Winter 2015

MBA Semester 4
MB0053: International Business Management

Q1. Why is Comparative Cost Theory considered as an improvement upon Absolute

Cost Advantage Theory? Explain Porters Diamond Model.
Absolute advantage refers to differences in productivity of nations, while comparative
advantage refers to differences in opportunity costs. Absolute advantage compares the
productivity of different producers or economies. The producer that requires a smaller
quantity inputs to produce a good is said to have an absolute advantage in producing that
good. Comparative advantage refers to the ability of a party to produce a particular good or
service at a lower opportunity cost than another
Ricardo argued that it was not the case and showed that countries should trade goods with
each other where they have comparative cost advantage. For a sustainable economic
system, Ricardo argued that a country should specialise in the production of those goods
that it can produce most efficiently and import the goods which it produces less efficiently
even if it has absolute cost advantage in the production of those goods.
Adam Smith attacked the mercantilism and argued that countries differ in their ability to
produce goods and services efficiently due to variety of reasons. At that time, England, by
virtue of their superior manufacturing processes, were the worlds most efficient textile
manufacturers of the world. This was due to combination of several factors such as
favourable climate, good soils, skilled manpower and accumulated experience and expertise
in textile production.
The crux of Smiths absolute advantage theory is that a country should not produce goods at
home in which it does not have cost advantage; instead it should import from other
countries. Absolute advantage theory was based on positive sum game where countries
benefit from trade unlike mercantilism theory which was based on zero game. Caselet.
Porters diamond model:
In 1990, Michael Porter analyzed the reason behind some nations success and others
failure in international competition. His thesis outlined four broad attributes that shape the
environment in which local firms compete and these attributes promote the creation of
competitive advantage.
They are explained as follows:

Factor endowments Characteristics of production were analysed in detail. There

are basic factors like natural resources, climate, and location and so on and
advanced factors like communications infrastructure, research facilities.

Demand conditions The role of home demand in improving competitive

advantage is emphasised since firms are most sensitive about the needs of their
closest customers.

Relating and supporting industries The presence of suppliers or related

industries is advantageous since the benefits of investment in advanced factors of
production spill over to these supporting industries.

Firm strategy, structure and rivalry Domestic rivalry creates pressure to

innovate, improve quality, and reduce costs which in turn helps create world-class
competitors.

Q2. Explain Hofstedes Cultural dimension.

According to Dr. Geert Hofstede, Culture is more often a source of conflict than of synergy.
Power Distance Index (PDI) This focuses on the level of equality or inequality between
individuals in a nations 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 upward mobility of its people. A country with low
power distance ranking depicts a society which de-emphasises the differences between its
peoples power and wealth. In these societies equality and opportunity is stressed for

everyone. Countries with high PDI index are Arab countries, Russia, India and China. Those
with low score are Australia and Japan.
Individualism This dimension focuses on the extent to which the society reinforces
individual or collective achievement and interpersonal relationships. A high individualism
ranking (western countries, Canada, Hungary) depicts that individuality and individual rights
are dominant within the society. A low individualism ranking (Asian and African countries like
Indonesia and Colombia) characterises societies of a more collective nature with close links
between individuals.
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 (like Japan, Venezuela, Hungary) shows the country
experiences high level of gender differentiation. In these cultures, men dominate the society
and power structure, with women being controlled and dominated by men.
Uncertainty Avoidance Index (UAI) This focuses on the degree of tolerance for
uncertainty and ambiguity within the society. A country with high uncertainty avoidance
ranking shows that the country has low tolerance for uncertainty and ambiguity. A ruleoriented 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 fewer concerns about ambiguity and uncertainty and has high tolerance
for a variety of opinions.
Long-Term Orientation (LTO) It 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 (China, Japan, Honk Kong) score high on this dimension. These
countries have a long term orientation, believe in many truths, accept changes easily, and
have thrift for investment. Cultures recording little on this dimension, trust in absolute truth,
are conventional and traditional.

Q3 An economic union comprises of a common market and a custom union.

Explain.
Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of
a common market with a customs union. The countries that are part of an economic union
have common policies on the freedom of movement of four factors of production, common
product regulations and a common external trade policy.
The purpose of an economic union is to promote closer cultural and political ties while
increasing the economic efficiency between the member countries.
Economic unions are established by means of a formal intergovernmental legal agreement
among independent countries with the intention of fostering greater economic integration.

The members of an economic union share some elements associated with their national
economic jurisdictions.
These include the free movements of:
Goods and services within the union along with a common taxing method for imports from
non-member countries.
Capital within the economic union.
Persons within the economic union. Some forms of cooperation usually exist while framing
fiscal and monetary policies.

Level
of Main Features of Regional Economic
Integration
Grouping
Customs
1. Second stage of economic integration
Union
2. Common external tariff for non
member countries
3. Ensures orderly & balanced
economic development of member
countries
4. Promotes regions as single trading
areas for all tariff & non tariff purposes
for non member countries with single
customs policy

Examples
1. Southern African Customs
Union (SACU)
2. Andean Pact;
3. Southern Common Market
(MERCOSUR)
4. EU- Turkey
5. Customs Union of Belarus,
Kazakhstan and Russia

Common
Market

1. Third stage of economic integration of

countries
2. Free movement of labour and capital
among participating countries
3. No restrictions on migration of people
with economic grouping

1. Caribbean Common Market (

Carricom);
2. Association of South East
Asian Nations (ASEAN)
3. Central American Common
Market (CACM)

Economic
Union

1. Fourth stage of economic integration Only example

of countries
Union (EU)
2. Common currency with aligned
banking & monetary policy
3. Single trade policy
4. Harmonisation of tax rates
5. Common fiscal, banking & interest
rate policy with common bank

is

European

Q4. Explain the components of International Financial Management.

The components like foreign exchange market, foreign currency derivatives, international
monetary markets and international financial markets which are essential to the international
financial management.
1. 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 quite big and includes various functions including 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.
2. Foreign currency derivatives
Currency derivative is defined as a financial contract that seeks to swap two currencies at a
predestermined 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 that 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.
3. 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 crossborders and the reallocation of capital between the states.
4. International financial markets
Independent markets that are not under the authority of any one country and the financial
markets of each country are linked by international foreign markets. What governs the heart
of the international financial market is the market where international trade and investment
dominates foreign currency As a result the purchase of currency preceeds the purchase of
services and goods.

Q5. What are the differences between International Accounting Standards and
Domestic Accounting Standards?
Though there are differences in accounting methods, domestic businesses are not affected.
The accounting system of a domestic organisation must meet the specialised and regulatory
standards of its home country. But, an MNC and its subsidiaries must meet differing
accounting and auditing standards of all the countries in which it operates. This leads to a
need for comparability between businesses in the group. In order to successfully manage
and organise their operations, local managers require accounting information, which should
be prepared according to the local accounting concepts and denomination in the local
currency. Yet, for financial controllers, to measure the foreign subsidiarys performance and
worth, the subsidiarys accounts must be translated into the organisations home currency.
This translation is done using accounting concepts and measures, which are detailed by the
organisation. Investors worldwide look for the highest possible returns on their capital, in
order to interpret the track record, though they use a currency and an accounting system of
their own. The organisation also has to pay taxes to the countries where it does business,
based on the accounting statements prepared in these countries. Besides this, when a
parent corporation tries to combine the accounting records of its subsidiaries to produce
consolidated financial statements, extra complexities occur because of the changes in the
value of the host and home currencies.
There are many differences between International Accounting Standards (IAS) and
Domestic Accounting Standards (DAS). On the basis of difference between the two, two
indices, namely 'divergence' and 'absence', are created. Absence is the difference between
DAS and IAS; the rules on certain accounting issues are missed out in DAS and covered in
IAS. Divergence represents the differences between DAS and IAS; the rules on the same
accounting issue differ in DAS and IAS.
Measurement of differences between IAS and DAS
You can measure the differences between IAS and DAS in the following way:
Literature on international accounting differences Referring to earlier reports on
international accounting could give more information about the subject. Most of the earlier
reports understand international accounting differences as various options adopted by
nations for the similar accounting problems, which correspond to divergence concept.
Framework of analysis Links between variations in accounting standards and financial
reporting quality of various countries could be clearly seen from the reports published earlier.
We should consider the institutional determinants of accounting differences such as legal
origin, governance structure, economic development, and equity market.

Q6. Explain the key component of International Strategic management.

The nature of strategic management plays a vital role in the international business world. It is
important to understand the term strategic management before discussing its nature. The
term strategic management refers to the complete range of strategic decision making activity
in an organisation. Strategic management identifies and comprehends the environmental
factors to control the plans accordingly. It has evolved as a concept over time and will
continue to evolve..
Strategic objectives
Strategic objectives assist in the implementation process of the organisations objectives or
goals. While implementing an international strategy, an organisation has to identify the
opportunities present in these countries, explore the various resources available, their
strengths and capabilities and plan to work on their core competencies. The objective should
be formed in a way that it is not deficient or immeasurable. The strategic objectives must
help the organisation to achieve their mission and vision.
Following are the commonly referred to as short-term objectives that are essential
components of action plans.
First, they guide employees of an organisation towards achieving the common goals. This
aids the organisation to concentrate and conserve valuable resources and work together in a
timely manner.
Second, challenging objectives encourage and inspire employees to demonstrate higher
levels of commitment and effort. A research has supported the concept that individuals work
harder when they are motivated towards a specific goal, rather than being asked to simply
do their best.
Third, different parts of an organisation always have the potential to follow their own goals
rather than the overall company goals. Though the intentions are good, they may work at
cross purposes to the organisation as a whole. Thus, meaningful objectives help resolve
divergence in such instances.
Finally, appropriate objectives offer a standard for rewards and incentives. They not only
result in higher levels of motivation for employees but they also ensure a greater sense of
equalityor fairness when rewards are allocated.
Strategic alliances
Alliances vary in scope from an informal business association based on a simple contract to
a joint project agreement. To manage the alliance for legal and tax purposes either a
corporation or partnership is set up.
Strategic alliances involve organisations working together towards a common goal for small
businesses, without losing their individuality. Forming strategic alliances helps one reap

considerable profits as well as obtain rewards of team effort. Statistical studies claim,
organisations that take part in alliances account for 18 percent of their profits that come from
their alliances.