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Distinction between internal and international trade in general involves transaction for
mutual benefit For this reason both the trading parties will have equal interest.
Trade is a case of geographic specific area. An area specialises in an activity and trade
takes place.
Trade needs optimising activity. Profits are measured by minimising cost and
increasing volume of trade. International trade has certain distinguishing factors as
compared with ordinary trade.
1. International trade is the trade between two countries which are geographically
and politically different. This gives rise to a conflict of interests in terms of benefit.
2. International trade has more restriction than internal trade. The world has
transformed from free trade to protection.
4. The factors of production are perfectly mobile within a country and immobile
within countries. This feature helps in retaining cost advantage in production. Different
countries have different currencies. With this the problems of equating value and
conversion of currencies arises. International liquidity is a major problem. Yet there is
no mechanism to facilitate international payments. In 1930 IMF floated specialised
instruments called Special Drawing Rights (SDR) as a common medium for
international transaction. Due to disparities in economic development, SDR failed to
provide adequate international liquidity.
Presently the world is divided into trading blocks and associations. The international
trade is highly segmented international trade leads specialised institutions for promoting
international co-operation, trade international payments and development
assistance.
Q) What is FDI ?
Foreign capital which enters the country in the form of equity capital is termed as
Foreign Direct investment (FDI).
It involves no interest payment, but only a share in the profit to the extent of shares
owned by foreigners. In India equity participation by foreigners is permisible upto 51% of
the capital of a project, with higher limits of investment in selected areas, such as
technology, upgradation & exports.
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direct investment as a percentage of gross domestic product (GDP). The largest flows of
foreign investment occur between the industrialized countries (North America, North
West Europe and Japan). But flows to non-industrialized countries are increasing.
The foreign direct investor may acquire 10% or more of the voting power of an enterprise
in an economy through any of the following methods:
* Tax Holidays
* Preferential [tariffs]
* [[infrastructure]] subsidies
* R&D support
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The Foreign Exchange Management Bill (FEMA) was introduced by Govt. of India in
parliament on August 4, 1998. The Bills aims “to consolidate and amend the law
relating to Foreign Exchange with the objective of facilitating external trade and
payments and for promoting the orderly development and maintenance of Foreign
Exchange Market in India”. It was adopted by parliament in 1999 and is known as
Foreign Exchange Management Act, 1999. Chapter II of FEMA deals with the regulation &
management of Foreign Exchange. Sec. 3 states that except as otherwise provided in
this Act, no person shall in any manner deal in or transfer any foreign exchange or
foreign security to any person not being an authorised person. Sec. 4 states that except
otherwise provided in this Act, no person resident in India shall acquire, hold, own,
possess or transfer any foreign exchange, foreign security or any immovable property
situated outside India.
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Foreign Exchange means foreign currency and includes all deposits, credits and
balances, payable in any foreign currency and any drafts, traveler’s cheques, letter of
credit and bills of exchange, expressed or drawn in Indian currency but payable, in any
foreign currency; any instrument payable, at the option of the drawee or holders thereof
or any other party thereto, either in Indian currency or in Foreign currency or partly in
one or partly in other. In 1973, Act of 1947 was replaced by Foreign exchange
regulations Act, 1973 and which is now replaced by Foreign Exchange Management Act,
1999.
The Agreement is based on and supplements, with additional obligations, the Paris,
Berne, Rome and Washington conventions in their respective fields. Thus, the Agreement
does not constitute a fully independent convention, but rather an integrative instrument
which provides "Convention-plus" protection for IPRs.
The TRIPS Agreement is, by its coverage, the most comprehensive international
instrument on IPRs, dealing with all types of IPRs, with the sole exception of breeders'
rights. IPRs covered under the TRIPS agreement are:
The TRIPS agreement is based on the basic principles of the other WTO Agreements, like
non-discrimination clauses - National Treatment and Most Favoured Nation Treatment,
and are intended to promote "technological innovation" and "transfer and dissemination"
Part V of the TRIPS Agreement provides an institutionalized, multilateral means for the
prevention of disputes relating to IPRs and settlement thereof. It is aimed at preventing
unilateral actions.
Q) What is EURO?
EURO is the "Association of European Operational Research Societies" within IFORS, the
"International Federation of Operational Research Societies". It is a "non profit"
association domiciled in Switzerland. Its affairs are regulated by a Council consisting of
representatives/alternates of all its members and an Executive Committee which
constitutes its board of directors. Its aim is to promote Operational Research throughout
Europe.
The members of EURO are normally full members of IFORS and comprise the national OR
societies of countries located within or nearby (in a broad sense) Europe. Each member is
represented in the EURO Council by two representatives, one of whom votes, if required.
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Council meetings are held annually, normally in conjunction with the EURO-k
conferences.
Q) What is labelling?
Environmental labelling schemes are complex, causing concerns about developing
countries’ and small businesses’ ability to export. How do you use labelling to inform
consumers about environmental protection without jeopardizing these weaker players?
Opinions are divided. Two WTO committees are grappling with the question.
In 2001, the Doha Ministerial Conference made this an issue of special focus for the
regular CTE (i.e. the regular committee sessions that are not part of the Doha Round
negotiations). (See paragraph 32(iii) of the Doha Declaration.)
Concerns have been raised about the growing complexity and diversity of environmental
labelling schemes. This is especially the case with labelling based on life-cycle analysis,
which looks at a product’s environmental effects from the first stages of its production to
its final disposal. These requirements could create difficulties for developing countries,
and particularly small and medium-sized enterprises in export markets.
WTO members generally agree that labelling schemes can be economically efficient and
useful for informing consumers, and tend to restrict trade less than other methods. This
is the case if the schemes are voluntary, allow all sides to participate in their design,
based on the market, and transparent. However, these same schemes could be misused
to protect domestic producers. For this reason, the schemes should not discriminate
between countries and should not create unnecessary barriers or disguised restrictions
on international trade.
Q) What is Dumping?
It occurs when goods are exported at a price less than their normal value, generally
meaning they are exported for less than they are sold in the domestic market or third-
country markets, or at less than production cost.
PATENTS
Article 27 Patentable Subject Matter
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1. Subject to the provisions of paragraphs 2 and 3, patents shall be available for any
inventions, whether products or processes, in all fields of technology, provided that they
are new, involve an inventive step and are capable of industrial application.i Subject to
paragraph 4 of Article 65, paragraph 8 of Article 70 and paragraph 3 of this Article,
patents shall be available and patent rights enjoyable without discrimination as to the
place of invention, the field of technology and whether products are imported or locally
produced.
2. Members may exclude from patentability inventions, the prevention within their
territory of the commercial exploitation of which is necessary to protect ordre public or
morality, including to protect human, animal or plant life or health or to avoid serious
prejudice to the environment, provided that such exclusion is not made merely because
the exploitation is prohibited by their law.
3. Members may also exclude from patentability:
(a) diagnostic, therapeutic and surgical methods for the treatment of humans or animals;
(b) plants and animals other than micro-organisms, and essentially biological
processes for the production of plants or animals other than non-biological and
microbiological processes. However, Members shall provide for the protection of plant
varieties either by patents or by an effective sui generis system or by any combination
thereof. The provisions of this subparagraph shall be reviewed four years after the date
of entry into force of the WTO Agreement.
(a) where the subject matter of a patent is a product, to prevent third parties not
having the owner’s consent from the acts of: making, using, offering for
sale, selling, or importing1 for these purposes that product;
(b) where the subject matter of a patent is a process, to prevent third parties not
having the owner’s consent from the act of using the process, and from the acts of:
using, offering for sale, selling, or importing for these purposes at least the product
obtained directly by that process.
2. Patent owners shall also have the right to assign, or transfer by succession, the
patent and to conclude licensing contracts.
1. Members shall require that an applicant for a patent shall disclose the invention in
a manner sufficiently clear and complete for the invention to be carried out by a person
skilled in the art and may require the applicant to indicate the best mode for carrying out
the invention known to the inventor at the filing date or, where priority is claimed, at the
priority date of the application.
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Patents:
The agreement says patent protection must be available for inventions for at least 20
years. Patent protection must be available for both products and processes, in almost all
fields of technology. Governments can refuse to issue a patent for an invention if its
commercial exploitation is prohibited for reasons of public order or morality. They can
also exclude diagnostic, therapeutic and surgical methods, plants and animals (other
than microorganisms), and biological processes for the production of plants or animals
(other than microbiological processes).
The agreement describes the minimum rights that a patent owner must enjoy. But it also
allows certain exceptions. A patent owner could abuse his rights, for example by failing
to supply the product on the market. To deal with that possibility, the agreement says
governments can issue “compulsory licences”, allowing a competitor to produce the
product or use the process under licence. But this can only be done under certain
conditions aimed at safeguarding the legitimate interests of the patent-holder.
If a patent is issued for a production process, then the rights must extend to the product
directly obtained from the process. Under certain conditions alleged infringers may be
ordered by a court to prove that they have not used the patented process.
An issue that has arisen recently is how to ensure patent protection for pharmaceutical
products does not prevent people in poor countries from having access to medicines —
while at the same time maintaining the patent system’s role in providing incentives for
research and development into new medicines. Flexibilities such as compulsory licensing
are written into the TRIPS Agreement, but some governments were unsure of how these
would be interpreted, and how far their right to use them would be respected.
A large part of this was settled when WTO ministers issued a special declaration at the
Doha Ministerial Conference in November 2001. They agreed that the TRIPS Agreement
does not and should not prevent members from taking measures to protect public health.
They underscored countries’ ability to use the flexibilities that are built into the TRIPS
Agreement. And they agreed to extend exemptions on pharmaceutical patent protection
for least-developed countries until 2016. On one remaining question, they assigned
further work to the TRIPS Council — to sort out how to provide extra flexibility, so that
countries unable to produce pharmaceuticals domestically can import patented drugs
made under compulsory licensing. A waiver providing this flexibility was agreed on 30
August 2003.
Q) What is anti-dumping?
If a company exports a product at a price lower than the price it normally charges on its
own home market, it is said to be “dumping” the product. Is this unfair competition?
Opinions differ, but many governments take action against dumping in order to defend
their domestic industries. The WTO agreement does not pass judgement. Its focus is on
how governments can or cannot react to dumping — it disciplines anti-dumping actions,
and it is often called the “Anti-Dumping Agreement”. (This focus only on the reaction to
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dumping contrasts with the approach of the Subsidies and Countervailing Measures
Agreement.)
The legal definitions are more precise, but broadly speaking the WTO agreement allows
governments to act against dumping where there is genuine (“material”) injury to the
competing domestic industry. In order to do that the government has to be able to show
that dumping is taking place, calculate the extent of dumping (how much lower the
export price is compared to the exporter’s home market price), and show that the
dumping is causing injury or threatening to do so.
GATT (Article 6) allows countries to take action against dumping. The Anti-Dumping
Agreement clarifies and expands Article 6, and the two operate together. They allow
countries to act in a way that would normally break the GATT principles of binding a tariff
and not discriminating between trading partners — typically anti-dumping action means
charging extra import duty on the particular product from the particular exporting
country in order to bring its price closer to the “normal value” or to remove the injury to
domestic industry in the importing country.
There are many different ways of calculating whether a particular product is being
dumped heavily or only lightly. The agreement narrows down the range of possible
options. It provides three methods to calculate a product’s “normal value”. The main one
is based on the price in the exporter’s domestic market. When this cannot be used, two
alternatives are available — the price charged by the exporter in another country, or a
calculation based on the combination of the exporter’s production costs, other expenses
and normal profit margins. And the agreement also specifies how a fair comparison can
be made between the export price and what would be a normal price.
Detailed procedures are set out on how anti-dumping cases are to be initiated, how the
investigations are to be conducted, and the conditions for ensuring that all interested
parties are given an opportunity to present evidence. Anti-dumping measures must
expire five years after the date of imposition, unless an investigation shows that ending
the measure would lead to injury.
The agreement says member countries must inform the Committee on Anti-Dumping
Practices about all preliminary and final anti-dumping actions, promptly and in detail.
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They must also report on all investigations twice a year. When differences arise,
members are encouraged to consult each other. They can also use the WTO’s dispute
settlement procedure.
Persistent: Persistent dumping is a practice of selling a product below its production cost.
Predatory: A type of anti-competitive event in which foreign companies or governments
price their products below market values in an attempt to drive out domestic
competition. This may lead to conditions where one company has a monopoly in a
certain product or industry. Antitrust or competition laws forbid predatory dumping in
many countries such as the U.S. and the European Union.
For example, suppose there are two companies selling identical products; Viva Concepts
is a domestic firm and company Pragmatic is a foreign firm. Pragmatic wants to drive
Viva Concepts out of the market, so it prices its product far below the cost of producing
it. Viva Concepts must compete by lowering its prices, which eventually causes the
company to lose money and exit the market.
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Business Dictionary: Deliberate pricing of merchandise or services for the sole purpose of
driving competitors of similar products or services out of the market. Once these
competitors are eliminated, the intent is to raise the price.
• 6. Political Union
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• Each country determines its own barriers and maintains its own external
tariffs on import against non-members.
• Examples of FTA are: The ASEAN Free Trade Agreement(AFTA) and the
North American Free Trade Areas(NAFTA)
Customs Union:
• Each country determines its own barriers and maintains its own external
tariffs on imports against non-members.
Common Market:
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Economic Union:
Political Union:
• Example is US where each US state has its own government that sets
policies and laws. But each state grant control to the federal government
over foreign policies, agricultural policies, welfare policies and monetary
policies. Goods, services, labor and capital can all move freely without
any restrictions among the US states and the government sets a
common external trade policy
In the Ricardian model, countries are assumed to differ only in their productive
capacities. It was in this model that David Ricardo first formally demonstrated the
principle of comparative advantage. When defined in terms of productivity differences,
comparative advantage is regularly confused with a simpler concept that economists call
absolute advantage. It is worth taking a few moments to illustrate the differences.
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Switzerland has higher productivity in watch production compared to the US, economists
would say the US has an absolute advantage in corn production and Switzerland has an
absolute advantage in watch production. In this case it is intuitive that if the US
concentrates on corn production and Switzerland on watch production, then resources
could be shifted from relatively lower productivity industries to higher productivity
industries and the total combined output of corn and watches would rise. With greater
output, and after an appropriate trading pattern is introduced, both countries could end
up with more of both goods than before, meaning that both countries can gain from
trade. For most who have studied economics this is what they remember as comparative
advantage. However, they are only partially right.
Ricardo’s simple analysis demonstrated that even when one country is technologically
superior in both goods, it could still be advantageous for countries to trade. In this
circumstance, a comparative advantage is present for those products that the country
can produce most-best in comparison to other countries, even if the most best product is
produced less productively than in the other country. For example, suppose the US is
10X more productive in corn and only 2X more productive in watches compared to
Switzerland. In this case the US is clearly most-best at producing corn (10x > 2x). At the
same time though, Switzerland is ½X as productive in watches and (1/10)X as productive
in corn. Thus, Switzerland’s most-best product and hence its comparative advantage is
watches (since ½ > 1/10) even though it can’t produce them as effectively as the US.
The reason both countries can benefit in this case is because productivity is not the only
determinant of industry advantage; instead it is the combination of productivity and
average wages. In countries with lower productivity in all industries, they will also have
lower average wages. However, average wages for similar workers will lie somewhere in
the middle of the range of the country’s industry productivities. In the example above,
wage differences between the US and Switzerland in the absence of trade will fall in the
range between 10X and 2X; perhaps wages will be 5X higher in the US in this example
(which implies they are 1/5 as high in Switzerland). This means that for the relatively
highest productivity industry in Switzerland (watches), productivity (1/2 as productive)
will sufficiently exceed the average wage (1/5 as high) to make production in watches
profitable in comparison to the US.
Observers of this situation may well note that Switzerland’s advantage is due to low
wages since wages are only 1/5 as high as in the US. However, it is a mistake to think
that low wages gives an advantage in all industries. That’s because, as Ricardo showed,
in the low wage country’s least productive industry (in this case corn), Switzerland’s
wage advantage (1/5 as high) will be overwhelmed by its productivity disadvantage (1/10
as productive). This means that corn production will be unprofitable in Switzerland
despite having lower wages.
Looking at this same situation from the US perspective, the US is most-best at producing
corn (10X as productive) but its wages are only 5X higher. That implies it will be
profitable for the US to produce corn and sell it in Switzerland. At the same time though,
the US productivity advantage in watches is only 2X higher, which is not enough to
compensate for its 5X higher wages. That’s why the US will find cheaper watches in
Switzerland.
The most important conclusion from the Ricardian model is that advantages from trade
do not disappear just because another country has lower wages; nor do they disappear
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It is important to note at this stage that the Ricardian model does not say that countries
WILL gain from international trade; only that countries CAN benefit from increased output
and trade if production is reorganized between countries appropriately while all
resources are kept fully employed. The model is a gross simplification compared to the
real world though, and thus it clearly does not incorporate everything that might happen
with trade. Nevertheless the model does provide an insight that quite likely carries over
to more complex situations. For example, the model results should cause observers of
international trade situations to hesitate when fears grow that low wage countries may
soon take over production of the world’s output, or when developing countries protect
their markets because of fears that they cannot compete with the more developed
countries in the world. These commonly expressed fears about international trade are
shown, by virtue of the Ricardian model, to be based on a misperception.
Historical Overview
The early logic that free trade could be advantageous for countries was based on the
concept of absolute advantages in production. Adam Smith wrote in The Wealth of
Nations,
"If a foreign country can supply us with a commodity cheaper than we ourselves can
make it, better buy it of them with some part of the produce of our own industry,
employed in a way in which we have some advantage. "
The idea here is simple and intuitive. If our country can produce some set of goods at
lower cost than a foreign country, and if the foreign country can produce some other set
of goods at a lower cost than we can produce them, then clearly it would be best for us
to trade our relatively cheaper goods for their relatively cheaper goods. In this way both
countries may gain from trade.
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The original idea of comparative advantage dates to the early part of the 19th century.
Although the model describing the theory is commonly referred to as the "Ricardian
model", the original description of the idea can be found in an Essay on the External Corn
Trade by Robert Torrens in 1815. David Ricardo formalized the idea using a compelling,
yet simple, numerical example in his 1817 book titled, On the Principles of Political
Economy and Taxation. The idea appeared again in James Mill's Elements of Political
Economy in 1821. Finally, the concept became a key feature of international political
economy upon the publication of Principles of Political Economy by John Stuart Mill in
1848.
Because the idea of comparative advantage is not immediately intuitive, the best way of
presenting it seems to be with an explicit numerical example as provided by David
Ricardo. Indeed some variation of Ricardo's example lives on in most international trade
textbooks today. (See page 40-5 in this text)
In his example Ricardo imagined two countries, England and Portugal, producing two
goods, cloth and wine, using labor as the sole input in production. He assumed that the
productivity of labor (i.e., the quantity of output produced per worker) varied between
industries and across countries. However, instead of assuming, as Adam Smith did, that
England is more productive in producing one good and Portugal is more productive in the
other; Ricardo assumed that Portugal was more productive in both goods. Based on
Smith's intuition, then, it would seem that trade could not be advantageous, at least for
England.
As it turned out, specialization in any good would not suffice to guarantee the
improvement in world output. Only one of the goods would work. Ricardo showed that
the specialization good in each country should be that good in which the country had a
comparative advantage in production. To identify a country's comparative advantage
good requires a comparison of production costs across countries. However, one does not
compare the monetary costs of production or even the resource costs (labor needed per
unit of output) of production. Instead one must compare the opportunity costs of
producing goods across countries.
A country is said to have a comparative advantage in the production of a good (say cloth)
if it can produce cloth at a lower opportunity cost than another country. The opportunity
cost of cloth production is defined as the amount of wine that must be given up in order
to produce one more unit of cloth. Thus England would have the comparative advantage
in cloth production relative to Portugal if it must give up less wine to produce another
unit of cloth than the amount of wine that Portugal would have to give up to produce
another unit of cloth.
All in all, this condition is rather confusing. Suffice it to say, that it is quite possible,
indeed likely, that although England may be less productive in producing both goods
relative to Portugal, it will nonetheless have a comparative advantage in the production
of one of the two goods. Indeed there is only one circumstance in which England would
not have a comparative advantage in either good, and in this case Portugal also would
not have a comparative advantage in either good. In other words, either each country
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has the comparative advantage in one of the two goods or neither country has a
comparative advantage in anything.
Note that trade based on comparative advantage does not contradict Adam Smith's
notion of advantageous trade based on absolute advantage. If as in Smith's example,
England were more productive in cloth production and Portugal were more productive in
wine, then we would say that England has an absolute advantage in cloth production
while Portugal has an absolute advantage in wine. If we calculated comparative
advantages, then England would also have the comparative advantage in cloth and
Portugal would have the comparative advantage in wine. In this case, gains from trade
could be realized if both countries specialized in their comparative, and absolute,
advantage goods. Advantageous trade based on comparative advantage, then, covers a
larger set of circumstances while still including the case of absolute advantage and
hence is a more general theory.
The modern version of the Ricardian model and its results are typically presented by
constructing and analyzing an economic model of an international economy. In its most
simple form, the model assumes two countries producing two goods using labor as the
only factor of production. Goods are assumed homogeneous (i.e., identical) across firms
and countries. Labor is homogeneous within a country but heterogeneous (non-identical)
across countries. Goods can be transported costlessly between countries. Labor can be
reallocated costlessly between industries within a country but cannot move between
countries. Labor is always fully employed. Production technology differences exist across
industries and across countries and are reflected in labor productivity parameters. The
labor and goods markets are assumed to be perfectly competitive in both countries.
Firms are assumed to maximize profit while consumers (workers) are assumed to
maximize utility. (See page 40-2 for a more complete description)
The primary issue in the analysis of this model is what happens when each country
moves from autarky (no trade) to free trade with the other country - in other words, what
are the effects of trade? The main things we care about are trade's effects on the prices
of the goods in each country, the production levels of the goods, employment levels in
each industry, the pattern of trade (who exports and who imports what), consumption
levels in each country, wages and incomes, and the welfare effects both nationally and
individually.
Using the model one can show that, in autarky, each country will produce some of each
good. Because of the technology differences, relative prices of the two goods will differ
between countries. The price of each country's comparative advantage good will be
lower than the price of the same good in the other country. If one country has an
absolute advantage in the production of both goods (as assumed by Ricardo) then real
wages of workers (i.e., the purchasing power of wages) in that country will be higher in
both industries compared to wages in the other country. In other words, workers in the
technologically advanced country would enjoy a higher standard of living than in the
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technologically inferior country. The reason for this is that wages are based on
productivity, thus in the country that is more productive, workers get higher wages.
The next step in the analysis is to assume that trade between countries is suddenly
liberalized and made free. The initial differences in relative prices of the goods between
countries in autarky will stimulate trade between the countries. Since the differences in
prices arise directly out of differences in technology between countries, it is the
differences in technology that cause trade in the model. Profit-seeking firms in each
country's comparative advantage industry would recognize that the price of their good is
higher in the other country. Since transportation costs are zero, more profit can be made
through export than with sales domestically. Thus each country would export the good in
which they have a comparative advantage. Trade flows would increase until the price of
each good is equal across countries. In the end, the price of each country's export good
(its comparative advantage good) will rise and the price of its import good (its
comparative disadvantage good) will fall.
The higher price received for each country's comparative advantage good would lead
each country to specialize in that good. To accomplish this, labor would have to move
from the comparative disadvantaged industry into the comparative advantage industry.
This means that one industry goes out of business in each country. However, because
the model assumes full employment and costless mobility of labor, all of these workers
are immediately gainfully employed in the other industry.
One striking result here is that even when one country is technologically superior to the
other in both industries, one of these industries would go out of business when opening
to free trade. Thus, technological superiority is not enough to guarantee continued
production of a good in free trade. A country must have a comparative advantage in
production of a good, rather than an absolute advantage, to guarantee continued
production in free trade. From the perspective of a less developed country, the
developed countries' superior technology need not imply that LDC industries cannot
compete in international markets.
The movement to free trade generates an improvement in welfare in both countries both
individually and nationally. Specialization and trade will increase the set of consumption
possibilities, compared with autarky, and will make possible an increase in consumption
of both goods, nationally. These aggregate gains are often described as improvements in
production and consumption efficiency. Free trade raises aggregate world production
efficiency because more of both goods are likely to be produced with the same number
of workers. Free trade also improves aggregate consumption efficiency, which implies
that consumers have a more pleasing set of choices and prices available to them.
Real wages (and incomes) of individual workers are also shown to rise in both countries.
Thus, every worker can consume more of both goods in free trade compared with
autarky. In short, everybody benefits from free trade in both countries. In the Ricardian
model trade is truly a win-win situation.
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themselves that its ability to describe the real world is extremely limited, if not non-
existent. Although the results follow logically from the assumptions, the assumptions are
easily assailed as unrealistic. For example, the model assumes only two countries
producing two goods using just one factor of production. There is no capital or land or
other resources needed for production. The real world, on the other hand, consists of
many countries producing many goods using many factors of production. In the model,
each market is assumed to be perfectly competitive, when in reality there are many
industries in which firms have market power. Labor productivity is assumed fixed, when
in actuality it changes over time, perhaps based on past production levels. Full
employment is assumed, when clearly workers cannot immediately and costlessly move
to other industries. Also, all workers are assumed identical. This means that when a
worker is moved from one industry to another, he or she is immediately as productive as
every other worker who was previously employed there. Finally, the model assumes that
technology differences are the only differences that exist between the countries.
With so many unrealistic assumptions it is difficult for some people to accept the
conclusions of the model with any confidence, especially when so many of the results are
counterintuitive. Indeed one of the most difficult aspects of economic analysis is how to
interpret the conclusions of models. Models are, by their nature, simplifications of the
real world and thus all economic models contain unrealistic assumptions. Therefore, to
dismiss the results of economic analysis on the basis of unrealistic assumptions means
that one must dismiss all insights contained within the entire economics discipline.
Surely, this is not practical or realistic. Economic models in general and the Ricardian
model in particular do contain insights that most likely carry over to the more complex
real world. The following story is meant to explain some of the insights within the theory
of comparative advantage by placing the model into a more familiar setting.
Example case:
Suppose it is early spring and it is time to prepare the family backyard garden for the
first planting of the year. The father in the household sets aside one Sunday afternoon to
do the job but hopes to complete the job as quickly as possible. Preparation of the
garden requires the following tasks. First, the soil must be turned over and broken up
using the roto-tiller, then the soil must be raked and smoothed. Finally, seeds must be
planted or sowed.
This year the father's seven-year-old son is anxious to help. The question at hand is
whether the son should be allowed to help if one's only objective is to complete the task
in the shortest amount of time possible.
At first thought, the father is reluctant to accept help. Clearly each task would take the
father less time to complete than the time it would take the son. In other words, the
father can perform each task more efficiently than the seven-year-old son. The father
estimates that it will take him three hours to prepare the garden if he works alone, as
shown in the following table.
Roto-Tilling 1.0
Raking 1.0
Planting 1.0
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Total 3.0
On second thought, the father decides to let his son help according to the following
procedure. First the father begins the roto-tilling. Once he has completed half of the
garden, the son begins raking the roto-tilled section while the father finishes roto-tilling
the rest of the garden plot. After the father finishes roto-tilling he begins planting seeds
in the section the son has already raked. Suppose the son rakes slower than the father
plants, and that the father completes the sowing process just as the son finishes raking.
Note this implies that raking takes the son almost 2 hours compared to one hour for the
father. However, because the son's work is done simultaneously with the father's work, it
does not add to the total time for the project. Under this plan the time needed to
complete the tasks in shown in the following table.
Roto-Tilling 1.0
Total 2.0
Notice that the total time needed to prepare the garden has fallen from 3 hours to 2
hours. The garden is prepared in less time with the son's help than it could have been
done independently by the father. In other words, it makes sense to employ the son in
(garden) production even though the son is less efficient than the dad in every one of the
three required tasks. Overall efficiency is enhanced when both resources (the father and
son) are fully employed.
This arrangement also clearly benefits both the father and son. The father completes the
task in less time and thus winds up with some additional leisure time which the father
and son can enjoy together. The son also benefits because he has contributed his skills
to a productive activity and will enjoy a sense of accomplishment. Thus both parties
benefit from the arrangement.
However, it is important to allocate the tasks correctly between the father and the son.
Suppose the father allowed his son to do the roto-tilling instead. In this case the time
needed for each task might look as follows.
The time needed for roto-tilling has now jumped to 4 hours because we have included
the time spent traveling to and from the hospital and the time spent in the emergency
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room! Once the father and son return, the father must complete the remaining tasks on
his own. Overall efficiency declines in this case compared to the father acting alone.
This highlights the importance of specializing in production of the task in which you have
a comparative advantage. Even though the father can complete all three tasks quicker
than his son, his relative advantage in roto-tilling greatly exceeds his advantage in raking
and planting. One might say that the father is most-best at roto-tilling while he is least-
best at raking and planting. On the other hand, the son is least-worse at raking and
planting but most-worse at roto-tilling. Finally, because of the sequential nature of the
tasks, the son can remain fully employed only if he works on the middle task, namely
raking.
The garden story offers an intuitive explanation for the theory of comparative advantage
and also provides a useful way of interpreting the model results. The usual way of stating
the Ricardian model results is to say that countries will specialize in their comparative
advantage good and trade them to the other country such that everyone in both
countries benefit. Stated this way it is easy to imagine how it would not hold true in the
complex real world.
A better way to state the results is as follows. The Ricardian model shows that if we want
to maximize total output in the world then,
In this way we might raise the wellbeing of all individuals despite differences in relative
productivities. In this description, we do not predict that a result will carry over to the
complex real world. Instead we carry the logic of comparative advantage to the real
world and ask how things would have to look to achieve a certain result (maximum
output and benefits). In the end we should not say that the model of comparative
advantage tells us anything about what will happen when two countries begin to trade;
instead we should say that the theory tells us some things that can happen.
Q32.
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Montenegro, which joined on 18th January, 2007. It is very important to note here that all
the United Nation member countries participate directly in International Monetary Fund
with exception of North Korea, Andorra, Cuba, Monaco, Tuvalu, Liechtenstein, and Nauru.
The main objective of International Monetary Fund it to provide financial assistance to all
the member countries that are facing financial problems. All the member states that are
facing problems regarding balance of payments can easily request for loans etc for
improving the situation. This can also be done by making request for the organizational
management of economies at IMF." But in return of getting assistance, the member
countries of International Monetary Fund are also required to launch certain types of
reforms that aim at improving the financial strength of member country. The reader
should note here that many times, these reforms become quite essential as the member
countries, that have fixed exchange rate policies, often engage in various types of
monetary, fiscal and political practices that are harmful for them. All those countries that
have budget deficits or are suffering from high inflation levels or have strict prices
controls, are also suffering from balance of payment problem. These reforms are carried
out by means of structural adjustment programs and basic motive of these reforms is to
help the member countries to come out of crisis permanently, rather than helping them
temporarily with financial assistance. These reforms, however, have been criticized for
their non-transparent behaviour.
The World Bank differs from the World Bank Group, in that the World Bank comprises
only two institutions: the International Bank for Reconstruction and Development (IBRD)
and the International Development Association (IDA), whereas the latter incorporates
these two in addition to three more: International Finance Corporation (IFC), Multilateral
Investment Guarantee Agency (MIGA), and International Centre for Settlement of
Investment Disputes (ICSID).
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The World Bank is one of two institutions created at the Bretton Woods Conference in
1944. The International Monetary Fund, a related institution is the second. Delegates
from many countries attended the Bretton Woods Conference. The most powerful
countries in attendance were the United States and United Kingdom which dominated
negotiations.
Although both are based in Washington, the World Bank is by custom headed by an
American, while the IMF is led by a European.
Key Factors
The World Bank sees the five key factors necessary for economic growth and the
creation of an enabling business environment as:
The Bank obtains funding for its operations primarily through the IBRD’s sale of AAA-
rated bonds in the world’s financial markets. The IBRD’s income is generated from its
lending activities, with its borrowings leveraging its own paid-in capital, plus the
investment of its "float". The IDA obtains the majority of its funds from forty donor
countries who replenish the bank’s funds every three years, and from loan repayments,
which then become available for re-lending.
Active Areas
The World Bank is active in the following areas:
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Criteria
Many achievements have brought the MDG targets for 2015 within reach in some cases.
For the goals to be realized, six criteria must be met: stronger and more inclusive growth
in Africa and fragile states, more effort in health and education, integration of the
development and environment agendas, more and better aid, movement on trade
negotiations, and stronger and more focused support from multilateral institutions like
the World Bank.
1. Eradicate Extreme Poverty and Hunger: From 1990 through 2004, the proportion
of people living in extreme poverty fell from almost a third to less than a fifth.
Although results vary widely within regions and countries, the trend indicates that
the world as a whole can meet the goal of halving the percentage of people living
in poverty. Africa’s poverty, however, is expected to rise, and most of the 36
countries where 90% of the world’s undernourished children live are in Africa.
Less than a quarter of countries are on track for achieving the goal of halving
under-nutrition.
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to 500 million cases of malaria each year, leading to more than 1 million deaths.
Nearly all the cases and more than 95 percent of the deaths occur in Sub-Saharan
Africa.
6. Ensure Environmental Sustainability: Deforestation remains a critical problem,
particularly in regions of biological diversity, which continues to decline.
Greenhouse gas emissions are increasing faster than energy technology
advancement.
7. Develop a Global Partnership for Development: Donor countries have renewed
their commitment. Donors have to ful. Ll their pledges to match the current rate
of core program development. Emphasis is being placed on the Bank Group’s
collaboration with multilateral and local partners to quicken progress toward the
MDGs’ realization.
The World Trade Organization deals with regulation of trade between participating
countries; it provides a framework for negotiating and formalising trade agreements, and
a dispute resolution process aimed at enforcing participants' adherence to WTO
agreements which are signed by representatives of member governments and ratified by
their parliaments. Most of the issues that the WTO focuses on derive from previous trade
negotiations, especially from the Uruguay Round (1986-1994).
The organization is currently endeavouring to persist with a trade negotiation called the
Doha Development Agenda (or Doha Round), which was launched in 2001 to enhance
equitable participation of poorer countries which represent a majority of the world's
population. However, the negotiation has been dogged by "disagreement between
exporters of agricultural bulk commodities and countries with large numbers of
subsistence farmers on the precise terms of a 'special safeguard measure' to protect
farmers from surges in imports. At this time, the future of the Doha Round is uncertain."[
The WTO has 153 members, representing more than 97% of total world trade and 30
observers, most seeking membership. The WTO is governed by a ministerial conference,
meeting every two years; a general council, which implements the conference's policy
decisions and is responsible for day-to-day administration; and a director-general, who is
appointed by the ministerial conference. The WTO's headquarters is at the Centre
William Rappard, Geneva, Switzerland.
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The United Nations ESCWA has written that globalization "is a widely-used term that can
be defined in a number of different ways. When used in an economic context, it refers to
the reduction and removal of barriers between national borders in order to facilitate the
flow of goods, capital, services and labor... although considerable barriers remain to the
flow of labor... Globalization is not a new phenomenon. It began in the late nineteenth
century, but it slowed down during the period from the start of the First World War until
the third quarter of the twentieth century. This slowdown can be attributed to the inward-
looking policies pursued by a number of countries in order to protect their respective
industries... however, the pace of globalization picked up rapidly during the fourth
quarter of the twentieth century..."
Saskia Sassen writes that "a good part of globalization consists of an enormous variety of
micro-processes that begin to denationalize what had been constructed as national —
whether policies, capital, political subjectivity, urban spaces, temporal frames, or any
other of a variety of dynamics and domains."
Thomas L. Friedman has examined the impact of the "flattening" of the world, and
argues that globalized trade, outsourcing, supply-chaining, and political forces have
changed the world permanently, for both better and worse. He also argues that the pace
of globalization is quickening and will continue to have a growing impact on business
organization and practice.
Noam Chomsky argues that the word globalization is also used, in a doctrinal sense, to
describe the neoliberal form of economic globalization.
Herman E. Daly argues that sometimes the terms internationalization and globalization
are used interchangeably but there is a significant formal difference. The term
"internationalization" (or internationalisation) refers to the importance of international
trade, relations, treaties etc. owing to the (hypothetical) immobility of labor and capital
between or among nations.
Finally, Takis Fotopoulos argues that globalization is the result of systemic trends
manifesting the market economy’s grow-or-die dynamic, following the rapid expansion of
transnational corporations. Because these trends have not been offset effectively by
counter-tendencies that could have emanated from trade-union action and other forms of
political activity, the outcome has been globalisation. This is a multi-faceted and
irreversible phenomenon within the system of the market economy and it is expressed
as: economic globalisation, namely, the opening and deregulation of commodity, capital
and labour markets which led to the present form of neoliberal globalisation; political
globalisation, i.e., the emergence of a transnational elite and the phasing out of the all
powerful-nation state of the statist period; cultural globalisation, i.e., the worldwide
homogenisation of culture; ideological globalisation; technological globalisation; social
globalisation
Globalization, since World War II, is largely the result of planning by politicians to break
down borders hampering trade to increase prosperity and interdependence thereby
decreasing the chance of future war. Their work led to the Bretton Woods conference, an
agreement by the world's leading politicians to lay down the framework for international
commerce and finance, and the founding of several international institutions intended to
oversee the processes of globalization.
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These institutions include the International Bank for Reconstruction and Development
(the World Bank), and the International Monetary Fund. Globalization has been facilitated
by advances in technology which have reduced the costs of trade, and trade negotiation
rounds, originally under the auspices of the General Agreement on Tariffs and Trade
(GATT), which led to a series of agreements to remove restrictions on free trade.
Since World War II, barriers to international trade have been considerably lowered
through international agreements — GATT. Particular initiatives carried out as a result of
GATT and the World Trade Organization (WTO), for which GATT is the foundation, have
included:
The Uruguay Round (1986 to 1994) led to a treaty to create the WTO to mediate trade
disputes and set up a uniform platform of trading. Other bilateral and multilateral trade
agreements, including sections of Europe's Maastricht Treaty and the North American
Free Trade Agreement (NAFTA) have also been signed in pursuit of the goal of reducing
tariffs and barriers to trade.
World exports rose from 8.5% in 1970, to 16.2% of total gross world product in 2001.
Measuring globalization
• Goods and services, e.g., exports plus imports as a proportion of national income
or per capita of population
• Labor/people, e.g., net migration rates; inward or outward migration flows,
weighted by population
• Capital, e.g., inward or outward direct investment as a proportion of national
income or per head of population
• Technology, e.g., international research & development flows; proportion of
populations (and rates of change thereof) using particular inventions (especially
'factor-neutral' technological advances such as the telephone, motorcar,
broadband)
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A.T. Kearney and Foreign Policy Magazine jointly publish another Globalization Index.
According to the 2006 index, Singapore, Ireland, Switzerland, the Netherlands, Canada
and Denmark are the most globalized, while Indonesia, India and Iran are the least
globalized among countries listed.
Effects of globalization
Globalization has various aspects which affect the world in several different ways such
as:
As of 2005–2007, the Port of Shanghai holds the title as the World's busiest port.
India is right now home of almost every well known I.T company around the globe. Four
Indians were among the world's top 10 richest in 2008, worth a combined $160 billion. In
2007, China had 415,000 millionaires and India 123,000.
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are fragmented and privatized. Global health policy makers have shifted during
the 1990s from United Nations players to financial institutions. The result of this
power transition is an increase in privatization in the health sector. This
privatization fragments health policy by crowding it with many players with many
private interests. These fragmented policy players emphasize partnerships,
specific interventions to combat specific problems (as opposed to comprehensive
health strategies). Influenced by global trade and global economy, health policy is
directed by technological advances and innovative medical trade. Global
priorities, in this situation, are sometimes at odds with national priorities where
increased health infrastructure and basic primary care are of more value to the
public than privatized care for the wealthy.
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'Turnkey' is also commonly used in motorsports to describe a car being sold with
drivetrain (engine, transmission, etc.) as a racer may prefer to keep the pieces to use in
another vehicle to preserve a combination.
Similarly, this term may be used to advertise the sale of an established business,
including all the equipment necessary to run it, or by a business-to-business supplier
providing complete packages for business start-up. An example would be the creation of
a "turnkey hospital" which would be building a complete medical center with installed
high-tech medical equipment.
Use in business
In a turnkey business transaction different entities are responsible for setting up a plant
or a part of it. A complex project involving infrastructure facility, a chemical plant, or a
refinery demands expertise which is not available with a single firm. The owner organizes
the overall project with a turnkey firm and 'receives' the project on its completion and
can then start to operate it. The 'agents' of the owner are: the principal engineering firm,
the licensor (if any),service subcontractors (e.g. electrical contractor) and the suppliers.
There may be several contracts drawn up by the principal engineering firm but they only
identify the latter as the recipient of the services. The principal contract is the one that
binds the owner and principal engineering firm.
A turnkey project could involve the following elements depending on its complexity:
• Project adminstration
• licensing-in of process
• design and engineering services
• subcontracting
• management control
• procurment and expediting of equipment;
• materials control
• inspection of equipment prior to delivery
• shipment, transportation
• control of schedule and quality
• pre-commisioning and completion
• performance-guarantee testing
• inventorying spare-parts
• training of owner's/plant[[sub-system}}operating and maintence
personnel
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Turnkey projects can also be extended, known as 'turnkey plus', where there is perhaps a
small equity interest by the engineering firm or the main suppliers to ensure allegiance
during the initial operational phases. Once the turnkey phase is over and the engineering
firm receives the 'completion certificate', (from the owner), the latter will work
independently or with the licensor (if any).
Specific usage
A prison turnkey
The term turnkey is also often used in the technology industry, most commonly to
describe pre-built computer "packages" in which everything needed to perform a certain
type of task (e.g. audio editing) is put together by the supplier and sold as a bundle. This
often includes a computer with pre-installed software, various types of hardware, and
accessories. Such packages are commonly called appliances. Turnkey products are
synonymous to "off-the-shelf" solutions - i.e. not bespoke.
In the United States, the precise definition of the types of allowable contractual features
for government contracts are contained in the Federal Acquisition Regulations.
In real estate, turn-key is defined as delivering a location that is ready for occupation.
The turn-key process includes all of the steps involved to open a location including the
site selection, negotiations, space planning, construction coordination and complete
installation.
Partners may provide the strategic alliance with resources such as products, distribution
channels, manufacturing capability, project funding, capital equipment, knowledge,
expertise, or intellectual property. The alliance is a cooperation or collaboration which
aims for a synergy where each partner hopes that the benefits from the alliance will be
greater than those from individual efforts. The alliance often involves technology transfer
(access to knowledge and expertise), economic specialization [1], shared expenses and
shared risk.
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Various terms have been used to describe forms of strategic partnering. These include
‘international coalitions’ (Porter and Fuller, 1986), ‘strategic networks’ (Jarillo, 1988) and,
most commonly, ‘strategic alliances’. Definitions are equally varied. An alliance may be
seen as the ‘joining of forces and resources, for a specified or indefinite period, to
achieve a common objective’.
There are four types of strategic alliances: joint venture, equity strategic alliance, non-
equity strategic alliance, and global strategic alliances.
• Joint venture is a strategic alliance in which two or more firms create a legally
independent company to share some of their resources and capabilities to
develop a competitive advantage.
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• Equity strategic alliance is an alliance in which two or more firms own different
percentages of the company they have formed by combining some of their
resources and capabilities to create a competitive advantage.
• Nonequity strategic alliance is an alliance in which two or more firms develop a
contractual-relationship to share some of their unique resources and capabilities
to create a competitive advantage.
• Global Strategic Alliances working partnerships between companies (often more
than 2) across national boundaries and increasingly across industries. Sometimes
formed between company and a foreign government, or among companies and
governments
The phrase generally refers to the purpose of the entity and not to a type of entity.
Therefore, a joint venture may be a corporation, limited liability company, partnership or
other legal structure, depending on a number of considerations such as tax and tort
liability.
Joint ventures are not uncommon in the oil and gas industry, and are often cooperations
between a local and foreign company (about 3/4 are international). A joint venture is
often seen as a very viable business alternative in this sector, as the companies can
complement their skill sets while it offers the foreign company a geographic presence.
Studies show a failure rate of 30-61%, and that 60% failed to start or faded away within 5
years. (Osborn, 2003) It is also known that joint ventures in low-developed countries
show a greater instability, and that JVs involving government partners have higher
incidence of failure (private firms seem to be better equipped to supply key skills,
marketing networks etc.) Furthermore, JVs have shown to fail miserably under highly
volatile demand and rapid changes in product technology. Some countries, such as the
People's Republic of China and to some extent India, require foreign companies to form
joint ventures with domestic firms in order to enter a market .A joint ownership venture
may be brought about in three major ways:
(i) Foreign investor buying an interest in a local company.
(ii) local firm acquiring an interest in an existing foreign firm.
(iii)Both the foreign and local entrepreneurs jointly forming a new enterprise.
Brokers :In addition, joint ventures are practiced by a joint venture broker, who are
people that often put together the two parties that participate in a joint venture. A joint
venture broker then often make a percentage of the profit that is made from the deal
between the two parties.
Competitive goals
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Strategic goals
1. Synergies
2. Transfer of technology/skills
3. Diversification
Examples
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Types of countertrade
There are five main variants of countertrade:
• Barter: Exchange of goods or services directly for other goods or services without
the use of money as means of purchase or payment.
• Switch trading: Practice in which one company sells to another its obligation to
make a purchase in a given country.
• Counter purchase: Sale of goods and services to a country by a company that
promises to make a future purchase of a specific product from the country.
• Buyback: occurs when a firm builds a plant in a country - or supplies technology,
equipment, training, or other services to the country and agrees to take a certain
percentage of the plant's output as partial payment for the contract.
• Offset: Agreement that a company will offset a hard - currency purchase of an
unspecified product from that nation in the future. Agreement by one nation to
buy a product from another, subject to the purchase of some or all of the
components and raw materials from the buyer of the finished product, or the
assembly of such product in the buyer nation.
Necessity
Countertrade also occurs when countries lack sufficient hard currency, or when other
types of market trade are impossible.
In 2000, India and Iraq agreed on an "oil for wheat and rice" barter deal, subject to UN
approval under Article 50 of the UN Gulf War sanctions, that would facilitate 300,000
barrels of oil delivered daily to India at a price of $6.85 a barrel while Iraq oil sales into
Asia were valued at about $22 a barrel. In 2001, India agreed to swap 1.5 million tonnes
of Iraqi crude under the oil-for-food program.
The Security Council noted: "... although locally produced food items have become
increasingly available throughout the country, most Iraqis do not have the necessary
purchasing power to buy them. Unfortunately, the monthly food rations represent the
largest proportion of their household income. They are obliged to either barter or sell
items from the food basket in order to meet their other essential needs. This is one of the
factors which partly explains why the nutritional situation has not improved in line with
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the enhanced food basket. Moreover, the absence of normal economic activity has given
rise to the spread of deep-seated poverty."
The neutrality of this article is disputed. Please see the discussion on the talk page.
Please do not remove this message until the dispute is resolved. (December 2007)
Noted US economist Paul Samuelson was skeptical about the viability of countertrade as
a marketing tool, claiming that "Unless a hungry tailor happens to find an undraped
farmer, who has both food and a desire for a pair of pants, neither can make a trade".
(This is called "double coincidence of wants".) But this is a too simplistic interpretation of
how markets operate in the real world. In any real economy, bartering occurs all the
time.
The volume of countertrade is growing. In 1972, it was estimated that countertrade was
used by business and governments in 15 countries; in 1979, 27 countries; by the start of
1990s, around 100 countries. (Vertariu 1992).
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Q.46. What is the need for studying country & company competitiveness while entering
in IB?
MARKETING
Q.47. What is MR? What is its importance in International Business?
Market research is any organized effort to gather information about markets or
customers. It is a very important component of business strategy. The term is
commonly interchanged with marketing research; however, expert practitioners
may wish to draw a distinction, in that marketing research is concerned specifically
about marketing processes, while market research is concerned specifically with
markets.
Market research,as defined by the ICC/ESOMAR International Code on Market and Social
Research, includes social and opinion research, [and] is the systematic gathering and
interpretation of information about individuals or organizations using statistical and
analytical methods and techniques of the applied social sciences to gain insight or
support decision making.
• 1 History
• 2 Market research for business/planning
• 3 Financial performance
o 3.1 Top ten of the market research sector 2006
• 4 See also
• 5 References
• 6 External links
History
Market research began to be conceptualized and put into formal practice during the
1920s,[4] as an offshoot of the advertising boom of the Golden Age of radio in the
United States. Advertisers began to realize the significance of demographics
revealed by sponsorship of different radio programs, so they increasingly sought
more direct feedback about their markets.
Market research is for discovering what people want, need, or believe. It can also involve
discovering how they act. Once that research is completed, it can be used to determine
how to market your product.
Questionnaires and focus group discussion surveys are some of the instruments for
market research.
• Market information
Through Market information one can know the prices of the different commodities in the
market, as well as the supply and demand situation. Information about the markets can
be obtained from different sources, varieties and formats, as well as the sources and
varieties that have to be obtained to make the business work.
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• Market segmentation
Market segmentation is the division of the market or population into subgroups with
similar motivations. It is widely used for segmenting on geographic differences,
personality differences, demographic differences, technographic differences, use of
product differences, psychographic differences and gender differences.
• Market trends
Market trends are the upward or downward movements of a market, during a period of
time. The market size is more difficult to estimate if one is starting with something
completely new. In this case, you will have to derive the figures from the number of
potential customers, or customer segments. [Ilar 1998]
Besides information about the target market, one also needs information about one's
competitors, customers, products, etc. Lastly, you need to measure marketing
effectiveness. A few techniques are:
• Customer analysis
• Choice Modelling
• Competitor analysis
• Risk analysis
• Product research
• Advertising the research
• Marketing mix modeling
International Marketing Research follows the same path as domestic research, but
there are a few more problems that may arise. Customers in international
markets may have very different customs, cultures, and expectations from the
same company. In this case, secondary information must be collected from each
separate country and then combined, or compared. This is time consuming and
can be confusing. International Marketing Research relies more on primary data
rather than secondary information. Gathering the primary data can be hindered
by language, literacy and access to technology.
Marketing managers make numerous strategic and tactical decisions in the process of
identifying and satisfying customer needs. They make decisions about potential
opportunities, target market selection, market segmentation, planning and implementing
marketing programs, marketing performance, and control. These decisions are
complicated by interactions between the controllable marketing variables of product,
pricing, promotion, and distribution. Further complications are added by uncontrollable
environmental factors such as general economic conditions, technology, public policies
and laws, political environment, competition, and social and cultural changes. Another
factor in this mix is the complexity of consumers. Marketing research helps the
marketing manager link the marketing variables with the environment and the
consumers. It helps remove some of the uncertainty by providing relevant information
about the marketing variables, environment, and consumers. In the absence of relevant
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The DECIDE model conceptualizes managerial decision making as a series of six steps.
The decision process begins by precisely defining the problem or opportunity, along with
the objectives and constraints.[4] Next, the possible decision factors that make up the
alternative courses of action (controllable factors) and uncertainties (uncontrollable
factors) are enumerated. Then, relevant information on the alternatives and possible
outcomes is collected. The next step is to select the best alternative based on chosen
criteria or measures of success. Then a detailed plan to implement the alternative
selected is developed and put into effect. Last, the outcome of the decision and the
decision process itself are evaluated.
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While there may be theoretically 'ideal' market segments, in reality every organistion
engaged in a market will develop different ways of imagining market segments, and
create Product differentiation strategies to exploit these segments. The market
segmentation and corresponding product differentiation strategy can give a firm a
temporary commerical advantage.
Every single product that is on sale can be defined by its niche market. As of special
note, the products aimed at a wide demographic audience, with the resulting low price
(due to price elasticity of demand), are said to belong to the mainstream niche—in
practice referred to only as mainstream or of high demand. Narrower demographics lead
to elevated prices due to the same principle.
In practice, product vendors and trade businesses are commonly referred as mainstream
providers or narrow demographics niche market providers (colloquially shortened to just
niche market providers). Small capital providers usually opt for a niche market with
narrow demographics as a measure of increasing their gain margins.
Nevertheless, the final product quality (low or high) is not dependant on the price
elasticity of demand; it is associated more with the specific needs that the product is
aimed at satisfy and in some cases with brand recognition with which the vendor wants
to be associated (e.g., prestige, practicability, money saving, expensiveness, planet
environment conscience, power, &c.).
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competitive advantage. A marketing strategy should be centered around the key concept
that customer satisfaction is the main goal.
Basic theory:
.Target Audience
.Proposition/Key Element
.Implementation
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Culture
Social norms, attitudes towards buying foreign goods, and the working practices
of foreign markets are all cultural factors when opting to invest in foreign
markets. Social norms affect business practices, since social norms are one
factor in the demand for a product. In the tobacco industry, for example,
adolescents in developing countries are often the focus for the marketing and
advertisement campaigns due to their vulnerability. Tobacco companies will
often use symbols and fabrications in western society associated with smoking
as a means of attracting these prospective consumers.[15] A company marketing
pork would experience less sales in an Islamic country, than it would in China
(which is the world's largest consumer of pork). In Western societies, sexuality
and sexual topics are often used in marketing communications (such as
advertising, for instance). However, in a comparatively more conservative
society (such as India for instance) social attitudes may shun the use of sexual
topics to advertise products.
Not all governments are as open to foreign investment as others, nor are all
governments equally favourable to business. Typically, a firm may opt to invest in an
economy in which the government is more inclined to support business activity in a
country. In other words, the "business-friendliness" of a foreign government is
paramount in this instance.
Additionally, some economies are more "liberal" and less regulated, by comparison to
other economies. Excessive regulations can be a hindrance on a firm, since they
contribute to additional costs to a firm. Conversely, regulations can aid in assisting firms,
by easing the path of doing business. A firm seeking to invest in foreign markets must
gauge the regulatory arrangement of the economy it is looking to invest in. Monetary
regulations, akin to the above points, can hinder the ability to do business. A high level of
monetary regulations can hamper foreign investment within an economy.
Lastly, the political stability of a country is also a key factor in foreign investment
decisions. Nation-states experiencing continual coup-d'etat can appear unattractive to
invest in, since the continual changes in political system can compound the inherent risk
in investing. Typically, a firm would opt to invest in a country which had a stable mode of
government, and in which handovers of power were peaceful and non-violent. Even if a
country is not a liberal democracy, a firm may often opt to invest in such an economy, if
the country in question demonstrated a stable political system. The key factor in noting a
nation-state's political stability is to avert excessive costs from diminshed production,
coupled with the loss of current and non-current assets.
• Developing economy
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• Newly-Industrialised country
• Industrialised country (also known as a developed country, advanced economy or
first world economy)
A developing economy has a comparatively low general living standard (as defined by
material lifestyle/level of material possession). Moreover, a developing economy may
also be at subsistence level, or possess a large share of its Gross Domestic Product in
primary industries. Accordingly, a developing country would not be a profitable market
for high-end consumer goods, or fast-moving consumer goods commonly found in
developed/advanced economies. Exports of machinery (related to the extraction and
processing of raw materials) may be viable for a developing economy, due to primary
industries possessing a large share of national income.
An industrialised economy is typically identified via a high Gross Domestic Product per
capita, a high United Nations Human Development Index rating and a high level of
tertiary/quaternary/quinary sector industries in the context of its national income. Thus,
the high general living standard denotes the highest generalised demand for goods and
services within all modes of economic development. Commonly, developed/advanced
economies are high exporters of high-tech manufactured goods, as well as service sector
products (such as financial services, for instance).
Globalisation
The greater economic ties/links between economies has presented a prime
opportunity for firms trading internationally. The advantages to an international
marketing firm are that regulations and costs are lower, which can promote the
use of outsourcing to foreign economies. The disadvantages to a firm in a
globalised economy include negative public relations resulting from the
exploitation of low cost labour, concerns surrounding environmental
degradation, etc.
Regional economic blocks often permit free (and thus less inhibited/restricted) trade
between member nation-states. As such, a British firm would find trading in Germany
less problematic (and vice versa, as both the United Kingdom and Germany are both EU
member states), by comparison with a British firm trading with Mexico or Thailand.
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Such trading blocks can also, conversely, place restrictions/regulations on trade. To use
the earlier example of the EU again, the EU may place regulations on the packaging,
labelling and distribution of a product. Consequently, a UK firm trading in Germany would
have to adhere to the European Union regulations, in order to trade legitimately within
the European Union.
Different types of definitions exist for Multinational Corporations because of the different
kinds of multinational business organisations and each definition characterises a
particular group. Further in maintaining a standard definition of Multinational
Corporations there is the problem of gradual evolution of a domestic firm into a
Multinational Corporation. The following are some of the definitions commonly used to
define a Multinational Corporation: -
According to ILO report (i.e. International Labour Organisation), “ The essential nature of
the Multinational Corporations lies in the fact that its managerial headquarters are
located in one country, while the enterprise carries out operations in number of other
countries.”
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Q.60. What are TNC’s? How are they different from MNC’s?
The first modern TNC is generally thought to be the Dutch East India Company.
Nowadays many corporations have offices, branches or manufacturing plants in different
countries than where their original and main headquarter is located.
This often results in very powerful corporations that have budgets that exceed some
national GDPs. Trancenational corporations can have a powerful influence in local
economies as well as the world economy and play an important role in international
relations and globalization. The presence of such powerful players in the world economy
is reason for much controversy.
Transnational corporations -- those corporations which operate in more than one country
or nation at a time -- have become some of the most powerful economic and political
entities in the world today. From Joshua Karliner, in his book, The Corporate Planet:
Ecology and Politics in the Age of Globalization [Sierra Club Books, 1997], we can gleam
a host of fundamental realizations, including the fact that many of these companies have
far more power than the nation-states across whose borders they operate.
For example, the combined revenues of just General Motors and Ford -- the two largest
automobile corporations in the world -- exceed the combined Gross Domestic Product
(GDP) for all of sub-Saharan Africa. The combined sales of Mitsubishi, Mitsui, ITOCHU,
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Sumitomo, Marubeni, and Nissho Iwai, Japan’s top six Sogo Sosha or trading companies,
are nearly equivalent to the combined GDP of all of South America. Overall, fifty-one of
the largest one-hundred economies in the world are corporations. The revenues of the
top 500 corporations in the U.S. equal about 60 percent of the country’s GDP.
Transnational corporations hold ninety percent of all technology and product patents
worldwide, and are involved in 70 percent of world trade. More than thirty percent of this
trade is “intra- firm”; in other words, it occurs between units of the same corporation.
The number of transnational corporations in the world has jumped from 7,000 in 1970 to
40,000 in 1995. While global in reach, these corporations’ home bases are concentrated
in the Northern industrialized countries, where ninety percent of all transnationals are
based. More than half come from just five nations: France, Germany, the Netherlands,
Japan and the United States. But despite their growing numbers, power is concentrated
at the top. i.e., the 300 largest corporations account for one-quarter of the world’s
productive assets.
The United Nations has justly described these corporations as “the productive core of the
globalizing world economy.” Their 250,000 foreign affiliates account for most of the
world's industrial capacity, technological knowledge, international financial transactions,
and ultimately the power of control. In terms of energy, they mine, refine and distribute
most of the world’s oil, gasoline, diesel and jet fuel, as well as build most of the world’s
oil, coal, gas, hydroelectric and nuclear power plants. They extract most of the world’s
minerals from the ground. They manufacture and sell most of the world’s automobiles,
airplanes, communications satellites, computers, home electronics, chemicals, medicines
and biotechnology products. They harvest much of the world’s wood and make most of
its paper. They grow many of the world’s major agricultural crops, while processing and
distributing much of its food.
Given their dominance of politics, economics and technology, it is not surprising to find
the big transnationals deeply involved in most of the world’s serious environmental
crises.
Transnational corporations exert significant influence over the domestic and foreign
policies of the Northern industrialized government that host them. Surprise! Indeed, the
interests of the most powerful governments in the world are often intimately intertwined
with the expanding pursuits of the transnationals that they charter. At the same time,
transnational corporations are moving to circumvent national governments. The borders
and regulatory agencies of most governments are caving in (or being paid off) to the
New World Order of globalization, allowing corporations to assume an ever more
stateless quality, leaving them less and less accountable to any government anywhere.
These corporations, together with their host governments, are reorganizing the world
economic structures -- and thus the balance of political power -- through a series of
intergovernmental trade and investment accords. These treaties serve as the
frameworks within which globalization is evolving -- allowing international corporate
investment and trade to flourish across the Earth. They include:
The Uruguay Round of the General Agreement on Tariffs and Trade (GATT)
The World Trade Organization, which was created to enforce the GATT's rules.
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For some, Multinational Corporations are an invaluable dynamic force and instrument for
wider distribution of capital, technology and employment. For others, they are monsters
which our present institutions, national or international, cannot adequately control, a law
to themselves with no reasonable concept, the public interest or social policy can
accept”. Multinational Corporations have no doubt been playing a vital role in
establishing new industries, transmitting resources, technology and managerial skills and
building up of physical and social infrastructure required for rapid progress of the poor
countries. The services of Multinational Corporations are useful to both developed as well
as developing countries. They have helped many countries, companies and industries to
expand and develop. These organisations confer the following benefits upon the host and
parent company:
• The developing countries need both foreign capital and technology to exploit and
use available resources for economic and industrial development. Multinational
Corporations can supply the required financial and technical and other resources to
the needy countries in exchange for economic gains. They raise investment, capital
in countries where it is abundant and invest it where capital is scarce and interest
rates are high.
• They locate labour incentive operations where wages are the lowest and thereby
help raise incomes among the worlds lowest income groups.
• Technology is necessary to bring down the cost of production, improve quality of
goods, and produce goods of uniform quality on a large scale. A developing country
like India cannot divert its limited resources to develop technology of its own.
Instead it can be bought readily by paying a price. Multinational Corporations are
agents between developed and developing countries for transfer of capital,
technology, resources and raw materials. They help less developed countries in
obtaining latest techniques of production without undergoing the slow process of
innovation, which involves invariably high costs.
• They work to equalise the cost of factors of production around the world. They
provide an efficient means of integrating national economies. Multinational
Corporations also help in creating some linkage effects of considerable significance.
Such linkage effects may be either in a backward direction or a forward one.
• In developing countries, despite growth of output by 6-10% per unit, employment
has been registering a growth rate of roughly 1-3% only. Less developed countries
under these conditions are looking upon Multinational Corporations as an alternative
source to fill the saving investment and foreign exchange gaps, which exist by and
large in all countries.
• Multinational Corporations are dynamic and offer growth opportunities for domestic
industries. The professional approach of Multinational Corporations in production
and marketing helps to increase profitability of local industries. They also assist
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In the increasingly conscience-focused marketplaces of the 21st century, the demand for
more ethical business processes and actions (known as ethicism) is increasing.[1]
Simultaneously, pressure is applied on industry to improve business ethics through new
public initiatives and laws (e.g. higher UK road tax for higher-emission vehicles).[2]
Businesses can often attain short-term gains by acting in an unethical fashion; however,
such behaviours tend to undermine the economy over time.
While business ethics emerged as a field in the 1970s, international business ethics did
not emerge until the late 1990s, looking back on the international developments of that
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decade.[6] Many new practical issues arose out of the international context of business.
Theoretical issues such as cultural relativity of ethical values receive more emphasis in
this field. Other, older issues can be grouped here as well. Issues and subfields include:
• The search for universal values as a basis for international commercial behaviour.
• Comparison of business ethical traditions in different countries. Also on the basis
of their respective GDP and [Corruption rankings].
• Comparison of business ethical traditions from various religious perspectives.
• Ethical issues arising out of international business transactions; e.g.
bioprospecting and biopiracy in the pharmaceutical industry; the fair trade
movement; transfer pricing.
• Issues such as globalization and cultural imperialism.
• Varying global standards - e.g. the use of child labor.
• The way in which multinationals take advantage of international differences, such
as outsourcing production (e.g. clothes) and services (e.g. call centres) to low-
wage countries.
• The permissibility of international commerce with pariah states.
Foreign countries often use dumping as a competitive threat, selling products at prices
lower than their normal value. This can lead to problems in domestic markets. It
becomes difficult for these markets to compete with the pricing set by foreign markets.
In 2009, the International Trade Commission has been researching anti-dumping laws.
Dumping is often seen as an ethical issue, as larger companies are taking advantage of
other less economically advanced companies.
Business value often embraces intangible assets not necessarily attributable to any
stakeholder group. Examples include intellectual capital and a firm's business model. The
Balanced scorecard methodology is one of the most popular methods for measuring and
managing business value.
For a publicly traded company, shareholder value is the part of its capitalization that is
equity as opposed to long-term debt. In the case of only one type of stock, this would
roughly be the number of outstanding shares times current shareprice. Things like
dividends augment shareholder value while issuing of shares (stock options) lower it. This
Shareholder value added should be compared to average/required increase in value, also
known as cost of capital.
For a privately held company, the value of the firm after debt must be estimated using
one of several valuation methods, s.a. discounted cash flow or others.
Customer Value
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Customer value is the value received by the end-customer of a product or service. "End-
customer" can include a single individual (consumer) or an organization with various
individuals playing different roles in the buying/consumption processes. Customer value
is conceived variously as utility, quality, benefits, and customer satisfaction.
Employee Value
The value a business underpins on partner relationships in the business. Partner value
here stresses that it can be critical to a firms functioning. It ceases to exist or carry out
business activities if partner value is diminished or lost.
Supplier Value
Managerial Value
Societal Value
Q.What is Corruption?
The word corrupt (Middle English, from Latin corruptus, past participle of corrumpere, to
destroy. when used as an adverb literally means "utterly broken". In modern English
usage the words corruption and corrupt have many meanings:
Relationship marketing differs from other forms of marketing in that it recognizes the
long term value to the firm of keeping customers, as opposed to direct or "Intrusion"
marketing, which focuses upon acquisition of new clients by targeting majority
demographics based upon prospective client lists.
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Relationship marketing differs from other forms of marketing in that it recognizes the
long term value to the firm of keeping customers, as opposed to direct or "Intrusion"
marketing, which focuses upon acquisition of new clients by targeting majority
demographics based upon prospective client lists.
Almost all companies surveyed agreed that cross-border alliances would grow in
importance to their business. Most cross border alliances are concentrated in relatively
few industries--those typified by high entry costs, globalization, scale economies, and
rapidly changing technologies--and span all elements of the value chain with particular
emphasis on joint development activities.
Given the range and scope of cross border activity and an equivalent range and scope of
themes in cross-border alliances it is not surprising to see that the result is a complex
patchwork of cross-border alliances, with emphasis on short- and long-term issues. As
this occurs, the industry structure and the rational behavior of major players within the
industry structure is also undergoing major change.
Cross-border alliances are only one of three options executives can use to achieve
corporate goals and objectives in the face of changing market conditions. They are
formed when they yield benefits that cannot be achieved in-house or through outright
acquisition or merger. They have beers used by managements to:
* Secure economies of scale in the R&D and manufacturing functions to offset the higher
cost and risk of bringing new products to the market without losing the identity or
independence of the company in the market place.
* Reduce the cost and time required to establish major positions in new geographic
markets compared with the cost of direct investment or acquisition.
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* Participate in some of the more rapidly growing markets where involvement of a local
partner is either required (eg. joint ventures in parts of Asia and South America) or
desirable.
Once in place however cross-border alliances are frequently difficult to manage and have
their own costs Few of them have been used as vehicles to pursue multiple opportunities
and even fewer could be considered a complete success on the scale needed to make a
fundamental impact on the development of the company. In particular, links with a
partner can create inflexibility, coordination difficulties and risk of competitive conflict.
Q. What is LIBOR?
London Inter-Bank Offer Rate. The interest rate that the banks charge each other for
loans (usually in Eurodollars). This rate is applicable to the short-term international
interbank market, and applies to very large loans borrowed for anywhere from one day to
five years. This market allows banks with liquidity requirements to borrow quickly from
other banks with surpluses, enabling banks to avoid holding excessively large amounts of
their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group
of large London banks, but the rate changes throughout the day.
Pre-shipment funds are available in the form of credit or loan prior to the actual
shipment of goods. These finances help an exporter in purchasing raw material &
components, buying equipment & machinery & manufacturing or sorting the goods
meant for export. Pre-shipment finance is also called as PACKING CREDIT Pre-shipment
finance is available in the following forms:
This facility, though for a short period, is granted to those exporters who are rated first
class by the bank. Loan is granted for making advance payment to suppliers for acquiring
exportable goods. Once goods are taken by exporter in his own custody, the bank
converts the clean advance into hypothication or pledge loan.
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In this case packing credit is extended for obtaining raw material, work-in-
progress & finished goods. The goods acquired are treated as security for the loan
granted. The exporter is in possession of the goods & is required to execute
hypothecation deed in favour of the bank. The activity of the production or conversion of
such raw materials & WIP into finished goods can be undertaken even by sub
contractors.
Once the raw material is converted in to the finished goods, the same has to be
handed over to transport operator or to the clearing & forwarding agent. The security
loan can be obtained only after this. This type of loan is of short duration & is released
against lorry receipt or railway receipt. The only condition which banks insist on, is that
the goods are handled by approved transport operators or clearing & forwarding agents.
Red clause L/C authorizes the negotiating bank to make advances to the
beneficiary (the exporter) to enable him to purchase the goods for export. Until & unless
the goods are purchased & shipped, the exporter cannot obtain bill of lading & insurance
policy. Incase he needs packing credit, he has to request the buyer to arrange for
opening a red clause letter of credit which contains a special clause in red L/C authorizing
& advancing bank to make either immediate payment to the beneficiary in full or in part
as per the terms stated in the L/C & against specified documents & conditions. After
executing the order, the exporter draws a draft asper the terms of credit & the proceeds
thereof are first utilized by the bank in repayment of the advance under the red clause
agreement.
The term Green Clause envisages the grant of storage facilities at the port in
addition to the pre-shipment credit facility to the beneficiary [the exporter]. The opening
of such credit, covering import of goods, in India requires prior approval of RBI.
This credit facility is available to manufacturer exp9orters who are not in receipt
of L/C or confirmed export order. Finance is made available for imports against license
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for manufacturer of export goods. However, two conditions need to be fulfilled. They are:
The bank must be satisfied that the imported material will be utilized for the goods
meant for export only;
The confirmed order or L/C should be produced within reasonable time not exceeding 60
days from the date of advance.
Bank can grant export credit at concessional rate of interest in such cases subject to
following condition have been fulfilled :
Accommodation is granted for the transit period stipulated by FEDAI for collection of the
instruments or till the date of realization of proceeds thereof whichever is earlier.
The bank`s past experience with the borrower & the letter`s track records are good.
The bank must get satisfactory evidence that the instrument represents the advance
remitted against as export order.
The trade practices suggest the possibility of such instrument being received
towards advance payments or the exporters are able to satisfy the ban with reasons for
receiving payments directly.
It is ensured by the bank in due course that the goods have been actually
shipped.
Pre-shipment Advance beyond 270 days Bankers are free to determine Rate
up to 360 days
Pre-shipment advance against incentives 13 % Per Annum.
receivable from the government covered
by ECGC guarantees. ( up to 90 Days )
1) It can also be given under the ' Red Clause ' L/C i.e. at the instance and
responsibility of the foreign bank establishing L/C. In a Red Clause L/C, the packing
credit advance is made against the deposit of L/C and execution of the letter of
pledge / hypothecation / trust receipt and other loan documents.
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2) Exporters who do not receive the export order in their name such as suppliers to
merchant exporters and Export / Trading / Houses, are also eligible provided :-
i) They produce a letter from the concerned merchant / Export /Trading
House that a portion of the ' Order ' has been allotted to them, detailing the goods to
be supplied.
ii) The merchant exporter or Export / Trading neither has availed nor wish to seek
packing credit in respect of the apportioned order, from any other bank / source.
iii) The letter from merchant exporter or Export / Trading House is countersigned by the
bank advising the L/C.
4) Sub-Contractors or Sub - Suppliers supplying the goods for exports under a consortia
arrangement are also eligible for packing credit.
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• Benificiary : The exporter of goods in whose favour the L/C has been established.
• Customer/importer : The person we intends to import the goods and instructs
bank to established Letter of Credit.
• Issuing Bank: The Banker in the importers Country who opened the L/C.
• Correspondent Bank or Advising Bank: The banker in the exporters country, who
is authorised by the issuing bank to advise the beneficiary of the Credit and to
effect such payment or to accept and pay such bills of exchange or to negotiate
against Stipulated documents and on Compliance of Stipulated terms and
condition specified by the importer on the exporter.
• Confirming Bank: The banker in the exporters(beneficiary) country, who at the
desire of the beneficiary adds confirmation to the letter of Credit so that
beneficiary can get payment without recourse from the Confirming bank. The
Confirming bank may be correspondent bank itself or some other bank.
Generally following types of Letter of Credit are in operation.
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i
Q) Explain the role of EXIM Bank in Export promotion?
Q) What is export finance? Explain the role of exim bank in export finance?
OR
Q) What is Exim Bank? What are its Function?
EXIM BANK FINANCE
The Export - Import Bank of India ( EXIM Bank ) provides financial assistance to promote
Indian Exporters through direct financial assistance, overseas investment finance for export
production and export development, pre-shipment credit, buyer's credit, lines of credit, re-
lending facilities, export bill rediscounting, refinance to commercial banks, finance for
computer software exports, finance for export marketing and bulk import finance to
commercial banks. The EXIM bank also extends non-funded facility to Indian exporters in the
form of guarantees. The diversified lending programmes of the EXIM banks now covers various
stage of exports i.e. from the development of export markets to expansion of production
capacity, project exports, exports of technology services and export of computer software.
Financing Programmes
1) Deferred payment exports :- Term finance is provided to Indian exporters of eligible goods
& services which enables them to offer deferred credit to overseas buyers. Deferred credit
can also cover Indian Consultancy, technology & other services. Commercial banks
participate in this programme directly or under risk syndication arrangements.
2) Pre-shipment credit :- Finance is available from EXIM bank for companies executing export
contracts involving cycle time exceeding 6 months. The facility also enables provision of
rupee mobilisation expenses for construction / turnkey project exporters.
3) Term Loan for Export Production :- EXIM bank provides term loan / deferred payment
guarantees to 100 % EOUs, units in free trade zones and computer software exporters. In
collaboration with International Finance Corporation, Washington, EXIM bank provides to
enable small & medium enterprises upgrade export production capability.
4) Facilities for deemed Exports :- Deemed exports are eligible for funded & non-funded
facilities from EXIM bank.
5) Overseas Investment Finance :- Indian Companies establishing joint ventures overseas are
provided finance towards their contribution in the joint ventures.
6) Finance for Export Marketing :- This programme, which is a component of a World Bank
Loan, helps exporters implement their export market development plans.
Loans to Foreign Governments, Companies & Financial Institutions :-
1) Overseas Buyer's Credit :- Credit is directly offered to foreign entities for import of eligible
goods and related services on deferred payments.
2) Lines of Credit :- Besides Foreign Governments, Finance is available to foreign financial
institutions & Govt. agencies to on lend in the respective country for import of goods and
services from India.
3) Relating facility to banks overseas :- Re-lending facility is extended to banks overseas to
enable them to provide term finance to their clients world-wide for imports from India.
Loans to Commercial Banks in India :-
1) Export Bills Re-discounting :- Commercial banks in India who are authorised to deal in
foreign exchange can re-discount their short term export bills with EXIM bank, for an
unexpired usance period of not more than 90 days.
2) Re-finance of Export Credit :- Authorised dealers in foreign exchange can obtain from EXIM
bank 100 % re-finance of deferred payment loans extended for export of eligible Indian
goods.
Guaranteeing of Obligations :-
EXIM bank participates with commercial banks in India in the issue of guarantees
required by Indian Companies for export contracts and for execution of overseas construction
and turnkey projects.
ORGANISATIONS :-
EXIM bank is fully owned by the Govt. of India and is managed by a Board of Directors with
repatriation from the Govt., Financial Institutions, Banks, Business Community. The operations
are grouped into Project Finance, Trade Finance, Overseas Investment Finance supported by
Planning & Co-ordination groups.
1) Export ( Supplier's ) Credit :- enables Indian exporters to extend item credit to importer
overseas, of eligible Indian goods.
2) Finance for Consultancy & Technology Services :- enables Indian exporters of consultancy
and technology services to extend credit to importer overseas.
3) Pre-shipment Credit :- enables Indian exporters to buy R/M and other inputs for export
contracts involving cycle time exceeding 6 months.
4) Foreign Currency Pre-shipment Credit :- enables eligible exporter to access finance through
commercial banks for imports of R/M & other ouputs needed for export production.
5) Finance for EOUs & units in EPZs :- enables Indian companies to acquire indigeneous and
imported machinery & other items for export production.
6) Foreign Currency lines of credit for imports :- enables eligible export oriented units to
acquire imported machinery for export production.
7) Production Equipment.Finance :- enables eligible export-oriented units to acquire
equipments.
8) Overseas Investment Finance :- enables Indian promoters to finance equity contribution in
joint ventures set up abroad.
9) Project Preparatory Services Overseas :- enables Indian consultancy firms undertake project
preparatory studies in developing countries by grant / loan financing.
10) Business Advisory & Technical Assistance Services Overseas :-
up of joint ventures in India between Indian Companies & enterprises in the European
Community.
1) Re-finance of Export Supplier's Credit :- enables banks to offer credit to Indian exporters of
eligible goods, who extend term credit over 180 days to foreign importer overseas.
2) Export bills re-discounting : enables banks to re-discount export bills with usance not
exceeding 180 days.
3) Re-lending facility :- enables banks overseas to make available term finance to their client,
for import of eligible Indian goods.
4) Re-finance of Term Loans to EOUs :- enables banks to offer credit to eligible export-oriented
units to acquire indigeneous and imported machinery and other assets for export
production.
5) Re-finance of term loans for Computer Software Exports :- enables acquisition of imported
and indigeneous computer system and project related assets.
6) Small Scale Industry ( SSI ) Export Bills Re-discounting :- enables banks to re-discount
export bills of their SSI customers with usance not exceeding 90 days.
7) Bank Import Finance :- enables banks to offer to importers for bulk import of consumable
inputs.
Pre-shipment funds are available in the form of credit or loan prior to the actual shipment of
goods. These finances helps an exporter in purchasing raw material & components, buying
equipment & machinery & manufacturing or sorting the goods meant for export. Pre-shipment
finance is available in the following forms :
This facility, though for a short period, is granted to those exporters who are rated first
class by the bank. Loan is granted for making advance payment to suppliers for acquiring
exportable goods. Once goods are taken by exporter in his own custody, the bank converts the
clean advance into hypothication or pledge loan.
In this case packing credit is extended for obtaining raw material, work-in-progress &
finished goods. The goods acquired are treated as security for the loan granted. The exporter is
in possession of the goods & is required to execute hypothication deed in favour of the bank.
The activity of the production or conversion of such raw materials & WIP into finished goods
can be undertaken even by sub contractors.
This facility is available in case of seasonal goods or those acquired by the exporters
under odd lots. The documents relating to acquisition of raw-materials are pledged to the bank
while possession of the goods remain with the exporter.
Once the raw material is converted in to the finished goods, the same has to be handed
over to transport operator or to the clearing & forwarding agent. The security loan can be
obtained only after this. This type of loan is of short duration & is released against lorry receipt
or railway receipt. The only condition which banks insist on, is that the goods are handled by
approved transport operators or clearing & forwarding agents.
In this exporter opens a letter of credit in favour of the supplier instead of blocking the
funds for purchase of raw material or finished products from manufacturers. When an exporter
who has received original letter of credit from importer, requests his banker to open a L/C in
favour of his suppliers. Generally banks are reluctant to open back to back L/C, but if it is
opened, the original L/C is retained by the bank as a security.
Red clause L/C authorizes the negotiating bank to make advances to the beneficiary
(the exporter) to enable him to purchase the goods for export. Until & unless the goods are
purchased & shipped, the exporter cannot obtain bill of lading & insurance policy. Incase he
needs packing credit, he has to request the buyer to arrange for opening a red clause letter of
credit which contains a special clause in red L/C authorizing & advancing bank to make either
immediate payment to the beneficiary in full or in part as per the terms stated in the L/C &
against specified documents & conditions. After executing the order, the exporter draws a draft
asper the terms of credit & the proceeds thereof are first utilized by the bank in repayment of
the advance under the red clause agreement.
The term Green Clause envisages the grant of storage facilities at the port in addition to
the pre-shipment credit facility to the beneficiary [the exporter]. The opening of such credit,
covering import of goods, in India requires prior approval of RBI.
This credit facility is available to manufacturer exporters who are not in receipt of L/C or
confirmed export order. Finance is made available for imports against license for manufacturer
of export goods. However, two conditions need to be fulfilled. They are:
The bank must be satisfied that the imported material will be utilized for the goods meant for
export only;
The confirmed order or L/C should be produced within reasonable time not exceeding 60 days
from the date of advance.
Bank can grant export credit at concessional rate of interest in such cases subject to
following condition have been fulfilled :
Accommodation is granted for the transit period stipulated by FEDAI for collection of the
instruments or till the date of realization of proceeds thereof whichever is earlier.
The bank`s past experience with the borrower & the letter`s track records are good.
The bank must get satisfactory evidence that the instrument represents the advance remitted
against as export order.
The trade practices suggest the possibility of such instrument being received towards
advance payments or the exporters are able to satisfy the ban with reasons for receiving
payments directly. It is ensured by the bank in due course that the goods have been actually
shipped.
Negotiation Bill Drawn Under L/C :An exporter can avail of post-shipment credit by drawing bills
or drafts under the Letter Of Credit. The bank insists on production of the necessary documents
as stated in the L/C. If all documents are in order the bank negotiate the bill & advance is
granted to the exporter.
Q) What is financial risk? How to evaluate the financial risk in International Business?
Q) What are import export documents? What is the legal importance of the documents?
The importers are required to furnish the following documents along with Bill of Entry
• Invoice
• Packing list
• Letter of guarantee of bank
• Insurance policy
• Catalogue
• Contract of suppliers
• Price list
• Import license
• Insurance policy
• Bill of Lading
• Certificate of origin
Introduction
An exporter without any commercial contract is completely exposed of foreign exchange risks
that arises due to the probability of an adverse change in exchange rates. Therefore, it
becomes important for the exporter to gain some knowledge about the foreign exchange rates,
quoting of exchange rates and various factors determining the exchange rates. In this section,
we have discussed various topics related to foreign exchange rates in detail.
Export from India required special document depending upon the type of product and
destination to be exported. Export Documents not only gives detail about the product and its
destination port but are also used for the purpose of taxation and quality control inspection
certification.
In case of Post Parcel, no Shipping Bill is required. The relevant documents are mentioned
below:
• Customs Declaration Form - It is prescribed by the Universal Postal Union (UPU) and
international apex body coordinating activities of national postal administration. It is
known by the code number CP2/ CP3 and to be prepared in quadruplicate, signed by the
sender.
• Despatch Note- It is filled by the exporter to specify the action to be taken by the
postal department at the destination in case the address is non-traceable or the parcel
is refused to be accepted.
• Commercial Invoice - Issued by the exporter for the full realisable amount of goods as
per trade term.
• Consular Invoice - Mainly needed for the countries like Kenya, Uganda, Tanzania,
Mauritius, New Zealand, Burma, Iraq, Ausatralia, Fiji, Cyprus, Nigeria, Ghana, Zanzibar
etc. It is prepared in the prescribed format and is signed/ certified by the counsel of the
importing country located in the country of export.
• Customs Invoice - Mainly needed for the countries like USA, Canada, etc. It is prepared
on a special form being presented by the Customs authorities of the importing country.
It facilitates entry of goods in the importing country at preferential tariff rate.
• Legalised / Visaed Invoice - This shows the seller's genuineness before the
appropriate consulate or chamber or commerce/ embassy.
• Certified Invoice - It is required when the exporter needs to certify on the invoice that
the goods are of a particular origin or manufactured/ packed at a particular place and in
accordance with specific contract. Sight Draft and Usance Draft are available for this.
Sight Draft is required when the exporter expects immediate payment and Usance Draft
is required for credit delivery.
• Packing List - It shows the details of goods contained in each parcel / shipment.
• Certificate of Inspection – It is a type of document describing the condition of goods
and confirming that they have been inspected.
• Black List Certificate - It is required for countries which have strained political
relation. It certifies that the ship or the aircraft carrying the goods has not touched
those country(s).
• Manufacturer's Certificate - It is required in addition to the Certificate of Origin for
few countries to show that the goods shipped have actually been manufactured and is
available.
• Certificate of Chemical Analysis - It is required to ensure the quality and grade of
certain items such as metallic ores, pigments, etc.
• Certificate of Shipment - It signifies that a certain lot of goods have been shipped.
• Health/ Veterinary/ Sanitary Certification - Required for export of foodstuffs,
marine products, hides, livestock etc.
• Certificate of Conditioning - It is issued by the competent office to certify compliance
of humidity factor, dry weight, etc.
• Antiquity Measurement – It is issued by Archaeological Survey of India in case of
antiques.
• Shipping Order - Issued by the Shipping (Conference) Line which intimates the
exporter about the reservation of space of shipment of cargo through the specific vessel
from a specified port and on a specified date.
• Cart/ Lorry Ticket - It is prepared for admittance of the cargo through the port gate
and includes the shipper's name, cart/ lorry No., marks on packages, quantity, etc.
• Shut Out Advice - It is a statement of packages which are shut out by a ship and is
prepared by the concerned shed and is sent to the exporter.
Export Credit Guarantee Corporation of India Limited, was established in the year 1957 by the
Government of India to strengthen the export promotion drive by covering the risk of exporting
on credit.
Major Functions:
• To provide a range of credit risk insurance covers to exporters against loss in export of
goods and services
The covers issued by ECGC can be divided broadly into four groups:
• Standard Policy
• Specific Policies
• Financial Guarantees
• Special Schemes
Standard Policy:
Shipments (Comprehensive Risks) Policy, which is commonly known as the Standard Policy, is
the one ideally suited to cover risks in respect of goods exported on short-term credit; i.e.
credit not exceeding 180 days. The policy covers both commercial and political risks from the
date of shipment.
Specific Policies:
Specific Policies are designed to protect Indian firms against payment risks involved in
international business.
These policies are issued separately for each specific contract, and cover risks normally from
the date of contract.
Financial Guarantees:
Financial Guarantees are issued to banks in India to protect them from risks of loss involved in
their extending financial support at pre-shipment and post-shipment stages. These also cover a
host of non-fund based facilities that are extended to exporters.
Special Schemes:
Some special schemes include:
• Transfer Guarantee meant to protect banks that add confirmation to Letters of Credit
opened by foreign banks
• Insurance cover for Buyers Credit and Lines of Credit
• Exchange Fluctuation Risk Insurance
Risks covered under the Standard Policies:
Commercial Risks:
Political Risks :
1) Commercial disputes including quality disputes raised by the buyer, unless the exporter
obtains a decree from a court of low in the buyer`s country in his favour.
2) Causes inherent in the nature of the goods.
3) Buyer`s failure to obtain import or exchange authorization from authorities in his
country.
4) Insolvency or default any agent of the exporter or of the collecting bank.
5) Loss or damage to goods which can be covered by commercial insurers.
6) Exchange fluctuation.
7) Discrepancy in documents.
A Special Economic Zone in short SEZ is a geographically bound zones where the economic
laws in matters related to export and import are more broadminded and liberal as compared to
rest parts of the country. SEZs are projected as duty free area for the purpose of trade,
operations, duty and tariffs. SEZ units are self-contained and integrated having their own
infrastructure and support services.
Within SEZs, a units may be set-up for the manufacture of goods and other activities including
processing, assembling, trading, repairing, reconditioning, making of gold/silver, platinum
jewellery etc.
As per law, SEZ units are deemed to be outside the customs territory of India. Goods and
services coming into SEZs from the domestic tariff area or DTA are treated as exports from
India and goods and services rendered from the SEZ to the DTA are treated as imports into
India.
Benefits of SEZ
Apart from providing state-of-the-art infrastructure and access to a large well-trained and
skilled work force, the SEZ also provides enterprises and developers with a favorable and
attractive framework of incentives which include 100% income tax exemption for a period of
five years and an additional 50% tax exemption for two years thereafter. Similarly, 100% FDI is
also provided in the manufacturing sector. Exemption from industrial licensing requirements
and no import license requirements is also given to the SEZ units.
Read more about the benefits of SEZ units » Various SEZ Units in India
The area under 'SEZ' covers a wide range of zones, including Export Processing Zones (EPZ),
Free Zones (FZ), Industrial Estates (IE), Free Trade Zones (FTZ), Free Ports, Urban Enterprise
Zones and others. Usually the goal of an SEZ structure is to increase foreign investment in the
country.
At present there are fourteen functional SEZs located at Santa Cruz (Maharashtra), Cochin
(Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh),
Falta and Salt Lake (West Bengal), Nodia (Uttar Pradesh), Indore (Madhya Pradesh), Jaipur
(Rajasthan), etc.
Q) What is DBK?
DBK or drawback means refund of custom duties paid on the imports of raw material,
components & packing material used for export products. Banks offer per-shipment as well as
post-shipment advances against DBK entitlements. However ,the scheme of granting free
advances against claims of DBK has been discounted with effect from 2nd March, 1992.
• Free on Board(FOB)
The sellers’s responsibility ends the moment the contracted goods are placed on board
the ship, free of cost to the buyer at a port of shipment named in the sales contract. ‘On
board’ means that a Received for Shipment’ Bill of Lading is not sufficient. Such B/L if
issued must be converted into ‘Shipped on Board B/L’ by using the stamp ‘Shiped on
Board’ and must bear signature of the carrier or his authorised representative together
with date on which the goods were ‘boarded’.
Negative list of exports contain those items which are either banned or cannot be freely
exported.
The negative list of exports consists of these parts:
Prohibited Items
Restricted Items
Canalised Items
The prohibited items are banned from exporting. The list of prohibited items contains
ten items. The items are:
Exotic Birds.
Beef.
Human Skeletons.
The restricted items are allowed to be exported only with special licensing by
the DGFT . Some of the restricted items are as follows:
Cattle
Camel
Fabrics / Textile items with imprints of excerpts or verses of the Holy Quran.
Fresh and frozen silver pomfrets of weight less than 300 gms.
The list contains those items which are to be exported only through
designated canalized agencies. At present there are six items which are canalized. They are:
ITEMS
CANALIZING
Marketing Federation of
Concentrate
Kerala
Q) What is export pricing g what factors should be considered while fixing export price?
Q) What are different terms used in export pricing?
INCO TERMS
While finalising the terms of import contract, the Importer, should, inter alia, be fully
conversant with the mode of pricing and the manner of payment for the imports. As regards
mode of pricing, the overseas supplier normally quote the terms prevailing in international
trade.
The importer for his benefits should know the meaning of the technical terminology. To avoid
ambiguity in interpretation of such terms, International Chamber of Commerce, Paris, Has give
detailed definition of a few standard terms popularly known as ‘INCO TERMS’. These terms
have almost universal acceptance and are explained below:
• Ex-work
‘Ex-work’ means that the seller’s responsibility is to make the goods available to the
buyer at works or factory. The full cost and risk involved in bringing the goods from this
place to the desired destination will be borne by the buyer. This terms thus represents the
minimum obligation for the seller. It is mostly used for sale of plantation commodities
such as tea, coffee and cocoa.
• Free on Board(FOB)
The sellers’s responsibility ends the moment the contracted goods are placed on board
the ship, free of cost to the buyer at a port of shipment named in the sales contract. ‘On
board’ means that a Received for Shipment’ Bill of Lading is not sufficient. Such B/L if
issued must be converted into ‘Shipped on Board B/L’ by using the stamp ‘Shiped on
Board’ and must bear signature of the carrier or his authorised representative together
with date on which the goods were ‘boarded’.
the goods to the port of destination named in the sale contract and pay the freight. This
being a shipment contract, the point of delivery is fixed to the ship’s rail and the risk of loss
or of damage to the goods is transferred from the seller to the buyer at that very point. As
will be seen though the seller bears the cost of carriage to the named destination, the risk is
Advantages
• 15 year corporate tax holiday on export profit – 100% for initial 5 years, 50% for the
next 5 years and up to 50% for the balance 5 years equivalent to profits ploughed back
for investment.
• Allowed to carry forward losses.
• No licence required for import made under SEZ units.
• Duty free import or domestic procurement of goods for setting up of the SEZ units.
• Goods imported/procured locally are duty free and could be utilized over the approval
period of 5 years.
• Exemption from customs duty on import of capital goods, raw materials, consumables,
spares, etc.
• Exemption from Central Excise duty on the procurement of capital goods, raw materials,
and consumable spares, etc. from the domestic market.
• Exemption from payment of Central Sales Tax on the sale or purchase of goods,
provided that, the goods are meant for undertaking authorized operations.
• Exemption from payment of Service Tax.
• The sale of goods or merchandise that is manufactured outside the SEZ (i.e, in DTA) and
which is purchased by the Unit (situated in the SEZ) is eligible for deduction and such
sale would be deemed to be exports.
• The SEZ unit is permitted to realize and repatriate to India the full export value of goods
or software within a period of twelve months from the date of export.
• “Write-off” of unrealized export bills is permitted up to an annual limit of 5% of their
average annual realization.
• No routine examination by Customs officials of export and import cargo.
• Setting up Off-shore Banking Units (OBU) allowed in SEZs.
• OBU's allowed 100% income tax exemption on profit earned for three years and 50 %
for next two years.
• Exemption from requirement of domicile in India for 12 months prior to appointment as
Director.
• Since SEZ units are considered as ‘public utility services’, no strikes would be allowed in
such companies without giving the employer 6 weeks prior notice in addition to the
other conditions mentioned in the Industrial Disputes Act, 1947.
• The Government has exempted SEZ Units from the payment of stamp duty and
registration fees on the lease/license of plots.
• External Commercial Borrowings up to $ 500 million a year allowed without any
maturity restrictions.
• Enhanced limit of Rs. 2.40 crores per annum allowed for managerial remuneration.
Disadvantages
Q). Explain the types and causes of disequilibrium in the balance of payments
In general terms, a deficit in the balance of payments is called disequilibrium. Such a
deficit may be at the capital account, current account ; occasional, chronic ; cyclical, enlarging
deficits. Each type is caused by different set of factors. But in general, disequilibrium is an
unfavourable position in BoP caused by continuous deficits which are large.
Types of disequilibrium in BoP :
Following are the different types of disequilibrium in BoP :
1. Cyclical disequilibrium : This is caused by the trade cycles. The economic activity changes
in cyclical fashion with boom depression. In each state, the disequilibrium is caused
depending on the spurt of incomes, intensity of demand for imports, domestic prices and
nature of exports and imports.
The impact of cyclical disequilibrium is found in developed economies as compared
with less developed economies.
2. Secular equilibrium : Secular disequilibrium depends on the level of growth in an economy.
An economy can be a primitive economy, or an economy under preparatory stage for
development or an economy in the take-off stage or an economy with high mass
consumption. These are the stages of growth as given by W.W.Rostow.
Secular disequilibriumis characterised by the level of population, capital
accumulation, technology and resources.
3. Structural disequilibrium : This is caused mainly due to the nature and composition of
exports and imports. The elasticities of exports and imports determine the efficiency of any
methods of correcting the trade. For example , stagnant exports and elastic imports cause
BoP problems. Correction of such disequilibrium will need structural changes in the
composition of trade and foreign exchange position.
Causes of disequilibrium in developing countries :
BoP disequilibrium is common with most developing economies. Study of the factors and
nature of disequilibrium will help in correction and design of methods of protection.
Following are the important causes of disequilibrium :
1. Large population, increasing growth rates of population.
2. Stagnant exports due to out dated products
3. Increasing demand for imports.
4. Low productivity and poor growth rates.
5. Lack of bargaining power.
6. Large external debt due to which the burden of debt servicing increases.
7. Adverse terms of trade.
8. Cyclical fluctuations in economic activity.
9. Problems of international liquidity.
10. Absence of ant trading association or regional block
11. Weak currency
12. Absence of trade ties with developed economies.
In addition all the problems of under development contribute to disequilibrium in BoP. Since
there is no effective mechanism to correct, the disequilibrium becomes chronic.
Capital account :
It deals with capital movements between one country and rest of the world.
Capital movements can be private, governmental or institutional ( IMF, World Bank and
others).It can be again classified as short term and long term capital movements.
Other items include amortisation, debt servicing, monetary gold and
miscellaneous. Amortisation is the loan liquidated, debt servicing is the repayment of
principle and interest and non-monetary gold is the payments made interms of gold.
These capital transactions will also have a debit or credit depending on the
directions of flows. Capital account can show a deficit or a surplus revealing the
strength of the economy. The deficits of the current account will be financed by the
capital account. So there is a spill over of deficits of current acceptant into capital
account.
Finally, the balance of payments will have the deficit or surplus, reflecting the
overall position of all the international transactions.
Important ratios :
1. Balance of trade :
Balance of trade is an important indicator of the efficiency of export sector and import
substitution sector. It is the position of an economy interms of merchandise on current
account. It is an important indicator because it will highlight the foreign exchange
commitments of the country with respect to each country and currency.
2. Basic balance :
This is the difference between exports + inflow of long term capital AND imports + out
flow of private capital. It is measure of gross movements in currencies in and out of the
economy.
3. Liquidity balance :
In international trade, liquidity is a major consideration in international payments.
Liquidity balance deals with the difference in the official exchange holdings over a given period
of time. High liquidity balance improves the credit worthiness of a country.
4. Official settlement balance :
It is a gross indicator of financial position arising out of the balance of payments. It is
the difference between exports + all private capital inflows AND imports + all private out flows.
It gives a clear picture of the balance of payments position pertaining to a given time period.
Q) What is LERMS?
It stands for liberalized exchange rate management system (LERMS) was introduction
March 1992, as a result the foreign exchange market in India effectively became a two ties
one, with a direct exchange rate system in force, one rate was the administration (or official)
one at which specified type or proportion of currency exchange had to be transacted by
demand and supply in the transaction in March 1993 this system was abolished and now single
market determined rate in applicable for all transaction.
Commodity Boards
Commodity Board is registered agency designated by the Ministry of Commerce, Government
of India for purposes of export-promotion and has offices in India and abroad. There are five
statutory Commodity Boards, which are responsible for production, development and export of
tea, coffee, rubber, spices and tobacco.
Textile Committee
Textile Committee carries pre-shipment inspection of textiles and market research for textile
yarns, textile machines etc.
Address: Textile Centre, second Floor, 34 PD, Mello Road, Wadi Bandar, Bombay-400009