MB 0053 SET 1

Q.1 what is globalization? What are its benefits? How does globalization help in

international business? Give some instances?

Globalization describes the process by which regional economies, societies, and cultures have

become integrated through a global network of political ideas through communication,

transportation, and trade. The term is most closely associated with the term economic

globalization: the integration of national economies into the international economy through trade,

foreign direct investment, capital flows, migration, the spread of technology, and military

presence.However, globalization is usually recognized as being driven by a combination of

economic, technological, sociocultural, political, and biological factors.The term can also refer to

the transnational circulation of ideas, languages, or popular culture through acculturation. An

aspect of the world which has gone through the process can be said to be globalized.

Against this view, an alternative approach stresses how globalization has actually decreased

inter-cultural contacts while increasing the possibility of international and intra-national conflict.

Globalization has various aspects which affect the world in several different ways

Industrial - emergence of worldwide production markets and broader access to a range of

foreign products for consumers and companies. Particularly movement of material and

goods between and within national boundaries. International trade in manufactured goods

increased more than 100 times (from $95 billion to $12 trillion) in the 50 years since

1955.China's trade with Africa rose sevenfold during 2000-07 alone.

Financial - emergence of worldwide financial markets and better access to external

financing for borrowers. By the early part of the 21st century more than $1.5 trillion in

national currencies were traded daily to support the expanded levels of trade and

investment

Economic - realization of a global common market, based on the freedom of exchange of

goods and capital

Job Market- competition in a global job market. In the past, the economic fate of workers

was tied to the fate of national economies. With the advent of the information age and

improvements in communication, this is no longer the case. Because workers compete in

a global market, wages are less dependent on the success or failure of individual

economies. This has had a major effect on wages and income distribution

Political - some use "globalization" to mean the creation of a world government which

regulates the relationships among governments and guarantees the rights arising from

social and economic globalization. Politically, the United States has enjoyed a position of

power among the world powers, in part because of its strong and wealthy economy. With

the influence of globalization and with the help of the United States’ own economy, the

People's Republic of China has experienced some tremendous growth within the past

decade. If China continues to grow at the rate projected by the trends, then it is very

likely that in the next twenty years, there will be a major reallocation of power among the

world leaders. China will have enough wealth, industry, and technology to rival the

United States for the position of leading world power.

Most of us assume that international and global business are the same and that any

company that deals with another country for its business is an international or global

company. In fact, there is a considerable difference between the two terms.

International companies – Companies that deal with foreign companies for their business are

considered as international companies. They can be exporters or importers who may not have

any investments in any other country, apart from their home country.

Global companies – Companies, which invest in other countries for business and also operate

from other countries, are considered as global companies. They have multiple manufacturing

plants across the globe, catering to multiple markets.

The transformation of a company from domestic to international is by entering just one market or

a few selected foreign markets as an exporter or importer. Competing on a truly global scale

comes later, after the company has established operations in several countries across continents

and is racing against rivals for global market leadership. Thus, there is a meaningful distinction

between a company that operates in few selected foreign countries and a company that operates

and markets its products across several countries and continents with manufacturing capabilities

in several of these countries.

Companies can also be differentiated by the kind of competitive strategy they adopt while

dealing internationally. Multinational strategy and global competitive strategy are the two types

of competitive strategy.

· Multinational strategy – Companies adopt this strategy when each country’s market needs to

be treated as self contained. It can be for the following reasons:

° Customers from different countries have different preferences and expectations about a product

or a service.

° Competition in each national market is essentially independent of competition in other national

markets, and the set of competitors also differ from country to country.

° A company’s reputation, customer base, and competitive position in one nation have little or no

bearing on its ability to successfully compete in another nation.

Some of the industry examples for multinational competition include beer, life insurance, and

food products.

· Global competitive strategy – Companies adopt this strategy when prices and competitive

conditions across the different country markets are strongly linked together and have common

synergies. In a globally competitive industry, a company’s business gets affected by the

changing environments in different countries. The same set of competitors may compete against

each other in several countries. In a global scenario, a company’s overall competitive advantage

is gauged by the cumulative efforts of its domestic operations and the international operations

worldwide.

A good example to illustrate is Sony Ericsson, which has its headquarters in Sweden, Research

and Development setup in USA and India, manufacturing and assembly plants in low wage

countries like China, and sales and marketing worldwide. This is made possible because of the

ease in transferring technology and expertise from country to country.

Industries that have a global competition are automobiles, consumer electronics (like televisions,

mobile phone), watches, and commercial aircraft and so on.

Table 1 portrays the differences in strategies adopted by companies in international and global

operations.

Table 1: Differences between International and Global Strategies

Strategy International Global

Location Selected target countries and

trading areas

Most global businesses operate in North America, Europe,

Asia Pacific, and Latin America

Business Custom strategies to fit the

circumstances of each host

country situation

Same basic strategy worldwide with minor country

customisation where necessary

Product-line Adopted to local culture and

particular needs and

expectations of local buyers

Mostly standardised products sold worldwide, moderate

customisation depending on the regulatory framework

Production Plants scattered across many

host countries, each

producing versions suitable

for the surrounding

environment

Plants located on the basis of maximum competitive

advantage (in low cost countries close to major markets,

geographically scattered to minimise shipping costs, or

use of a few world scale plants to maximise economies of

scale)

Source of supply

of raw materials

Suppliers in host country

preferred

Attractive suppliers from across the world

Marketing and

distribution

Adapted to practices and

culture of each host country

Much more worldwide coordination; minor adaptation to

host country situations if required

Cross country

connections

Efforts made to transfer

ideas, technologies,

Efforts made to use almost the same technologies,

competencies, and capabilities in all country markets (to

competencies and capabilities

that work successfully in one

country to another country

whenever such a transfer

appears advantageous

promote use of a mostly standard strategy), new

successful competitive capabilities are transferred to

different country markets

Company

organisation

Form subsidiary companies

to handle operations in each

host country; each subsidiary

operates more or less

autonomously to fit host

country conditions

All major strategic decisions closely coordinated at global

headquarters; a global organisational structure is used to

unify the operations in each country

Benefits of globalisation

We have moved from a world where the big eat the small to a world where the fast eat the slow",

as observed by Klaus Schwab of the Davos World Economic Forum. All economic analysts must

agree that the living standards of people have considerably improved through the market growth.

With the development in technology and their introduction in the global markets, there is not

only a steady increase in the demand for commodities but has also led to greater utilization.

Investment sector is witnessing high infusions by more and more people connected to the world's

trade happenings with the help of computers. As per statistics, everyday more than $1.5 trillion is

now swapped in the world's currency markets and around one-fifth of products and services are

generated per year are bought and sold.Buyers of products and services in all nations comprise

one huge group who gain from world trade for reasons encompassing opportunity charge,

comparative benefit, economical to purchase than to produce, trade's guidelines, stable business

and alterations in consumption and production. Compared to others, consumers are likely to

profit less from globalization.Another factor which is often considered as a positive outcome of

globalization is the lower inflation. This is because the market rivalry stops the businesses from

increasing prices unless guaranteed by steady productivity. Technological advancement and

productivity expansion are the other benefits of globalization because since 1970s growing

international rivalry has triggered the industries to improvise increasingly.

Globalization can be described as a process by which the people of the world are unified into a

single society and functioning together. This process is a combination of economic,

technological, sociocultural and political forces. Globalization, as a term, is very often used to

refer to economic globalization, that is integration of national economies into the international

economy through trade, foreign direct investment, capital flows, migration, and spread of

technology. The word globalization is also used, in a doctrinal sense to describe the neoliberal

form of economic globalization.Globalization is also defined as internationalism, however such

usage is typically incorrect as "global" implies "one world" as a single unit, while "international"

(between nations) recognizes that different peoples, cultures, languages, nations, borders,

economies, and ecosystems exist(http://en.wikipedia.org/).

Globalization has two components: the globalization of market and globalization of

production....

Some other benefits of globalization as per statistics

Commerce as a percentage of gross world product has increased in 1986 from 15% to

nearly 27% in recent years.

The stock of foreign direct investment resources has increased rapidly as a percentage of

gross world product in the past twenty years.

For the purpose of commerce and pleasure, more and more people are crossing national

borders. Globally, on average nations in 1950 witnessed just one overseas visitor for

every 100 citizens. By the mid-1980s it increased to six and ever since the number has

doubled to 12.

Worldwide telephone traffic has tripled since 1991. The number of mobile subscribers

has elevated from almost zero to 1.8 billion indicating around 30% of the world

population. Internet users will quickly touch 1 billion.

· Promotes foreign trade and liberalisation of economies.

· Increases the living standards of people in several developing countries through capital

investments in developing countries by developed countries.

· Benefits customers as companies outsource to low wage countries. Outsourcing helps the

companies to be competitive by keeping the cost low, with increased productivity.

· Promotes better education and jobs.

· Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best

practices, and culture.

· Provides better quality of products, customer services, and standardised delivery models across

countries.

· Gives better access to finance for corporate and sovereign borrowers.

· Increases business travel, which in turn leads to a flourishing travel and hospitality industry

across the world.

· Increases sales as the availability of cutting edge technologies and production techniques

decrease the cost of production.

· Provides several platforms for international dispute resolutions in business, which facilitates

international trade.

Some of the ill-effects of globalisation are as follows:

· Leads to exploitation of labour in several cases.

· Causes unemployment in the developed countries due to outsourcing.

· Leads to the misuse of IPR, copyrights and so on due to the easy availability of technology,

digital communication, travel and so on.

· Influences political decisions in foreign countries. The MNCs increasingly use their economical

powers to influence political decisions.

· Causes ecological damage as the companies set up polluting production plants in countries with

limited or no regulations on pollution.

· Harms the local businesses of a country due to dumping of cheaper foreign goods.

· Leads to adverse health issues due to rapid expansion of fast food chains and increased

consumption of junk food.

· Causes destruction of ethnicity and culture of several regions worldwide in favour of more

accepted western culture.

In spite of its disadvantages, globalisation has improved our lives in various fields like

communication, transportation, healthcare, and education.

Q2. What is culture and in the context of international business environment how does it

impact international business decisions?

Answer: Culture is defined as the art and other signs or demonstrations of human customs,

civilisation, and the way of life of a specific society or group. Culture determines every aspect

that is from birth to death and everything in between it. It is the duty of people to respect other

cultures, other than their culture. Research shows that national ‘‘cultures’’ generally characterise

the dominant groups’ values and practices in society, and not of the marginalised groups, even

though the marginalised groups represent a majority or a minority in the society.

Culture is very important to understand international business. Culture is the part of

environment, which human has created, it is the total sum of knowledge, arts, beliefs, laws,

morals, customs, and other abilities and habits gained by people as part of society.

Culture is an important factor for practising international business. Culture affects all the

business functions ranging from accounting to finance and from production to service. This

shows a close relation between culture and international business.

The following are the four factors that question assumptions regarding the impact of global

business in culture:

· National cultures are not homogeneous and the impact of globalisation on heterogeneous

cultures is not easily predicted.

· Culture is not similar to cultural practice.

· Globalisation does not characterise a rupture with the past but is a continuation of prior trends.

· Globalisation is only one of many processes involved in cultural change.

Cultural differences affect the success or failure of multinational firms in many ways. The

company must modify the product to meet the demand of the customers in a specific location and

use different marketing strategy to advertise their product to the customers. Adaptations must be

made to the product where there is demand or the message must be advertised by the company.

The following are the factors which a company must consider while dealing with international

business:

· The consumers across the world do not use same products. This is due to varied preferences

and tastes. Before manufacturing any product, the organisation has to be aware of the customer

choice or preferences.

· The organisation must manage and motivate people with broad different cultural values and

attitudes. Hence the management style, practices, and systems must be modified.

· The organisation must identify candidates and train them to work in other countries as the

cultural and corporate environment differs. The training may include language training,

corporate training, training them on the technology and so on, which help the candidate to work

in a foreign environment.

· The organisation must consider the concept of international business and construct guidelines

that help them to take business decisions, and perform activities as they are different in different

nations. The following are the two main tasks that a company must perform:

° Product differentiation and marketing – As there are differences in consumer tastes and

preferences across nations; product differentiation has become business strategy all over the

world. The kinds of products and services that consumers can afford are determined by the level

of per capita income. For example, in underdeveloped countries, the demand for luxury products

is limited.

° Manage employees – It is said that employees in Japan were normally not satisfied with their

work as compared with employees of North America and European countries; however the

production levels stayed high. To motivate employees in North America, they have come up with

models. These models show that there is a relation between job satisfaction and production. This

study showed the fact that it is tough for Japanese workers to change jobs. While this trend is

changing, the fact that job turnover among Japanese workers is still lower than the American

workers is true. Also, even if a worker can go to another Japanese entity, they know that the

management style and practices will be quite alike to those found in their present firm. Thus,

even if Japanese workers were not satisfied with the specific aspects of their work, they know

that the conditions may not change considerably at another place. As such, discontent might not

impact their level of production.

The following are the three mega trends in world cultures:

· The reverse culture influence on modern Western cultures from growing economies,

particularly those with an ancient cultural heritage.

· The trend is Asia centric and not European or American centric, because of the growing

economic and political power of China, India, South Korea, and Japan and also the ASEAN.

· The increased diversity within cultures and geographies.

The following are the necessary implications in international business:

· Avoid self reference criterion such as, one’s own upbringing, values and viewpoints.

· Follow a philosophical viewpoint that considers that many perspectives of a single observation

or phenomenon can be true.

· Discover and identify global segments and global niche markets, as national markets are

diverse with growing mobility of products, people, capital, and culture.

· Grow the total share market by innovating affordable products and services, and making them

accessible so that, they are affordable for even subsistence level consumers rather than fighting

for market share.

· Organise global enterprises around global centres of excellence.

Hofstede’s cultural dimensions

According to Dr. Geert Hofstede, ‘Culture is more often a source of conflict than of synergy.

Cultural differences are a trouble and always a disaster.’

Professor Hofstede carried out a detailed study of how values in the workplace are influenced by

culture. He worked as a psychologist in IBM from 1967 to 1973. At that time he gathered and

analysed data from many people from several countries. Professor Hofstede established a model

using the results of the study which identifies four dimensions to differentiate cultures. Later, a

fifth dimension called ‘long-term outlook’ was added.

The following are the five cultural dimensions:

· Power Distance Index (PDI) – This focuses on the level of equality or inequality, between

individuals in the nation’s society. A country with high power distance ranking depicts that

inequality of power and wealth has been allowed to grow within the society. These societies

follow caste system that does not allow large upward mobility of its people. A country with low

power distance ranking depicts the society and de-emphasises the differences between its

people’s power and wealth. In these societies equality and opportunity is stressed for everyone.

· Individualism – This dimension focuses on the extent to which the society reinforces

individual or collective achievement and interpersonal relationships. A high individualism

ranking depicts that individuality and individual rights are dominant within the society.

Individuals in these societies form a larger number of looser relationships. A low individualism

ranking characterises societies of a more collective nature with close links between individuals.

These cultures support extended families and collectives where everyone takes responsibility for

fellow members of their group.

· Masculinity – This focuses on the extent to which the society supports or discourages the

traditional masculine work role model of male achievement, power, and control. A country with

high masculinity ranking shows the country experiences high level of gender differentiation. In

these cultures, men dominate a major part of the society and power structure, with women being

controlled and dominated by men. A country with low masculinity ranking shows the country,

having a low level of differentiation and discrimination between genders. In low masculinity

cultures, women are treated equal to men in all aspects of the society.

· Uncertainty Avoidance Index (UAI) – This focuses on the degree of tolerance for uncertainty

and ambiguity within the society that is unstructured situations. A country with high uncertainty

avoidance ranking shows that the country has low tolerance for uncertainty and ambiguity. A

rule-oriented society that incorporates rules, regulations, laws, and controls is created to

minimise the amount of uncertainty. A country with low uncertainty avoidance ranking shows

that the country has less concern about ambiguity and uncertainty and has high tolerance for a

variety of opinions. A society which is less rule-oriented, readily agrees to changes, and takes

greater risks reflects a low uncertainty avoidance ranking.

· Long-Term Orientation (LTO) – Describes the range at which a society illustrates a

pragmatic future oriented perspective instead of a conventional historic or short term point of

view. The Asian countries are scoring high on this dimension. These countries have a long term

orientation, believe in many truths, accept change easily, and have thrift for investment. Cultures

recording little on this dimension, trust in absolute truth is conventional and traditional. They

have a small term orientation and a concern for stability. Many western cultures score

considerably low on this dimension.

In India, PDI is the highest Hofstede dimension for culture with a rank of 77, LTO dimension

rank is 61, and masculinity dimension rank is 62.

Every society has its own unique culture. Culture must not be imposed on individuals of different

culture. For example, the Cadbury Kraft Acquisition, 2009 was a landmark international deal, in

which a U.S. based company Kraft acquired the British chocolate giant, Cadbury which were in

complete extremes in terms of culture. Let us discuss the major cultural elements that are related

to business.

Cultural elements that relate business

The most important cultural components of a country which relate business transactions are:

· Language.

· Religion.

· Conflicting attitudes.

Cross cultural management is defined as the development and application of knowledge about

cultures in the practice of international management, when people involved have diverse cultural

identities.

International managers in senior positions do not have direct interaction that is face-to-face with

other culture workforce, but several home based managers handle immigrant groups adjusted

into a workforce that offers domestic markets.

The factors to be considered in cross cultural management are:

Cross cultural management skills

The ability to demonstrate a series of behaviour is called skill. It is functionally linked to

achieving a performance goal.

The most important aspect to qualify as a manager for positions of international responsibility is

communication skills. The managers must adapt to other culture and have the ability to lead its

members.

The managers cannot expect to force members of other culture to fit into their cultural customs,

which is the main assumption of cross cultural skills learning. Any organisation that tries to

enforce its behavioural customs on unwilling workers from another culture faces conflict. The

manager has to possess the skills linked with the following:

· Providing inspiration and appraisal systems.

· Establishing and applying formal structures.

· Identifying the importance of informal structures.

· Formulating and applying plans for modification.

· Identifying and solving disagreements.

Handling cultural diversity

Cultural diversity in a work group offers opportunities and difficulties. Economy is benefited

when the work groups are managed successfully. The organisation’s capability to draw, save,

and inspire people from diverse cultures can give the organisation spirited advantages in

structures of cost, creativity, problem solving, and adjusting to change.

Cultural diversity offers key chances for joint work and co-operative action. Group work is a

joint venture where, the production of two or more individuals or groups working in cooperation

is larger than the combined production of their individual work.

Factors controlling group creativity

On complicated problem solving jobs diverse groups do better than identical groups. Diverse

groups require time to solve issues of working together. In diverse groups, over time, the work

experience helps to overcome gender, racial, and organisational and functional discriminations.

But the impact cannot be evaluated and there is always risk in creating a diverse group. A

successful group is profitable with respect to quick results and the creation of concern for the

future. Negative stereotypes are emphasised if it fails.

Factors related with the industry and company culture are also important. Diverse groups do well

when the members:

· Assist to make group decisions.

· Value the exchange of different points of view.

· Respect each other’s skills and share their own.

· Value the chance for cross-cultural learning.

· Tolerate uncertainty and try to triumph over the inefficiencies that occur when members of

diverse cultures work together.

A diverse group is known to be more creative, where the members are tolerant of differences.

The top management level provides its moral and administrative support, and gives time for the

group to overcome the usual process difficulties. They also provide diversity training, and the

group members are rewarded for their commitment.

Ignore diversity

It may be difficult to manage diversity. It is better to ignore, which is an alternative. The

management must:

· Ignore cultural diversity within the employees.

· Down-play the importance of cultural diversity.

This rejection to identify diversity happens when management:

· Fails to have sufficient awareness and skills to identify diversity.

· Identifies diversity but does not have the skill to manage the diversity.

· Recognises the negative consequences of identifying diversity probably cause greater issues

than ignoring it.

· Thinks the likely benefits of identifying and managing diversity do not validate the expected

expenses.

· Identifies that the job provides no chances for drawing advantages from diversity.

Strategies to ignore diversity may be possible when culture groups are given various jobs, and

sharing required resources are independent in the workplace. Groups and group members are

equally incorporated and work together. In such cases, confusion occurs when the diverse value

systems are not identified that are held by different staff groups.

Q3. Cosmos Limited wants to enter international markets. Will country risk analysis help

Cosmos Limited to take correct decisions? Substantiate your answer

Answer: Country risk analysis is the evaluation of possible risks and rewards from business

experiences in a country. It is used to survey countries where the firm is engaged in international

business, and avoids countries with excessive risk. With globalisation, country risk analysis has

become essential for the international creditors and investors

Overview of Country Risk Analysis

Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border

investment. CRA represents the potentially adverse impact of a country’s environment on the

multinational corporation’s cash flows and is the probability of loss due to exposure to the

political, economic, and social upheavals in a foreign country. All business dealings involve

risks. An increasing number of companies involving in external trade indicate huge business

opportunities and promising markets. Since the 1980s, the financial markets are being refined

with the introduction of new products.

When business transactions occur across international borders, they bring additional risks

compared to those in domestic transactions. These additional risks are called country risks which

include risks arising from national differences in socio-political institutions, economic structures,

policies, currencies, and geography. The CRA monitors the potential for these risks to decrease

the expected return of a cross-border investment. For example, a multinational enterprise (MNE)

that sets up a plant in a foreign country faces different risks compared to bank lending to a

foreign government. The MNE must consider the risks from a broader spectrum of country

characteristics. Some categories relevant to a plant investment contain a much higher degree of

risk because the MNE remains exposed to risk for a longer period of time.

Analysts have categorised country risk into following groups:

· Economic risk – This type of risk is the important change in the economic structure that

produces a change in the expected return of an investment. Risk arises from the negative changes

in fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or

creation).

· Transfer risk – Transfer risk arises from a decision by a foreign government to restrict capital

movements. It is analysed as a function of a country’s ability to earn foreign currency. Therefore,

it implies that effort in earning foreign currency increases the possibility of capital controls.

· Exchange risk – This risk occurs due to an unfavourable movement in the exchange rate.

Exchange risk can be defined as a form of risk that arises from the change in price of one

currency against another. Whenever investors or companies have assets or business operations

across national borders, they face currency risk if their positions are not hedged.

· Location risk – This type of risk is also referred to as neighborhood risk. It includes effects

caused by problems in a region or in countries with similar characteristics. Location risk includes

effects caused by troubles in a region, in trading partner of a country, or in countries with similar

perceived characteristics.

· Sovereign risk – This risk is based on a government’s inability to meet its loan obligations.

Sovereign risk is closely linked to transfer risk in which a government may run out of foreign

exchange due to adverse developments in its balance of payments. It also relates to political risk

in which a government may decide not to honor its commitments for political reasons.

· Political risk – This is the risk of loss that is caused due to change in the political structure or

in the politics of country where the investment is made. For example, tax laws, expropriation of

assets, tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also

contribute to the element of political risk.

Risk assessment requires analysis of many factors, including the decision-making process in the

government, relationships of various groups in a country and the history of the country. Country

risk is due to unpredicted events in a foreign country affecting the value of international assets,

investment projects and their cash flows. The analysis of country risks distinguishes between the

ability to pay and the willingness to pay. It is essential to analyse the sustainable amount of funds

a country can borrow. Country risk is determined by the costs and benefits of a country’s

repayment and default strategies. The ways of evaluating country risks by different firms and

financial institutions differ from each other. The international trade growth and the financial

programs development demand periodical improvement of risk methodology and analysis of

country risks.

Purpose of Country Risk Analysis

Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable information.

Country risk is composed of all the uncertainty that defines the risk of country exposure. The

assessment of country risk is used to incorporate country risk in capital budgeting and modify the

discount rate.

CRA regulates the estimated cash flows and explores the main techniques used to measure a

country’s overall riskiness. It is mainly used by MNCs, in order to avoid countries with

excessive risk. It can be used to monitor countries where the MNC is engaged in international

business. Analysing the country risk helps in evaluating the risk for a planned project considered

for a foreign country and assesses gain and loss possibility outcomes of cross-border investment

or export strategy.

Country detailed risk refers to the unpredictability of returns on international business

transactions in view of information associated with a particular country. The techniques used by

the banks and other agencies for country risk analysis can be classified as qualitative or

quantitative. Many agencies merge both qualitative and quantitative information into a single

rating. A survey conducted by the US EXIM bank classified the various methods of country risk

assessment used by the banks into four types. They are:

· Fully qualitative method – The fully qualitative method involves a detailed analysis of a

country. It includes general discussion of a country’s economic, political, and social conditions

and prediction. Fully qualitative method can be adapted to the unique strengths and problems of

the country undergoing evaluation.

· Structured qualitative method – The structured method uses a uniform format with

predetermined scope. In structured qualitative method, it is easier to make comparisons between

countries as it follows a specific format across countries. This technique was the most popular

among the banks during the late seventies.

· Checklist method – The checklist method involves scoring the country based on specific

variables that can be either quantitative, in which the scoring does not need personal judgment of

the country being scored or qualitative, in which the scoring needs subjective determinations. All

items are scaled from the lowest to the highest score. The sum of scores is then used to determine

the country risk.

· Delphi technique – The technique involves a set of independent opinions without group

discussion. As applied to country risk analysis, the MNC can assess definite employees who

have the capability to evaluate the risk characteristics of a particular country. The MNC gets

responses from its evaluation and then may determine some opinions about the risk of the

country.

· Inspection visits – Involves travelling to a country and conducting meeting with government

officials, business executives, and consumers. These meetings clarify any vague opinions the

firm has about the country.

· Other quantitative methods – The quantitative models used in statistical studies of country

risk analysis can be classified as discriminant analysis, principal component analysis, logit

analysis and classification and regression tree method

Data sourcing

The basic data is important to analyse a country. The economic, financial and currency risk

components are based on the variables (quantitative and qualitative variables). The variables

must consider the particularities of each country and the needs of the model used. The standard

variables are used to maintain the regular analysis comparable with similar works of other

countries. Therefore, the first step is to make sure that the historical series of official data are

reliable, consistent and comparable. The standard economic variables that are found mainly in

the varied approach adopted by financial institutions and rating agencies, are associated with the

country’s real ability to repay its commitments. The balance of payments (summary account of

economic transactions among a country and the others nations of the world, during a period) and

its evolution through the years means a strong source of data. The exchange rate (currency risk)

is another important variable considered, as it balances the transactions (balances the prices of

goods, services, and capital) between residents and non-residents. The analysis must consider the

historical behavior of the exchange rate and the policy which made clear whether the country

follows a rational economics approach or it uses the exchange rate as a tool to maintain a forced

macroeconomic equilibrium.

Apart from the macroeconomic variables which deal with the external sector of the economy,

there are some other relevant variables such as the interest rate, level of investments, public debt

and its service, internal savings, consumption, GDP or GNP, money supply, inflation rate and so

on.

The analysis must be accomplished with qualitative variables, which consider social aspects as

population, life expectancy, rate of birthday, rate of unemployment, level of literacy and so on.

The social-political aspects are necessary for all kind of analysis as they describe the whole

setting of the running economy.

Tools

The risk management demands a regular follow up regarding governmental policies, external and

internal environment, outlook provided by rating agencies, and so on. Following are the tools

recommended:

· Chain of value – Includes the main countries that sustain trade relationships with the nation,

broken by sectors and products.

· Strength and weakness chart – Focus the key aspects that warn the country.

· Table of financial markets performance – Follow up the behavior of bonds and stocks

already issued and to be issued.

· Table of macroeconomic variables – Provides alert signals when the behavior of any ratio

presents a relevant change.

The content of country risk analysis mainly involves country history, corporate risk,

dependency level, external environment, domestic financial system, ratios for economic risk

evaluation and strength and weakness chart.

Country history

The historical brief helps to identify aspects that interfere in the future behavior of the country,

reducing the ability to payback any external commitment. The main historical data provides a

good understanding of the key factors which draw the behaviour of the society, the government,

the private sector, the legal environment, the economical, political, and the relationships to

neighbour nations and the world as a whole.

Corporate risk

Both country risk studies and business risk analysis enhances wealth from the available

resources, in terms of capital, natural resources, technology and labour forces. This clarifies that

those kind of analysis procures extensive knowledge from the business approach for companies,

including financial theory.

Dependency level

The next step after the history in brief, is a clear definition about how the country is positioned in

the world in terms of its wide relationships, economic block in which it belongs to, importance of

international trade and so on. All these aspects are significant to identify the dependency level of

the country. The financial dependency to meet the needs of a country is also a strong concern for

the analyst. In this case, the maturity of debts (internal and external) and the available sources of

financing also help to measure the freedom grades of the country.

External environment

The external trade is an important factor to the development of societies. Globalisation has

brought international business to the center of the discussions and the external environment has

become vital for all countries.

Thus, a complete vision on economic trends, the behavior of financial markets, the forecasts for

conflicts among nations, the improvement of the economic blocks, the level of openness of the

world economy, financial crisis and international liquidity is a framework over which the

analysis must start.

Domestic financial system

The banking sector has implemented many actions to avoid losses, after the international crisis.

Basel Committee has defined some strong measures to be followed by the financial houses and

Central Banks are trying to monitor their jurisdictions. Apart from those procedures, recently

Asia and Turkey crisis have shown that the inspection is not enough to keep the reliability of

some domestic system. The international banks had developed many tools to deal with

international crisis. When domestic banks do not have a consistent risk management policies and

adequate provisions to theirs credits, the country risk happens to be the worst. Therefore, the

analysis must consider the health of the domestic financial system, by evaluating information

provided by the Central Banks and, from the principal banks of the country. Accessing Centrals

Bank policies and supervising procedures also help to evaluate the health of the financial system.

Ratios for economic risk evaluation

Cross-border economic risk analysis evaluates the probable macroeconomic ratios among some

variables. They can be separated into two groups such as domestic and external. The figures

must be presented in historic series (at least five years) to provide information about its progress,

which can be real values, percentages, or relations. The mainly used ratios and variables in case

of domestic economy are the following:

· Gross domestic product (GDP) –· GDP per capita –· GDP growth rate –· Unemployment

rate –· Internal savings or GDP –· Investment or GDP –· Gross domestic fixed investment

or variation of GDP – Gini Index –· Growth domestic fixed investment or gross domestic

savings –.· Budget deficit or GDP –· Internal debt or GDP –

The monetary policy is essential as it deals with the price stability. An economy which presents

less instability in its prices of goods and services, provides huge facilities to decision makers

based on their predictions to expected returns of investments and a firm social, economical and

political environment. All these aspects request a systematic approach over price indicators such

as the following:

· Real interest rate –· Percentage increase in the money supply The mainly used ratios and

variables in case of external economy are the following:

· External debt or GDP –· Short term debts and reserves –· Exchange currency rate –·

External debt services and exports –.

Strength and weakness chart

In order to explain the significant aspects provided by the analysis, the strength and weakness

chart can be used to merge each strength and weakness with the related scenario. is a model of

relationships among several variables (quantitative and qualitative) to show their

interdependency and the complexity of analysis.

Q4. How can managers in international companies adjust to the ethical factors influencing

countries? Is it possible to establish international ethical codes? Briefly explain?

Answer: Ethics can be defined as the evaluation of moral values, principles, and standards of

human conduct and its application in daily life to determine acceptable human behaviour.

Business ethics pertains to the application of ethics to business, and is a matter of concern in the

corporate world. Business ethics is almost similar to the generally accepted norms and principles.

Behaviour that is considered unethical and immoral in society, for example dishonesty, applies to

business as well.

Managers are influenced by three factors affecting ethical values. These factors have unique

value systems that have varying degrees of control over managers.

Religion – Religion is one of the oldest factors affecting ethics. Despite the differences in

religious teachings, religions agree on the fundamental principles and ethics. All major religions

preach the need for high ethical standards, an orderly social system, and stress on social

responsibility as contributing factors to general well-being.

Culture – Culture refers to a set of values and standards that defines acceptable behaviour

passed on to generations. These values and standards are important because the code of conduct

of people reflects on the culture they belong to. Civilisation is the collective experience that

people have passed on through three distinct phases: the hunting and gathering phase, agriculture

phase, and the industrial phase. These phases reflect the changing economic and social

arrangements in human history.

Law – Law refers to the rules of conduct, approved by the legal system of a country or state that

guides human behaviour. Laws change and evolve with emerging and changing issues. Every

organisation is expected to abide the law, but in the pursuit of profit, laws are frequently

violated. The most common breach of law in business is tax evasion, producing inferior quality

goods, and disregard for environmental protection laws.

Ethics is significant in all areas of business and plays an important role in ensuring a successful

business. The role of business ethics is evident from the conception of an idea to the sale of a

product. In an organisation, every division such as sales and marketing, customer service,

finance, and accounting and taxation has to follow certain ethics.

Public image – In order to gain public confidence and respect, organisations must ascertain that

they are honest in their transactions. The services or products of a business affect the lives of

thousands of people. It is important for the top management to impart high ethical standards to

their employees, who develop these services or products.

A company that is ethically and socially responsible has a better public image. People tend to

favour the products and services of such organisations. Investors’ trust is just as important as

public image for any business. A company that practices good ethical creates a positive

impression among its stakeholders.

Management’s credibility with employees – Common goals and values are developed when

employees feel that the management is ethical and genuine. Management’s credibility with

employees and the public are intertwined. Employees feel proud to be a part of an organisation

that is respected by the public. Generous compensations and effective business strategies do not

always guarantee employee loyalty; organisation ethics is equally significant. Thus, companies

benefit from being ethical because they attract and retain good and loyal employees.

Better decision-making – Decisions made by an ethical management are in the best interests of

the organisation, its employees, and the public. Ethical decisions take into account various social,

economic and ethical factors.

Profit maximisation – Companies that emphasise on ethical conduct are successful in the long

run, even though they lose money in the short run. Hence, a business that is inspired by ethics is

a profitable business. Costs of audit and investigation are lower in an ethical company.

Protection of society – In the absence of proper enforcement, organisations are responsible to

practice ethics and ensure mechanisms to prevent unlawful events. Thus, by propagating ethical

values, a business organisation can save government resources and protect the society from

exploitation.

Most countries have similar ethical values, but are practiced differently. This section deals with

the way individuals in different countries approach ethical issues, and their ethically acceptable

behaviour. With the rise in global firms, issues related to ethical values and traditions become

more common. These ethical issues create complications to Multi-National Companies (MNCs)

while dealing with other countries for business. Hence, many companies have formulated well-

designed codes of conduct to help their employees.

Two of the most prominent issues that managers in MNCs operating in foreign countries face are

bribery and corruption and worker compensation.

Bribery and corruption – Bribery can be defined as the act of offering, accepting, or soliciting

something of value for the purpose of influencing the action of officials in the discharge of their

duties. Corruption is the abuse of public office for personal gain. The issue arises when there are

differences in perception in different countries. For example, in the Middle East, it is perfectly

acceptable to offer an official a gift. In Britain it is considered as an attempt to bribe the official,

and hence, considered unlawful.

Worker compensation – Businesses invest in production facilities abroad because of the

availability of low-cost labour, which enables them to offer goods and services at a lower price

than their competitors. The issue arises when workers are exploited and are underpaid compared

to the workers in the parent country who are paid more for the same job. The disparity arises due

to the differences in the regulatory standards in the two countries.

Earlier, we believed that ethics is a prerogative of individuals, but now this perception has

immensely changed. Many companies use management techniques to encourage ethical

behaviour at an organisational level.

Code of conduct for MNCs

The code of conduct for MNCs refers to a set of rules that guides corporate behaviour. These

rules prescribe the duties and limitations of a manager. The top management must communicate

the code of conduct to all members of the organisation along with their commitment in enforcing

the code.

Some of the ethical requirements for international companies are as follows:

· Respect basic human rights.

· Minimise any negative impact on local economic policies.

· Maintain high standards of local political involvement.

· Transfer technology.

· Protect the environment.

· Protect the consumer.

· Employ labour practices that are not exploitative.

When a manager of an international firm faces an ethical problem, certain models help in solving

these ethical issues

Culture is a major factor which influences marketing decisions and practices in a foreign

country. For example, in the middle-eastern countries the prior approval of the governing

authorities should be taken if a firm plans to advertise a product related to women’s apparel, as

showcasing some aspects of women clothing is considered immodest and immoral

Q.5 Discuss the international marketing strategies. How is it different from domestic

marketing strategies?

Answer:

International marketing refers to marketing of goods and products by companies overseas or

across national borderlines. The techniques used while dealing overseas is an extension of the

techniques used in the home country by the company.

Taking into account the various conditions on which markets vary and depend, appropriate

marketing strategies should be devised and adopted. Like, some countries prevent foreign firms

from entering into its market space through protective legislation. Protectionism on the long run

results in inefficiency of local firms as it is inept towards competition from foreign firms and

other technological advancements. It also increases the living costs and protects inefficient

domestic firms.

To counter this scenario firms must learn how to enter foreign markets and increase their global

competitiveness. Firms that plan to do business in foreign land find the marketplace different

from the domestic one. Market sizes, customer preferences, and marketing practices all vary;

therefore the firms planning to venture abroad must analyse all segments of the market in which

they expect to compete.

The decision of a firm to compete internationally is strategic; it will have an effect on the firm,

including its management and operations locally. The decision of a firm to compete in foreign

markets has many reasons. Some firms go abroad as the result of potential opportunities to

exploit the market and to grow globally. And for some it is a policy driven decision to globalise

and to take advantage by pressurising competitors.

But, the decision to compete abroad is always a strategic down to business decision rather than

simply a reaction. Strategic reasons for global expansion are:

· Diversifying markets that provide opportunistic global market development.

· Following customers abroad (customer satisfaction).

· Exploiting different economic growth rates.

· Pursuing a global logic or imperative to harvest new markets and profits.

· Pursuing geographic diversification.

· Globalising for defensive reasons.

· Exploiting product life cycle differences (technology).

· Pursuing potential abroad.

Likewise, there can be other reasons like competition at home, tax structures, comparative

advantage, economic trends, demographic conditions, and the stage in the product life cycle. In

order to succeed, a firm should carefully look at their geographic expansion and global

marketing strategy. To a certain extent, a firm makes a decision about its extent of globalisation

by taking a stance that may span from entirely domestic to a global reach where the company

devotes its entire marketing strategy to global competition. In the process of developing an

international marketing strategy, the firm may decide to do business in its home-country

(domestic operations) only or host-country (foreign country) only.

Segmentation

Firms that serve global markets can be segregated into several clusters based on their similarities.

Each such cluster is termed as a segment. Segmentation helps the firms to serve the markets in an

improved way. Markets can be segmented into nine categories, but the most common method of

segmentation is on the basis of individual characteristics, which include the behavioural,

psychographic, and demographic segmentations. The basis of behavioural segmentation is the

general behavioural aspects of the customers. Demographic segmentation considers the factors

like age, culture, income, education and gender. Psychographic segmentation takes into account:

beliefs, values, attitudes, personalities, opinions, lifestyles and so on.

Market positioning

The next step in the marketing process is, the firms should position their product in the global

market. Product positioning is the process of creating a favourable image of the product against

the competitor’s products. In global markets product positioning is categorised as high-tech or

high–touch positioning.

One challenge that firms face is to make a trade-off between adjusting their products to the

specific demands of a country and gaining advantage of standardisation such as the maintenance

of a consistent global brand image and cost savings. This is task is not easy.

International product policy

Some thinkers of the industry tend to draw a distinction between conventional products and

services, stressing on service characteristics such as heterogeneity (variation in standards among

providers, frequently even among different locations of the same firm), inseparability from

consumption, intangibility, and perishability. Typically, products are composed of some service

component like, documentation, a warranty, and distribution. These service components are an

integral part of the product and its positioning.

Firms have a choice in marketing their products across markets. Many a times, firms opt for a

strategy which involves customisation, through which the firm introduces a unique product in

each country, believing that tastes differ so much between countries that it is necessary to create

a new product for each market. On the other hand, standardisation proposes the marketing of one

global product, with the belief that the same product can be sold in different countries without

significant changes. For example, Intel microprocessors are the same irrespective of the country

in which they are sold.

Finally, in most cases firms will go for some kind of adaptation. Here, when moving a product

between markets minor modifications are made to the product. For example, in U.S. fuel is

relatively cheap, therefore cars have larger engines than the cars in Asia and Europe; and then

again, much of the design is identical or similar.

International pricing decisions

Pricing is the process of ascertaining the value for the product or service that will be offered for

sale.

In international markets, making pricing decisions is entangled in difficulties as it involves trade

barriers, multiple currencies, additional cost considerations, and longer distribution channels.

Before establishing the prices, the firm must know its target market well because when the firm

is clear about the market it is serving, then it can determine the price appropriately. The pricing

policy must be consistent with the firms overall objectives. Some common pricing objectives are:

profit, return on investment, survival, market share, status quo, and product quality.

The strategies for international pricing can be classified into the following three types:

· Market penetration· Market holding: · Market skimming:

The factors that influence pricing decisions are inflation, devaluation and revaluation, nature of

product or industry and competitive behaviour, market demand, and transfer pricing.

The approach taken by company towards pricing when operating in international markets are

ethnocentric, polycentric, and geocentric.

Price can be defined by the following equation:

The pricing decision enables us to change the price in many ways, some of them are:

· “Sticker” price changes –. · Change quantity –· Change quality –· Change terms –

Transfer pricing

Transfer pricing is the process of setting a price that will be charged by a subsidiary (unit) of a

multi-unit firm to another unit for goods and services, which are sold between such related units.

Transfer pricing is determined in three ways: market based pricing, transfer at cost and cost-plus

pricing. The Arm’s Length pricing rule is used to establish the price to be charged to the

subsidiary.

Many managers consider transfer pricing as non-market based. The reason for transfer pricing

may be internal or external. Internal transfer pricing include motivating managers and

monitoring performance. External factors include taxes, tariffs, and other charges.

Transfer Pricing Manipulation (TPM) is used to overcome these reasons. Governments usually

discourage TPM since it is against transfer pricing, where transfer pricing is the act of pricing

commodities or services. However, in common terminology, transfer pricing generally refers

TPM.

International advertising

International advertising is usually associated with using the same brand name all over the world.

However, a firm can use different brand names for historic reasons. The acquisition of local

firms by global players has resulted in a number of local brands. A firm may find it unfavourable

to change those names as these local brands have their own distinctive market.

The purpose of international advertising is to reach and communicate to target audiences in more

than one country. The target audience differ from country to country in terms of the response

towards humour or emotional appeals, perception or interpretation of symbols and stimuli and

level of literacy. Sometimes, globalised firms use the same advertising agencies and centralise

the advertising decisions and budgets. In other cases, local subsidiaries handle their budget,

resulting in greater use of local advertising agencies.

International advertising can be thought of as a communication process that transpires in

multiple cultures that vary in terms of communication styles, values, and consumption patterns.

International advertising is a business activity and not just a communication process. It involves

advertisers and advertising agencies that create ads and buy media in different countries. This

industry is growing worldwide. International advertising is also reckoned as a major force that

mirrors both social values, and propagates certain values worldwide.

International promotion and distribution

Distribution of goods from manufacturer to the end user is an important aspect of business.

Companies have their own ways of distribution. Some companies directly perform the

distribution service by contacting others whereas a few companies take help from other

companies who perform the distribution services. The distribution services include:

· The purchase of goods.

· The assembly of an attractive assortment of goods.

· Holding stocks.

· Promoting sale of goods to the customer.

· The physical movement of goods.

In international marketing, companies usually take the advantage of other countries for the

distribution of their products. The selection of distribution channel is helpful to gain the

competitive advantage. The distribution channel is also dependent on the way to manage and

control the channel. Selecting the distribution channel is very important for agents and

distributors.

Domestic vs. International marketing

Domestic marketing refers to the practice of marketing within a firm’s home country. Whereas

International or foreign marketing is the practice of marketing in a foreign country; the

marketing is for the domestic operations of the firm in that country.

Domestic marketing finds the "how" and "why" a product succeeds or fails within the firm’s

home country and how the marketing activity affects the outcome. Whereas, foreign marketing

deals with these questions and tries to find answers according to the foreign market conditions

and it provides a micro view of the market at the firm’s level.

In domestic marketing a firm has insight of the marketing practices, culture, customer

preferences, climate and so on of its home country, while it is not totally aware of the policies

and the market conditions of the foreign country.

The stages that have led to achieve global marketing are:

· Domestic marketing – Firms manufacture and sell products within the country. Hence, there is

no international phenomenon.

· Export marketing – Firms start exporting products to other countries. This is a very basic

stage of global marketing. Here, the products are developed based on the company’s domestic

market although the goods are exported to foreign countries.

· International marketing – Now, Firms start to sell products to various countries and the

approach is ‘polycentric’, that is, making different products for different countries.

· Multinational marketing – In this stage, the number of countries in which the firm is doing

business gets bigger than that in the earlier stage. And hence, the company identifies the regions

to which the company can deliver same product instead of producing different goods for

different countries. For example, a firm may decide to sell same products in India, Sri lanka and

Pakistan, assuming that the people living in this region have similar choice and at the same time

offering different product for American countries. This approach is termed ‘regiocentric

approach’.

· Global marketing – Company operating in various countries opts for a common single product

in order to achieve cost efficiencies. This is achieved by analysing the requirements and the

choice of the customers in those countries. This approach is called ‘Geocentric approach’.

The practice of marketing at the international stage does not designate any country as domestic

or foreign. The firm is not considered as the corporate citizen of the world as it has a home base.

The firm must not have a ’single marketing plan’, because there are differences between the

target markets (that is domestic or international markets). There should never be a rigid

marketing campaign. A firm that is successful internationally first obtains success locally.

Few approaches that you can consider for an international marketing are:

· Advertise as a foreign product – By doing so, the product will be considered as genuine and

original in some countries.

· Joint partnership with a local firm – finding a firm that has already established credibility

will benefit a lot. The product will be considered as a local product by following this marketing

approach.

· Licensing – You can sell the rights of your product to a foreign firm. Here the problem is that

the firm may not maintain the quality standard and therefore may hurt the image of the brand.

Culture is a major factor which influences marketing decisions and practices in a foreign

country. For example, in the middle-eastern countries the prior approval of the governing

authorities should be taken if a firm plans to advertise a product related to women’s apparel, as

showcasing some aspects of women clothing is considered immodest and immoral.

Q.6 Explain briefly the international financial management components with examples and

applicability

Answer: The term ‘Financial Management’ refers to the proper maintenance of all the monetary

transactions of the organisation. It also means recording of transactions in a standard manner that

will show the financial position and performance of the organisation. The Financial Management

can be categorised into domestic and international financial management.

The domestic financial management refers to managing financial services within the country.

International financial management refers to managing finance and share between the countries.

The main aim of international finance management is to maximise the organisation’s value that

in turn will increase the impact on the wealth of the stockholders. When the doors of

liberalisation opened, entrepreneurs capitalised the opportunity to step their foot to conduct

business in different parts of the world.

International trade gave way for the growth of international business. For a corporation to be

successful, it is vital to manage the finance and business accounts appropriately. The rise in

significance and complexity of financial administration in a global environment creates a great

challenge for financial managers. The contributions of different financial innovations like

currency derivative, international stock listing, and multicurrency bonds have necessitated the

accurate management of the flow of international funds through the study of international

financial management.

The International Financial Management (IFM) came to its existence when the countries all over

the world started opening their doors for each other. This phenomenon is also called as

liberalisation. But after the end of the Second World War, the integration in terms of foreign

activities has grown substantially. The firms of all types are now opting to operate their business

and deploy their resources abroad. Furthermore, the differences between the countries have

persisted that has given rise to the prevalence of market imperfections

Components of International Financial Management

Foreign exchange market

The Foreign exchange or the forex markets facilitates the participants to obtain, trade, exchange

and speculate foreign currency. The foreign exchange market consists of banks, central banks,

commercial companies, hedge funds, investment management firms and retail foreign exchange

brokers and investors. It is considered to be the leading financial market in the world. It is vital to

realise that the foreign exchange is not a single exchange, but is created from a global network of

computers that connects the participants from all over the world.

The foreign exchange market is immense in size and survives to serve a number of functions

ranging from the funding of cross-border investment, loans, trade in goods, trade in services and

currency speculation. The participant in a foreign exchange market will normally ask for a price.

The trading in the foreign exchange market may take place in the following forms:

· Outright cash or ready – foreign exchange currency deals that take place on the date of the

deal.

· Next day – foreign exchange currency deals that take place on the next working day.

· Swap – Simultaneous sale and purchase of identical amounts of currency for different

maturities.

· “Spot” and “Forward” contracts – A Spot contract is a binding obligation to buy or sell a

definite amount of foreign currency at the existing or spot market rate. A forward contract is a

binding obligation to buy or sell a definite amount of foreign currency at the pre-agreed rate of

exchange, on or before a certain date.

The advantage of spot dealing has resulted in a simplest way to deal with all foreign currency

requirements. It carries the greatest risk of exchange rate fluctuations due to lack of certainty of

the rate until the deal is carried out. The spot rate that is intended to receive will be set by current

market conditions, the demand and supply of currency being traded and the amount to be dealt.

In general, a better spot rate can be received if the amount of dealing is high. The spot deal will

come to an end in two working days after the deal is struck.

A forward market needs a more complex calculation. A forward rate is based on the existing spot

rate plus a premium or discounts which are determined by the interest rate connecting the two

currencies that are involved. For example, the interest rates of UK are higher than that of US and

therefore a modification is made to the spot rate to reflect the financial effect of this differential

over the period of the forward contract. The duration will be up to two years for a forward

contract. A variation in foreign exchange markets can be affected to any company whether or not

they are directly involved in the international trade or not. This is often referred to as ‘Economic’

foreign exchange and most difficult to protect a business.

The three ways of managing risks are as follows:

· Choosing to manage risk by dealing with the spot market whenever the need of cash flow rises.

This will result in a high risk and speculative strategy since one will not know the rate at which a

transaction is dealt until the day and time it occurs. Managing the business becomes difficult if it

depends on the selling or buying the currency in the spot market.

· The decision must be made to book a foreign exchange contract with the bank whenever the

foreign exchange risk is likely to occur. This will help to fix the exchange rate immediately and

will give a clear idea of knowing the exact cost of foreign currency and the amount to be

received at the time of settlement whenever this due occurs.

· A currency option will prevent unfavourable exchange rate movements in the similar way as a

forward contract does. It will permit gains if the markets move as per the expectations. For this

base, a currency option is often demonstrated as a forward contract that can be left if it is not

followed. Often banks provide currency options which will ensure protection and flexibility, but

the likely problem to arise is the involvement of premium of particular kind. The premium

involved might be a cash amount or it could also influence into the charge of the transaction.

Foreign currency derivatives

Currency derivative is defined as a financial contract in order to swap two currencies at a

predestined rate. It can also be termed as the agreement where the value can be determined from

the rate of exchange of two currencies at the spot. The currency derivative trades in markets

correspond to the spot (cash) market. Hence, the spot market exposures can be enclosed with the

currency derivatives. The main advantage from derivative hedging is the basket of currency

available.

Figure 1 describes the examples of currency derivatives. The derivatives can be hedged with

other derivatives. In the foreign exchange market, currency derivatives like the currency features,

currency options and currency swaps are usually traded. The standard agreement made in order

to buy or sell foreign currencies in future is termed as currency futures. These are usually traded

through organised exchanges. The authority to buy or sell the foreign currencies in future at a

specified rate is provided by currency option. These will help the businessmen to enhance their

foreign exchange dealings. The agreement undertaken to exchange cash flow streams in one

currency for cash flow streams in another currency in future is provided by currency swaps.

These will help to increase the funds of foreign currency from the cheapest sources.

Figure 1: Example for Foreign Currency Derivatives

Some of the risks associated with currency derivatives are:

· Credit risk takes place, arising from the parties involved in a contract.

· Market risk occurs due to adverse moves in the overall market.

· Liquidity risks occur due to the requirement of available counterparties to take the other side of

the trade.

· Settlement risks similar to the credit risks occur when the parties involved in the contract fail to

provide the currency at the agreed time.

· Operational risks are one of the biggest risks that occur in trading derivatives due to human

error.

· Legal risks pertain to the counterparties of currency swaps that go into receivership while the

swap is taking place.

International monetary systems

The international monetary systems represent the set of rules that are agreed internationally

along with its conventions. It also consists of set of rules that govern international scenario,

supporting institutions which will facilitate the worldwide trade, the investment across cross-

borders and the reallocation of capital between the states.

International monetary systems provide the mode of payment acceptable between buyers and

sellers of different nationality, with addition to deferred payment. The global balance can be

corrected by providing sufficient liquidity for the variations occurring in trade. Thereby it can be

operated successfully.

The gold and gold bullion standards

The gold standard was the first modern international system. It was operating during the late 19th

and early 20th centuries, the standard provided for the free circulation between nations of gold

coins of standard specification. The gold happened to be the only standard of value under the

system. The advantages of this system depend in its stabilising influence. Any nation which

exports more than its import would receive gold in payment of the balance. This in turn has

resulted in the lowered value of domestic currency. The higher prices lead to the decreased

demands for exports. The sudden increase in the supply of gold may be due to the discovery of

rich deposit, which in turn will result in the increase of price abruptly.

This standard was substituted by the gold bullion standard during the 1920s; thereby the nations

no longer minted gold coins. Instead, reversed their currencies with gold bullion and determined

to buy and sell the bullion at a fixed cost. This system was also discarded in the 1930s.

The gold-exchange system

Trading was conducted internationally with respect to the gold-exchange standard following

World War II. In this system, the value of the currency is fixed by the nations with respect to

some foreign currency but not with respect to gold. Most of the nations fixed their currency to

the US dollar funds in the United States. With a view to maintain a stable exchange rate at the

global level, the International Monetary Fund (IMF) was created at the ‘Bretton Woods

international Conference’ held in 1944. The drain on the US gold reserves continued up to the

1970s. Later in 1971, the gold convertibility was abandoned by the United States leaving the

world without a single international monetary system.

Floating exchange rates and recent development

After the abundance of the gold convertibility by the US, the IMF in 1976 decided to be in

agreement on the float exchange rates. The gold standard was suspended and the values of

different currencies were determined in the market. The ‘Japanese yen’ and the ‘German

Deutschmark’ strengthened and turned out to be increasingly important in international financial

market, at the same time the US dollar diminished its significance. The Euro was set up in

financial market in 1999 as a replacement for the currencies. Hence, it became the second most

commonly used currency after the dollar in the international market. Many large companies opt

to use euro rather than the dollar in bond trading with a goal to receive better exchange rates.

Very recently the some of the members of Organisation of Petroleum Exporting Countries

(OPEC) such as Saudi Arabia, Iraq have opted to trade petroleum in Euro than in Dollar.

International financial markets

International foreign markets provide links connecting the financial markets of each country and

independent markets external to the authority of any one country. The heart of the international

financial market is being governed by the market of currency where the foreign currency is

denominated by the international trade and investment. Hence the purchase of goods and services

is preceded by the purchase of currency.

The purpose of the foreign currency markets, international money markets, international capital

markets and international securities markets are as follows:

· The foreign currency markets – The foreign currency market is an international market that is

familiar in structure. This means that there exists no central place where the trading can take

place. The ’market’ is actually the telecommunications like among financial institutions around

the globe and opens for business at any time. The greater part of the worlds that deal in foreign

currencies is still taking position in the cities where international financial activity is centred.

· International money markets – A money market can be conventionally defined as a market

for accounts, deposits or deposits that include maturities of one year or less. This is also termed

as the Euro currency markets which constitute an enormous financial market that is beyond the

influence and supervision of world financial and government authorities. The Euro currency

market is a money market for depositing and borrowing money located outside the country

where that money is officially permitted tender. Also, Euro currencies are bank deposits and

loans existing outside any particular country.

· International capital markets – The international capital provides links among the capital

markets of individual countries. It also comprises a separate market of their own, the capital

market that flows in to the Euro markets. The firms enjoy the freedom to raise capital, debit,

fixed or floating interest rates and maturities varying from one month to thirty years in an

international capital markets.

· International security markets – The banks have experienced the greatest growth in the past

decade because of the continuity in providing large portion of the international financial needs of

the government and business. The private placements, bonds and equities are included in the

international security market.

The following are the reasons given for the enormous growth in the trading of foreign currency:

· Deregulation of international capital flows – Without the major government restrictions, it is

extremely simple to move the currencies and capital around the globe. The majority of the

deregulation that has differentiated government policy over the past 10 to 15 years.

· Gain in technology and transaction cost efficiency – The advancements in technology is not

only taking place in the distribution of information, in addition to the performance of exchange

or trading. This has resulted greatly to the capacity of individuals on these markets to accomplish

instantaneous arbitrage.

· Market upwings – The financial markets have become increasingly unstable over recent years.

There are faster swings in the stock values and interest rates, adding to the enthusiasm for

moving further capital at faster rates.

The scope of international financial management includes management of working capital,

financing decisions and taxation.

1 .What is WTO? Explain its objectives, functions and structure(10 marks)

Ans: WTO

World Trade Organisation (WTO). WTO was established on 1st January 1995. In April 1994, the

Final Act was signed at a meeting in Marrakesh, Morocco. The Marrakesh Declaration of 15th

April 1994 was formed to strengthen the world economy that would lead to better investment,

trade, income growth and employment throughout the world. The WTO is the successor to the

General Agreement of Tariffs and Trade (GATT). India is one of the founder members of WTO.

WTO represents the latest attempts to create an organisational focal point for liberal trade

management and to consolidate a global organisational structure to govern world affairs. WTO

has attempted to create various organisational attentions for regulation of international trade.

WTO created a qualitative change in international trade. It is the only international body that

deals with the rules of trades between nations.

The WTO agreements are a set of rules that are followed by the member governments while

formulating policies and practices in the area of international trade. The agreements mainly cover

goods, services and intellectual property. The agreements comprise the rights and obligations of

the government that are enforceable in multilateral framework. The agreement supports

individual countries’ commitments to lower customs tariffs and other trade barriers, and to open

services markets. The agreements recommend governments to make their trade policies

transparent. According to the agreement, the government must notify the WTO about the

measures adopted to make their trade policies transparent

Objectives and functions

The key objective of WTO is to promote and ensure international trade in developing countries.

The other major functions include:

· Helping trade flows by encouraging nations to adopt discriminatory trade policies.

· Promoting employment, expanding productions and trade and raising standard of living and

income and utilising the world’s resources.

· Ensuring that developing countries secure a better share of growth in world trade.

· Providing forum for trade negotiations.

· Resolving trade disputes.

The important functions of the WTO as stated in the WTO agreement are the following:

· Developing transitional economies – Majority of the WTO members belong to developing

countries. The developing countries such as India, China, Mexico, Brazil and others have an

important role in the organisation. The WTO helps in solving the problems of developing

economies. The developing states are provided with trade and tariff data. This depends on the

country’s individual export interest and their participation in WTO-bodies. The new members

benefit hugely from these services.

· Providing help for export promotion – The WTO provides specialised help for export

promotion to its members. The export promotion is done through the International Trade Center

established by the GATT in 1964. It is operated by the WTO and the United Nations. The center

accepts requests from member countries, usually developing countries for support in formulating

and implementing export promotion programmes. The center provides information on export

market and marketing techniques. The center also provides assistance in establishing export

promotion and marketing services. Through this WTO proves its commitment in the upliftment

of the world economy.

· Cooperating in global economic policy-making – The main function of the WTO is to

cooperate in global economic policy-making. In the Marrakesh Ministerial Meeting in April

1994, a separate declaration was adopted to achieve this objective. The declaration specifies the

responsibility of WTO as, to improve and maintain the cooperation with international

organisations such as the World Bank, International Monetary Fund (IMF) that are involved in

monetary and financial matters. WTO analyses the impact of liberalisation on the growth and

development of national economies which is the important factor in the success of the economy.

· Monitoring implementation of the agreement – The WTO administers sixty different

agreements that have the statue of international legal documents. The member-governments sign

and confirm all WTO agreements on attainment.

· Providing forum for negotiations – The WTO provides a permanent forum for negotiations

among members. The negotiations can be on matters already in the WTO agreements or matters

not addressed in the WTO law.

· Administrating dispute settlement – The important function of WTO is the administration of

the WTO dispute settlement system. It helps in settling multilateral trading dispute. A dispute

arises when a member country adopts a trade policy and other fellow members consider it as a

violation of WTO agreements. The Dispute Settlement Body (DSB) is responsible for the

settlement of disputes. The dispute settlement system is prohibited from adding or deleting the

rights and obligations provided in the WTO agreements. The WTO dispute settlement system

helps to:

° Preserve the rights and responsibilities of the members.

° Clarify the current provisions of the agreements.

Structure

The structure of the WTO consists of the Ministerial Conference, which is the highest authority.

This body consists of the representatives from all WTO members. The WTO members meet in

every two years and take decisions on all matters under the multilateral trade agreements. The

daily activities of the WTO are conducted by subsidiary bodies and principally by the General

Council which is composed of WTO members. The members report to the Ministerial

Conference. The General Council on behalf of the Ministerial Conference administers as the

Dispute Settlement Body to manage the dispute settlement procedures. It also acts as the Trade

Policy Review Body that conducts regular reviews of the trade policies of the individual WTO

members.

Q.2 Explain briefly the nature of e-business and the challenges involved. (10 marks)

Ans: Nature of E-Business

E-business can be defined as "the use of networks and information technology in order to

electronically design, market, buy, sell and deliver products and services worldwide". E-

business, meaning ‘electronic-business’, deals with application of information and

communication technologies, in short an electronic medium in support of all the activities of

business.

The e-business mainly stands for the internet enabled business. There are four entities in the

internet enabled business. These four entities are as shown in the figure 11.1.

The Challenges of E-Business

E-business is crucial to business success. Many companies come out with changes that are

necessary for e-business to become profitable. The process of e-business is long lasting than that

of the re-engineering. There are some important trends in the e-business that are described as

follows:

· Technology focus is on e-business – The hardware, software, and network vendors, focus on

providing the tools for e-business. The e-business is mainly the extension of the products and

services.

· E-business produces cumulative effects – E-business is long lasting. The relationship with

customers, suppliers, and employees changes as we implement e-business.

· E-business implementation effects success and failure of a business – There will be both the

success and the failures that are associated with any kind of business. The failures become

dramatic with e-business as it is more visible externally.

The e-business is facing challenges mainly in the areas of technology, logistics, and legal issues.

Technology

The technology plays a major role in the concept of new economy. The technology has two

dimensions; one is the shift from manufacturing to services and second is the shift from physical

resources to the knowledge resources. There are so many mechanisms for technology innovation

and diffusion, both within and outside the countries. Many of the organisations will include

different technologies both for quantitative and qualitative terms.

Small scale enterprises play a vital role in the implementation of new technologies. They have

added more value in terms of population, employment, and services that they are offering.

Internet also plays a vital role as it helps the small and medium enterprises in providing the cost

effective possibilities to advertise their products. Internet also provides the contacts to buyers and

suppliers on a global basis. E-business is helps the radical transformation in the way that the

business is done. The introduction of technologies like the common database, electronic

networks and value added services are helpful for speeding up the transactions and these are

fundamental at the industrial level. The e-business has to undergo lot of challenges in

implementing the technologies that are helpful for the organisation since many of the people in

the organisation will not be interested to shift to the new technology and learn the new skills.

Logistics

The logistics is defined as the planning framework for maintaining the material, information, and

capital flow. The logistics includes the complex information, communication and control

systems required in the business environment. The logistics presents e-business with challenges

that exceeds the expectations of the customers with a reasonable cost. Now–a-day, attempt has

been made to reduce the inventory costs. In order to meet the high expectations of the customers,

an e-business needs the special infrastructure for tuning and managing the interactions. The

interactions can be in between the shippers, logistic providers, shipping companies, and also the

customers.

Legal concerns

As there is tremendous usage of internet, it is better to consider the legal concerns behind the

internet. This is because whatever is printed on the net will be accessed by public throughout the

world. We also have an option of going back and seeing the basics of that information. Now-–a-

day with the help of wireless phones, Personal Digital Assistants (PDAs), internet can be

accessed from anywhere in the world. As a result the customers must be provided proper security

and privacy to access internet. It becomes very difficult to trust the actual with the unethical,

illegal, internet marketing and advertising frauds and e-business email scams and hence one must

be careful while performing e-business.

.

There are uncertainties in e-business when compared with direct business. The uncertainties are

related to the security, privacy, credit and debit card handling. The security is the primary

concern in e-business. The PCI Data Security standard (PCI DSS) needs to be followed by one

who handles the credit card information. E-business is all about the trust between buyer and the

seller so one must be careful while dealing with the transactions which involve the handling of

credit and debit cards.

There is a need for matching both the e-customers and e-merchants with the legally responsible

parties in the real world. There is a need for on cryptographic methods for reducing the risks

associated with the identification and authentication. The cryptographic methods for eliminating

the risks those are associated with the non repudiation and security.

Q3. Mention the relevance of these terms in International business - Letter of credit, Bill of

Lading and Factoring.

Answer: Letter of credit: A standard, commercial letter of credit (LC[1]) is a document issued

mostly by a financial institution, used primarily in trade finance, which usually provides an

irrevocable payment undertaking.

The letter of credit can also be source of payment for a transaction, meaning that redeeming the

letter of credit will pay an exporter. Letters of credit are used primarily in international trade

transactions of significant value, for deals between a supplier in one country and a customer in

another. In such cases the International Chamber of Commerce Uniform Customs and Practice

for Documentary Credits applies (UCP 600 being the latest version) They are also used in the

land development process to ensure that approved public facilities (streets, sidewalks, storm

water ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is

to receive the money, the issuing bank of whom the applicant is a client, and the advising bank

of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be

amended or canceled without prior agreement of the beneficiary, the issuing bank and the

confirming bank, if any. In executing a transaction, letters of credit incorporate functions

common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present

in order to receive payment include a commercial invoice, bill of lading, and documents proving

the shipment was insured against loss or damage in transit.

Letters of credit (LC) deal in documents, not goods. The LC could be irrevocable or revocable.

An irrevocable LC cannot be changed unless both the buyer and seller agree. Whereas in a

revocable LC changes to the LC can be made without the consent of the beneficiary. A sight LC

means that payment is made immediately to the beneficiary/seller/exporter upon presentation of

the correct documents in the required time frame. A time or date LC will specify when payment

will be made at a future date and upon presentation of the required documents.[citation needed]

Negotiation means the giving of value for draft(s) and/or document(s) by the bank authorized to

negotiate, viz the nominated bank. Mere examination of the documents and forwarding the same

to the letter of credit issuing bank for reimbursement, without giving of value / agreed to give,

does not constitute a negotiation.

After a contract is concluded between buyer and seller, buyer's bank supplies a letter of

credit to seller.

All the charges for issuance of Letter of Credit, negotiation of documents, reimbursements and

other charges like courier are to the account of applicant or as per the terms and conditions of the

Letter of credit. If the letter of credit is silent on charges, then they are to the account of the

Applicant. The description of charges and who would be bearing them would be indicated in the

field 71B in the Letter of Credit.[citation

A bill of lending (BL - sometimes referred to as BOL or B/L) is a document issued by a carrier

to a shipper, acknowledging that specified goods have been received on board as cargo for

conveyance to a named place for delivery to the consignee who is usually identified. A through

bill of lading involves the use of at least two different modes of transport from road, rail, air, and

sea. The term derives from the verb "to lade" which means to load a cargo onto a ship or other

form of transportation.

A bill of lading can be used as a traded object. The standard short form bill of lading is evidence

of the contract of carriage of goods and it serves a number of purposes:

It is evidence that a valid contract of carriage, or a chartering contract, exists, and it may

incorporate the full terms of the contract between the consignor and the carrier by

reference (i.e. the short form simply refers to the main contract as an existing document,

whereas the long form of a bill of lading (connaissement intégral) issued by the carrier

sets out all the terms of the contract of carriage);

It is a receipt signed by the carrier confirming whether goods matching the contract

description have been received in good condition (a bill will be described as clean if the

goods have been received on board in apparent good condition and stowed ready for

transport); and

It is also a document of transfer, being freely transferable but not a negotiable instrument

in the legal sense, i.e. it governs all the legal aspects of physical carriage, and, like a

cheque or other negotiable instrument, it may be endorsed affecting ownership of the

goods actually being carried. This matches everyday experience in that the contract a

person might make with a commercial carrier like FedEx for mostly airway parcels, is

separate from any contract for the sale of the goods to be carried; however, it binds the

carrier to its terms, irrespectively of who the actual holder of the B/L, and owner of the

goods, may be at a specific moment.

The BL must contain the following information:

Name of the shipping company;

Flag of nationality;

Shipper's name;

Order and notify party;

Description of goods;

Gross/net/tare weight; and

Freight rate/measurements and weighment of goods/total freight

Factoring is a financial transaction whereby a business job sells its accounts receivable (i.e.,

invoices) to a third party (called a factor) at a discount in exchange for immediate money with

which to finance continued business. Factoring differs from a bank loan in three main ways.

First, the emphasis is on the value of the receivables (essentially a financial asset), not the firm’s

credit worthiness. Secondly, factoring is not a loan – it is the purchase of a financial asset (the

receivable). Finally, a bank loan involves two parties whereas factoring involves three..

Factoring is a word often misused synonymously with invoice discounting- factoring is the sale

of receivables, whereas invoice discounting is borrowing where the receivable is used as

collateral.

The three parties directly involved are: the one who sells the receivable, the debtor, and the

factor. The receivable is essentially a financial asset associated with the debtor's liability to pay

money owed to the seller (usually for work performed or goods sold). The seller then sells one or

more of its invoices (the receivables) at a discount to the third party, the specialized financial

organization (aka the factor), to obtain cash. The sale of the receivables essentially transfers

ownership of the receivables to the factor, indicating the factor obtains all of the rights and risks

associated with the receivables. Accordingly, the factor obtains the right to receive the payments

made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the

invoice amount. Usually, the account debtor is notified of the sale of the receivable, and the

factor bills the debtor and makes all collections. Critical to the factoring transaction, the seller

should never collect the payments made by the account debtor, otherwise the seller could

potentially risk further advances from the factor. There are three principal parts to the factoring

transaction;

a.) the advance, a percentage of the invoice face value that is paid to the seller upon submission,

b.) the reserve, the remainder of the total invoice amount held until the payment by the account

debtor is made and

c.) the fee, the cost associated with the transaction which is deducted from the reserve prior to it

being paid back the seller.

Sometimes the factor charges the seller a service charge, as well as interest based on how long

the factor must wait to receive payments from the debtor.The factor also estimates the amount

that may not be collected due to non-payment, and makes accommodation for this when

determining the amount that will be given to the seller. The factor's overall profit is the

difference between the price it paid for the invoice and the money received from the debtor, less

the amount lost due to non-payment.

Q.4 a) Explain the role played by EXIM bank. (10 marks)

Ans: Export-Import Bank of India is the premier export finance institution of the country, set

up in 1982 under the Export-Import Bank of India Act 1981

Exim Bank is managed by a Board of Directors, which has representatives from the Government,

Reserve Bank of India, Export Credit Guarantee Corporation of India, a financial institution,

public sector banks, and the business community.

The Bank's functions are segmented into several operating groups including:

Corporate Banking Group which handles a variety of financing programmes for Export

Oriented Units (EOUs), Importers, and overseas investment by Indian companies.

Project Finance / Trade Finance Group handles the entire range of export credit services

such as supplier's credit, pre-shipment Agri Business Group, to spearhead the initiative to

promote and support Agri-exports. The Group handles projects and export transactions in

the agricultural sector for financing.

Small and Medium Enterprise: The group handles credit proposals from SMEs under

various lending programmes of the Bank.

Export Services Group offers variety of advisory and value-added information services

aimed at investment promotion.

Export Marketing Services Bank offers assistance to Indian companies, to enable them

establish their products in overseas markets.

Besides these, the Support Services groups, which include: Research & Planning,

Corporate Finance, Loan Recovery, Internal Audit, Management Information Services,

Information Technology, Legal, Human Resources Management and Corporate Affairs.

b) What are B2B and C2B business models?

The term "business-to-business" was originally coined to describe the electronic

communications between businesses or enterprises in order to distinguish it from the

communications between businesses and consumers (B2C).Today it is widely used to describe

all products and services used by enterprises. Many professional institutions and the trade

publications focus much more on B2C than B2B, although most sales and marketing personnel

are in the B2B sector.

Business-to-Business Intermediary This model is sometimes referred to as a ‘hub’ or

‘exchange’. It is established by an electronic intermediary that runs a marketplace where

suppliers and buyers have a central point to come together. These B2B hubs tend to focus mainly

on non-core items that may range from stationery and computers to catering services and travel.

There are two types of hubs:

Vertical - focus on an industry and provide content that is specific to the industry’s value

system of buyers and suppliers. Examples include e-Steel that acts as an intermediary

between steel- makers and customers, and VerticalNet that provides intermediaries for

many industries including electronics, process, telecommunications, and utilities.

Horizontal - provide the same function for a variety of industries. An example is

iMark.com, which acts as an intermediary between buyers and suppliers of used capital

equipment in different industries.

An intermediary may be closed - where members and trading partners are vetted for legal and

financial probity - or open to all-comers, with the marketplace itself acting as a trusted

intermediary. It is important to note that intermediaries may be biased towards either buyers or

suppliers. Supply-side intermediaries may be run by consortia of manufacturers such as

Chemdex that acts as an intermediary for suppliers to the life sciences industry. Similarly, buy-

side intermediaries may be run by a consortia of customers such as Covisint for car makers or by

independent organizations such as Achilles for utilities. These intermediaries may attempt to

aggregate demand for buyers in order to obtain reduced prices and more favorable terms from

suppliers. In relation to payment, some intermediaries may charge a flat fee per transaction to

both the buyer and suppliers. Alternatively, a percentage may be charged in the case of value-

added services such as auctions. In the case of large, repetitive transactions, to achieve maximum

benefit the intermediary should be linked seamlessly to the buyer’s purchasing and the suppliers’

systems so that the entire purchasing process can be executed electronically. In the context of

competitive advantage and the influence of the Internet, customer/supplier lifecycle is a useful

framework for understanding an organization’s business processes, as well as those of their

customers, suppliers, and competitors. This framework provides a way of distinguishing between

buying and selling activities to better understand the interrelationships between customers and

suppliers’ business processes, and what they term ‘TouchPoints’ in the company.

A successful electronic business strategy will alter the nature of the product or service being

offered, its value in the marketplace, or the buyer-supplier relationship.

Consumer-to-business (C2B) is an electronic commerce business model in which consumers

(individuals) offer products and services to companies and the companies pay them. This

business model is a complete reversal of traditional business model where companies offer goods

and services to consumers (business-to-consumer = B2C). We can see this example in blogs or

internet forums where the author offers a link back to an online business facilitating the purchase

of some product (like a book on Amazon.com), and the author might receive affiliate revenue

from a successful sale.

This kind of economic relationship is qualified as an inverted business type. The advent of the

C2B scheme is due to major changes:

Connecting a large group of people to a bidirectional network has made this sort of

commercial relationship possible. The large traditional media outlets are one direction

relationship whereas the internet is bidirectional one.

Decreased cost of technology : Individuals now have access to technologies that were

once only available to large companies ( digital printing and acquisition technology, high

performance computer, powerful software)

C2B business models like most of C2C models like Ebay are based on 3 players: a consumer

acting as seller, a business acting as buyer and an intermediary dealing with the connection

between sellers and buyers.

Consumer

A consumer in the C2B business model can be any individual who has something to offer either

a service or a good. The individual is paid for the work provided to the companies. Depending on

the model, the "consumer" can be:

A webmaster/ blogger offering advertising service (through Google Adsense program for

example or amazon.com affiliation program)

A photographer or a designer offering stock images to companies by selling his artwork

through Fotolia or istockphoto for example

Any individual answering a poll through a survey site

Any individual with connections offering job hiring service by referring someone through

referral hiring sites like jobster.com or h3.com

Business

Business in the C2B business model represents any companies buying goods or services to

individual trough intermediaries. Here are some examples of potential companies which can be

such clients:

Any company which wants to fill a job (through referral hiring sites)

Any company needing to advertise online (through Google Adwords program for

example)

Any advertising agency which needs to buy a stock photo (through microstock sites)

Intermediary

The Intermediary is the crucial element since it creates the connection between business which

needs a service or a good and a mass of individuals. Intermediary is usually a portal both for

buyers (businesses) and seller (individuals).

The intermediary plays two roles:

It promotes goods and services offered by individuals by proposing a distribution

channel. It offers what individuals can't do themselves : large promotion, logistic and

financial support, technical expertise

It offers buyers a contact to a mass of individuals and takes care of money transactions

and legal aspects

C2B vs B2C : Graphical Representation

Q.5 What kind of impact will globalization and international business environment create

on Indian businesses? (10 marks)

Ans: Globalisation has brought in new opportunities to developing countries. Greater access to

developed country markets and technology transfer hold out promise improved productivity and

higher living standard. But globalisation has also thrown up new challenges like growing

inequality across and within nations, volatility in financial market and environmental

deteriorations. Another negative aspect of globalisation is that a great majority of developing

countries remain removed from the process. Till the nineties the process of globalisation of the

Indian economy was constrained by the barriers to trade and investment liberalisation of trade,

investment and financial flows initiated in the nineties has progressively lowered the barriers to

competition and hastened the pace of globalisation

Impact on India:

India opened up the economy in the early nineties following a major crisis that led by a foreign

exchange crunch that dragged the economy close to defaulting on loans. The response was a slew

of Domestic and external sector policy measures partly prompted by the immediate needs and

partly by the demand of the multilateral organisations. The new policy regime radically pushed

forward in favour of amore open and market oriented economy.

Major measures initiated as a part of the liberalisation and globalisation strategy in the early

nineties included scrapping of the industrial licensing regime, reduction in the number of areas

reserved for the public sector, amendment of the monopolies and the restrictive trade practices

act, start of the privatisation programme, reduction in tariff rates and change over to market

determined exchange rates.

Over the years there has been a steady liberalisation of the current account transactions, more

and more sectors opened up for foreign direct investments and portfolio investments facilitating

entry of foreign investors in telecom, roads, ports, airports, insurance and other major sectors.

The Indian tariff rates reduced sharply over the decade from a weighted average of 72.5%

in 1991-92 to 24.6 in 1996-97.Though tariff rates went up slowly in the late nineties it touched

35.1% in 2001-02. India is committed to reduced tariff rates. Peak tariff rates are to be reduced to

be reduced to the minimum with a peak rate of 20%, in another 2 years most non-tariff barriers

have been dismantled by march 2002, including almost all quantitative restrictions.

International business environment

Export and Import: India's Export and Import in the year 2001-02 was to the extent of 32,572

and 38,362 million respectively. Many Indian companies have started becoming respectable

players in the International scene. Agriculture exports account for about 13 to 18% of total

annual of annual export of the country. In 2000-01 Agricultural products valued at more than US

$ 6million were exported from the country 23% of which was contributed by the marine products

alone. Marine products in recent years have emerged as the single largest contributor to the total

agricultural export from the country accounting for over one fifth of the total agricultural

exports. Cereals (mostly basmati rice and non-basmati rice), oil seeds, tea and coffee are the

other prominent products each of which accounts fro nearly 5 to 10% of the countries total

agricultural exports.

Q6.Discuss any 3 regional trading agreements and its effect on international business. (10

marks)

Answer: Regional integration is bonding between nations and states through political, cultural

and economic cooperation. The cooperation is overseen by rules and regulations decided upon by

the states entering into an understanding.

Regional Trading Arrangements

The European Union (EU)

The European Union (EU) is an economic and political union established in 1993. This came

into effect because of the Treaty of Maastricht, signed on 7th February 1992 by the European

Communities. The EU comprises of 27 member states committed to regional integration.

The EU has developed a single market for all the member states and sixteen member states have

adopted a common currency called the Euro. The member states sign an agreement called

Schengen Agreement, which ensures the free movement of people, goods, capital and services,

including the abolition of passport controls. The agreement enacts legislation in justice and home

affairs, and maintains common policies on trade, agriculture, fisheries and regional development.

EU has also devised a common foreign and security policy for its member states. The EU has

established diplomatic missions around the world and they represent the member states at the

United Nations, WTO, G8 and G-20 summits. EU ambassadors head the EU delegations.

Important organisations of the EU include the European Commission, the Council of the

European Union, the European Council, the Court of Justice of the European Union, and the

European Central Bank. The EU citizens elect the European Parliament every five years.

European Free Trade Association (EFTA)

The European Free Trade Association (EFTA) is a free trade organisation established in 1960

between four European counties, Norway, Switzerland, Iceland and Liechtenstein. The EFTA

was formed at the Stockholm Convention between seven countries, presently only four countries

remain as the members of EFTA. The EFTA was formed as an alternative to EU, allowing

countries to join EFTA if they were not willing to join EU. It operates parallel to the EU. The

Stockholm Convention was replaced by the Vaduz Convention. This Convention provides a

framework for a free and liberal trade amongst its member states.

In 1994, three of the EFTA countries signed European Economic Area (EEA) agreement and

became a part of the European Union Internal Market. Switzerland opted to arrange bilateral

agreements with the EU. In addition, the EFTA states have jointly arranged free trade

agreements with many other countries. In 1999, Switzerland established a number of bilateral

agreements with the EU, covering a wide range of areas, including movement of persons,

transport and technical barriers to trade. This agreement prompted the EFTA states to modernise

their convention to guarantee that it will continue to provide guidelines for the expansion and

liberalisation of trade among them and with the rest of the world.

North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement (NAFTA) was signed in 1994 by three governments,

Canada, Mexico, and the United States. This trade agreement is the largest in the world in terms

of combined purchasing power parity Gross Domestic Product (GDP) and second largest by

nominal GDP comparison.

The NAFTA is divided into two sections, the North American Agreement on Environmental

Cooperation (NAAEC) and the North American Agreement on Labour Cooperation (NAALC).

The North American Agreement on Environmental Cooperation (NAAEC) was established in

1994. It is an environmental agreement between the United States of America, Mexico and

Canada. The agreement comprises of a declaration of objectives and principles regarding

conservation and the protection of the environment. The Commission for Environmental

Cooperation (CEC) was set up as part of the agreement.

North American Agreement on Labour Cooperation (NAALC) was also established in 1994 to

achieve the following goals:

· Improve working conditions and living standards.

· Promote a set of guiding labour principles.

· Encourage cooperation to promote innovation.

· Improve the levels of productivity and quality.

NAALC provides various means such as exchanges of information, technical assistance, and

consultations for achieving the above goals.