INTERNATIONAL BUSINESS MANAGEMENT Assignment 1 Submitted By: 1) Discuss the importance of WTO in Global Trade (5 Marks)

The World Trade Organization (WTO) was established on 1 January 1995. It is the legal and institutional foundation of the multilateral trading system. It provides the principal contractual obligations determining how governments frame and implement domestic trade legislation and regulations. WTO replaced GATT which had been established to increase the trade between the nations after the end of WW II, but did not have a legal foundation. The WTO is a platform to evolve trade relations between the nations through debate and negotiations. It intends to liberalize international trade and at the same time regulate the trade between participating countries. It provides a framework for negotiating and formalising of trade agreements, dispute resolution, enforcement of adherence to WTO agreements which are signed by the representatives of the member governments and ratified by their parliaments (i.e. have a legal foundation). The WTO has 153 members, representing more than 97% of total world trade and 30 observers, most seeking membership. The WTO is governed by a ministerial conference, meeting every two years; a general council, which implements the conference's policy decisions and is responsible for day-to-day administration; and a director-general, who is appointed by the ministerial conference. The WTO's headquarters is at the Centre William Rappard, Geneva, Switzerland. An important aspect of the WTO is that no member nation should give a Most favored Nation status to any other country. Members are bound to grant to the products of other members no less favorable treatment than that accorded to the products of any other country. This allows free trade on a global aspect and reduces regional or bilateral bias, though it can not be fully avoided. Another important aspect is the provision on "national treatment" requires that once goods have entered a market, they must be treated no less favorably than the equivalent domestically-produced good thus providing equal opportunities to foreign and domestic goods in a market and promoting free market economy. While quotas are generally outlawed in WTO, tariffs or customs duties are legal. Tariff reductions made by over 120 countries in the Uruguay Round are contained in some 22,500 pages of national tariff schedules, which are considered an integral part of the WTO. Tariff reductions, for the most part phased in over five years, will result in a 40 per cent cut in industrial countries' tariffs in industrial products from an average of 6.3 per cent to 3.8 per cent. WTO also promotes fair competition. Imposing compensating duties on two forms of "unfair" competition: dumping and subsidies by the governments is allowed by WTO. The WTO Agreement on agriculture is designed to provide increased fairness in farm trade, though it is not fairly imposed as is seen in forms of subsidies given by the

western governments to the farmers and imposing restrictions on the produce from other countries e.g. India. The regulations and the safeguards provided on intellectual property such as patents has improved conditions of competition where ideas and inventions are involved paving way for breakthrough innovations and an improved quality of life. The WTO is also a centre of economic research and analysis: regular assessments of the global trade picture in its annual publications and research reports on specific topics are produced by the organization. Finally, the WTO cooperates closely with the two other components of the Bretton Woods system, the IMF and the World Bank. It is the WTO's duty to review and propagate the national trade policies, and to ensure the coherence and transparency of trade policies through surveillance in global economic policy-making. Another priority of the WTO is the assistance of developing, least-developed and low-income countries in transition to adjust to WTO rules and disciplines through technical cooperation and training. The organization is working to persist with a trade negotiation called the Doha Development Agenda (or Doha Round), which was launched in 2001 to enhance equitable participation of poorer countries which represent a majority of the world's population. However, the negotiation has been dogged by "disagreement between exporters of agricultural bulk commodities and countries with large numbers of subsistence farmers on the precise terms of a 'special safeguard measure' to protect farmers from surges in imports. The impact of the WTO has been very good and the international trade has increased by leaps and bounds but still the trade has not reached a full free and fair global market scenario as still some regional and mutual biasness remain.

2) Discuss the role of IMF in bringing regulatory mechanism for currency management ( 5 Marks)
In order to rebuild the world economy and especially the war ravaged countries during the World War II, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944. The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century. It was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states The planners at Bretton Woods set up a system of rules, institutions, and procedures to regulate the international monetary system. They established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to

the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments. On August 15, 1971, the United States unilaterally terminated convertibility of the dollar to gold. As a result, "the Bretton Woods system officially ended and the dollar became fully 'fiat currency,' backed by nothing but the promise of the federal government." This action, referred to as the Nixon shock, created the situation in which the United States dollar became the sole backing of currencies and a reserve currency for the member states. Free trade relied on the free convertibility of currencies. Negotiators at the Bretton Woods conference, fresh from what they perceived as a disastrous experience with floating rates in the 1930s, concluded that major monetary fluctuations could stall the free flow of trade. The new economic system required an accepted vehicle for investment, trade, and payments. Unlike national economies, however, the international economy lacks a central government that can issue currency and manage its use. In the past this problem had been solved through the gold standard, but the architects of Bretton Woods did not consider this option feasible for the postwar political economy. Instead, they set up a system of fixed exchange rates managed by a series of newly created international institutions using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency. In the 19th and early 20th centuries gold played a key role in international monetary transactions. The gold standard was used to back currencies. The international value of currency was determined by its fixed relationship to gold. Gold was used to settle international accounts. The gold standard maintained fixed exchange rates that were seen as desirable because they reduced the risk of trading with other countries. Imbalances in international trade were theoretically rectified automatically by the gold standard. A country with a deficit would have depleted gold reserves and would thus have to reduce its money supply. The resulting fall in demand would reduce imports and the lowering of prices would boost exports; thus the deficit would be rectified. Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend. This decrease in the amount of money would act to reduce the inflationary pressure. Supplementing the use of gold in this period was the British pound. Based on the dominant British economy, the pound became a reserve, transaction, and intervention currency. But the pound was not up to the challenge of serving as the primary world currency, given the weakness of the British economy after the Second World War. The architects of Bretton Woods had conceived of a system wherein exchange rate stability was a prime goal. Yet, in an era of more activist economic policy, governments did not seriously consider permanently fixed rates on the model of the classical gold standard of the nineteenth century. Gold production was not even sufficient to meet the demands of growing international trade and investment. And a sizeable share of the world's known gold reserves were located in the Soviet Union, which would later emerge as a Cold War rival to the United States and Western Europe. The only currency strong enough to meet the rising demands for international currency transactions was the U.S. dollar. The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the

U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold. Another view is that in the time of discount banks, discount was the interest earned on gold, and that the only way to repay interest on government bonds is by printing more dollars, thus raising the price of gold. If gold is fixed at $35 then other countries will demand gold and not accept dollars. The closing of the gold window in 1971 was the result. The rules of Bretton Woods, set forth in the articles of agreement of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), provided for a system of fixed exchange rates. The rules further sought to encourage an open system by committing members to the convertibility of their respective currencies into other currencies and to free trade. What emerged was the "pegged rate" currency regime. Members were required to establish a parity of their national currencies in terms of the reserve currency (a "peg") and to maintain exchange rates within plus or minus 1% of parity (a "band") by intervening in their foreign exchange markets (that is, buying or selling foreign money). In theory, the reserve currency would be the bancor (a World Currency Unit that was never implemented), suggested by John Maynard Keynes; however, the United States objected and their request was granted, making the "reserve currency" the U.S. dollar. This meant that other countries would peg their currencies to the U.S. dollar, andonce convertibility was restoredwould buy and sell U.S. dollars to keep market exchange rates within plus or minus 1% of parity. Thus, the U.S. dollar took over the role that gold had played under the gold standard in the international financial system. Meanwhile, to bolster faith in the dollar, the U.S. agreed separately to link the dollar to gold at the rate of $35 per ounce of gold. At this rate, foreign governments and central banks were able to exchange dollars for gold. Bretton Woods established a system of payments based on the dollar, in which all currencies were defined in relation to the dollar, itself convertible into gold, and above all, "as good as gold". The U.S. currency was now effectively the world currency, the standard to which every other currency was pegged. As the world's key currency, most international transactions were denominated in US dollars. The U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that contributed to the supremacy of the United States. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system. Member countries could only change their par value with IMF approval, which was contingent on IMF determination that its balance of payments was in a "fundamental disequilibrium". The Bretton Woods Conference led to the establishment of the IMF and the IBRD (now the World Bank), which still remain powerful forces in the world economy.

As mentioned, a major point of common ground at the conference was the goal to avoid a recurrence of the closed markets and economic warfare that had characterized the 1930s. Thus, negotiators at Bretton Woods also agreed that there was a need for an institutional forum for international cooperation on monetary matters. Already in 1944 the British economist John Maynard Keynes emphasized "the importance of rule-based regimes to stabilize business expectations" something he accepted in the Bretton Woods system of fixed exchange rates. Currency troubles in the interwar years, it was felt, had been greatly exacerbated by the absence of any established procedure or machinery for intergovernmental consultation. As a result of the establishment of agreed upon structures and rules of international economic interaction, conflict over economic issues was minimized, and the significance of the economic aspect of international relations seemed to recede. International Monetary Fund was Officially established on December 27, 1945, when the 29 participating countries at the conference of Bretton Woods signed its Articles of Agreement, the IMF was to be the keeper of the rules and the main instrument of public international management. The Fund commenced its financial operations on March 1, 1947. IMF approval was necessary for any change in exchange rates in excess of 1%. It advised countries on policies affecting the monetary system. Although attended by 44 nations, discussions at the conference were dominated by two rival plans developed by the United States and Britain. As the chief international economist at the U.S. Treasury in 194244, Harry Dexter White drafted the U.S. blueprint for international access to liquidity, which competed with the plan drafted for the British Treasury by Keynes. Overall, White's scheme tended to favor incentives designed to create price stability within the world's economies, while Keynes' wanted a system that encouraged economic growth. Keynes' proposals would have established a world reserve currency (which he thought might be called "bancor") administered by a central bank vested with the possibility of creating money and with the authority to take actions on a much larger scale (understandable considering deflationary problems in Britain at the time). In case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries and thereby create foreign trade equilibrium. Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary. But the United States, as a likely creditor nation, and eager to take on the role of the world's economic powerhouse, balked at Keynes' plan and did not pay serious attention to it. The U.S. contingent was too concerned about inflationary pressures in the postwar economy, and White saw an imbalance as a problem only of the deficit country. Although compromise was reached on some points, because of the overwhelming economic and military power of the United States, the participants at Bretton Woods largely agreed on White's plan. The IMF sought to provide for occasional discontinuous exchange-rate adjustments (changing a member's par value) by international agreement. Member nations were

permitted to adjust their currency exchange rate by 10%. This tended to restore equilibrium in their trade by expanding their exports and contracting imports. This would be allowed only if there was a fundamental disequilibrium. A decrease in the value of a country's money was called a devaluation, while an increase in the value of the country's money was called a revaluation. It was envisioned that these changes in exchange rates would be quite rare. However, the concept of fundamental disequilibrium, though key to the operation of the par value system, was never defined in detail.

3) Under what circumstances multi-directive strategy is practiced as against global strategy ( 5 Marks)
Pressure for local responsiveness implies that it may not be possible for a firm to realize the full benefits from economies of scale, learning effects, and location economies. It may not be possible to serve the global market place from a single low cost location, producing a globally standardised product and marketing it worldwide to attain the cost reductions associated with experience effects. The need to customize the product offerings to local conditions may work against the implementation of such a strategy. For example, automobile firms have found that Japanese, American and European consumers demand different kinds of cars and this necessitates producing products that are customized for local markets. In response, firms such as Honda, Ford, and Toyota are pursuing a strategy of establishing top to bottom design and production facilities in each of these regions so that they can better serve local demands. Although such customization brings benefits, it also limits the ability of a firm to realize significant scale economies and location economies. In addition, pressure for local responsiveness imply that it may not be possible to leverage skills and products associated with a firms core competencies wholesale from one nation to another. Concessions often have to be made to local conditions. Despite being depicted as poster boy for the proliferation of standardised global products, even McDonalds has found that it has to customize its product offerings to account for national differences in tastes and preferences. Firms typically choose among four main strategic postures when competing internationally. These can be characterized as a global standardization strategy, a localization strategy, a trans-national strategy and an international strategy. Global Standardization Strategy Global Standardization strategy focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies. Their strategic goal is to pursue a low cost strategy on a global scale. The production, marketing, and R&D activities of firms pursuing a global standardisation strategy are concentrated in a few favourable locations. (Ethnocentric) Firm do not customize their product offerings and marketing strategy to local conditions because customization involves shorter production runs and the duplication of functions, which tends to raise costs. Instead the firm prefers to market a standardized product worldwide so that they can reap maximum benefits from

economies of scale and learning effects. The firms use cost advantage to support aggressive pricing world markets. This strategy is useful only when there are strong pressures for cost reductions and demands fro local responsiveness are minimal. These conditions prevail in many industrial goods industries, whose products often serve universal needs. For example, in semiconductor industry, global standards have emerged, creating enormous demands for standardised global products. Accordingly companies like Intel, Texas Instruments pursue global standardization strategy. But these conditions are not yet found many consumer goods markets, where demands for local responsiveness remain high. Then this strategy is inappropriate. Trans-national Strategy Globalization strategy makes most sense when cost pressures are intense and demands for local responsiveness limited. Localisation strategy makes most sense when demands for local responsiveness are high, but cost pressures are moderate or low. Trans-national Strategy is pursued when firms face both strong cost pressures and strong pressure for local responsiveness. In todays global environment, competitive conditions are so intense that to survive firms must do all they can to respond to pressures for cost reductions and local responsiveness. Firms must try to realise location economies and experience effects, to leverage products internationally, to transfer core competencies and skills within the company and to simultaneously pay attention to pressures for local responsiveness. In the modern multinational enterprises, core competencies and skills do not reside just in the home country but can develop in any of the firms worldwide operations. Multi National Enterprises maintain the flow of skills and product offerings should not be all one way, from home country to foreign subsidiary. The flow should also be from foreign subsidiary to home country and from foreign subsidiary to foreign subsidiary. Trans-national enterprises must also focus on leveraging subsidiary skills. Firms pursuing Trans-national Strategy try to achieve simultaneously low costs through location economies, economies of scale, and learning effects; differentiate their product offering across geographic markets to account for local differences; and promote a multidirectional flow of skills between different subsidiaries in the firms global network of operations. (Polycentric) Example: Caterpillar The need to compete with low-cost competitors such as Komatsu forced Caterpillar to look for greater cost economies. But due to variations in construction practices and government regulations across countries mean that Caterpillar also has to be responsive to local demands. To deal with cost pressures, Caterpillar redesigned its products to use many identical components and invested in a few large scale component manufacturing facilities, sited at favourable locations, to fill global demand and realize scale economies. At the same time the company augments the centralized manufacturing components with assembly plants in each of its major global markets. At these plants Caterpillar adds local product features, tailoring the finished product to local needs. Thus, Caterpillar is able to realise many of the benefits of global manufacturing while reacting to pressures for local responsiveness by differentiating its product among

national markets. Meanwhile, Komatsu is still wedded to a Japan-centric (ethnocentric) global strategy, have seen their cost advantage evaporate and have been steadily losing market share to Caterpillar. Therefore Trans-national or multi directive Strategy is pursued when firms face both strong cost pressures and strong pressure for local responsiveness as against global strategy.

4) How do government controls MNCs through their regulatory mechanism (5 Marks)

The governments of growing economies promote MNCs to make FDI and set shop in their countries. The countries provide special incentives to attract the MNCs to make investments in their countries. But at the same time the governments have to make sure that the MNCs do not exploit the resources and the markets of the countries and also that the country does not loose control of the resources and its sovereignty. So they enforce some regulatory mechanisms to keep the MNCs under control. The legal system of a country plays an important role in controlling the functioning of the MNCs. A countrys laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligation of those involved in business transactions. The legal environments of countries differ in significant ways. The legal system is influenced by the prevailing political system. The government of a country defines the legal framework within which firms do businesses and often the laws that regulate business reflect the rulers dominant political ideology. There are four types of legal systems: Common law, Civil law, Theocratic law and Bureaucratic Law The Contract Law applicable in the country also plays an important role in regulation. A contract is a document that specifies the conditions under which an exchange is to occur and details rights and obligations of the parties involved. Some form of contract regulates many business transactions. Contract Law is the body of law that governs contract enforcement. The parties to an agreement normally resort to contract law when one party feels the other has violated either the letter or the spirit of an agreement. Control over the property rights is also a way of regulating the functioning of MNCS. Resource include land, buildings, equipment, capital, mineral rights, businesses, and intellectual property. The government can regulate the MNCs by regulating the amount of FDI and the percentage holding of the MNC in a company. e.g. An foreign insurance company has to have an Indian partner to come in the Indian market e.g. TATA-AIG, BhartiAXA . The government can create market access regulations in the form of licensing requirements or prohibitions e.g. Military, mass media, transport etc.

The regulations can also be in terms of performance requirements. These can be restrictions or necessities in terms of technology transfer, exports, employment, local content etc. The governments can also enforce necessity of joint ventures to secure technology transfer and safeguard the interests of local industries e.g. MarutiSuziki. The governments also regulate the MNCs by strict tax rules and structures to keep a strict vigil on the performance of the company and the balance of payments. Implementing product safety and product liability laws. Product safety laws set certain safety standards to which a product must adhere. Product Liability involves holding a firm and its officers responsible when a product causes injury, death or damage. Product liability can be much greater if a product does not conform to required safety standards. Both civil and criminal product liability laws exist. Civil laws call for payment and monetary damages. Criminal liability laws result in fines or imprisonment. Enforcing strict environmental regulations to safeguard the interests of the countrys environment and resources.