpower as well as unskilled and semiskilled labour.

This changing trend is incasing significant shift of location of business activities. Hard

disk drive manufacturers are reported to be shifting their production base from

Singapore to cheaper locations like Malaysia, Thailand and China.

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While in the past unskilled and semiskilled labour intensive activities tended to be

located in the developing countries, today sophisticated activities also find favour

with developing countries.

The changing quality attributes of human resources in the developing countries and

wage differentials are causing a location shift in business activities, resulting in new

trends in the global supply chain management.

India is reported to be emerging as a global R&D hub. India and several other

developing countries are large sources of IT personnel.

In short, the labour changing labour market characteristics have been causing global

restructuring of business processes and industries. And this causes a great challenge

for strategic HRM.

CULTURAL DIFFERENCES

Cultural differences cause a great challenge to HRM.

The behavioural attitude of workers, the social environment, values, beliefs, outlooks

etc., are important factors, which affect industrial relations, loyalty, productivity etc.

There are also significant differences in aspects related to labour mobility. Cultural

factors are very relevant in inter personal behaviour also.

In some countries it is common to address the boss Mr. so and so but in countries

like India addressing the boss by name would not be welcome.

In countries like India people attach great value to designations and hierarchical

levels. This makes delivering and organisational restructuring difficult.

DIFFERENCES IN REGULATORY ENVIRONMENT

A firm operating in different countries is confronted with different environments

with respect to government policies and regulations regarding labour.

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The attitude of employers and employees towards employment of people show

great variations is different nations. In some countries hire and fire is the common

thing whereas in a number of countries the ideal norm has been lifetime

employment.

In countries like India workers generally felt that while they, have the right to change

organisations, as they preferred, they had a right to lifetime employment in the

organisation they were employed with.

In such situations it is very difficult to get rid of inefficient or surplus manpower. The

situation, however, is changing in many countries, including India.

DIFFERENCE IN CONDITIONS OF EMPLOYMENT

Besides the tenancy of employment, there are several conditions of employment the

differences of which cause significant challenge to international HRM.

The system of rewards, promotion, incentives and motivation, system of labour

welfare and social security etc., vary significantly between countries.

CASE STUDY: ORGANIZATIONAL CHANGE AT UNILEVER

Unilever is a very old multinational with worldwide operations in the detergent and food

industries. For decades, Unilever managed its worldwide detergents activities in an arm's-

length manner. A subsidiary was set up in each major national market and allowed to operate

largely autonomously, with each subsidiary carrying out the full range of value creation

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activities, including manufacturing, marketing, and R&D. The company had 17 autonomous

national operations in Europe alone by the mid-1980s.

In the 1990s, Unilever began to transform its worldwide detergents activities from a loose

confederation into a tightly managed business with a global strategy. The shift was prompted

by Unilever's realization that its traditional way of doing business was no longer effective in

an arena where it had become essential to realize substantial cost economies, to innovate, and

to respond quickly to changing market trends.

The point was driven home in the 1980s when the company's archrival, Procter & Gamble,

repeatedly stole the lead in bringing new products to market. Within Unilever, "persuading"

the 17 European operations to adopt new products could take four to five years. In addition,

Unilever was handicapped by a high-cost structure from the duplication of manufacturing

facilities from country to country and by the company's inability to enjoy the same kind of

scale economies as P&G. Unilever's high costs ruled out its use of competitive pricing.

To change this situation, Unilever established product divisions to coordinate regional

operations. The 17 European companies now report directly to Lever Europe. Implicit

in this new approach is a bargain: The 17 companies are relinquishing autonomy in their

traditional markets in exchange for opportunities to help develop and execute a unified pan-

European strategy. As a consequence of these changes, manufacturing is now being

rationalized, with detergent production for the European market concentrated in a few key

locations. The number of European plants manufacturing soap has been cut from 10 to 2,

and some new products will be manufactured at only one site. Product sizing and packaging are

being harmonized to cut purchasing costs and to pave the way for unified pan-European"

advertising. By taking these steps, Unilever estimates it may save as much as $400 million a

year in its European operations.

Lever Europe is attempting to speed its development of new products and to synchronize the

launch of new products throughout Europe. Its efforts seem to be paying off: A dishwasher

detergent introduced in Germany in the early 1990s was available across Europe a year later—

a distinct improvement.

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But history still imposes constraints. Procter & Gamble's leading laundry detergent carries the

same brand name across Europe, but Unilever sells its product under a variety of names. The

company has no plans to change this. Having spent 100 years building these brand names, it

believes it would be foolish to scrap them in the interest of pan-European standardization.

http://www.unilever.com

G20WHAT IS THE G-20

The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established

in 1999 to bring together systemically important industrialized and developing economies to

discuss key issues in the global economy. The inaugural meeting of the G-20 took place in

Berlin, on December 15 & 16, 1999, hosted by German and Canadian finance ministers.

MANDATE

The G-20 is an informal forum that promotes open and constructive discussion between

industrial and emerging-market countries on key issues related to global economic stability.

By contributing to the strengthening of the international financial architecture and providing

opportunities for dialogue on national policies, international co-operation, and international

financial institutions, the G-20 helps to support growth and development across the globe.

ORIGINS

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The G-20 was created as a response both to the financial crises of the late 1990s and

to a growing recognition that key emerging-market countries were not adequately

included in the core of global economic discussion and governance.

The proposals made by the G-22 and the G-33 to reduce the world economy's

susceptibility to crises showed the potential benefits of a regular international

consultative forum embracing the emerging-market countries.

Such a regular dialogue with a constant set of partners was institutionalized by the

creation of the G-20 in 1999.

MEMBERSHIP

The G-20 is made up of the finance ministers and central bank governors of 19 countries:

Argentina

Australia

Brazil

Canada

China

France

Germany

India

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Indonesia

Italy

Japan

Mexico

Russia

Saudi Arabia

South Africa

South Korea

Turkey

United Kingdom

United States of America

The European Union, who is represented by the rotating Council presidency and the

European Central Bank, is the 20th member of the G-20.

To ensure global economic for a and institutions work together, the Managing

Director of the International Monetary Fund (IMF) and the President of the World

Bank, plus the chairs of the International Monetary and Financial Committee and

Development Committee of the IMF and World Bank, also participate in G-20

meetings on an ex-officio basis.

The G-20 thus brings together important industrial and emerging-market countries

from all regions of the world. Together, member countries represent around 90 per

cent of global gross national product, 80 per cent of world trade (including EU intra-

trade) as well as two-thirds of the world's population.

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The G-20's economic weight and broad membership gives it a high degree of

legitimacy and influence over the management of the global economy and financial

system.

ACHIEVEMENTS

The G-20 has progressed a range of issues since 1999, including agreement about

policies for growth, reducing abuse of the financial system, dealing with financial

crises and combating terrorist financing.

The G-20 also aims to foster the adoption of internationally recognized standards

through the example set by its members in areas such as the transparency of fiscal

policy and combating money laundering and the financing of terrorism.

In 2004, G-20 countries committed to new higher standards of transparency and

exchange of information on tax matters. This aims to combat abuses of the financial

system and illicit activities including tax evasion. The G-20 also plays a signficant role

in matters concerned with the reform of the international financial architecture.

The G-20 has also aimed to develop a common view among members on issues

related to further development of the global economic and financial system and held

an extraordinary meeting in the margins of the 2008 IMF and World Bank annual

meetings in recognition of the current economic situation.

MEETINGS AND ACTIVITIES

It is normal practice for the G-20 finance ministers and central bank governors to

meet once a year.

The ministers' and governors' meeting is usually preceded by two deputies' meetings

and extensive technical work.

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This technical work takes the form of workshops, reports and case studies on specific

subjects, that aim to provide ministers and governors with contemporary analysis

and insights, to better inform their consideration of policy challenges and options.

INTERACTION WITH OTHER INTERNATIONAL ORGANIZATIONS

The G-20 cooperates closely with various other major international organizations

and for a, as the potential to develop common positions on complex issues among G-

20 members can add political momentum to decision-making in other bodies.

The participation of the President of the World Bank, the Managing Director of the

IMF and the chairs of the International Monetary and Financial Committee and the

Development Committee in the G-20 meetings ensures that the G-20 process is well

integrated with the activities of the Bretton Woods Institutions.

The G-20 also works with, and encourages, other international groups and

organizations, such as the Financial Stability Forum, in progressing international and

domestic economic policy reforms. In addition, experts from private-sector

institutions and non-government organisations are invited to G-20 meetings on an

ad hoc basis in order to exploit synergies in analyzing selected topics and avoid

overlap.

EXTERNAL COMMUNICATION

The country currently chairing the G-20 posts details of the group's meetings and

work program on a dedicated website.

Although participation in the meetings is reserved for members, the public is

informed about what was discussed and agreed immediately after the meeting of

ministers and governors has ended.

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After each meeting of ministers and governors, the G-20 publishes a communiqué

which records the agreements reached and measures outlined. Material on the

forward work program is also made public.

69

International Business

Documents

north american

american depository

relative factor

worldwide

indian patent

wholly owned

international

global depository