International Business Marketing

Classification of Economies

• Classification based on ownership:1. Capitalist economy2. Socialist economy3. Mixed economy• Classification based on levels of economic

development:1. Developed countries eg.USA, UAE, Singapore2. Developing countries eg.India, China3. Transition to market economies eg.Russia,

Poland

Economic Indicators

• GDP(value of total final output of all goods and services produced in a single year within a country’s boundary)

• GNP(GDP + income received by residents from abroad - incomes claimed by nonresidents)

• Income Distribution• Inflation• Interest Rates• Unemployment• Foreign Exchange Reserves

Economic Integration

• Two or more countries from the same region enter into agreements.

• Objective of these agreements is to reduce trade barriers among member countries.

• Promotion of trade and investment• Forming economic union consisting of common

legislative, judicial and executive institutions.• RTAs between countries are significant

development.

Levels of Economic Integration

• Based on the level and nature of integration, RTAs can be classified into four categories:

1. Free trade area

2. Customs union

3. Common market

4. Economic union

Free trade area

• Cooperative arrangement among two or more nations.

• General agreement on Tariffs and Trade• Trade barriers are removed among

members• Members eliminate tariffs among

themselves but keep their original tariffs against rest of the world.

• Eg.NAFTA

Customs union

• Two or more countries agree to remove all barriers to free trade with each other, while establishing a common external tariff against other nations.

• Free trade area lay tariffs separately against non-members.

• Does not allow flow of factors of production.• Permits only trade.• Eg. EU-Turkey customs union

Common market

• Also referred as tariff union.• Regional grouping of countries that levies

common external duties on imports from nonmember countries, but which eliminates tariffs, quotas and other govt. restrictions on trade among member countries.

• Allows free flow of factors of production such as labour, capital and technology among members.

• Eg.Belgium-Luxembourg Economic Union, Central American common market, East African community.

Economic union

• Members move beyond the common market to unify their fiscal and monetary policy.

• Eg. European Union – shared political institutions.

• Benefits – standardization of fiscal system, product standards, competition.

• One central bank, common currency.• Lead to loss of sovereignty from member

countries.

Advantages of Integration

• Increases size of market• Increases aggregate demand for products and

services• Quantity of production,• Employment• Economic activity of the region• People of the region get a variety of products at

comparatively lower price• Resources of the region pooled• Rapid technological innovations and

development.

Trade creation

• Refers to the expansion of trade between the member countries of a Customs union.

• Occurs when lower-cost partner country imports displace higher-priced domestic production

• Decrease costs of production and consumer prices within the country.

• Benefits are greater

Trade diversion

• Refers to the volume of trade that is diverted due to the formation of a customs union from the foreign country to the union partners due to the elimination of intra-union tariff.

• Happens when lower-cost imports from outside the block are displaced by higher-cost imports from within the block.

Trade blocks

• Purpose of trading blocks is to create a single largest market.

• Globalisation implies opening up the economy for rest of the globe by liberalising the rules and regulations.

• EU• NAFTA• ASEAN• SAARC• LAFTA• CACM• Andean Group

Opportunities

• Business opened within the region• Efficient business firms can enter and expand to

all the countries within the region.• Challenges of less efficient business firms

helped by more efficient businesses.• Overall business performance will

increase(productivity, quality, price, customer service)

• Rise in Employment opportunities.

Threats

• Less efficient firms face the problem of survival.• Price differentials vanish - leading firms with production

cost higher than industry average to be killed.• Resources of less efficient company exploited by firms of

advanced country.• Less developed countries of the region will mostly

become a consumption centre and advanced countries becoming production centres.

• Less developed countries become poorer and advanced countries of the region becoming richer.

SAARC

• South Asian Association for Regional Co-operation

• Members: India, Bangladesh, Bhutan, Pakistan, the Maldives, Nepal, Sri Lanka and Afghanistan.

• December 8, 1985

• Afghanistan joined in April 2007

Objectives of SAARC

• Improve quality of life and welfare of people of SAARC member countries

• Develop region economically, socially and culturally• Provide opportunity to people of the region to live in

dignity and to exploit their potentialities.• Enhance self reliance of the member countries jointly• Provide conducive climate mutual assistance among

member countries in economic, social, cultural and technical fields.

• Co-operation with other developed economies• Unity among member countries regarding issues of

common interest in international forums.• Extend co-operation with other trade blocks.

Organisation Structure

• The Council(Highest policy-making body)Represented by the heads of the government of

member countries. Meets once in two years.• Council of Ministers(Represented by the foreign ministers of the

member governments)Formulates policies, reviews the functioning of

SAARC(consists of secretariat, secretary-general, directors and general staff)

Meets twice a year.

Cont…

• Standing Committee(Represented by foreign secretaries of the

member governments)Monitors and co-ordinates the programmes.

Meets as and when necessary, submits reports to council of ministers.

• Programming Committee(Represented by the senior officials of the member

governments)Scrutinizes budget and annual schedule

Cont…• Technical Committees(Comprises the representatives of all countries)Formulates, implements and monitors projects. Agriculture,

Environment, Rural development, Tourism, transport, science and technology.

SAARC Secretariat – all secretarial work done, located in Nepal. Co-ordinating, monitoring and implementing SAARC activities. Communication link between SAARC and other international forums.

Chief of the Secretariat : Secretary-General. Appointed by the council of ministers on rotation basis among members for a period of three years. Assisted by seven directors(one from each member country) and general service staff.

SAPTA

• SAARC Preferential Trading Arrangement

• Signed on April 11, 1993

• Objectives: gradually liberalize the trade among SAARC member countries. Eliminate trade barriers among SAARC countries. Reduce tariffs. Promote and sustain mutual trade and economic co-operation among member countries.

Cont…

• Product Areas: All raw materials, semi-finished products, finished products.

• Tariffs : Concession given in tariffs. Providing technical assistance, enhancing exports, entering long-term contracts of less developed countries.

Cont…

• India – economic liberalisation 1991

• Seeds for integrated global economy sown in 1940s

• IMF, GATT

• General Agreement on Tariffs and Trade

GATT

• 1947• 23 countries• To revive economies from recession before

world war II.• Objectives: To raise standard of living, full

employment, develop full use of resources of the world, expand production and international trade.

• Several rounds of negotiations held during 1947 to 1960.

Uruguay Round

• Significant round – Uruguay round, initiated in 1986 and concluded in 1991

• Mr.Arthur Dunkel – Director General of GATT.• Dunket proposals:1. TRIMs – Trade related investment measures2. TRIPs – Trade related intellectual property

rights3. Textiles, clothing, agriculture subsidiaries.• Agreement regarding multilateral trading

system signed in Morocco, 1994.

Cont….

• Results of Uruguay round – strengthen the world economy and lead to more trade, investment, employment and income growth throughout the world.

• The World Trade Organization (WTO) was established on January 1, 1995 to implement the final act of Uruguay round agreement of GATT.

• Membership – 151(2007)

Differences between GATT and WTO

GATT WTO

Set of rules and multilateral agreement.

Permanent institution

Designed with an attempt to establish International trade organisation.

Established to serve its own purpose.

Applied on a provisional basis

Full and permanent activities

Cont…

Rules are applicable to trade in merchandise goods

Rules applicable to trade in merchandise, services and intellectual property.

Originally multilateral, but plurilateral agreements added

Agreements multilateral

Dispute settlement system not faster and automatic

Dispute settlement system fast and automatic.

WTO

• Basic purpose is to promote international trade without any discrimination.

• Designed to play the role of a watchdog in the spheres of trade in goods, services, foreign investment, intellectual property rights etc.

• Member countries should give equal treatment to the products imported from any other member countries.

• A member country should treat the foreign products once they enter their country exactly equal to those of similar domestic products.

• Since 1995, WTO has become the engine as well as the vehicle to promote globalization in all spheres of economic life.

Functions of WTO• Administers 28 agreements contained in the final act• Oversees implementation of tariff cut and reduction of non-tariff

measures• Examines trade regimes of individual member countries• Watchdog of international trade• Provides Disputes Settlement Court• Acts as management consultant for world trade• Technical co-operation and training division established• WTO used as a forum by member countries for negotiations • Co-operates with other international institutions like IMF, World

Bank etc.• Oversees the national trade policies of member governments.

Organisation structure of the WTO

• Four hierarchical levels:

1. Ministerial conference

2. General council

3. Councils

4. Committees and management bodies.

Cont…

• WTO related issues

• Dispute settlement mechanism of WTO

• WTO and Anti-dumping measures

• WTO-The Third Pillar in Global Business

Globalization

• Entire world is one country for business.• Erasing national and political boundaries for the

purpose of business is termed as globalisation.• Integration of the economy of a country with the

rest of the world economy is called globalisation.• Implies opening up the economy for FDI by

liberalising the rules and regulations by creating favourable and encouraging industrial climate.

Cont…

• Increasing integration of economies around the world, particularly through trade and financial flows.

• Movement of people (labour) and knowledge (technology) across international borders.

• Offers extensive opportunities for worldwide development

• Integrated countries have faster growth and reduced poverty

• Living standards, progress on democracy, environment and working standards rose.

World Economic Trade and Investment Trends

• 2004 – sharp upturn in world economy. Advanced and emerging market economies.

• USA, Japan, Asian countries, Europeon union

• Rise in investment and credit, volume of reserves.

• 2008-2009 : Recession

FDI inflows trends in India

• ‘India being an emerging power, no company interested in the Asia-Pacific region can afford to ignore this increasingly important market. It is a country of contrasts where centuries old traditions thrive side by side with modern technology’.

• Post-1991 : Increasing trend

Comparison between India and SAARC countries

• India – leading player• India attracted more FDI• Nepal – not attractive• Bangladesh – fluctuating trend• Bhutan – minimal• Maldives – no significant inflows• Pakistan and Sri Lanka – better FDI

inflows

Comparison between India and fastly developing Asian Economies• 9 Asian economies considered as fastly

developing.• Higher growth in economic development

and foreign investments• They throw a red carpet for FDI into their

economies.• Hong Kong, South Korea, Malaysia,

Singapore, Thailand, Brunei, Indonesia, Philippines, Taiwan.

Cont…

• India’s major competitor in Asian region is China.

• China – most populated country. Started economic reforms and opened up of the economy in late 1970s.

• Level of FDI inflow is greater.

• Increasing trend