International Business

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INTERNATIONAL BUSINESS
VARIOUS ORGANISATIONAL STRUCTURES IN IB
ORGANIZATION ARCHITECTURE AND PROFITABILITY Totality of a firms organization, including structure, control
systems, incentives, processes, culture and people. Superior organization profitability requires three conditions: An organizations architecture must be internally consistent. Strategy and architecture must be consistent. Strategy, architecture and competitive environments must be consistent. ORGANIZATIONAL ARCHITECTURE
INTERNATIONAL BUSINESS Organizational structure
Location of decision making responsibilities within the structure (vertical differentiation) Formal division of the organization into subunits e.g. product divisions (horizontal differentiation) Establishment of integrating mechanisms including cross-functional teams and or pan-regional committees
Control systems
Metrics used to measure performance of subunits and judge managerial performance
Incentives
Devices used to reward appropriate employee behaviour Closely tied to performance metrics
Processes
Manner in which decisions are made and work is performed
Organizational culture
Values and norms shared among employees of an organization Strategy used to manage human resources
People (Employees)
Strategy used to recruit, compensate, and retain individuals with necessary skills, values and orientation
PURPOSE OF ORGANIZATIONAL STRUCTURE

To exercise control To establish division of labour To facilitate communications To facilitate coordination & integration To establish accountability To delegate responsibility To establish lines of authority and chain of command To establish rules and regulations
VERTICAL DIFFERENTIATION Concerned with where decisions are made. Two Approaches
Centralization Decentralization CENTRALIZATION

Facilitates coordination. Ensure decisions consistent with organizations objectives. Top-level managers have means to bring about organizational change. Avoids duplication of activities.
DECENTRALIZATION
Overburdened top management.

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Motivational research favours decentralization. Permits greater flexibility. Can result in better decisions. Can increase control.
STRATEGY AND ORGANIZATION STRUCTURE Major strategic decisions are centralized at the firms headquarters while operating decisions are decentralized GLOBAL STRATEGY

Aim to realize location and experience economies Centralization of some operating decisions Multi-domestic firms: aim for local responsiveness Decentralizing operating decisions to foreign subsidiaries
INTERNATIONAL FIRMS Maintain centralized control over their core competency and decentralize other decision to foreign subsidiaries. TRANSNATIONAL FIRMS

Aim to realize location and experience curve economies Centralized control over global production centers Need to be locally responsive
COMPANYS INTERNATIONAL DIVISION STRUCTURE
Adopted in early stages of international business operations Coordinate all IB activities Develop international expertise & skills Develop a global/international mindset Champion of foreign business
DISADVANTAGES OF INTERNATIONAL DIVISION

Dependent on domestic product divisions for R&D, engg., etc. Conflict over pricing and transfer pricing Power struggles in firm: intl Vs. domestic Cannot handle too many products Not appropriate if foreign sales over 25% Heads of foreign subsidiaries relegated to second-tier position
WORLDWIDE AREA STRUCTURE
Favoured by firms with low degree of diversification Area is usually a country Facilitates local responsiveness Favoured by firms with low degree of diversification & domestic structure based on function World is divided into autonomous geographic areas Operational authority decentralized Facilitates local responsiveness Fragmentation of organization can occur Consistent with multi domestic strategy
A WORLDWIDE AREA STRUCTURE
PRODUCT DIVISION

Adopted by firms that is reasonably diversified Original domestic firm structure based on product division Value creation activities of each product division coordinated by that division worldwide
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Help realize location and experience curve economies Facilitate transfer of core competencies Problem: area managers have limited control, subservient to product division managers, leading to lack of local responsiveness
A WORLDWIDE PRODUCT DIVISION STRUCTURE
MATRIX STRUCTURE

Helps to cope with conflicting demands of earlier strategies Two dimensions: product division and geographic area Product division and geographic areas given equal responsibility for operating decisions
PROBLEMS
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Bureaucratic structure slows decision making Conflict between areas and product divisions Difficult to make Attempts to meet needs of transnational strategy
A GLOBAL MATRIX STRUCTURE
THE INTERNATIONAL STRUCTURAL STAGES MODEL
ADR & GDR

HOW DO WE RAISE FUNDS FROM INTERNATIONAL MARKET? WHAT IS AN ADR / GDR?
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There are some very good proxies that can be used by Non Resident Indians (NRIs) and non-Indians for making investments in India. ADR stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt. Every publicly traded company issues shares and these
shares are listed and traded on various stock exchanges. Thus, companies in India issue shares which are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock Exchange), etc. These shares are sometimes also listed and traded on
foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation).
But to list on a foreign stock exchange, the company has to
comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly. But many companies get listed on these stock exchanges The company deposits a large number of its shares with a The bank issues receipts against these shares, each receipt These receipts are then sold to the people of this foreign indirectly- using ADRs and GDRs. bank located in the country where it wants to list indirectly. having a fixed number of shares as an underlying (Usually 2 or 4). country (and anyone who are allowed to buy shares in that country). These receipts are listed on the stock exchanges. They exactly like regular stockstheir prices fluctuate behave
depending on their demand and supply, and depending on the fundamentals of the underlying company.
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These receipts, which are traded like ordinary stocks, are Each receipt amounts to a claim on the predefined number The issuing bank acts as a depository for these shares- that
called Depository Receipts. of shares of that company. is, it stores the shares on behalf of the receipt holders. WHAT IS THE DIFFERNCE BETWEEN ADR AND GDR?
Both ADR and GDR are depository receipts, and represent a
claim on the underlying shares. The only difference is the location where they are traded. If the depository receipt is traded in the United States of If the depository receipt is traded in a country other than Since ADRs and GDRs are traded like any other stock, NRIs America (USA), it is called an American Depository Receipt (ADR). USA, it is called a Global Depository Receipt (GDR). and foreigners can buy these using their regular equity trading accounts. INDIAN COMPANIES HAVING ADRs & GDRs
Company Bajaj Auto Dr. Reddys HDFC Bank Hindalco ICICI Bank Infosys Technologies ITC L&T MTNL Patni Computers Ranbaxy Laboratories FUTURE OF ADRs AND GDRs
ADR No Yes Yes No Yes Yes No No Yes Yes No
GDR Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes
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If you look across the spectrum of companies in Central
Europe (CE), GDR programmes are becoming less popular because overall institutions are investing directly. For a newly listed CE company, a GDR programme still makes sense: the costs are marginal, there are no extra efforts in terms of compliance and its a good way to get exposure. Im not sure if having an ADR programme is really beneficial given the amount of paperwork and additional lawyers time needed to comply with the Sarbanes Oxley Act. There is good empirical evidence to show that, on average, there is a 10 to 15 per cent increase in stock price when a foreign company lists an American depositary receipt. The reason is that it has become a new company by agreeing voluntarily to play by a different set of rules. Terminating an ADR programme sends the reverse signal. It says to investors: We, as management, no longer want to be subjected to this additional layer of regulation and scrutiny. There have been a lot of good names delisting over the past few months since the rule change that allowed companies to exit if their ADR trading fell below five per cent. The US brokerage system, besides the large institutional system, is still dollar based. Investors dont want multiple brokerage accounts, which is why an ADR offers such value because its a US dollar security. With an ADR, you dont face custody costs, tax issues or get your dividends in another currency. ADR programmes can either be in Pink Sheets, which means the issuer has no relationship with us or they can apply for and go through the process of joining International OTCQX.
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INTERNATIONAL BUSINESS RBI RULES FOR ADRs & GDRs Indian companies are allowed to raise equity capital in the international market through the issue of GDR & ADRs. An applicant company seeking Government's approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition can be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. There is no such restriction because a company engaged in the manufacture of items covered under Automatic Route is likely to exceed the percentage limits under Automatic Route, whose direct foreign investment after a proposed GDRs/ADRs/FCCBs is likely to exceed 50 % / 51 % / 74 %. There are no end-use restrictions on GDRs/ADRs issue proceeds, except for an express ban on investment in real estate and stock markets.
ADR & GDR NORMS FURTHER RELAXED
Indian bidders allowed raising funds through ADRs, GDRs and external commercial borrowings (ECBs) for acquiring shares of PSEs in the first stage and buying shares from the market during the open offer in the second stage.
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Conversion
and
reconversion
(a.k.a.
two-way
conversion
or
fungibility) of shares of Indian companies into depository receipts listed in foreign bourses, while extending tax incentives to nonresident investors, allowed. The re-coversion of ADRs/GDRs would, however, be governed by the Foreign Exchange Management Act notified by the Reserve Bank of India in March 2001.
Permission to retain ADR/GDR proceeds abroad for future foreign exchange requirements, removal of the existing limit of $20,000 for remittance under the employees stock option scheme (ESOP) and permitting remittance up to $ 1 million from proceeds of sales of assets here.
Companies have been allowed to invest 100 per cent of the proceeds of ADR/GDR issues (as against the earlier ceiling of 50%) for acquisitions of foreign companies and direct investments in joint ventures and wholly-owned subsidiaries overseas.
Any Indian company which has issued ADRs/GDRs may acquire shares of foreign companies engaged in the same area of core activity upto $100 million or an amount equivalent to ten times of their exports in a year, whichever is higher. Earlier, this facility was available only to Indian companies in certain sectors.
FIIs can invest in a company under the portfolio investment route upto 24 per cent of the paid-up capital of the company. It can be increased to 40% with approval of general body of the shareholders by a special resolution. This limit has now been increased to 49% from the present 40%.
Two way fungibility in ADR/GDR issues of Indian companies has been introduced subject to sectoral caps wherever applicable. Stock brokers in India can now purchase shares and deposit these with the Indian custodian for issue of ADRs/GDRs by the overseas depository to the extent of the ADRs/GDRs that have been converted into underlying shares.
FOR EXAMPLE
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INTERNATIONAL BUSINESS Cipla to raise funds from international market Cipla on Fridiay said it would raise Rs. 1,500 crore from the international market by issuing non-convertible debentures, foreign currency convertible bonds, American Depository Receipts and Global Depository Receipts, Cipla said in a filing to the Bombay Stock Exchange.
INTERNATIONAL LOGISTICS AND ITS IMPORTANCE IN IB
INTERNATIONAL LOGISTICS An important dimension of the supply chain is logistics, also sometimes called materials management. According to the Council of Logistics Management, USA, logistics management is the process of planning, implementing and controlling the efficient, cost effective flow and storage of raw materials, in process inventory, finished goods, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements. The difference between supply chain management and materials management is on degree. Materials management, or logistics, focuses much more on the transport and storage of materials and final goods, whereas supply chain management extends beyond that to include the management of supplier and customer relations. Logistics, also known by such other names as marketing logistics, industrial logistics/ business logistics/ distribution/ channels of distribution logistics/ distribution engineering materials logistics management supply chain management is a very important component of operations management.
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COMPONENTS OF LOGISTICS Logistics encompasses the total movement concept, covering the entire range of operations concerned with the movement of materials and products to, through, and out of the firm to the consumer. It includes a variety of activities such as inventory management, warehousing and storage, transportation, materials handling, order processing, distribution, communications, packaging, salvage and scrap disposal, returned goods handling, customer service etc. Some of the major components of logistics are the following:
FIXED FACILITIES LOCATION The major consideration is the location of fixed facilities like production and warehousing in such a way as to maximize the total efficiency of the logistics system. Factors like future potential of the markets, future plans of the company, competitive factors, political stability, etc. are also important considerations. INVENTORY MANAGEMENT The main objective of inventory management is to minimize the cost of the inventory while ensuring smooth supplies. Developments in inventory management by the customers order processing and in the total logistics system have made inventory management both challenging and efficient. ORDER PROCESSING
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The efficiency of order processing by the client as well as the company have important implications for inventory levels and other aspects of the logistics. Rapid order processing shortens the order cycle and allows for lower safety stocks on the part of the client. Exporters from developing countries like India face the challenge of coping up with such situations.
Material
Handling are
and also
Transportation: an important
Material part of
handling the
and
transportation
logistics
management. The technologies in use in material handling and transportation affect the efficiency of logistics. IMPORTANCE OF INTERNATIONAL LOGISTICS IN IB
Firms have begun to explore how the logistics function can provide certain strategic advantages: more efficient distribution networks, improved quality, reduced total cycle time, better post sale service, and efficient response to customer needs.
When a firm becomes heavily involved in international business, logistics is seen as a critical part of the strategic planning process. An effective international logistics strategy not only offers
significant cost savings but also can help firms penetrate new foreign markets.
Indeed, international logistics is recognized as an integral part of the marketing mix that furthers the global marketing process. With the assistance of an efficiently managed international logistics function, firms can gain economies of scale from increased production, obtain technological advantages from other countries, and expand their markets.
As logistics activities become a substantial part of a firm's international operations, the role played by international logistics managers also increases in importance.
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In order to obtain a competitive advantage through such operations, a comprehensive and complex logistics system (including infrastructure and control systems) must be established. Various barriers in international markets, however, tend to offset a firm's efforts to establish an efficient logistics system.
These often lead to higher total logistics costs and decreased flexibility, all of which adversely affects the competitive position of the firm.
VARIOUS ENTRY METHODS FOR INTERNATIONAL BUSINESS
EXPORT Exporting is the most traditional way of entering into International Business. Export can be done in two ways:
1. Direct Export Products are sold directly to buyers in target markets
either through local sales representatives or distributors. Sales representatives promote their companys products and do not take title to the merchandise. Distributors take ownership of the goods (and the accompanying risk) and usually on-sell through wholesalers and retailers to end-users. Advantages of Direct Exports o Give a higher return on your investment than selling through an agent or distributor o Allows the exporting company to set lower prices and be more competitive o Gives the company a close contact with its customers
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INTERNATIONAL BUSINESS Disadvantages of Direct Exports o The company may not have the services of a foreign intermediary, so it may need more time to become familiar with the market o The customers or clients may take longer to get to know the company and its products, and such familiarity is often important when doing business internationally
2. Indirect Export - Products are sold through intermediaries such as
agents and trading companies. Agents may represent one or more indirect exporters in return for commission on sales.
FOREIGN DIRECT INVESTMENT FDI are investments made to acquire a lasting interest by a resident entity in one economy in an enterprise resident in another economy. FDI has come to play a major role in the internationalization of business. This has happened due to changes in technologies, improved trade and investment policies of governments, regulatory environment in terms of liberalization and easing of restrictions on foreign investments and acquisitions, and deregulation and privatization of many industries. Advantages: o It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technologies, capital process, products, organizational technologies and management skills. o FDI can provide a strong impetus to economic development of the host country. This is all the more true when large MNCs enter developing nations through FDI. o FDI allows companies to avoid foreign government pressure for local production.
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INTERNATIONAL BUSINESS o It allows making the move from domestic export sales to a locally based national sales office. o Capability to increase total production capacity.
Depending on the industry sector and type of business, a foreign direct investment may be an attractive and viable option. With rapid globalization of many industries and vertical integration rapidly taking place on a global level, at a minimum a firm needs to keep abreast of global trends in their industry. From a competitive standpoint, it is important to be aware of whether a companys competitors are expanding into a foreign market and how they are doing that. Often, it becomes imperative to follow the expansion of key clients overseas if an active business relationship is to be maintained. New market access is also another major reason to invest in a foreign country. At some stage, export of product or service reaches a critical mass of amount and cost where foreign production or location begins to be more cost effective. Any decision on investing is thus a combination of a number of key factors including: o Assessment of internal resources o Competitiveness o Market Analysis o Market expectations
LICENSING Licensing is a legal agreement between the owner of intellectual property such as a copyright, patent or trademark and someone who wants to use that IP. The licensee pays rent to the licensor for the use of an idea/product/process that is otherwise protected by IP law. Like a lease on a building, the license is for a specific period of time. The licensee uses that idea/product/process to sell products or services and earns money.
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INTERNATIONAL BUSINESS Advantages: o Licensing appeals to prospective global players because it does not require large capital investment not detailed involvement with foreign customers. By generating royalty income, licensing provides an opportunity to exploit research and development already conducted. After initial costs, the licensor can reap benefits until the end of license contract period. o It reduces the risk of expropriation because the licensee is a local company that can provide leverage against government action. o Helps avoid host country regulations that are more prevalent in equity ventures. o Provides a way of testing foreign markets without significant resources.
o
Can be used as a pre-emption major in new market before the entry of competition.
Limitations: o Limited form of market entry which does not guarantee a basis for expansion. o Licensor may create more competition in exchange of royalty. FRANCHISING Franchising involves granting of rights by a parent company to another (franchisee) to do business in a prescribed manner. This right can take the form of selling the franchisers products, using its name, production and marketing techniques or using its general business approach. It allows provides a network of interdependent business relationships that allows a number of people to share:
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INTERNATIONAL BUSINESS o Brand identification o Successful method of doing business o Proven marketing and distribution system Franchise agreement typically requires the payment of a fee upfront and then a percentage on sales. In return, the franchiser provides assistance and at times may require the purchase of goods or supplies to ensure the same quality of goods or services worldwide. Franchising is adaptable to international arena and requires minor modification for the local market. It can be beneficial to both groups. Franchiser has a new stream of income and the franchisee gets time proven concept/product which can be quickly bought to the market. Major Forms of Franchising: manufacturer-retailer system (e.g. car dealership) manufacturer-wholesaler system (e.g. soft-drink companies) service firm retailer system (fast-food, hotel) e,g, McDonalds, Burger King
JOINT VENTURES A joint venture is an agreement involving two or more organizations that arrange to produce a product or service through a collectively owned enterprise. It has been one of the most popular way of entering a new market. Typically, it is a 50-50 joint venture in which each of the party holds 50% ownership stake and contributes a team of managers to share operating control. At times, this stake can be a majority one so as to ensure tighter control. Advantages: o Domestic company brings in the knowledge of the domestic market.
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INTERNATIONAL BUSINESS o The risk is divided between joint-venture partners. o Normally, foreign partner has an option to sell its stake in the venture to another entity. Limitations: o Limited control over business approach for foreign entity. o Profits have to be shared. e.g. Danone-Brittania, Hero Honda, Maruti Suzuki WHOLLY OWNED SUBSIDIARIES In a wholly owned subsidiary, the company owns 100% of the equity. Establishing a wholly owned subsidiary in a foreign market can be done in 2 ways: 1. Set up of new operation 2. Acquisition of established firm. WOS allows a foreign firm complete control and freedom to execute its business strategy in the foreign country. This freedom is accompanied by a greater risk due to lack of knowledge of the market. Acquisition of an established company can reduce this risk to an extent.
INFLUENCE OF PEST FACTORS ON INTERNATIONAL BUSINESS OR RISK ANALYSIS IN INTERNATIONAL BUSINESS

Any business is affected by its external environment. The major macroeconomic factors in the external environment that affect the business are political, environmental, social and technological.
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A. POLITICAL ENVIRONMENT
The political environment of a country greatly influences the business operating in those countries or business trading with those countries. The success and growth of international business depends on the stable, collaborative, conducive and secure political system in the country. The following factors affect the political environment in a country.
1. Tax Policy:
The tax policy of a country affects the profitability of the business there. The Corporate Taxation laws affect the profitability directly. The direct taxation laws also affect the business because it influences consumer spending. The structure of indirect taxation in a country like its excise duty structure, customs and sales tax greatly affects the input costs of a business. For e.g. Countries like UAE have very low direct taxation levels inducing great spending and hence trading and marketing based business are successful. But due to very high indirect taxation levels the manufacturing business is not very successful.
2. Government support:
One of the most important political factor is the Government support to international businesses. Business can be successful only if the local government provides support in terms o infrastructure, license clearing if required, transparent policy and quick dispute resolution mechanism. Also the nature of the political system i.e. democracy, communism etc. in the country influences the Government support. For e.g. the RBI has provided single window clearance for FDI and hence has greatly increased the FDI levels in our country.
3. Labour Laws:
The labour laws in a country affect the viability of a business in that country. The pension laws also play a critical role especially in cross
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INTERNATIONAL BUSINESS border acquisitions. Many businesses had to be withdrawn or closed because of the labor unrest in the country. For e.g.: Withdrawal of Premier Automobiles due to union strikes in our country. The problems faced by doctors and nurses in UK due to the restrictive laws in that country.
4. Environmental policy:
The countries environmental policy (under the Kyoto Protocol or otherwise) affects many business like chemicals, refineries and heavy engineering.
5. Tariffs and duty structure:
The level of duties and tariffs that are imposed by the country influence its imports and exports greatly. Some countries follow a protectionist policy to the domestic industry by raising import barriers For e.g. India in the pre liberalization era, Russia.
6. Political stability and political milieu:
Political stability greatly affects the longevity of the businesses in a country. Political risk assessment should be done to determine the country risk on the basis of following parameters:
a. Confiscation:
The
nationalization
of
businesses
without
compensation. For e.g. India during the nationalist wave during Indira Gandhis tenure.
b. Nationalization: Resource nationalization is a major risk for
businesses involving local resources like oil, minerals etc. For e.g. the resource nationalization in Columbia.
c. Instability risk: The possibility of military takeovers or huge
government changes. For e.g. the coups in Thailand or in Fiji has affected the profits of businesses there by as much as 60% due to work stoppage and property destruction.
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d. Domestication: The global company relinquishing control in
favor of domestic investors. Africa B. ECONOMIC FACTORS
For e.g. Barclays bank in South
The economic factors in a country greatly influence the business in that country. The following factors are important in the macroeconomic environment.
1. Economic system:
The economic system in a country i.e. capitalism/ communism/ mixed economy (India) is important for deciding the nature of the businesses. The nature of the system decides the allocation of resources. Due to globalization there is a gradual shift toward market forces to allocate resources even in the communist countries like China.
2. Interest rates:
The interest rates in the country affect the cost of capital (if raised locally) and the operational costs. Interest rates also determine the confidence of the Government in the economy and consumer spending.
3. Exchange rates:
The exchange rates affect international trade and capital inflows in the country.
4. Income levels and spending pattern:
Though it is more of a demographic parameter has is very important bearing on the sell side of all international businesses. For e.g. In a country like India, with rising a spirer population there is a market opportunity for products like IPod (considered luxury items till now) C. SOCIAL FACTORS Businesses are driven by people both as human capital and as consumers. It is necessary for an international businessman to understand the social
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INTERNATIONAL BUSINESS and cultural aspects of the country they operate in. The following are the important social factors.
1. Age distribution:
The age distribution of the population is important to consider the consumption patterns in the markets. Age distribution also determines the mindset of the market and helps segmentation of the market accordingly. It also has a bearing on the employee quality. A young population also determines a workforce.
2. Family system:
The family system has a bearing on the decision makers in consumption. For e.g. in Islamic countries women have a less say in making consumption decisions. In emerging economies like India children are gaining important role in consumption. This helps in positioning of products.
3. Cultural aspects:
The cultural aspects influence the way the business is conducted in countries. In Japan there is a different way in which contracts are signed and executed. In Russia being a communist oriented mindset the business is conducted in a closed manner. Italians have a seemingly lazy way of doing business and hence it is very difficult to conduct business in the pacy US way.
4. Career attitudes:
The career attitude of the workforce is important social aspect.
D. TECHNOLOGICAL FACTORS Technology has a very important role to play in determining the success of international businesses because technology has made international business possible. The following are the technological factors that influence the business.
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1. R&D:
The support that the Government gives to R&D encourages setting up R&D business levels. Also the ease of a qualified local workforce influence business. For e.g. The semiconductor industry in Taiwan
2. Technology transfer:
The ease of technology transfer influences the business climate. The environment where the technology transfer is not viable gradually loses out on business from emerging countries that seek technology transfers. For e.g. in the early 40s countries like Czechoslovakia (the Czech Republic) was a very technologically advanced country but had very low business interest due to the less chances of technology transfers. For e.g. GE withdrew operations from a JV as there as they could not access local expertise)
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INTERNATIONAL TRADE THEORIES
1. Classical Country-Based Theories 1.1. Mercantilism (pre-16th century) This theory takes an us-versus-them view of trade; other countrys gain is our countrys loss. Neo-mercantilism views persist today. A nations wealth depends on accumulated treasure. Theory says you should have a trade surplus. Maximize exports through subsidies. Minimize imports through tariffs and quotas. Flaw: Zero-sum game.
Mercantilism- Zero-Sum Game

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In 1752, David Hume pointed out that: Increased exports lead to inflation and higher prices Increased imports lead to lower prices Result: Country A sells less because of high prices and Country B sells more because of lower prices In the long run, no one can keep a trade surplus
1.2.
Free Trade supporting theories
This theory shows that specialization of production and free flow of goods grow all trading partners economies Absolute Advantage (Adam Smith, The Wealth of Nations, 1776) Mercantilism weakens a country in the long run and enriches only a few segments; it robs individuals of the ability to trade freely. Adam Smith claimed market forces, not government volume and controls, should determine the direction,
composition of international trade. Under free (unregulated) trade each nation should specialize in producing those goods it could produce most efficiently. This theory states that a country is capable of producing more of a good with the same input than another country. Hence, a country should specialize in and export products for which it has absolute advantage; import others. A country has absolute advantage - either natural or acquired when it is more productive than another country in producing a particular product. Trade between countries is, therefore, beneficial. Assume that there are just two countries in the world, the India and Japan. Pretend also that they produce only two goods, shoes and shirts. The resources of both countries can be used to produce either shoes or shirts. Both countries make both products, spending half of their working
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INTERNATIONAL BUSINESS hours on each. But India makes more shoes than shirts, and Japan makes more shirts than shoes. TABLE A Shoes India Japan Total 100 80 180 Shirts 75 100 175
What will happen when each country specializes and spends all its working hours making one product? It will make twice as much of that product and none of the other, as shown in Table B. TABLE B Shoes India Japan Total 200 0 200 Shirts 0 200 200
The world now has both more shoes and more shirts. India can trade 100 units of shoes for 100 units of shirts, and both countries will benefit. In this example, India could make more shoes than Japan with the same resources. It has an absolute advantage at shoemaking. Japan, on the other hand, had an absolute advantage at shirt making.
Assumptions: Perfect competition and no transportation costs in a world of two countries and two products
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One unit of input (combination of land, labor, and capital) Each nation has two input units it can use to produce either rice or automobiles Each country uses one unit of input to produce each product
Comparative Advantage (David Ricardo, Principals of Political Economy, 1817) Also known as Opportunity Cost Theory David Ricardo, in his theory of comparative costs, suggested that countries will specialize and trade in goods and services in which they have a comparative advantage. A country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than its trading partners. The theory of comparative costs argues that, put simply, it is better for a country that is inefficient at producing a good to specialize in the production of that good it is least inefficient at, compared with producing other goods. Now suppose one country has an absolute advantage in both products. Table C shows what production might be like if India had an absolute advantage at making both shoes and shirts. TABLE C Shoes India China Total 100 80 180 Shirts 80 75 155
In this case, the India can produce more of each good with the same set of resources than China can. The India could produce either 200 units of shoes or 160 units of shirts. China could produce either 160 units of shoes or 150 units of shirts. If the India produces only shoes, it gives up 80 units
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INTERNATIONAL BUSINESS of shirts to gain 100 units of shoes. If China produces only shoes, it gives up 75 units of shirts to gain 80 units of shoes. For India, the opportunity cost of producing shirts is higher and the opportunity cost of producing shoes is lower; vice-versa for China. Hence, India has a comparative advantage in shoemaking and China has a comparative advantage in shirt making. Table D shows what happens when each country specializes in the product in which it has a comparative advantage. TABLE D Shoes India China Total 200 0 200 Shirts 0 150 150
By specializing in this way, the India and China have increased the production of shoes by twenty units over what they produced before, from 180 to 200. But the world has lost five units of shirts, going from 155 to 150. Production in the India could be adjusted to make up the difference. For example, if the India gave up 10 units of shoes, it could produce 8 units of shirts. Table E shows the results of such a tradeoff.
TABLE E Shoes India China 190 0 Shirts 8 150

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INTERNATIONAL BUSINESS Total 190 158
In this way, the total production of both goods could be increased. For India, the opportunity cost of choosing to produce 80 units of shirts was the 100 units of shoes that could have been produced with the same resources. In the like manner, China's opportunity cost of producing 80 units of shoes was 75 units of shirts. In the terms of trade each reduce each country's opportunity cost of acquiring the good traded for, trade will take place. In this example, China will not accept fewer than 80 units of shoes for 75 units of shirts and the India will not pay more than 100 units of shoes for 80 units of shirts. Both countries must benefit for trade to occur. The real world is much more complex than this two-country, two-product mode. Trade involves many different countries and products. And it is not always clear where a country's comparative advantage lies. Summary Country should specialize in the production of those goods in which it is relatively more productive, even if it has absolute advantage in all goods it produces. This extends free trade argument. Efficiency of resource utilization leads to more productivity.
1.3.
Free Trade refined Factor-proportions (Heckscher-Ohlin, 1919)
1.3.1.
Eli Heckscher and Bertil Ohlin developed the theory of relative factor endowments, now often referred to as the Heckscher-Ohlin theory. The theory states that the pattern of international trade
35
INTERNATIONAL BUSINESS depends on differences in factor endowments not on differences in productivity. Relative endowments of the factors of production (land, labour, and capital) determine a country's comparative advantage. Countries have comparative advantage in those goods for which the required factors of production are relatively abundant. This is because the prices of goods are ultimately determined by the prices of their inputs. Goods that require inputs that are locally abundant will be cheaper to produce than those goods that require inputs that are locally scarce. For example, a country where capital and land are abundant but labour is scarce will have comparative advantage in goods that require lots of capital and land, but little labour - grains, for example. Since capital and land are abundant, their prices will be low. Those low prices will ensure that the price of the grain that they are used to produce will also be low - and thus attractive for both local consumption and export. Labour intensive goods on the other hand will be very expensive to produce since labor is scarce and its price is high. Therefore, the country is better off importing those goods. Summary Factor endowments vary among countries Products differ according to the types of factors that they need as inputs A country has a comparative advantage in producing products that intensively use factors of production (resources) it has in abundance
Assumptions
36
A given technology was universally available. Relative factor endowments are different in each country Tastes and preferences are identical in both countries A given product was either labor- or capital-intensive The theory ignored transportation costs.
1.3.2. changes
Product Life Cycle (Ray Vernon, 1966)
As products mature, both location of sales and optimal production Affects the direction and flow of imports and exports Globalization and integration of the economy makes this theory less valid
Classic Theory Limitations: All the classical theories are based on the following assumptions that no longer hold true Simple world (two countries, two products) No transportation costs No price differences in resources Resources immobile across countries Constant returns to scale Each country has a fixed stock of resources & no efficiency gains in resource use from trade Full employment
2. Modern Trade Theory In industries with high fixed costs: Specialization increases output, and the ability to enhance
economies of scale increases

37
Learning effects are high. These are cost savings that come from learning by doing
New Trade Theory-Applications Typically, requires industries with high, fixed costs o World demand will support few competitors o Competitors may emerge because of First-mover advantage Economies of scale may preclude new entrants o Role of the government becomes significant Some argue that it generates government intervention and strategic trade policy Theory of National Competitive Advantage
The theory attempts to analyze the reasons for a nations success in a particular industry Porter studied 100 industries in 10 nations - Postulated determinants of competitive advantage of a nation were based on four major attributes Factor endowments Demand conditions Related and supporting industries Firm strategy, structure and rivalry
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INTERNATIONAL BUSINESS Factor endowments: A nations position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry Basic factor endowments Advanced factor endowments Basic Factor Endowments
Basic factors: Factors present in a country - Natural resources - Climate - Geographic location - Demographics
While basic factors can provide an initial advantage they must be supported by advanced factors to maintain success
Advanced Factor Endowments
Advanced factors: companies, and competitive advantage
The result of investment by people, are more likely to lead to
government
If a country has no basic factors, it must invest in advanced factors - Communications - Skilled labor - Research - Technology - Education
Porters Theory-Predictions Porters theory should predict the pattern of international trade that we observe in the real world.
39
Countries should be exporting products from those industries where all four components of the diamond are favourable, while importing in those areas where the components are not favourable
3. Other Theories: 3.1. The productivity theory by H. Myind It is criticized that the comparative cost theories are not applicable to developing countries. Hence, H. Myint proposed productivity theory and the vent for surplus theory. The productivity theory points toward indirect and direct benefits. This theory emphasizes that the process of specialization involves adapting and reshaping the production structure of a trading country to meet the export demands. Countries increase productivity in order to utilize the gains of exports. This theory encourages the developing countries to go for cash crops, increase productivity by enhancing the efficiency of human resources, adapting latest technology etc. Limitations: Labour productivity did not increase after certain level Increase in working hours Increase in proportion of gainfully employed labour in proportion to disguised unemployed labour
3.2.
The vent for surplus theory
International trade absorbs the output of unemployed factors. If the countries produce more than the domestic requirements, they have to export the surplus to other countries. Otherwise, a part of the productive labour of the country must cease and the value of its annual Produce diminishes.
In the absence of foreign trade, they would be surplus productive capacity in the country. This surplus productive capacity is taken by
40
INTERNATIONAL BUSINESS another country and in turn gives the benefit under international trade.
Appropriateness of this Theory for Developing Countries: According to this theory, the factors of production of developing countries are fully utilized. The unemployed labour of the developing countries is profitably employed when the vent for surplus is exported. 3.3. Mills theory of reciprocal demand
Comparative cost advantage theories do not explain the ratios at which commodities are exchanged for one another. J.S. Mill introduced the concept of reciprocal demand to explain the determinations of the equilibrium terms of trade.
Reciprocal
demand
indicates
countrys
demand
for
one
commodity in terms of the other commodity; it is prepared to give up in exchange. It determines the terms of trade and relative share of each country. Equilibrium: Quality of a product exported by country A = Quality of another product exported by country B Assumptions: Existence of two countries Trade in only two goods both the goods are produced under the law of constant returns
41
Absence of transportation Costs. Existence of perfect competition Existence of full employment
TEN REASONS WHY FDI HAPPENS

1. Foreign Direct Investments (FDI) as defined in the BOP Manual, are investments made to acquire a lasting interest by a resident entity in one economy in an enterprise resident in another economy. The purpose of the investor is to have a significant influence, an effective voice in the management of the enterprise. The definition of the Organization for Economic Cooperation and Development (OECD) which considers as direct investment enterprise an incorporated or unincorporated enterprise in which a direct investor who is resident in another economy owns ten percent or more of the ordinary shares or voting power (for incorporated enterprise) or the equivalent (for an unincorporated enterprise). 2. It provides a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development. 3. FDI inflows are considered as channels of entrepreneurship, technology, management skills, and of resources that are scarce in developing countries. Hence, they could help their host countries in their industrialization.
42
INTERNATIONAL BUSINESS 4. For small and medium sized companies, FDI represents an opportunity to become more actively involved in international business activities. In the past 15 years, the classic definition of FDI as noted above has changed considerably, over 2/3 of direct foreign investment is still made in the form of fixtures, machinery, equipment and buildings. 5. FDI is viewed as a basis for going global. FDI allows companies to accomplish following tasks: Avoiding foreign government pressure for local production Circumventing trade barriers, hidden and otherwise Making the move from domestic export sales to a locally-based national sales office Capability to increase total production capacity. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc 6. Foreign direct investment is viewed as a way of increasing the efficiency with which the world's scarce resources are used. A recent and specific example is the perceived role of FDI in efforts to stimulate economic growth in many of the world's poorest countries. Partly this is because of the expected continued decline in the role of development assistance (on which these countries have traditionally relied heavily), and the resulting search for alternative sources of foreign capital. 7. FDI enables the firm owns assets to be profitably exploited on a comparatively large scale, including intellectual property (such as technology and brand names), organizational and managerial skills, and marketing networks. And it is more profitable for the production utilizing these assets to take place in different countries than to produce in and export from the home country exclusively. 8. FDI may result in a greater diffusion of know-how than other ways of serving the market. While imports of high-technology products, as well as the purchase or licensing of foreign technology, are important channels for the international diffusion of technology, FDI provides more scope for spillovers. For example, the technology and
43
INTERNATIONAL BUSINESS productivity of local firms may improve as foreign firms enter the market and demonstrate new technologies, and new modes of organization and distribution, provide technical assistance to their local suppliers and customers, and train workers and managers who may later be employed by local firms.
9. FDI increases employment in host country. Inflows of FDI also increase
the amount of capital in the host country. Even with skill levels and technology constant, this will either raise labour productivity and wages, allow more people to be employed at the same level of wages, or result in some combination of the two. 10. Proponents of foreign investment point out that the exchange of investment flows benefits both the home country (the country from which the investment originates) and the host country (the destination of the investment). Opponents of FDI note that multinational conglomerates are able to wield great power over smaller and weaker economies and can drive out much local competition. The truth might lie somewhere in between but they surely become reasons for companies to invest in foreign markets.
WTO ROUNDS WRT INDIA

The WTO came into being on January 1, 1995, and is the successor to the General Agreement on Tariffs and Trade (GATT), which was created in 1948. India was one of the 76 countries that signed the accession to the WTO and is one of the founder members of the WTO. TRADE IMPLICATIONS OF SIGNING THE WTO FOR INDIA The implications of signing the WTO agreement for Indian trade have been mixed. India has benefited in the areas of garment exports, agricultural products exports and in market access to foreign markets in automobiles and electronics. India has a disadvantage mainly in areas of TRIPs, drug
44
INTERNATIONAL BUSINESS prices, patents in agriculture, TIS ( trade in services ) and TRIMS especially in biomedical areas, AoA export subsidies etc. BENEFITS
1. Garment exports:
The Multi Fiber Arrangement (MFA) that required Indian garment exporters to have quotas for exporting to developed countries was phased out in 2005. The readymade garment exports from India has reached Rs 800 crores in 2007 and expected to reach Rs 1000 crores in 2008. This is thrice the exports in 2004-05.
2. Market access:
As a signatory to the WTO India automatically gets the MFN ( most favored nation ) status. This gives India access to markets in Europe and US in sectors like automobiles and engineering. India also benefits from the clauses related to trade without discrimination and benefit from capital good exports.
3. Anti Dumping measures:
India suffered from persistent dumping by Romanian and Russian steel majors in the areas of steel casings, pipes affecting Indian domestic industry greatly. Also India suffered from dumping by Chinese steel industry. The anti dumping provisions and countervailing duties lend security to Indias domestic industries.
4. The Agreement on Agriculture:
The AOA stipulates that the developed countries will reduce tariffs on agriculture imports (up to 35%) thus helping Indias agriculture exports. It also promises reduction of domestic subsidies in the developed countries helping exports from India.
5. Competitive advantage: India has competitive advantage in the areas
of merchandise trade. India can utilize its competitive advantage in processing, beverages, gems and jeweller compared to the traditional
45
INTERNATIONAL BUSINESS centers in Europe like Amsterdam or Manchester etc increasing its trade with both the Euro region and the US.
DISADVANTAGES
1. TRIPS:
The Indian Patent Act is not compatible with the TRIPS agreement under the WTO. The Indian Patent Act allows only process patents in areas of foods, chemicals and medicines. Under the TRIPS the IPA will have to modify to allow product patents also. Also products developed outside India can claim international patents applicable to India. This will hurt our agriculture foods. E.g. the Alphanso mango and the Basmati strand controversy.
2. Drug prices:
The granting of the product patents in India will hurt the Indian generic drugs industry and benefit the foreign pharma companies that own the formulation patents. This will lead to increase in drug prices in India. (This resulted in regulatory intervention in the recent budget in life saving drugs) e.g. The Pfizer controversy
3. Genetics:
Indian seed and genetic research organizations are Government funded and will not be able to compete with the MNCs like Montessanto etc that have economies of scale. This will increase seed prices for Indian farmers and also lend our genetic resources to the MNCs
4. Services:
The opening up of the banking sector in 2009 will affect Indian banks due to the foreign banks with huge balance sheets.
5. TRIMS:
The Trade Related Investment Measures resulted in problems in trade in investment issues like transit charges, formalities etc. together
46
INTERNATIONAL BUSINESS called as Singapore issues. Indian companies would have to lose in the differential charges that are applied. These issues were dropped in the Chachun ministerial conferences.
6. Anti dumping:
The anti dumping rules were imposed on Indian linen in EU. Similarly Indian textiles faced anti dumping regulations in US. mechanism to resolve anti dumping duties issues. INDIAS STAND IN THE DOHA ROUND AND THE FOLLOWING MINISTERIAL CONFERENCES
1. Doha round:
There is no
The Doha Development Round commenced at Doha, Qatar in November 2001 and is still continuing. Its objective is to lower trade barriers around the world, permitting free trade between countries of varying prosperity. As of 2008, talks have stalled over a divide between the developed nations led by the European Union, the United States and Japan and the major developing countries (represented by the G20 developing nations), led and represented mainly by India, Brazil, China and South Africa. Singapore issues: The issues related to the trade facilitation and differential charges in investment vehicles affected Indian investment and venture companies. This affected the Indian services. Agricultural subsidies: Brazil. 2. Cancun conference 2003 : The objective of this conference was to forge the agreement discussed in Doha. The EU, US and Japan support domestic
agriculture by subsides. This was opposed by countries like India and
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INTERNATIONAL BUSINESS Issues: Market access to foreign markets. This agreement on market access for the developing countries in capital and industrial goods increased strength of G20 countries. India benefited greatly in the capital goods export. The Singapore issues were resolved that resulted in removing the undue advantage for countries like US and Japan in investment arena. This also benefited the Indian financial sector internationally.
3. Geneva 2004: In Geneva conference the developed nations reduced
subsidiaries on manufactured goods. This resulted in Indian small manufacturers like steel forging, casting to export largely and benefit from the construction boom in US.
4. Paris 2005: France reduced subsidies on farm products. However US
and Japan did not relent. Hong Kong 2006 and Potsdam 2007 talks failed in resolving the farm subsidies. So the recent rounds are in a stalemate situation from Indias point of view.
DISCUSS NAFTA/ EU/ ASEAN/ SAARC/ MERCUSOR
MERCOSUR Mercosur is a regional trade agreement among Argentina, Brazil ,Paraguay & Uruguay founded in 1991 by the Treaty of Asuncin, which was later amended and updated by the 1994 Treaty of Ouro Preto. Its
48
INTERNATIONAL BUSINESS purpose is to promote free trade and the fluid movement of goods, people, and currency. Bolivia, Chile, Colombia, Ecuador and Peru currently have associate member status. Venezuela signed a membership agreement on 17 June 2006, but before becoming a full member its entry has to be ratified by the Paraguayan and the Brazilian parliaments. The bloc comprises a population of more than 263 million people, and the combined Gross Domestic Product of the full-member nations is in excess of US$2.78 trillion a year (Purchasing power parity, PPP) according to International Monetary Fund (IMF) numbers, making Mercosur the fifth largest economy in the World. OBJECTIVES OF MERCOSUR Free transit of production goods, services and factors between the member states with inter alia, the elimination of customs rights and lifting of nontariff restrictions on the transit of goods or any other measures with similar effects;
Fixing of a common external tariff (TEC) and adopting of a common trade policy with regard to non member states or groups of states, and the coordination of positions in regional and international commercial and economic meetings;
Coordination of macroeconomic and sectorial policies of member states relating to foreign trade, agriculture, industry, taxes, monetary system, exchange and capital, services, customs, transport and communications, and any others they may agree on, in order to ensure free competition between member states; and
The commitment by the member states to make the necessary adjustments to their laws in pertinent areas to allow for the strengthening of the integration process. The Asuncion Treaty is based on the doctrine of the reciprocal rights and obligations of the member states.
MERCOSUR initially targeted free-trade zones, then customs unification and, finally, a common market, where in addition to customs unification
49
INTERNATIONAL BUSINESS the free movement of manpower and capital across the member nations' international frontiers is possible, and depends on equal rights and duties being granted to all signatory countries. During the transition period, as a result of the chronological differences in actual implementation of trade liberalization by the member states, the rights and obligations of each party will initially be equivalent but not necessarily equal. In addition to the reciprocity doctrine, the Asuncion Treaty also contains provisions regarding the most-favored nation concept, according to which the member nations undertake to automatically extend--after actual formation of the common market--to the other Treaty signatories any advantage, favor, entitlement, immunity or privilege granted to a product originating from or intended for countries that are not party to ALADI. SAARC The South Asian Association for Regional Cooperation (SAARC) is an economic and political organization of eight countries in Southern Asia. It was established on December 8, 1985 by India, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives and Bhutan. In April 2007, at the Association's 14th summit, Afghanistan became its eighth member.Sheelkant Sharma is the current secretary & Mahinda Rajapaksa is the current chairman of SAARC which is headquartered at Kathmandu. OBJECTIVES OF SAARC
To promote the welfare of the peoples of South Asia and to improve their quality of life; To accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potential;
To promote and strengthen collective self-reliance among the countries of South Asia; To contribute to mutual trust, understanding and appreciation of one another's problems;
50
To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields; To strengthen cooperation with other developing countries; To strengthen cooperation among themselves in international forums on matters of common interest; and To cooperate with international and regional organizations with similar aims and purposes.
FREE TRADE AGREEMENT Over the years, the SAARC members have expressed their unwillingness on signing a free trade agreement. Though India has several trade pacts with Maldives, Nepal, Bhutan and Sri Lanka, similar trade agreements with Pakistan and Bangladesh have been stalled due to political and economic concerns on both sides. India has been constructing a barrier across its borders with Bangladesh and Pakistan. In 1993, SAARC countries signed an agreement to gradually lower tariffs within the region, in Dhaka. Eleven years later, at the 12th SAARC Summit at Islamabad, SAARC countries devised the South Asia Free Trade Agreement which created a framework for the establishment of a free trade area covering 1.4 billion people. This agreement went into force on January 1, 2006. Under this agreement, SAARC members will bring their duties down to 20 per cent by 2007. The last summit (15th) was held in Colombo where four major agreements - the SAARC development fund, the establishment of a SAARC standard organization, the SAARC convention on mutual legal assistance in criminal matters, and the protocol on Afghanistan's admission to the South Asia Free Trade Agreement (SAFTA) were adopted with emphasis on regionwide food security. NAFTA The North American Free Trade Agreement (NAFTA) is a trilateral trade bloc in North America created by the governments of the United States,
51
INTERNATIONAL BUSINESS Canada, and Mexico. In terms of combined purchasing power parity GDP of its members, as of 2007 the trade bloc is the largest in the world and second largest by nominal GDP comparison. It also is one of the most powerful, wide-reaching treaties in the world. The North American Free Trade Agreement (NAFTA) has two supplements, the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). Implementation of the North American Free Trade Agreement (NAFTA) began on January 1, 1994. This agreement will remove most barriers to trade and investment among the United States, Canada, and Mexico. Under the NAFTA, all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. In addition, many tariffs were eliminated immediately, with others being phased out over periods of 5 to 15 years. This allowed for an orderly adjustment to free trade with Mexico, with full implementation beginning January 1, 2008. The agricultural provisions of the U.S.-Canada Free Trade Agreement, in effect since 1989, were incorporated into the NAFTA. Under these provisions, all tariffs affecting agricultural trade between the United States and Canada, with a few exceptions for items covered by tariff-rate quotas, were removed by January 1, 1998. Mexico and Canada reached a separate bilateral NAFTA agreement on market access for agricultural products. The Mexican-Canadian agreement eliminated most tariffs either immediately or over 5, 10, or 15 years. U.S. trade with Mexico and Canada has grown more rapidly than total U.S. trade since 1994. The automotive, textile, and apparel industries have experienced the most significant changes in trade flows, which may also have affected employment levels in these industries. The five major U.S. industries that have high volumes of trade with Mexico and Canada are automotive industry, chemicals and allied products, computer equipment, textiles and apparel, and microelectronics.
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INTERNATIONAL BUSINESS The effects of NAFTA, both positive and negative, have been quantified by several economists. Some argue that NAFTA has been positive for Mexico, which has seen its poverty rates fall and real income rise (in the form of lower prices, especially food), even after accounting for the 19941995 economic crisis. Others argue that NAFTA has been beneficial to business owners and elites in all three countries, but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U.S. agribusiness, and negative impacts on U.S. workers in manufacturing and assembly industries who lost jobs. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the U.S. and Mexico. EU The European Union (EU) is a political and economic union of 27 member states, located primarily in Europe. The EU generates an estimated 30% share of the world's nominal gross domestic product (US$16.8 trillion in 2007). Thus EU presents an enormous export and investor market that is both mature and sophisticated. The EU has developed a single market through a standardised system of laws which apply in all member states, guaranteeing the freedom of movement of people, goods, services and capital. It maintains a common trade policy. Fifteen member states have adopted a common currency, the euro. OBJECTIVES OF THE EU Its principal goal is to promote and expand cooperation among members states in economics, trade, social issues, foreign policies, security, defense, and judicial matters. Another major goal of the EU is to implement the Economic and Monetary Union, which introduced a single currency, the Euro for the EU members. The single market refers to the creation of a fully integrated market within the EU, which allows for free movement of goods, services and factors of
53
INTERNATIONAL BUSINESS production. The EU, in conjunction with Member States, has a number of policies designed to assist the functioning of the market. Some of the policies are given below: Competition Policy: The main competition lied in energy and transport sector. The union designed this strategy to prevent price fixing, collusion (secret agreement), and abuse of monopoly. Free movement of goods: A custom union covering all trade in goods was established and a common customs tariff was adopted with respect to countries outside the union. Services: Any member nation has a right to provide services in other Member States. Capital: There are no restrictions on the movement of capital and on payments with the EU and between member states and third countries. TRADE BETWEEN THE EUROPEAN UNION AND INDIA India was one of the first Asian nations to accord recognition to the European Community in 1962. The EU is Indias largest trading partner and biggest source of FDI. It is a major contributor of developmental aid and an important source of technology. Over the years, EU India trade has grown from 4.4 bn to 28.4 bn US$. Top items of trade between India and EU Indias exports to EU Textile and clothing % 35 Indias Imports from EU Gemstones and jewellery Power generating equipment Chemical products Office machinery Transport equipment % 31 28 15 10 6
Leather and leather products 25 Gemstones and jewellery Agriculture products Chemical products 12 10 9
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India is EUs 17th largest supplier and 20th largest destination for exports. Tariff and non-tariffs have been reduced, but compared to International standards they are still high. Under the Bilateral trade between India and EU, it accounts for 26% of Indias exports and 25% of its imports. The European Union (EU) and India agreed on September 29,2008 at the EU-India summit in Marseille, France's largest commercial port, to expand their cooperation in the fields of nuclear energy and environmental protection and deepen their strategic partnership.
Trade between India and the 27-nation EU has more than doubled from 25.6 billion euros ($36.7 billion) in 2000 to 55.6 billion euros last year, with further expansion to be seen.
ASEAN The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Myanmar on 23 July 1997, and Cambodia on 30 April 1999. OBJECTIVES The ASEAN Declaration states that the aims and purposes of the Association are: (i) (ii) To accelerate the economic growth, social progress and cultural development in the region through joint endeavors. To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter. (iii) To maintain close cooperation with the existing international and regional organizations with similar aims.
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Brunei
Darussalam joined on 8 January 1984, Vietnam on 28 July 1995, Laos and
WORKING OF ASEAN The member countries of ASEAN have Preferential Trading Arrangements (PTA), which reduces tariffs on products traded among member countries. In 1992, ASEAN developed a Common Effective Preferential Tariffs (CEPT) plan to reduce tariffs systematically for manufactured and processed products. The members have also established a series of co-operative efforts to encourage joint participation in industrial, agricultural and technical development projects and to increase foreign investments in their economies. These efforts include an ASEAN finance corporation, the ASEAN Industrial Joint Ventures Programme (AJIV) etc. ASEAN nations have introduced some programmes for greater diversification in their economies. INDIA AND ASEAN India is interested in maintaining close economic relations with the members of ASEAN, as these countries are closer to India. The ASEAN countries are offering co-operation to India in the field of trade, investment, science and technology and training of personnel. Also, Indias trade with ASEAN countries is satisfactory in recent years.
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EFFECT OF CURRENT ECONOMIC MELTDOWN ON INTERNATIONAL BUSINESS
1. Slower global growth: Global growth stood at 5 percent in 2007, but
the IMF expects world growth to slow to 3 percent in 2009 - 0.9 percentage points lower than forecasted in July 2008.
2. Economic contraction in some countries: In G7 countries except
for the United States and Canada, GDP growth was slower in Q2 of 2008 compared to Q1. Three major European economies (Italy, France and Germany) experienced negative GDP growth in Q2, and forecasts are for a continued decline in Q3. The IMF forecasts around 0 percent growth for advanced economies in 2009.
3. Depth of slowdown: It is observed that economic slowdowns,
preceded by financial stress tend to be more severe. Although employment has contracted in several countries in recent months, it has not been as severe as that during 1990-91.
4. Financing
challenges
for
governments:
State
and
local
governments may be faced with financial crisis. Even administrative costs may be difficult to come by. The governments would be hard pressed for funds for guarantees and development work. For e.g. In the case of Iceland the banking sector has assets of around 300% of GDP, something no government could ever guarantee, at least not on a short-term basis.
5. Rising unemployment: According to IMF, unemployment in the
advanced economies will rise from 5.7 percent in 2008 to 6.5 percent in 2009.
6. Large
employment
losses
in
sectors:
Some
sectors
like
construction, real estate services will experience disproportionate

57
INTERNATIONAL BUSINESS employment declines. In addition there will be significant job losses in the financial sector.
7. Reduced world trade volume: According to the IMF, the world trade
will grow only at the rate of 1.9% as against the earlier estimate of 4.1% for 2009. A drop in exports, as well as capital inflow, may trigger a falloff in investments.
8. Rising income insecurity and disproportionate impact on low-
income groups: As stock markets around the world have eroded trillions of dollars in wealth and rolled back some of the investment gains of the past 5 years, the investment and retirement savings of many individuals have lost significant value. There is a risk that lowincome countries and lower-income groups within countries will bear the brunt of challenges, as the most poor are the most defenseless, says World Bank President Robert Zoellick.
9. Return to Tariff and Non-Tariff Barriers: Developed economies in
order to ward off unemployment and financial crisis may erect barriers to free trade. This might start a local business environment. For e.g. President-elect Barrack Obama has already announced his intention to reduce outsourcing from US by 30%.
10. Surplus Production Capacities: In line with demand destruction,
many branded products may face surplus capacities. For e.g. Car, Steel & Aircrafts manufacturers are already staring at excess capacity.
11. Increase in Government Controls: In order to bail out sinking
Corporates the governments, would buy out or control the operations of large companies. For e.g. AIG and Citibank
12. Impact on India: a. BPO Operations: India is likely to face a severe crunch on the IT and
ITes services, rendered by Indian BPO Companies.

b. Increase in Trade Deficit: Already in the last quarter, Indias trade
deficit has grown where exports are not meeting the set targets while imports continue to grow.
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c. Falling Currency: as the demand for dollars increases the Indian
rupee is likely to weaken. The rupee has already depreciated to Rs. 50 a dollar.
d. Pressure on Services Sector: As the demand for services is
destroyed, these sunshine industries such as BPOs, Airlines, and Telecommunication etc. will face salary and employment cutbacks.
DISCUSS SWAPS, OPTIONS, FUTURES

SWAPS
a) A swap is a derivative in which two counterparties agree to exchange
one stream of cash flows against another stream. These streams are called the legs of the swap. b) The cash flows are calculated over a notional principal amount, which is usually not exchanged between counterparties. Consequently, swaps can be used to create unfunded exposures to an underlying asset, since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral. c) Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the underlying prices. d) Most swaps are traded over-the-counter (OTC), "tailor-made" for the counterparties. Some types of swaps are also exchanged on futures markets such as the Chicago Mercantile Exchange Holdings Inc., the largest U.S. futures market, the Chicago Board Options Exchange and Frankfurt-based Eurex AG.
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INTERNATIONAL BUSINESS e) The five generic types of swaps, in order of their quantitative importance, are: interest rate swaps, currency swaps, credit swaps, commodity swaps and equity swaps.
FUTURES
a) A futures contract is a standardized contract, traded on a futures
exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality at a certain date in the future, at a price determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract.
b) The future date is called the delivery date or final settlement date.
The official price of the futures contract at the end of a day's trading session on the exchange is called the settlement price for that day of business on the exchange.
c) A futures contract gives the holder the obligation to make or take
delivery under the terms of the contract,

d) Both parties of a "futures contract" must fulfill the contract on the
settlement date. The seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his/her position by either selling a long position or buying back (covering) a short position, effectively closing out the futures position and its contract obligations.
e) Futures contracts, or simply futures, are exchange traded derivatives.
The exchange's clearinghouse acts as counterparty on all contracts, sets margin requirements, and crucially also provides a mechanism for settlement. OPTIONS
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INTERNATIONAL BUSINESS An option is a contract written by a seller that conveys to the buyer the right but not the obligation to buy (in the case of a call option) or to sell (in the case of a put option) a particular asset, such as a piece of property, or shares of stock or some other underlying security, such as, among others, a futures contract. In return for granting the option, the seller collects a payment (the premium) from the buyer.
b)
a)
For example, buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or before expiration, while buying a put option provides the right to sell. Upon the option holder's choice to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the contract.
c)
The theoretical value of an option can be evaluated according to several models. These models, which are developed by quantitative analysts, attempt to predict how the value of the option will change in response to changing conditions. Hence, the risks associated with granting, owning, or trading options may be quantified and managed with a greater degree of precision, perhaps, than with some other investments.
d)
Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges, facilitating trading among independent parties. Over-the-counter options are traded between private parties, often well-capitalized institutions that have negotiated separate trading and clearing arrangements with each other.
e)
Another important class of options, particularly in the U.S., are employee stock options, which are awarded by a company to their employees as a form of incentive compensation
f)
Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans.
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INTERNATIONAL HUMAN RESOURCE MANAGEMENT
International the
human
resource
management needs;
(HRM)
involves the
ascertaining the corporate strategy of the company and assessing corresponding human and resource determining recruitment, staffing organizational strategy; recruiting,
inducting, training and developing and motivating the personnel; putting in place the performance appraisal and compensation plans and industrial relations strategy and the effective management of all these.
The strategic role of HRM is complex enough in a purely domestic firm, but it is more complex in an international business, where staffing, management development, performance evaluation, and compensation activities are complicated by profound differences between countries in labour markets, culture, legal systems, economic systems, and the like.
It is not enough that the people recruited fit the skill requirement, but it is equally important that they fit in to the organizational culture and the demand of the diverse environments in which the organization functions.
FACTORS AFFECTING INTERNATIONAL HRM The following are some of the important factors, which make international HRM complex and challenging: DIFFERENCES IN LABOUR MARKET CHARACTERISTICS
The skill levels, the demand and supply conditions and the behaviour characteristics of labour vary widely between countries.
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INTERNATIONAL BUSINESS While some countries experience human resource shortage in certain sectors, many countries have abundance.
In the past, developing countries were regarded, generally, as pools of unskilled labour. Today, however, many developing countries have abundance of skilled and scientific manpower as well as unskilled and semiskilled labour.
This changing trend is incasing significant shift of location of business activities. Hard disk drive manufacturers are reported to be shifting their production base from Singapore to cheaper locations like Malaysia, Thailand and China.
While in the past unskilled and semiskilled labour intensive activities tended to be located in the developing countries, today sophisticated activities also find favour with developing countries.
The changing quality attributes of human resources in the developing countries and wage differentials are causing a location shift in business activities, resulting in new trends in the global supply chain management.
India is reported to be emerging as a global R&D hub. India and several other developing countries are large sources of IT personnel. In short, the labour changing labour market characteristics have been causing global restructuring of business processes and industries. And this causes a great challenge for strategic HRM.
CULTURAL DIFFERENCES
Cultural differences cause a great challenge to HRM. The behavioural attitude of workers, the social environment, values, beliefs, outlooks etc., are important factors, which affect industrial relations, loyalty, productivity etc.
63
There are also significant differences in aspects related to labour mobility. Cultural factors are very relevant in inter personal behaviour also.
In some countries it is common to address the boss Mr. so and so but in countries like India addressing the boss by name would not be welcome.
In countries like India people attach great value to designations and hierarchical levels. This makes delivering and organisational restructuring difficult.
DIFFERENCES IN REGULATORY ENVIRONMENT
A firm operating in different countries is confronted with different environments with respect to government policies and regulations regarding labour.
The attitude of employers and employees towards employment of people show great variations is different nations. In some countries hire and fire is the common thing whereas in a number of countries the ideal norm has been lifetime employment.
In countries like India workers generally felt that while they, have the right to change organisations, as they preferred, they had a right to lifetime employment in the organisation they were employed with.
In such situations it is very difficult to get rid of inefficient or surplus manpower. The situation, however, is changing in many countries, including India.
DIFFERENCE IN CONDITIONS OF EMPLOYMENT
64
Besides the tenancy of employment, there are several conditions of employment the differences of which cause significant challenge to international HRM.
The system of rewards, promotion, incentives and motivation, system of labour welfare and social security etc., vary significantly between countries.
CASE STUDY: ORGANIZATIONAL CHANGE AT UNILEVER
Unilever is a very old multinational with worldwide operations in the detergent and food industries. For decades, Unilever managed its worldwide detergents activities in an arm's-length manner. A subsidiary was set up in each major national market and allowed to operate largely autonomously, with each subsidiary carrying out the full range of value creation activities, including manufacturing, marketing, and R&D. The company had 17 autonomous national operations in Europe alone by the mid-1980s. In the 1990s, Unilever began to transform its worldwide detergents activities from a loose confederation into a tightly managed business with a global strategy. The shift was prompted by Unilever's realization that its traditional way of doing business was no longer effective in an arena where it had become essential to realize substantial cost economies, to innovate, and to respond quickly to changing market trends. The point was driven home in the 1980s when the company's archrival, Procter & Gamble, repeatedly stole the lead in bringing new products to market. Within Unilever, "persuading" the 17 European operations to adopt new products could take four to five years. In addition, Unilever was handicapped by a high-cost structure from the duplication of manufacturing
65
INTERNATIONAL BUSINESS facilities from country to country and by the company's inability to enjoy the same kind of scale economies as P&G. Unilever's high costs ruled out its use of competitive pricing. To change this situation, Unilever established product divisions to coordinate regional operations. The 17 European companies now report directly to Lever Europe. Implicit in this new approach is a bargain: The 17 companies are relinquishing autonomy in their traditional markets in exchange for opportunities to help develop and execute a unified panEuropean strategy. As a consequence of these changes, manufacturing is now being rationalized, with detergent production for the European market concentrated in a few key locations. The number of European plants manufacturing soap has been cut from 10 to 2, and some new products will be manufactured at only one site. Product sizing and packaging are being harmonized to cut purchasing costs and to pave the way for unified pan-European" advertising. By taking operations. Lever Europe is attempting to speed its development of new products and to synchronize the launch of new products throughout Europe. Its efforts seem to be paying off: A dishwasher detergent introduced in Germany in the early 1990s was available across Europe improvement. But history still imposes constraints. Procter & Gamble's leading laundry detergent carries the same brand name across Europe, but Unilever sells its product under a variety of names. The company has no plans to change this. Having spent 100 years building these brand names, it believes it would be foolish to scrap them in the interest of pan-European standardization. http://www.unilever.com a year latera distinct these steps, Unilever estimates it may save as much as $400 million a year in its European
66
G20
WHAT IS THE G-20 The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 to bring together systemically important industrialized and developing economies to discuss key issues in the global economy. The inaugural meeting of the G-20 took place in Berlin, on December 15 & 16, 1999, hosted by German and Canadian finance ministers. MANDATE The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe. ORIGINS The G-20 was created as a response both to the financial crises of the late 1990s and to a growing recognition that key emergingmarket countries were not adequately included in the core of global economic discussion and governance. The proposals made by the G-22 and the G-33 to reduce the world economy's susceptibility to crises showed the potential benefits of a
67
INTERNATIONAL BUSINESS regular international consultative forum embracing the emergingmarket countries. Such a regular dialogue with a constant set of partners was institutionalized by the creation of the G-20 in 1999.
MEMBERSHIP The G-20 is made up of the finance ministers and central bank governors of 19 countries:

Argentina Australia Brazil Canada China France Germany India Indonesia Italy Japan Mexico
68

Russia Saudi Arabia South Africa South Korea Turkey United Kingdom United States of America The European Union, who is represented by the rotating Council presidency and the European Central Bank, is the 20th member of the G-20.
To ensure global economic for a and institutions work together, the Managing Director of the International Monetary Fund (IMF) and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate in G-20 meetings on an exofficio basis.
The G-20 thus brings together important industrial and emergingmarket countries from all regions of the world. Together, member countries represent around 90 per cent of global gross national product, 80 per cent of world trade (including EU intra-trade) as well as two-thirds of the world's population.
The G-20's economic weight and broad membership gives it a high degree of legitimacy and influence over the management of the global economy and financial system.
ACHIEVEMENTS
69
The G-20 has progressed a range of issues since 1999, including agreement about policies for growth, reducing abuse of the financial system, dealing with financial crises and combating terrorist financing.
The G-20 also aims to foster the adoption of internationally recognized standards through the example set by its members in areas such as the transparency of fiscal policy and combating money laundering and the financing of terrorism.
In 2004, G-20 countries committed to new higher standards of transparency and exchange of information on tax matters. This aims to combat abuses of the financial system and illicit activities including tax evasion. The G-20 also plays a signficant role in matters concerned with the reform of the international financial architecture.
The G-20 has also aimed to develop a common view among members on issues related to further development of the global economic and financial system and held an extraordinary meeting in the margins of the 2008 IMF and World Bank annual meetings in recognition of the current economic situation.
MEETINGS AND ACTIVITIES
It is normal practice for the G-20 finance ministers and central bank governors to meet once a year.
The ministers' and governors' meeting is usually preceded by two deputies' meetings and extensive technical work.
This technical work takes the form of workshops, reports and case studies on specific subjects, that aim to provide ministers and
70
INTERNATIONAL BUSINESS governors with contemporary analysis and insights, to better inform their consideration of policy challenges and options. INTERACTION WITH OTHER INTERNATIONAL ORGANIZATIONS
The G-20 cooperates closely with various other major international organizations and for a, as the potential to develop common positions on complex issues among G-20 members can add political momentum to decision-making in other bodies.
The participation of the President of the World Bank, the Managing Director of the IMF and the chairs of the International Monetary and Financial Committee and the Development Committee in the G-20 meetings ensures that the G-20 process is well integrated with the activities of the Bretton Woods Institutions.
The G-20 also works with, and encourages, other international groups and organizations, such as the Financial Stability Forum, in progressing international and domestic economic policy reforms. In addition, experts from private-sector institutions and nongovernment organisations are invited to G-20 meetings on an ad hoc basis in order to exploit synergies in analyzing selected topics and avoid overlap.
EXTERNAL COMMUNICATION
The country currently chairing the G-20 posts details of the group's meetings and work program on a dedicated website.
Although participation in the meetings is reserved for members, the public ended. is informed about what was discussed and agreed immediately after the meeting of ministers and governors has
71
After each meeting of ministers and governors, the G-20 publishes a communiqu which records the agreements reached and measures outlined. Material on the forward work program is also made public.
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VARIOUS ORGANISATIONAL STRUCTURES IN IB

INTERNATIONAL BUSINESS Organizational structure

Metrics used to measure performance of subunits and judge managerial performance

Manner in which decisions are made and work is performed

PURPOSE OF ORGANIZATIONAL STRUCTURE

Centralization Decentralization CENTRALIZATION

Overburdened top management.

COMPANYS INTERNATIONAL DIVISION STRUCTURE

DISADVANTAGES OF INTERNATIONAL DIVISION

WORLDWIDE AREA STRUCTURE

A WORLDWIDE AREA STRUCTURE

A WORLDWIDE PRODUCT DIVISION STRUCTURE

A GLOBAL MATRIX STRUCTURE

THE INTERNATIONAL STRUCTURAL STAGES MODEL

ADR & GDR

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

Both ADR and GDR are depository receipts, and represent a

ADR No Yes Yes No Yes Yes No No Yes Yes No

If you look across the spectrum of companies in Central

ADR & GDR NORMS FURTHER RELAXED

INTERNATIONAL LOGISTICS AND ITS IMPORTANCE IN IB

VARIOUS ENTRY METHODS FOR INTERNATIONAL BUSINESS

2. Indirect Export - Products are sold through intermediaries such as

INFLUENCE OF PEST FACTORS ON INTERNATIONAL BUSINESS OR RISK ANALYSIS IN INTERNATIONAL BUSINESS

favor of domestic investors. Africa B. ECONOMIC FACTORS

For e.g. Barclays bank in South

The career attitude of the workforce is important social aspect.

INTERNATIONAL TRADE THEORIES

Mercantilism- Zero-Sum Game

Free Trade supporting theories

TABLE E Shoes India China 190 0 Shirts 8 150

INTERNATIONAL BUSINESS Total 190 158

Free Trade refined Factor-proportions (Heckscher-Ohlin, 1919)

Product Life Cycle (Ray Vernon, 1966)

economies of scale increases

Advanced Factor Endowments

Advanced factors: companies, and competitive advantage

The result of investment by people, are more likely to lead to

The vent for surplus theory

Absence of transportation Costs. Existence of perfect competition Existence of full employment

TEN REASONS WHY FDI HAPPENS

WTO ROUNDS WRT INDIA

agriculture by subsides. This was opposed by countries like India and

DISCUSS NAFTA/ EU/ ASEAN/ SAARC/ MERCUSOR

Darussalam joined on 8 January 1984, Vietnam on 28 July 1995, Laos and

EFFECT OF CURRENT ECONOMIC MELTDOWN ON INTERNATIONAL BUSINESS

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

construction, real estate services will experience disproportionate

ITes services, rendered by Indian BPO Companies.

DISCUSS SWAPS, OPTIONS, FUTURES

delivery under the terms of the contract,

INTERNATIONAL HUMAN RESOURCE MANAGEMENT

DIFFERENCES IN REGULATORY ENVIRONMENT

DIFFERENCE IN CONDITIONS OF EMPLOYMENT

CASE STUDY: ORGANIZATIONAL CHANGE AT UNILEVER

MEETINGS AND ACTIVITIES

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