CASE STUDY

ASSIGNMENT

International Business

SUBMITTED BY-
ADUITIYA CHOPRA 2013JE0139
AKHILESH SONI 2013JE0210
TEJASVI AGARWAL 2013JE0217
SAURABH TRIPATHI 2013JE0522
KUNAL BOHRA 2013JE0677
ANSH SRIVASTAVA 2013JE0993
 CASE STUDY 01

COMPETING IN A GLOBALISED ECONOMY

(Q1) Why does Korea look to Japan while reviewing its strategy?

Ans- As mentioned in the paragraph the shipbuilding industry was taken by storm by the
Koreans who came out of nowhere and took the dominance from Japan. It was only because
the Japanese industry failed to diversify. Thus Korea needs to learn from the example of
Japan and diversify in every which way possible.

(Q2) Consider the threats and opportunities to Korean shipbuilding from globalization?

Ans- With increasing globalisation the Korean Ship Building Sector is facing stubborn
competition from the Chinese shipbuilding industry. But today's value is such that China is
only building no value containers where as the higher technology value added containers are
still being built by Korea. Koreas dominance in shipbuilding will stay for about 4 to 10 years
as per experts. But Korea needs to change to accommodate for the new competition in its
business space. Korean nursery has tagged its hopes on the high value high-technology ship
making contracts but it also leads to focus on the low value container ships if it needs to stay
significant and compete with China.

For now courier bills 90% container ship and 10% hi Technology shifts such as oil rigs and
icebreakers. In the future with stress on highest tech ships courier might be building up to
60% off search ships but still 40% of its market will be open to competition from China.
Korea is doing well in adapting to the current market condition and using the cheap labour
available in China to make small container boxes that are integral parts of a ship without
actually sacrificing the technological expertise that are detrimental to making high
technology ships.

Although the shipbuilding industry is currently threatened by new players like China, with
good diversification and adaptation Korea can phase out the competition and only benefit
from such globalisation.
 CASE STUDY 02

IMPACT OF FREER TRADE

(Q1) What does this case study suggest in terms of the factor endowment theory of
international trade?

Ans. The factor endowment theory holds that countries are likely to be abundant in different
types of resources. Factor endowment theory is used to determine comparative advantage. It
holds that a country will have a comparative advantage in the good that uses the factor with
which it is heavily endowed. When calculating comparative advantage, it is essential to
remember that it is the ratios of factors that matter; a country could be heavily endowed with
both labour and capital, but it proportionally may have more of one than another than would
another country.

In the case study it is given that the clothes making is labour intensive, and ten Chinese will
work for the price of one American. It is also stated that America is the second largest
producer of cotton (after China). The factor endowment theory, while used to explain
overarching notions of comparative advantage, in reality only accounts for a small percentage
of world trade. At one time, there were big disparities between labour and capital in the US
and East Asia. East Asia began to grow much faster than the US, however trade increased as
the two countries became more similar, even though the factor endowment theory would
predict that trade should have lessened. This suggests that there must be something other than
factor endowments motivating international trade. The assumptions that drive the factor
endowment theory may be flawed.

The above argument can be explained by watching the American exports which are still
rising because labour costs do not matter so much in textile making these days. There is more
to garment making and at the top end there is a high fashion, which is price insensitive;
globalisation has little effect on designers of Paris, New York or Milan.

But as strong as these domestic niches may be, they add up to just a few percent of total sales.
To keep a full quarter of the industry at home in the absence of trade barrier will be achieved
by the use of technology. Internet driven retails is helping the US markets to keep a full
control on the industry.

Hence, low effect of labour costs on textile industry and use of technology are the two factors
endowments motivating international trade and the assumptions that drive the theory is
flawed.

(Q2) Briefly outline the factors that might permit the USA to retain a sizeable textile
and garment industry.

Ans. Factors that might permit the USA to retain a sizeable textile and garment industry are:
America remains the worlds second largest grower of cotton (after China), and in many
cases it still makes sense to weave near the farms, most of which are in such southern states
as North Carolina and Mississippi, rather than to ship cotton abroad.

There is a high fashion, which is price insensitive; globalisation has little effect on the
designers of Paris, Milan or New York.

The use of technology to keep a full quarter of industry at home in the absence of trade
barriers.

Internet driven retail will lead to the growth of American textile and garment industry. It hints
a day where America can preserve a relatively healthy textile and clothing business without
artificial barriers.

American garment makers increasingly offer electronic ordering, automated distribution

centres and inventory management systems tied into those of their customers. The best
manufacturers have learned how to deliver order at a few days notice, something their
offshore competitors cannot match. A triumph of information technology, speed and
flexibility over low labour rates.

As the technology advances, the balance between custom and bulk manufacturing may
become quite fine. If this comes to pass, the high tech firms that remain may wonder why
they fought so long to keep trade barriers when innovation worked even better.
 CASE STUDY 03

TONIA MOTOR BIKES CHINESE PIRACY

(Q1) Do you find it conceivable that the state-owned enterprises in China are engaging
in product piracy? Explain.

Ans. It is pretty credible to believe that some of the Chinese State firms are themselves
involved in the product piracy debacle as we can see in the Tonia Motorbikes case. The
technological secrets of the Tonia enterprise were divulged only to Happy Motors on the
behest of high level officials of the Chinese Government. Yet after sometime the counterfeit
model of the bike was out in the market, which means that someone in Happy Motors sold
the secrets for some personal gains.

(Q2) What effect has Chinas entry into WTO had on product piracy?

Ans. Ever since Chinas entry into WTO other nations like USA, Germany and Japan have
been pressurizing China to take immediate actions on the Piracy issue as it is in contravention
with the TRIPS(Trade-Related Aspects of Intellectual Property Rights)

Japan, the U.S. and some European countries have begun preparatory work to create an
international convention intended to prevent the spread of illegally copied and pirated
products.Chinese authorities impose no criminal penalties on those who make or sell
counterfeit goods if the total value of confiscated products is less than a certain amount.

In the planned action at the WTO, the U.S. and other countries have urged China to broaden
its criminal prosecution in dealing with piracy.Thus in the wake of international pressure
China is moving towards curbing Product Piracy.

(Q3) What should Kenichi do about this problem?

Ans. Since Tonia Motorbikes is based out of Japan, Kenichi should enforce pressure from the
Japanese Government to have a crackdown at the counterfeit scam as it is not only affecting
its revenues but also its brand image in international markets. Kenichi can file a lawsuit in the
Japanese and International Tribunal for Trade and force the Chinese Government to take
immediate and adequate actions.
 CASE STUDY 04

LEVI STRAUSS & CO. NO LONGER MADE IN THE USA

(Q1) Do you feel that LS&C is acting in responsible manner in closing its North
American production operations? Explain.

Ans. Yes, I think LS&C is acting in responsible manner by closing their production sites in
North America. According to The product life cycle theory, proposed by Raymond Vernon,
as the product matures both the location of sales and the optimal production location will
change affecting the flow and direction of trade.

This theory also states that the size and wealth of the US market gave US firms a strong
incentive to develop new products. When LS&C started this theory was true US recently
went through the phase of industrialization, it had a lot of opportunities for the entrepreneurs.
But as the US market matured the initial ideas of these entrepreneurs became standardized
thus creating a fairly competitive environment in which price was the most important factor.
As the production cost were high in North America the companies from cheap labour
countries saw an opportunity and began exporting their product in North America at a
cheaper rates. This resulted in decrease of sale of LS&C. So for keeping their company in
competition reduction in production cost was necessary and moving their production centres
to cheap labour country is the best way to do so.

(Q2) Do American companies like LS&C that transfer production to lower wage
countries hurt or help the economy of United States?

Ans. I think transferring the production outlets to lower wage countries help the economy of
United States. According to Adam Smith, countries should specialize in the production of
goods for which they have an absolute advantage and then trade these goods for the goods
produced by other countries. It is common knowledge that US has low manpower so by the
reallocation of these manpower oriented companies US can now focus on production of
automated goods like commercial aircraft, industrial machines, semiconductors, etc. of which
US is a big exporter. These industries require less manpower so US can produce these goods
in large quantities thus increasing the net worth of produced goods.

At the time of recession the trade deficit of US became zero as the trade and financing dried
up. However the factors of deficit can be still seen in China and Japan and if not addressed it
could limit the economic growth of US. Reason being that the deficit is an unsustainable
condition and since the US has the most stable economy therefore it is the only country that
can survive a trade deficit.
(Q3) Evaluate the soundness of the strategic shift away from production and towards a
focus on design and marketing?

Ans. LS&C has been in US market since last 150 years so it already has a very big and loyal
customer base. They have already established themselves as a brand name. At their current
cost schedule they are losing the customers who spend less on clothings. So if they reduce
their cost they should be greatly increasing their customer base thus increasing their sales. So
it can be inferred that it is better to shift their production base rather than pouring more
money in designing and marketing.
 CASE STUDY 05

THE DOLLARISATION OF SAN MIGUEL

(Q1) How would replacing the peso with the dollar affect monetary policy in San
Miguel?

Ans:- As the economy is shrinking and inflation being the highest in the western hemisphere,
the president of country San Miguel decided to go for dollarization i.e. substitution of its
currency peso with US dollar.

One of the main advantages of adopting a strong foreign currency as sole legal tender is to
reduce the transaction costs of trade among countries using the same currency. There are at
least two ways to infer this impact from data. The first is the significantly negative effect of
exchange rate volatility on trade in most cases, and the second is an association between
transaction costs and the need to operate with multiple currencies. Also, Countries with full
currency substitution can invoke greater confidence among international investors, inducing
increased investments and growth.

Therefore, it will definitely boost the trade relations and investment in the San Miguel which
can expand the economy and the increased investment will help to cope with the inflation and
some growth might be seen in the country.

(Q2) What are the advantages and disadvantages of a country adopting the US dollar as
its currency?

Ans:- Advantages

Reduced Volatility: Apart from the governments, the local businesses also face
advantages as a result of currency pegs. The local businesses can predict how their
goods will be priced in the international market. Once they are aware of the exact
pricing, they can also predict the quantities that will be demanded at that price.
Credible And Disciplined Monetary Policy: Currency pegs are often popular in third
world countries. This is because these impoverished countries are also breeding
grounds for corruption. Hence, these countries do not trust their local leaders with
their monetary policy.
Dollarization avoids currency and balance of payments crises. Without a domestic
currency there is no possibility of a sharp depreciation, or of sudden capital outflows
motivated by fears of devaluation.
By definitively rejecting the possibility of inflationary finance through dollarization,
countries might also strengthen their financial institutions and create positive
sentiment toward investment, both domestic and international.
 Stable Basis for Planning: Currency pegs provide an extremely stable basis for
financial planning to the governments. Governments have to buy essential
commodities such as oil and food grains from the international market.

Disadvantages

Countries are likely to be reluctant to abandon their own currencies, symbols of their
nationhood, particularly in favour of those of other nations. As a practical matter,
political resistance is nearly certain, and likely to be strong.
Increased Foreign Influence: On the flipside, countries which adopt a currency peg
face increased foreign influence in their domestic affairs. This is because their
monetary policy is determined by another nation which may lead to a conflict
situation.
Difficulty in Automatic Adjustment: A floating currency system leads to automatic
adjustment of deficits. For instance, if one country imports too much, they will have
to pay out a lot. This will lead to a decrease in the currency supply in their economy
causing deflation. Deflation means low prices and low prices make their exports
competitive.

(Q3) Other than replacing its currency, what else could be done to help solve San
Miguels economic problem?

Ans:- In order to solve the economic problem, San Miguels President should, other than
replacing, think about devaluation of its currency peso, in order to get economic stability and
a consolidated growth rate in the country, and they are somewhat successful in their efforts.
Redefining its financial and trade policies with a strong political setup are also a way out.

Devaluation is a deliberate downward adjustment to the value of a country's currency relative

to another currency, group of currencies or standard. Devaluation will fill the gap of trade
imbalance. Devaluing the peso will cause the products and goods as well as services available
for other countries at low price as compared to previous rate. This will surely encourage
export from San Miguel and trade deficit will be marginalised. Boosting trade is the best
option to expand the economy and reduce the inflation rate. Growth rate and GDP will boost
the economy and strengthen the monetary policy and reduce the fiscal deficit. Also the
purchasing power of the people will improve and when the availability of products and
services normalizes, inflation definitely will be in control.

(Q4) What would you recommend?

Ans:- I would like to recommend that dollarization is certainly a good option to strengthen
the economy and to control of inflation as replacement of peso with US dollar is certainly
going to boost trade with the whole world in the name of dollar and investment opportunities
will flourish in San Miguel. But the poor people have to suffer for this. These people are
marginalised section of the country and when replacement occurs, these people with meagre
amount of money will have to face problems. Also the sovereignty of country lies in its
currency and dollarization hurt this sentiment that even if the country has its currency, still it
has to replace it. Also the dominance of US over san Miguel will hover and it may cause
political instability.

Hence in my opinion, before dollarization, the government should at least go for devaluation
and modification of financial and trade policies for a short period of 1 to 2 years and see what
happens. Whether economic instability balances or not and if there is even slight
improvement in the current conditions, the government should continue these policies till
further balance of economy. And the last option still stays at dollarization i.e. the replacement
of San Miguels peso with US dollar.
 CASE STUDY 06
MANAGEMENT GURUS MIGHT RETHINK THE DUTCH APPROACH

(Q1) What are believed to be effective Dutch characteristics for managing cross border
mergers and take over?
Ans. The characteristics which render an upper hand to the Dutch in managing cross border
mergers and take overs are autonomy, friendship, understanding, respect, collegiality, and
complementarity. Dutch multinationals favored a decentralized organization structure based
on national boundaries. This is a very attractive approach which has made Dutch famous for
making acquisitions across the globe.

(Q2) How does the Dutch approach differ from that perceived to be followed by other
nationalities?
Ans. The French believe in dominating approach, the German believe in hierarchical
approach and the Americans believe in superiority and precedence approach. Contrary to this,
the Dutch believe in compromising approach. Dutch are both assertive and cooperative which
helps to preserve relationship for the future. This approach turns out to be an effective
strategy for business expansion. Also, unlike Americans, Dutch focus on the long term
aspects of business.