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Definition of Globalization The broadening set of interdependent relationships among people from different parts of a world that happens to be divided into nations Globalization of Markets Historically distinct and separate markets are merging into one huge global marketplace Mostly NOT consumer product markets Mostly industrial products Are the tastes and preferences of consumers converging? Are MNEs creating a global marketplace? MNEs around the world are becoming more vulnerable to competition in their home markets Merging of historically distinct and separate national markets into one huge global marketplace Facilitated by offering standardized products: o o o o Citicorp (see their German ad) Coca-Cola (see Japanese ad) Sony PlayStation McDonalds

Definition of International Business All commercial transactionsincluding sales, investments, and transportation that take place between two or more countries Definitions On International Business There are two ways of looking at the term international business. One is the action and the other is the actor. As an action, international business refers to the types, process, scale, governance and other aspects of carrying out international business. As referring to actor, the term international business refers to the entity carrying out the international business. John D Daniels and Lee H Radebaugh in their book, International Business, define international business as, all commercial transactions- private and governmental-between two or more countries. Private companies undertake such transactions for profit; governments

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may or may not do the same in their transactions. These transactions include sales, investments and transportation. The Internet Public Library (IPL) defines International Business as, doing business in international markets, and business information specific to various countries or geographic regions of the world. A great part of international business is international trade which is defined as, The business of buying and selling commodities / services / investments beyond national borders. According to Harcourt Brace & Company, Orlando, Florida, International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals and organizations. These definitions see the term international business as an action. The next one looks at the term as referring to the actor. According to International Business Journal, International business is a commercial enterprise that performs economic activity beyond the bounds of its location, has branches in two or more foreign countries and makes use of economic, cultural, political, legal and other differences between countries. MULTINATIONAL CORPORATIONS Multinational corporations do substantial business in several countries. Multinational corporations can be controversial at home and abroad. Multinational corporations face a variety of ethical challenges. Planning and Controlling are complicated in multinational corporations. Organizing is complicated in multinational corporations. Leading is complicated in multinational corporations. Multinational Corporation (MNC) county. Transnational Corporation Fortunes Top 10 Multinational Corporations 1. Wal-Mart Stores 2. BP 3. Exxon Mobil 4. Royal Dutch Shell Group 5. General Motors 6. DaimlerChrysler 7. Toyota Motor 8. General Electric 9. Total 10. Chevron

INTL. TRADE THEORY 1)Mercantilism countries should export more than they import - balance of trade surplus result in more gold & silver for governments trade conducted by governments Led consolidation of power trade with colonies import less-valued raw materials export more-valued manufactured goods

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views trade as zero-sum game 2)Absolute Advantage proposed by Adam Smith countries differed in their ability to produce different goods efficiently and should specialize in the production of goods they can produce more efficiently views trade as a positive sum game countries will benefit from trade if they have an absolute advantage in one product 3)Comparative Advantage even if a country has an absolute advantage in both products it should Specialize in production of that good in which it has a comparative advantage proposed by Ricardo 4)Assumptions Comparative Advantage Full employment 2 products and 2 countries only Ignores role of technology and marketing Perfect competition Mobility of resources Transportation costs ignored Max efficiency - countries produce goods for other reasons Theories of Specialization Both absolute and comparative advantage theories are based on specialization Assumptions policymakers question: full employment economic efficiency division of gains transport costs statics and dynamics services production networks mobility Trade Pattern Theories How much a country will depend on trade if it follows a free trade policy What types of products countries will export and import With which partners countries will primarily trade Theory of Country Size Countries with large land areas are apt to have varied climates and natural resources They are generally more self-sufficient than smaller countries are Large countries production and market centers are more likely to be located at a greater distance from other countries, raising the transport costs of foreign trade Factor-Proportions Theory A countrys relative endowments of land, labor, and capital will determine the relative costs of these factors Factor costs will determine which goods the country can produce most efficiently Country-similarity Theory Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies

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Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries, political and economic agreements, and by the distance between them Product Life Cycle (PLC) Theory Companies will manufacture products first in the countries in which they were researched and developed, almost always developed countries Over the products life cycle, production will shift to foreign locations, especially to developing economies as the product reaches the stages of maturity and decline

Barriers to TB A trade barrier is defined as any hurdle or impediment or road block that hampers the smooth flow of goods, services, and payments from one destination to another. They arise from the rules and regulations governing trade, either from the home country or the host country, or intermediary. Trade barriers are mandate obstacles to the free movement of goods between different countries. The contribution of the GATT in removing such trade barriers has not been satisfactory. Objective of Trade Barriers: To protect domestic industries from foreign goods. To promote new industries and research and development activities by providing a home market for domestic industries. To maintain a favourable balance of payment, by restricting imports from foreign countries. To conserve the foreign exchange reserve of the country by restricting imports from foreign countries. T protect the national economy from dumping by other countries with surplus production. To mobilize additional revenues by imposing heavy duties on imports. To counteract trade barriers imposed by other countries. Types of Trade Barriers: 1. Tariff Barriers 2. Non-tariff barriers Tariff Barriers: The term tariff refers to the duties imposed on internationally traded commodities when they cross national boundaries and may be in the form of heavy taxes or custom duties on imports, so as to discourage their entry into the home country. Tariff rates are generally high in the developing countries. With the recent economic liberalization across the world, many developing countries have reduced the tariff rates and NTBs as part of their trade liberalization. India has had one of the highest tariff walls in the world, the govt. following the recommendation of the Tax Reforms Committee (Chellaiah Committee) steadily reduced the peak level of tariff structure in line with those of other developing countries.

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Non-tariff Barriers: Non tariff barriers (NTBs) are described as new protectionism measures (as against tariffs which are regarded as traditional barriers) . The export growth of many developing countries has been seriously affected by the NTBs. Types of NTBs : The NTBs are of two categories 1. These are mostly traditional NTB such as import licensing, import quotas, foreign exchange regulations and cancellation of exports. These are generally used by developing countries to prevent foreign exchange outflows.

2. One of the most important new protectionism measures under this category is the voluntary export restraint (VER). Mostly used by developed economies to protect domestic industries which have lost international competitiveness.

Types of Forex Risks 112 Forex risks are of three types. These are: i Accounting or Translation Risk ii Transaction risk iii Operating risk. WORLD TRADE ORGANISATION (WTO) The WTO was established on January 1, 1995. It is the embodiment of the Uruguay Round results and the successor to GATT. 76 Governments became members of WTO on its first day. It has now 146 members, India being one of the founder members. It has a legal status and enjoys privileges and immunities on the same footing as the IMF and the World Bank. It is composed of the Ministerial Conference and the General Council. The Ministerial Conference (MC) is the highest body. It is composed of the representatives of all the Members. The Ministerial Conference is the executive of the WTO and responsible for carrying out the functions of the WTO. The MC meets at least once every two years. The General Council (GC) is an executive forum composed of representatives of all the Members. The GC discharges the functions of MC during the intervals between meetings of MC. The GC has three functional councils working under its guidance and supervision namely: a) Council for Trade in Goods. b) Council for Trade in Services. c) Council for Trade Related Aspects of Intellectual Property Rights (TRIPs). Director-General heads the secretariat of WTO. He is responsible for preparing budgets and financial statements of the WTO. WTO has now become the third pillar of United Nations Organization (UNO) after World Bank and International Monetary Fund. Objectives Of WTO In its preamble, the Agreement establishing the WTO lays down the following objectives of the WTO.

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1. Its relation in the field of trade and economic endeavor shall be conducted with a view to raising standards of living, ensuring full employment and large and steadily growing volume of real income and effective demand, and expanding the production and trade in goods and services. 2. To allow for the optimal use of the worlds resources in accordance with the objective of sustainable development, seeking both (a) to protect and preserve the environment, and (b) to enhance the means for doing so in a manner consistent with respective needs and concerns at different levels of economic development. 3. To make positive efforts designed to ensure that developing countries especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development. 4. To achieve these objectives by entering into reciprocal and mutually advantageous arrangements directed towards substantial reduction of tariffs and other barriers to trade and the elimination of discriminatory treatment in international trade relations. 5. To develop an integrated, more viable and durable multilateral trading system encompassing the GATT, the results of past trade liberalisation efforts, and all the results of the Uruguay Round of multilateral trade negotiations. 6. To ensure linkages between trade policies, environment policies and sustainable development.

Functions ofWTO The following are the functions of the WTO: 1. It facilitates the implementation, administration and operation of the objectives of the Agreement and of the Multilateral Trade Agreements. 2. It provides the framework for the implementation, administration and operation of the Plurilateral Trade Agreements relating to trade in civil aircraft, government procurement, trade in diary products and bovine meat. 3. It provides the forum for negotiations among its members concerning their multilateral trade relations in matters relating to the agreements and a framework for the implementation of the result of such negotiations, as decided by the Ministerial Conference. 4. It administers the Understanding on Rules and Procedures governing the Settlement of Disputes of the Agreement. 5. It cooperates with the IMF and the World Bank and its affiliated agencies with a view to achieving greater coherence in global economic policy-making. What is FDI? Direct investment in foreign-based production and/or marketing activities with substantial managerial involvement o Once a firm undertakes FDI, it becomes a multinational enterprise (multinational = more than one country) FDI takes two forms: o Green-field investment: establishing a wholly new operation in a foreign country o Acquiring or merging with an existing firm in the foreign country o

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Reasons for FDI Growth Faster growth than world trade and output FDI circumvents potential future trade barriers Political and economic changes favoring FDI are occurring in all countries Globalization of world markets FDI no longer the exclusive territory for large MNEs -- small and midsize enterprises (SMEs) now rule this business activity

Why is FDI important? Companies want a presence in foreign markets Firms want control over growth of these markets: o To gain first mover advantages o To ward off competitors o To determine locations, advertising and other related strategic decisions in the firms interest

MODUAL 3

Z Foreign Exchange Market: A market for converting the currency of one country into the currency of another Z Exchange Rate: The rate at which one currency is converted into another Z Foreign Exchange Risk: The risk that arises from changes in exchange rates

Functions of Foreign Exchange Market Currency Conversion: v Companies receiving payment in foreign currencies need to convert to their home currency v Companies paying foreign businesses for goods or services v Companies invest spare cash for short terms in money market accounts. v Speculation: taking advantage changing exchange rates Reducing FX Risk: v v v Spot exchange rate: rate of currency exchange on a particular day Forward exchange rate: two parties agree to exchange currencies on a specific future date, commonly 30, 60, 90, or 180 days. Currency swap: simultaneous purchase and sale of a given amount of FX for two different value dates

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Exchange Rate Determination Exchange rates are determined by the demand and supply of one currency relative to the demand and supply of another. The forces that determine exchange rates are complex, and no theoretical consensus exists, even among academic economists who study the phenomenon every day. Price and Exchange Rates The Law of one price states that in competitive markets free of transportation costs and barriers to trade (such as tariffs), identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency. The purchasing power parity (PPP) exchange rate could be found from any individual set of prices. By comparing the prices of identical products in different currencies. Money Supply and Price Inflation: A country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower. If we can predict what a countrys future inflation rate is likely to be, we can predict how the value of its currency relative to other currenciesits exchange rate-is likely to change. Interest Rates and Exchange Rates: Economic Theory tells us that interest rates reflect expectations about likely future inflation rates. In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. Factors Influencing Currency Value Economic Factors 1. Balance of Payments 2. Interest Rates 3. Inflation 4. Monetary and Fiscal Policy 5. International Competitiveness 6. Monetary Reserves 7. Government Controls and Incentives 8. Importance of the Currency in World Political Factors 9. Political Party and Leader Philosophies 10. Proximity of Elections or Change Expectation Factors 11. Expectations 12. Forward Exchange The International Monetary System u The institutional arrangements that countries adopt to govern exchange rates u Dollar, Euro, Yen, and Pound float against each other v Floating exchange rate: 4 Foreign exchange market determines the relative value of a currency u Some countries use other institutional arrangements to fix their currencys value Global Bond Market F Two types: Foreign:

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Sold outside borrowers country and denominated by the currency of the country where issued Desire to lower cost of capital Eurobonds: Underwritten by a bank syndicate and placed in countries other than the one in whose currency the bond is denominated Issued by multinational corporations,large domestic corporations, and international institutions Not offered in capital market, or to residents, of the country whose currency they are denominated Why Enter Foreign Markets? Improved communications Greater revenue Lower cost of goods sold Higher overseas profits as an investment motive Test market Protect markets, profits, & sales o protect domestic market follow domestic accounts overseas attack competitors markets use foreign production to lower costs in-bond plant concept (e.g. maquiladoras) Increase profits and sales o enter new markets o new market creation o preferential trading arrangements an agreement by a group of nations to establish free trade among themselves while maintaining trade restrictions with other nations European Union NAFTA o faster-growing foreign markets Protect markets, profits & sales Protect foreign markets

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