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Introduction on International business@ 1st Oct 2008

What is International Business?Any Commercial transaction between two or more countries is known asInternational Business. The parties of the transaction could be either companies

or Governments.Necessity of International Business:

Raw Materials reuired from abroad

!rocesses acuired from abroad. "#$%alMart Advanced technolo#ies reuired from abroad

Competition$There will always be competition. "ven if the company does

not enter into forei#n territory& forei#n companies will enter into the hostcountry.

'o barin# some very local businesses& it is not possible to stay insulated from

international business because of the above mentioned reasons.

Features of International Business (Distinction b/w Domestic and IB):

%orld is the Market Global scale of operation

Ample number of opportunities %orld class products(services

International level of productivity

Efficient/Productive value chain

International Business by its very nature is a primary determinant of InternationalTrade. )ne of the reasons of the increasin# success of international businessventures is #lobali*ation.

Cometitions due to !lobal "ortunitiesThere are four level of competitions due to #lobal opportunities+. From host country suliers# If a company from india wants to manufactureor e,port its products to -' then the e,istin# -' suppliers will have advanta#eover the indian company in terms of *ero custom ta,& minimum transportationcost and a popular brand name.

. From domestic layers of home countries$ In home country multiplecompanies with similar products havin# same pricin# start competin#.

/. Free trade a!reements/ trade bloc$s$ The advanta#es of Manufacturersbelon#in# to a trade block is they don0t have to pay any custom duty. The onlycost incurred by them is the transportation cost. "#$1A2TA.
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3. International %layers$ apart from the company from home country& a numberof other companies across the world would also like to sell their product in aparticular host country. 'o there e,ists competition from international players.

Why Comanies en!a!e in International Business?

The followin# are the factors for companies en#a#in# in International Business

+. &o increase sales / 'ales ansion

4ar#er canvas 5 convention of 'cale "conomy Companies 4evera#e International !roduct 4ife Cycle6 as stage in

product PLC changes around the world the place of production changes.I!4C sta#es followed by a product are different in different countries.These differences provide different market opportunities in differentcountries.

4ead Market$$companies want to be leaders in some market and 7ust wantto present in some other lead markets. If a company wants to be #lobal&then it has to know what is happenin# in the lead market for its product.2or this the compny needs to have a presence in the lead market.

2ollowin# the Customer $$"very company has some core customers.Companies follow their core customers where ever they #o in theinternational arena.

. &o ac*uire resources

Better uality or competitive resources at lower cost

Global sourcin#$$ not to depend on a few countries. Companies want tospread risks in acuirin# resources.

low cost , quality of resources , technology, hr

/. +educin! +is$ $$ companies try to reduce risk by spreadin# operationsaround the world.

'imple #eo#raphic risk & Industry cycle &Cross patrollin#

,odes of International Business

There are basically two aspects of international business

+. 'upplyin# to host country. Manufacturin# in host country

1. Supplying to host country --In this case the products are manufactured in homecountry and then exported to host country. It is feasible when the labor costs are low in


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home country, transportation costs are not high and no tariff barriers to exports. Theadvantage of this method is scale economy and excess capacity utilization.

-. ,anufacturin! in host country ## The manufacturin# in the host country canbe done either by contract manufacturin# or by licensin#.

contract Manufacturin#$$ In contract manufacturin# the company #ives a

contract to local manufacturers instead of settin# up a factory. Theadvanta#e is the companies will have low level of involvement and in turn#et a taste of the market first. The disadvanta#es bein# sharin# of profitsand the manufacturers mi#ht take over the market.

4icensin#$$ In licensin# the licensor permits the use of technolo#y for a

certain period of time to the licenseefor the manufacturin# of licensedproducts and sale in the licensed territories. 8ere the licensor owns thetechnolo#y. The licensee is permitted to use the technolo#y. 2or this thelicensee pays down payment as well as royalty to the licensor.

FDI B!"D and non FDI B!"D

Non FDI##### exports, contract manufacturing$ licensing, management contract, %&Dtur'ey pro(ects,

)ontract %& D * )ritical part of %&D at home . no technology diffusion. !tand alonemodules ++++ r&d contract. )ountry should be compliant with I%

Turn'ey pro(ects * )lient in host country. "ntire responsibility from concept tocommission is given to the expert company. "g design, global procurement, testing ,stage

upto product being switched -. /lobal bidding. )lient is normally in the host country.

ublic private partnerships come under this0

FDI based### local assembly, 12, wholly owned subsidiary, ac3uisition, merger. Inorder of ris'

Forei!n Country ntry 'trate!ies

+. ",ports. Contract Manufacturin#/. 4icensin#3. Assembly9. :oint ;enture


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.ortsThe company #oes for e,ports because it has hi#her competitive advanta#e. Thetransportation costs are low. The tariff rates are also low.-. Contract ,anufacturin! no mar$etin! s doneIn contract manufacturin# the parent(hirin# company approaches a firm known as

contract manufacturer with a desi#n(formula. )nce the contract is finalised thenthe contract manufacturer manufactures the components(products for the hirin#company. Freedom frm mana!in! the labour 0 tech/desi!n diffusion wiloccur but only for manufacturin! art1

2. 3icensin!In licensin#& first the licensor searches for a potential licensee. Then the licensorpermits the use of technolo#y for manufacturin# a component(product to thelicensee for a definite eriodat a certain location. +ole 4 manufacture 5mar$et

A contract manufacturer only produces products where as a licensee producesas well as sells for the licensor.

The advanta#e in licensin# bein# the licensor #ets tie ups with best distributors&knows local market and has cost advanta#e.Can co6er many countries in theworld at faster seed and lesser in6estment.

The disadvanta#e is diffusion of technolo!y 7 loosin! the mar$et toliscensee. 8lso at the e,piry of the licensin# a#reement the licensee willbecome the competitor to the licensor. 'o the market presence increases withlicensin#.

Franchising ser!ices" trade#ar$ being used

9.8ssembly

In case of assembly& different parts of the product are manufactured in differentcountries. The assembly of the parts takes place in the host country. )ver a

period of time the product becomes local to the host country. 4ocal labour

Beco* in other country when u start business customi*ation becomes e,pensive

.;oint >>>Risk cost sharin# with local partner


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Advanta#e > local market familiarity & labor mana#ement & host country relation (relation with banks& reduces risk as sharin# risk in unknown market

?isadvanta#e > cultural differences due to environmental chan#es & #uardtechnolo#y

MI@"? ;"1T-R" > when one partner is #overnment

+easons for formin! ;oint


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Disad6anta!es

Total risk ownership. 1o risk sharin# 4ess knowled#e of the market

?e#ree of competition increases

>. 8c*uisitionAcuisition may be defined as a corporate action in which a company buys most&if not all& of the tar#et companys ownership stakes in order to assume the controlof the tar#et firm.8d6anta!es

Acuirin# the entire tar#et company 'aves time( uicker to market

Duick to the market$due to well established distribution and sales channel The competition in the market remains unchan#ed

'uppliers inherit

Disad6anta!es

)bsolete technolo#y

Resources mi#ht not be best in class !rocesses and practices mi#ht not be world class

In :; $$$choose ur location

Mer#er$$$$ u choose only the time of it

roriation 6s. NationalisationIf the #overnment of any country takes over any forei#n company& then it isknown as e,propriation where as if the #overnment takes over any localisedcompany& then it is known as 1ationalisation.%holly owned subsidiaries are e,posed to e,propriation where as 7oint venturea#reements protect firms from e,propriation.


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International Business 6s. Domestic BusinessThe followin# factors distin#uish International business from domestic business

%orld market

!olitical environment

4e#al system Cultural difference

Communication

?istance are hi#her ?iversity

-ncertainty$!olitical& economical and currency risks

-ncontrollability$The de#ree of -ncontrollability is hi#her in host countries Competitions

Competence$people in different countries are at different levels of

competence.

,ultinational nterrises (,N)Multinational "nterprise is a firm that has en#a#ed in forei#n direct investmentE2?IF. "uivalently& an M1" is a company that owns Ea si#nificant part ofF andoperates facilities in nations other than the one in which it is based.Multinational company EM1CF

A M1C is a company which has its own presence in at least two countries. M1"sare partnerships. M1"s include M1Cs but not viceversa.&yes of ,Ns

Global

Multi$domestic

Transnational

lobal Comany

Inte#rates its operations around the world

!roduces for the world market -tilises best resrouces

)perates on scale economies

It has a #lobal brand The dark side is$ no customi*ation of #lobal brands so mi#ht lose some

se#ment of the market "#$Mc ?onalds& intel

,ulti Domestic Comany

)perates in different countries

Customises its product for different countries

Better customer loyalty 4ar#er scales and better mar#ins(profitability.


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Takes into account cultural differences& temperature variations !roducts are customi*ed to the e,tent necessary Advanta#es are$ #reater market share& client loyalty& lon# term market

share& better mar#ins "#$-nilever& !G

&ransnational Comany

%orld is the market

4earns the best practices from anywhere in the worldwide operations 4evera#es learnin# Inte#rates operations worldwide to reduce cost.

lower the cost of customi*ation "#$Caterpillar& G"

%ulture)ulture refers to the shared behaviour patterns based on attitudes, values and beliefs of agroup of people.


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&le#ents 'Deter#inants o( %ulture

The following are the determinants of culture4. "ducation5. %eligion6. 7anguage

8. esthetics9. ttitudes and Beliefs:. Technology and material culture;. !ocial ?. -pinion 7eaders

1.&ducation

The education level of a country is one of the determinants of its culture. The more theeducation level of a country, the more it is adaptable to change. "ducation broadens theperspectives. From business point of view it shapes the 'ind of mar'et we are operating,

the 'ind and type of products$services the country is offering. The governance of acountry becomes simple with education.In india, "ducation is being given the paramountimportance.

2. )eligion

%eligion is a ma(or aspect of consumer behaviour. It is a strong shaper of values. @ithinreligion there are many many factions whose specific beliefs may affect business.%eligion has also influence on practices. From business perspective, products$serviceshas to be in sync with religion. The largest religion is christianity.

*. +anguage

7anguage is a factor that greatly affects cultural stability. @hen people from differentareas spea' the same language, culture spreads more easily. Business can be done moreeasily with other nations that share the same language. Because countries see language isan integral part of their cultures, they sometimes regulate their languages. For advertisingthe language has a greater impact e.g. Aandarin.

,. esthetics

!ensory perceptions play a ma(or role. There are many aspects from business point of

view

Design * how you ma'e your product

)olor * ac'aging

Ausic * dvertising

roduct olicy

)onsumer preferences.

Brand ame )ustomization


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. ttitudes and /elie(s

)hanging behaviour is easier but changing attitude is difficult. From companyperspective understanding belief is very important. Beliefs are derived from values andhistory. Beliefs are related to education also. ttitudes are inherent in us. From company

perspective predispositions i.e. ris' ta'ing ability, creativity demands compliance areimportant.

. echnology and aterial %ulture

It determines how much the culture has adopted technology. "g. %obotics is being usedin


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)entralization and decentralization

7oer Distance

ower distance is a term describing the relationship between superiors and subordinates.

"mployee preferences in how to interact with their bosses, subordinates and peers variessubstantially internationally. @here power distance is high, people prefer littleconsulation between superiors and subordinates. !imilarly where power distance is low,perople prefer and usually have consultative styles.

Indi!idualis# 5s %ollecti!is#

some societies are individualistic = american society> where the effort is sinlge handedand group effort is to the extent necessary, where as in collective societies =(apanesesociety> people prefer to wor' in teams but ta'e a longer time to come up with aconsensus. ttributes of Invidualism are low dependence on the organization and a desire

for personal time, freedom and challenge. The attributes of )ollectivism are dependenceon the organization, desire for training, good physical conditions and benefits.

uthoritati!e 5s 7articiapati!e

In authoritative societies people prefer being instructed. They li'e authoritative decision.where as in articipative societies people wor' in consent with each other. In certaincountries people li'e to ta'e decisions where as it is exactly opposite in some othercountries.

. aslo9s hierarchy o( needs !aries across countries

ccording to this theory there are five levels of needs. The needs from lowest to highestlevel being physiological, security, affiliation, esteem and self actualization. eople try tofulfill lower level needs sufficiently before moving on to higher ones. But differentcountries have different levels of needs. !o this theory is helpful for differentiating thereward preferences of employees in different countries.

. onochronic 5s 7olychronic

In monochronic culture people are used to perform tas's se3uentially where as inpolychronic culture people are comfortable in doing the tas's simultaneously. some

cultures tend to focus first on the whole and then on the parts where as others do theopposite. )ultures such as those in northern europe are called monochronic where ascultures in southern europe are polychronic.

3. +o conte:t 5s ;igh conte:t

In low context cultures people consider firsthand information that helps directly indecision ma'ing are only relevant. @here as in high context cultures people consider


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peripheral information to be valuable in decision ma'ing and infer meaning from thingssaid indirectly. @hen managers from both types of cultures deal with each other, lowcontext individuals believe that the high context individuals are inefficient and wastemuch time where as high context individuals believe that low context individuals are tooaggressive to be trusted.

8. )is$ ta$ing beha!iours.

%is' ta'ing behaviours are basically categorized into four categories


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10. %ulture Shoc$ 5s )e!erse %ulture Shoc$

)ulture shoc' is the frustration that results when a person moves to another country andhas to learn and cope with a vast array of cultural cues and expectations.!ome people alsoencounter culture shoc' while returning to home country because they have learned adifferent culture abroad. This is 'nown as reverse culture shoc'.

11. cco#odation o( (oreigners"very country does accomodate foreigners. The principal reason being business, FDI andinturn the country will emerge in the world map. owever the local citizens treat localpeople and foreigners differently. In many countries foreign women are easily acceptedas managers as compared to local women.12. I#ple#entation o( cultural change

The various aspects of implementation of cultural change are as follows 5alue Syste#s##The more something counters our value system, the more

difficult it becomes to accept. %ost o( change##!ome changes to foreign culture increases the productivity and

sales greatly where as some other changes to foreign culture increases the

productivity marginally. !o we have to consider the cost in changes to someforeign culture and the benefits associated with the change. oo #uch change too soon--eople are generally reluctant to accept too much

changes too soon. so the changes in products$services have to be made in a phasedmanner.

)eard sharing##sometimes a proposed change may have no foreseeable benefit

to the people who must support it. so in this scenario the profits generated due tothe proposed change has to be shared among the people who must support it.

7articipation in change decision##To avoid problems arising from a proposed

change, all the sta'eholders are made to participate in change decison. By thismethod the company may learn how strong the resistance will be if changes are

made. Opinion leaders##!ometimes opinion leaders greatly help to speed up the

acceptance of change. By discovering the local channels of influence, a companymight locate an opinion leader.

i#ing--Aany good business decisions fall flat because they are ill timed. !o

changes should be implemented at the right time so that it can be easily accepted.

1*. %o#pany indsets

The adaptation of a foreign culture by a company not only depends upon the conditionsof the foreign culture but also depends upon the attitudes of managers of the company. so

accordingly the attitudes or orientations can be broadly classified into three categories

olycentrism

"thnocentrism

/eocentrism

7olycentris#


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polycentric organization customizes business practices$processes for differentcountries. The organization believes that business units in different countries should actvery much li'e local companies. It gives better foothold in the mar'et but the downside isthe company has to give up its core business practices. "xcessive polycentrism may leadto such extensive imitation of proven host#country practices that the company loses its

innovative superiority.

&thnocentris#

In ethnocentrism the company believes, what wor'ed well in the home country will wor'well in the host country. It might be business practices or retention of employees. !incecultures and people are different, so ethnocentrism does not necessarily wor'. Inethnocentrism managers overloo' important cultural factors abroad because they havebecome accustomed to certain cause and effect relationships in the home country. erethe management recognizes the environmental differences but still focuses on achievinghome country ob(ectivees.

=eocentris#

/eocentrism is a (udicial process. ere a model is being created ta'ing into considerationthe host country needs and own company practices. /eocentrism exists when a companybases its operations on an informed 'nowledge of its organization culture along withhome and host country needs, capabilities and constraints.

%hapter *

%hapter * > 7olitical )is$. Notes %ontributed /y )ashi

7olitical )is$

it is the ris' that political decisions or e!entsin a country negati!elyaffect thepro(itability or sustainability o( an in!est#ent. olitical ris' is the chance that politicaldecisions? e!ents or conditionsin a country will affect the business environment in waysthat may adversely affect the business of A"s.
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olitical ris' matters most to any A" in the world.

@hen companies choose among the 5EE countries, they consider political ris' to

be very important. The lower the political ris', the better the business opportunity and in turn higher

the country attracti!eness.

%auses o( 7olitical )is$

4. /ovt. ctions.5. )ivil !trife$


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*. International ar

Damages or destroys the companys local assets.

"g. @hen Ira3 invaded uwait, there were many A"s by virtue of management

contracts. Aany Indian companies were also operating.

A"s are bound to leave the country during war.

,. ;ar#(ul actions against people

In(urious actions that target the local staff of the companyG often involves

'idnapping, extortion and terrorism. /enerally seen in lesser developed countries.

. %hange in 7olitical Ideology

olitical ideology can change with the change in political government.

"very government has a different perception about the A"s. In case of Aonarchy, li'e saudi arabia,when a new prince comes in , chances are

there will be changes in political environement.

I#pact o( 7olitical )is$

4. "xpropriation or ationalization.5. Disruption of property.6.


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!tri'es happen resulting loss of profit =opportunity loss> in addition to property

getting damaged.

*. 4nilateral breach o( contract

Decision of a government to repudiate the original contract that it had negotiatedwith the foreign company. The revision penalizes the firm and rewards the nationby reallocating the profits of the local operations.

In addition this extends to government approval of a local companys choice to

breach its contracts with its foreign partner. In some countries the new govt might not honour the previous management

contracts $ leases.

,. )estrictions on repatriation o( pro(it

The govt arbitrarily set limits on the gross amount of profits a foreign company can remit

from its local operation.

.Di((ering points o( !ie

Differing interpretation of labour rights and environmental obligations create bac'lashproblems in the foreign companys home mar'et.

. Discri#inatory ta:ation policies

foreign company bears a higher tax burden than the local firm, or in some cases, themore favoured foreign company, due to its nationality.

;o to access political ris$

Aanagers use 6 approaches to predict political ris' *

4. nalyzing past trends.5. Ta'ing expert opinion.6. "xamining the social and economic conditions that might lead to such political

ris'

1. nalyAing past trends

)ompanies cannot help but get influenced by past patterns of political ris'. Aanagementcan ma'e predictions based on past patterns. redicting ris' using past trends holds manydangers. owever political situations may change rapidly for better or worse as far asforeign companies are concerned."xamples *


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FDI into

has always been democratic in spite of change in governments.

2. &:pert Opinions

)ompanies may rely on experts opinion about a countrys political situation, with thepurpose of ascertaining how influential people may sway future political events affectingbusiness.

)ompanies read the statements made by political leaders both in and out of office todetermine their philosophies on business in general, foreign input to business, the meansof affecting economic changes and their feelings toward given foreign countries.

Aanagers visit the country and listen to a cross section of opinions. "mbassy officialsand foreign and local business people are useful sources of opinions about the probabilityand direction of change.. 1ournalists, academicians, middle level local govt authoritiesand labor leaders usually reveal their own attitudes, which often reflect changing politicalconditions that may affect the business sector. )ompanies may determine opinions moresystematically by relying on analysts with experience in a country. These analysts mightrate a country on specific political conditions that could lead to problems for foreignbusinesses. company also may rely on commercial ris' assessment services, such asthose published by Business International, "conomist Intelligence


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5. rocedural6. Distributive8. )atastrophic

1. Syste#atic 7olitical )is$

These 'inds of ris's are inherent in system. Domestic and International companies facepolitical ris's created by shifts in public policy or change in political ideology. Theseregulations alter the business system for all companies, so not necessarily meant for onlyforeign companies. Then again, a government may target its public policy initiativestoward a specific economic sector that it believes foreign companies unduly dominate.!ystemic changes do not necessarily create political ris's that reduce potential profits."g. In 4HHE, newly elected rgentina govt. began a radical program of deregulation andprivatization of the state centred economy.

2. 7rocedural political ris$

)ompanies procure from best sources from different countries to have comparativeadvantage. /lobally competent supply chain is re3uired from most competitive$bestsources. The three main ob(ectives of supply chain are

7owest cost.

!hortest time.

Kuality and reliability.

ormally supply chain is never short term until there is a war situation. s we get rawmaterials from across the world, it has to cross borders, so the company faces different

levels of ris'. !ome countries are more corrupt and the company faces many hurdles. Theris's are higher in less developed countries. "very day people, products and funds moveto different locations in the global mar'et. "ach move creates a procedural transactionbetween units, whether within a company or country. olitical actions sometimes createfrictions that interfere with these transactions. /overnment corruption, labour disputesand a partisan (udicial system can significantly raise the cost of getting things done.)orruption among custom officials can push a foreign firm to agree to pay for specialassistance, if it wants to clear goods through customs.

*. Distributi!e 7olitical )is$

A" and host country cannot do without each other. A" is doing a business in hostcountry and thus generating employment. But if the host country feels that the A" iscapable of doing much more than at present and mostly much of it is going currently toother countries then host country wants to have a larger share from the A"s economicgain for its own people and their economic growth. Thus taxation changes can come in.Aany countries see foreign investors as agents of prosperity. s foreign investors achievegreater success, some countries 3uestion the distributive (ustice of the rewards,wondering whether they are getting their fair share. )ountries then aim to claim a greater


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share of rewards but in ways that do not provo'e the company to leave. They do so byrevising their tax codes, regulatory structure and monetary policy to capture greaterbenefits from foreign companies."g.

Interest ggregation* utting it all together in the form of budget. rior to budget

government tal's in a structured form to various groups. olicy Aa'ing * 7egislature.

Implementation&d(udication *

!hould loo' forward for the economic cooperation of other countries.

!hould loo' for groups which the country (oins. company which has more

membership internationally, is more transparent and predictable about its policies. should loo' for the proper functioning of foreign companies, local companies and

small scale industries.

countrys political environment has enormous implications to managers andcompanies. political system is the complete set of institutions, political organizations,

interest groups, the relationships between those institutions and the political norms andrules that govern their functions. The purpose of a political system must agree, is that itintegrates different groups into a functioning, self sustaining and self governing society.


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4. /D$/I5. 6. opulation and Demographics

8. "xports$Imports =Trade /ap>9. FDI:. FI;. For"x %eserves?. InflationH. Interest %ate4E. "xchange %ate44. Balance of ayment =B->45. uman Development Index =DI>46. Aanagers divide the /D to the number of people who live in acountry. This ratio leads to a per capita estimator that measures the relative performance

of a countrys economy. It signifies the average income level of the country. Itdetermines which 'inds of products will be bought by the people of that country. It is agood indicator for consumer goods where as for industrial goods sectoral brea' up is agood indicator.

2. 7urchasing 7oer 7arity 777"


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The urchasing power parity is the number of units of a countrys currency re3uired tobuy the same amounts of goods and services in the domestic mar'et that one unit ofincome would buy in the other country. It is useful to compare the purchasing power of

different countries. The most common exchange rate comes from comparing abas'et of goods and services in a country with an e3uivalent bas'et in the


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companies adopt FDI route in order to get a controlling sta'e in a host country for a longterm purpose. It might not be only for manufacturing. It can also be a part of the overallsupply chain. FDI helps the home country to a great extent in terms of controlling othermar'ets.

Inard FDI* FDI, what comes to home country is 'nown as inward FDI. The inwardFDI for India is 49 Billion dollars. Inward FDI indicates, how the country is beingperceived by other countries and A"s. The Inward FDI tells about the competitivesectors of the country.Outard FDI* FDI what goes out of home country is 'nown as outward FDI. -utwardFDI indicates that, the country has certain strengths of world class level =technology,s'ills> in certain sectors for which they are venturing outside. It indicates the economicdevelopment of the host country. )ountries go for outward FDI, when there is mar'etopportunity or staying closer to the customer as re3uired by the customer. For outward

FDI, the country should have economic strength as well as domain 'nowledge andcapabilities.

. F7I

Foreign portfolio investments are meant for only short term purpose. ere the mainmotive is to get a good return at a moderate ris' with high li3uidity. )ountries cant getany controlling sta'e by investing through FI.

3. For&: )eser!es

It indicates the economic health and sustainability of the country. For"x reserves are

re3uired for payment of interests, debts for imports. The for"x reserve of a countryshould be high.

8. In(lation


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Inflation is the pervasive and sustained rise in the aggregate level of prices measured byan index of the cost of various goods and services. In(lation results hen aggregatede#and gros (aster than aggregate supply. From A"s perspective it determines

the pricing and long term strategy. It is a large measure of A"s confidence. moderate rate of inflation brings stability which is attractive to the A"s. It is a measureof the governments success in the economy. Inflation also puts great pressure ongovernments to control it. -ften governments try to reduce inflation by raising interestrates and imposing protectionist trade policies and currency controls.


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It records a countrys international transactions that ta'e place between companies,governments or individuals. In doing so the B- reports the total of all the money thatcomes into a country from abroad less all the money going out of the country to any other

country during the same period. B- is also officially 'nown as the statement ofInternational transactions. B- has two main accounts namely current account andcapital account.%urrent ccount* It trac's all trade activity in merchandise. The components of )urrentaccount area. 2alue of exports and imports of physical goods.b. %eceipts and payments for services and intangible goodsc. rivate transfers such as money sent home by expatriate wor'ersd. -fficial transfers.%apital ccount* It trac's both loans given to foreigners and loans received by citizens.The components of capital account are

a. 7ong term capital flows.b. !hort term capital flows.)urrent accounts indicate trade balance, dividends, interests for investments, unilateraltransfers where as )apital accounts indicate FII, Investments, loans, repayments, realestate.B- is an important measure for long term stability of a country. The B- should bemoderate.

12. ;u#an De!elop#ent Inde: ;DI"

DI measures the average achievements in a country on three dimensions.+onge!ity* as measured by life expectancy at birthCnoledge* as measured by the adult literacy rate and the combined primary, secondaryand tertiary gross enrolment ratio.Standard o( li!ing* as measured by /I per capita expressed in for


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1*. 4ne#ploy#ent

If the country has high level of unemployment, then it triggers political ris'. Theproportion of unemployed wor'ers in a country shows how well a nations humanresources are used and serves as a measure of economic activity.Aanagers access thesituation of a country by chec'ing the misery Index. Aisery Index is the sum of countrysinflation and unemployment rates. The higher the misery, the lower are the chances thatforeign companies will invest in the country.

1,. Inco#e distribution and 7o!erty

The top 5EM of the world population account for the ?:M of the income where as thebottom 5EM account for only 4M. In India ?E percent of the population earn less than L5a day and 8E percent of the population earn L4 a day. Therefore managers loo' for theeconomic potential of a country by ad(usting their analyses to reflect the actualdistribution of income. The s'ewness of the income distribution is very high in India aswell as sian countries. If income distribution is une3ual, then it will lead to poverty. !oonly a part of the population will be relevant. overty impacts the economic environmentand analyses to a huge extent. International companies facing such situations must deal

with their implications to virtually every feature of the economic environment. Incountries with high poverty levels customary mar'et systems may not exist, nationalinfrastructure may not wor', criminal behaviours may be pervasive. !o companies haveto deal with all such situations.

1. Debt

It is the sum total of governments financial obligations. It measure the states borrowingfrom its population, foreign organization, foreign governments and internationalinstitutions. The larger the total debt, the more unstable the countrys economybecomes. countrys debt has two parts * Internal and "xternal debt.Internal Debt* Internal debt results when the government spends more than it collects inrevenues. Internal deficit occurs due to imperfect taxing system, state owned enterprisesrun deficits.&:ternal Debt* "xternal debt results when a government borrows money from foreign


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lenders. Foreign investors monitor debt levels to gauge debt pressures on the governmentto revise its economic policies.

ypes o( &cono#ic Syste#s

n economic system is the set of structures and processes that guides the allocation ofresources and shapes the conduct of business activities. -n one end there is capitalismand on the other hand there is communism. )apitalism is a free mar'et system built onprivate ownership and control. )ommunism is a centrally planned system built on stateownership of all economic factors of production and control of economic activity. !obasically there are three types of economic systems.

Aar'et "conomy

)ommand "conomy

Aixed "conomy

ar$et &cono#y

It is basically a capitalist economy. In mar'et economy individuals, rather thangovernment, ma'e the ma(ority of economic decisions. The theoretical principles thatdefine free#mar'et economies are based on the principle of laissez#faire =non#interventionby government in economic matters>. This principle is credited to dam !mith and hisproposition that a mar'et economy has two general features

roducers efficiently ma'e products that consumers want in a profit ma'ing

motive. )onsumers determine the relationships among price, 3uantity, supply and demand

so that capital and labor are allocated productively.

!o the consumer sovereignty, where by consumers influence the allocation of resourcesthrough their demand of products is the essence of mar'et economy. mar'et is veryless dependent upon government rules and restrictions. owever for some public goodsli'e traffic systems or national defence, government intervenes to enforce contracts,property rights to ensure fair and free competition and to regulate certain economicactivities and provide general security."g* ong ong, /reat Britain, )anada,


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services usually remains constant however the 3uality deteriorates over a time periodbecause

@hatever product is made is usually in short supply.

)onsumers typically have few to no other choices.

There is not much incentive for companies to innovate and little profits to invest.

)ommand economies are traditionally found in communist countries. In communistcountries, the state economic planners give highest priority to industrial investments andmilitary spending where as consumer goods and food products are given little or nopriority. owever centrally planned economies sometimes allowed free mar'et forces toplay in the informal gray mar'ets where scarce consumer goods are exchanged at mar'etdetermined rates. )ommand economies can perform well in terms of growth rates forshort periods of time by mobilizing unemployed or underemployed resources to generategrowth. owever the products produced are not competitive with global standards, oftenachieved marginal rates of efficiency while ma'ing acceptable products. )urrently very

fewer countries are practicing command economies li'e orth orea and )uba. Aany)ountries are transiting from command economies to mar'et economies, thereby creatingbusiness opportunities.

i:ed &cono#y

Aost of the economies are neither purely mar'et nor command economies. Aost of themfall in the midway of the capitalism#communism spectrum. In a mixed economy thepublic sector, private sector and private sector co#exist simultaneously. mixedeconomy is a system where economic decisions are largely mar'et driven and ownershipis largely private, but the government intervenes in many private economic decisions.

ere the government owns 'ey factors of production, yet consumers and privateproducers still influence price and 3uantity.The proponents of mixed economies concede that an economic system should aspire toachieve the efficiencies endemic to free mar'ets. But an economic system must alsoprotect the society from the excesses of individualism and greed and ideally applypolicies needed to achieve low employment, low poverty, steady economic growth and ane3uitable distribution of wealth.

-perationally government intervention in the economy ta'es various forms.

)entral, regional, local governments may actually own some means of

production. The government can influence private production or consumption decisions.

The government can redistribute income and wealth in pursuit of some e3uityob(ective.

The extent and nature of government intervention varies from country to country andchanges over time based on a countrys political, social, cultural and institutionaltraditions and trends.


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ransition to a #ar$et econo#y

!ince the mar'et economies outperformed command and mixed economies, therefore it isapparent that government ownership and control of the factors of production constrainedgrowth and prosperity due to operational inefficiency and strategic ineffectiveness. lso

due to globalization, there is free flow of products, people and ideas among nations.Together these developments aggravate a fundamental limitation of mixed and commandeconomies. Aar'et economies create powerful individual incentives that stimulateinnovation, whereas mixed and command economies seemed to create wea' or noincentives.The process of transition to a mar'et economy varies from country to country. It largelydepends on how well the countrys government can dismantle its central planning systemand consumer sovereignty in its economic environment. The success of transition appearsto be intricately lin'ed to how well the government deals with privatizing the means ofproduction, deregulating the economy, protecting property rights, reforming fiscal andmonetary policies and applying antitrust regulation.

7ri!atiAation

It is the process of transfer of ownership and control of factors of production fromgovernment to private owners. It will lead to a certain level of unemployment.rivatization improves general mar'et efficiency and shapes the relationship betweensupply and demand. rivatization reduces govt debt by eliminating the need to subsidizetypically inefficient, money loosing state owned enterprises. rivatization leads to upgradation of technologies, improvisation of business practices and creation ofinnovations.

Deregulation

Deregulation involves relaxing or removing restrictions on the free operation of mar'etsand business practices. The country, by deregulating, ma'es it more attractive for A"s.The result will be employee generation, exports, infrastructure development, 'nowledgegrowth, sectoral growth. The govt gains taxes in the form of =income taxes, companytaxes, and indirect taxes>. It increases the productivity due to less regulation compliance.Therefore the resulting freedom and savings encourage managers to ma'e theinvestments into the innovations that then lead to economic growth. The disadvantage inderegulation is, the control remains elsewhere instead of the host country.

7roperty )ights

rotection of property rights means that entrepreneurs who come up with an innovationcan legally claim the present and future rewards of their idea, effort and ris'. Theprotection also supports a competitive economic environment by assuring investors andentrepreneurs that they will prosper from their hard wor'.

Fiscal and onetary )e(or#


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dopting free mar'et principles re3uires a government to rely on mar'et#orientedinstruments for macroeconomic stabilization, set strict budget limits, and use mar'etbased policies to manage the supply.


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4tility o( International rade heories (or countries and

co#panies

Trade theory in India comes from the ministry of commerce. It is based on the factorsbasically framed by @T- li'e who should be your trading partners, specifying tradebloc's etc. 7i'e India, other countries wrestle with the 3uestions of what, how much and

with whom their country should import and export. The decisions ta'en by countries inthis matter greatly affect their business because they affect which countries can producegiven products more efficiently and whether countries will permit imports to competeagainst their own domestically produced goods and services.

Trade theories tell how or whether governments should intervene directly to affect theircountries trade with other countries. Trade theories tell countries about what productsshould be exported and imported or what should be the total foreign trade as a percentageof the /D.-nce countries ma'e decisions about what, how much and with whom totrade, officials enact trade policies to achieve the desired results. There are two aspects oftrade policies.

olicy boo' which specifies the policies

andboo' of proceedings which specifies as an exporter or importer what should be

your duties.

)ompanies need to understand trade theories so that they can find where to locate theproduction$distribution unit. the second reason being sourcing i.e. where to import from
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and where to export. These different trade theories provide insights about favourablelocales as well as potentially successful export products. The theories also increaseunderstanding about government trade policies and predict how those policies mightaffect companies competitiveness.

7rescripti!e heory

There are two prescriptive theories namely Aercantilism and eomercantilism

ercantilis#

It is a trade theory which formed the foundation of economic thought from about 49EE to4?EE. It says all theories are related to countries not companies. ccording to this theorya country should export more than it imports and if successful, receive gold fromcountries that run deficits. !o employment will be there and excess production will occurin the country. In this process the country will become stronger and popular.

To export more than import, governments imposed restriction on most imports and theysubsidized production of many products that could otherwise not complete in domestic orexport mar'ets. s the influence of the mercantilist philosophy wea'ened after 4?EE, thegovernments of colonial powers seldom aimed directly to limit the development of theindustrial capabilities within their colonies. favourable balance of trade indicates that a country is exporting more than it isimporting, where as an unfavourable balance of trade indicates the opposite. owever itis not necessarily beneficial to run a trade surplus or disadvantageous to run a tradedeficit. country that is running a surplus for the time being, imports goods and servicesof less value than those it is exporting. In mercantilist period the difference in trade wasmade up by a transfer of gold, but today it is made up by holding the deficit countrys

currency or investments denominated in that currency.

Neo#ercantilis#

It is an extension of Aerc' theory. ccording to this theory the countries try to run afavourable balance of trade i.e. export more than they import. The ob(ective is not purelyeconomical, rather social and political. By exporting they ac3uire political good will ofthe countries to whom they export. Developed countries do this to developing countries.In addition by doing excessive production and export, they generate employment in thehome country and increase the sphere of influence among the host countries.

heories o( SpecialiAation

The theory of specialization states that nations should neither artificially limit imports norpromote exports. There are three theories of specialization.


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Theory of absolute advantage.

)omparative advantage.

Factor proportions theory.

heory o( absolute ad!antageIn 4;;: dam smith said the wealth of the country depend on its goods and services. efirst tal'ed about free trade. ccording to him some countries can produce certain goodsmore efficiently =competitively> because of their natural advantage =natural resources>.These countries should produce these goods and export it to countries having less or noadvantage of these goods. -n the contrary, the goods that could not be producedcompetitively should be obtained from other countries that have competitive advantage

over the same. It will lead to the optimal utilisation of resources throughout the world. Bydoing this countries will have large production units for certain products. Based on thistheory, he 3uestioned why the citizens of any country should have to buy domesticallyproduced goods when they could buy these goods more cheaply abroad.Through specialization, countries could increase their efficiency because of three reasons.

7abor could become more s'illed by repeating the same tas's.

7abor would not loose time in switching from the production of one 'ind of

product to another. 7ong production runs would provide incentives for the development of more

effective wor'ing methods

country can have either natural advantage or ac3uired advantage.Natural ad!antage* country may have a natural advantage in producing a productbecause of climatic conditions, access to certain natural resources, or availability ofcertain labor forces. o country is sufficiently rich in natural resources to be independentof the rest of the world. !o most countries import ores, metals and fuels from othercountries.c6uired d!antage* )ountries that produce manufactured goods and servicescompetitively have an ac3uired advantage, usually either in product or processtechnology. n advantage of product technology is that it enables a country to produce auni3ue product or one that is easily distinguished from those of competitors. n

advantage in process technology is a countrys ability to produce a homogeneous product=one not easily distinguished from that of competitors> efficiently.

heory o( co#parati!e ad!antage

In 4?4;, David %icardo developed the theory of comparative advantage. This theory saysthat global efficiency gains may still result from trade if a country specializes in thoseproducts that it can produce more efficiently than other productsNregardless of whether


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other countries can produce those same products even more efficiently. !o a country willgain if it concentrates its resources on producing the commodities it can produce mostefficiently. It will then trade some of those commodities for those commodities it hasrelin3uished. This theory is accepted by most economists and is influential in promotingpolicies for free trade.

ssu#ptions and +i#itations o( heories o( SpecialiAation

Full e#ploy#ent>The specialization theories assume that resources are fully employed.owever when countries have many unemployed or unused resources, they may see' torestrict imports to employ or use idle resources.&cono#ic &((iciency Obecti!e>)ountries also often pursue ob(ectives other thanoutput efficiency. They may avoid overspecialization because of the vulnerability createdby changes in technology and by price fluctuations.Di!ision o( =ains>lthough specialization brings potential benefits to all countries thattrade, the earlier discussion did not indicate how countries will divide increased output.

o %ountries? o %o##odities>the theory assumes a simple world composed ofonly two countries and two commodities.ransportation costs>If transportation costs more than what is saved throughspecialization, then the advantages of trade are negated.Statics and Dyna#ics>The theories view the advantages statically. owever the relativeconditions that give countries advantages or disadvantages in the production of givenproducts are dynamic.Ser!ices>The theories of absolute and comparative advantage deal with commoditiesrather than services. owever an increasing portion of world trade is in services.obility>The theory assumes that resources can move domestically from the productionof one good to another and at no cost. But this assumption is not completely valid.

Factor 7roportions heory

ec'scher and ohlin developed factor proportions theory. This theory is based oncountries production factors li'e land, labor and capital. This theory says that differencesin countries endowments of labor compared to their endowments of land or capitalexplained the differences in the cost of production of factors. If labor were abundant incomparison to land and capital, then labor cost would be low. These relative factor costslead countries to excel in the production and export of products that used their abundantproduction factors. In countries where there is little capital available for investment perwor'er is low, managers might expect to find cheap labor rates and export

competitiveness in products that re3uire large amounts of labor relative to capital.owever, because the factor#proportions theory assumes production factors to behomogeneous, tests to substantiate the theory have been mixed. 7abor s'ills in fact varywithin and among countries because people have different training and education.

International 7roduct +i(e %ycle

The international product life cycle theory of trade states that the location of production


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of certain 'inds of products shifts as they go through their life cycles, which consist offour stages namely introduction, growth, maturity and decline.

Introductory phase

-nce a company has created a new product, theoretically it can manufacture that productanywhere in the world. In practice, however, the early production generally occurs indomestic location so that the company can obtain rapid mar'et feedbac' as well as saveon transport costs. In this stage, the production process is more labor intensive becausethe product is not yet standardized and its production process must permit rapid changesin product characteristics as mar'et feedbac' dictates.lthough the early production ismost apt to occur in high income countries, which have high labor rates, this labor tendsto be highly educated and s'illed so that it is adept and efficient when production is notyet standardized. "ven if production costs are high because of expensive labor,companies can often pass costs onto consumers who are unwilling to wait for possibleprice reductions later.

=roth 7hase

In this phase, as the sales of new product grow, competitors enter the mar'et and demandgrows substantially in foreign mar'ets, particularly in other high income countries.Because sales are growing rapidly at home and abroad, there are incentives for companiesto develop process technology. owever product technology may not yet be welldeveloped because of the number of product variations introduced by competitors that arealso trying to gain mar'et share. !o the production process may still be labor intensiveduring this stage, although it is becoming less so.

aturity phase

In this stage the overall worldwide demand begins to level off, although it may begrowing in some countries and declining in some countries. There is often a sha'eout ofproducts such that product models become highly standardized, ma'ing cost an importantcompetitive weapon. 7onger production runs become possible for foreign plants, whichin turn reduce per unit cost, thus creating more demand in emerging economies. Becausemar'ets and technologies are widespread, the innovating country no longer commands aproduction advantage. roducers have incentives to shift production to emergingeconomies where they can employ uns'illed, inexpensive labor efficiently forstandardized production.

Decline 7hase

In this phase the mar'ets in high income countries decline more rapidly than those inlow#income economies as affluent customers demand ever newer products. By this time,mar'et and cost factors have dictated that almost all production is in emergingeconomies, which export to the declining or small niche mar'ets in high incomecountries.

heory o( %ountry siAe


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The theory of country size holds that large countries usually depend less on trade thansmall countries. )ountries with large land areas are apt to have varied climates and anassortment of natural resources, ma'ing them more self sufficient than smaller countries.Further transport costs in trade affect large and small countries differently. mong

countries that border each other, the smaller country tends to depend more on trade thanthe larger country because of transportation costs. The distances for neighbouringcountries for small countries are less and hence less transportation cost.

%ountry si#ilarity

!imilar countries engage in trade among themselves because

%e3uirements are similar

!imilar income levels, needs

"ase and comfort of operations

7orterBs dia#ond theory

For diagra# please re(er at the top o( this post.

ccording to porters diamond theory, companies development of internationallycompetitive products and for being supremacy depends on four domestic factors namely

Demand conditions Factor conditions

%elated and supporting industries Firm strategy, structure and rivalry

Demand conditions are the first condition in the theory. )ompanies come up with newproducts only when they observe a need or demand for the same in the mar'et.)ompanies then start up production near the observed mar'et. The demand conditionsloo' for the 3uality of people i.e. how demanding the customers are. If the customers are

more demanding, then industry players try to outperform each other and this leads tomore competition and thus better products. The second condition is the Factor conditions.ere the companies loo' for the natural advantage available in the domestic mar'et interms of s'illed labor, capital, technology and e3uipment. If certain factor conditions arenot available then the companies refer the host country diamond. It is possible due tointernational trade. The third condition is the existence of related and supportingindustries. These industries are re3uired in the country for the components of the mainproduct. The ability of the companies to develop and sustain a competitive advantage


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re3uires favourable circumstances for the fourth condition i.e. firm strategy, structure andrivalry. %ivalry brings out the best in the companies. ll earlier theories loo'ed atcomparative advantage while porters diamond focuses on competitive advantage.Implications of orters diamond

For country go!ern#ent

/overnment should focus on Ospecialized factor conditionsP eg#education for

growth of IT. /overnment should not allow companies to have strategic alliance between

companies of the same country because it will reduce competition. If alliance is tota'e place, then it has to ta'e place with foreign players.

/overnments should be open for foreign country mar'et through negotiation with

other countries.

For %o#panies

!elect and tap the host country diamond.


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Factor obility

Factor conditions change in both 3uality and 3uantity. The relative capabilities of

countries also change. The changes are important in understanding and predictingchanges in export production and import mar'et locations. t the same time the mobilityof capital, technology and people affect trade and relative competitive positions.

hy production (actors #o!e

)apital, especially short term capital, is the most internationally mobile production factor.

)ompanies and private individuals primarily transfer capital because of differences inexpected return. !hort term capital is more mobile than long term capital because there ismore li'ely to be an active mar'et through which investors can 3uic'ly buy foreignholdings and sell them if they want to transfer capital bac' home or to another country.owever companies invest in long#term abroad to tap mar'ets and lower operating costs.nother reason for capital mobility is because governments give foreign aid and loans.on profit organizations donate money abroad to relieve worrisome economic and socialconditions. Individuals remit funds to help their families and friends in foreign countries.

eople are also internationally mobile. eople move from the area of abundance to areaof scarcity. eople who travel to another country as tourists, students and retirees do notconstitute labor mobility unless they wor' there. bout 5 percent of the worldspopulation has migrated to another country. eople whether professionals or uns'illedwor'ers, largely wor' in another country for economic reasons. eople also move forpolitical reasons also li'e persecution or war dangers. eople move for short term whenthey are allocated in turn'ey onsite pro(ects, or overseas positions. owever people movefor long term through migration and ta'e citizenship.

&((ects o( (actor #o!e#ents

Immigrants bring human capital with them, thus adding to the base of s'ills that

enabled countries to be newly competitive in an array of products they mightotherwise have imported.


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)ountries receive foreign capital to develop infrastructure and natural resources,

which further altered their competitive structures and international trade. )ountries lose potentially productive resources when educated people leave, a

situation 'nown as a brain drain, but they may gain from the foreign earnings onthose factors.

)elationship o( trade and Factor #obility

Free trade when coupled with freedom of factor mobility internationally will usuallyresult in the most efficient allocation of resources.

Substitution

@hen the factor proportions vary widely among countries, pressures exist for the mostabundant factors to move to countries with greater scarcity# where they can command abetter return. If finished goods and production factors were both free to moveinternationally, the comparative costs of transferring goods and factors would determinethe location of production. owever there are restrictions on factor movements that ma'ethem only partially mobile internationally. The inability to gain sufficient access to

foreign production factors may stimulate efficient methods of substitution, such asdevelopment of alternatives for traditional production methods.

%o#ple#entarity

Trade and investments are complementary. @hen companies invest abroad, theinvestments often stimulate exports from their home countries. ny investment in termsof trade made by a foreign country leads to import of capital e3uipment, import ofcomponents, local players also reduce cost, improve technology, import goods and mayalso export in the long run. bout a third of world trade =exports> is among controlledentities such as from parent to subsidiary, subsidiary to parent, subsidiary to subsidiary ofthe same company. Aany of the exports would not occur if overseas investments did notexist. nother reason might be domestic operating units may export materials andcomponents to their foreign facilities for use in a finished product.


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%hapter 3- =o!ern#ental In(luence on rade

7rotectionis#The governmental restrictions and incentives to trade are 'nown as protectionism./overnments want to protect their own industries. /overnments also want to promoteexports at the same time. fter ;Es, India changed from Import substitution to exportoriented. /overnmental measures may limit your ability to sell abroad, such as byprohibiting the export of certain products to certain countries, or by ma'ing it difficult foryou to buy what you need from foreign suppliers. /overnments routinely influence theflow of imports and exports. lso governments directly or indirectly subsidize domesticindustries to help them engage foreign producers at home or challenge them abroad.ll nations interfere with international trade to varying degrees. /overnments intervenein trade to attain economic, social or political ob(ectives. /overnments pursue politicalrationality when trying to regulate trade. /overnmental officials apply trade policies that

they reason have the best chance to benefit the nation and its citizen and in some casetheir personal political longevity.)ole o( =o!ern#ent

Interest articulation* since different interest groups co#exist, so different interests

need to be put forward. Interest aggregation* ta'e all sta'eholders view into account

olicy ma'ing

Implementation and ad(udication

he &cono#ic )ationales (or go!ern#ental inter!ention

1.4ne#ploy#ent

-ne of the social ob(ectives of government is to prevent unemployment. The governmentcan do that through import restriction. -ne difficulty with restricting imports to create(obs is that other countries normally retaliate with their own restrictions. Two factors canease the effects of retaliation

!mall trading countries are less important in the retaliation process.

%etaliation that decreases employment in a capital#intensive industry may not

affect employment as much as the value of the trade loss would imply.

If import restrictions do increase domestic employment, then fellow citizens will have tobear the cost of higher prices or higher taxes. /overnment officials should compare thecosts of higher prices with the costs of unemployment and displaced production thatwould result from freer trade. In addition, they must consider the costs of policies to easethe plight of displaced employees, such as for unemployment benefits or retraining. Theemployment issue can slow trade liberalization because displaced wor'ers are often theones who are least able to find alternative wor' at a comparable salary. !o persistent
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unemployment pushes many groups to call for protectionism. owever, evidencesuggests that efforts to reduce unemployment through import restrictions are usuallyineffective.


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/reater growth for manufactured products

Import substitution versus export promotion

ation building

4se o( surplus or$ers

!urplus wor'ers can more easily increase manufacturing output than agricultural output.!ince agricultural output per person is low, so many people can migrate from agriculturalsectors to industrial sectors and in turn increase industrial output. The industrializationargument presumes that the unregulated importation of lower priced products preventsthe development of a domestic industry. owever the industrialization rationale assertsthat the industrial output will increase, even if the prices are not globally competitive,because local consumers must buy local goods from local producers.

7ro#oting in!est#ent in(los

Inflows of foreign investment in the industrial area promote sustainable growth. Importrestrictions, applied to spur industrialization, may also increase foreign direct investment.Foreign investment inflows may also add to local employment, which is attractive topolicyma'ers.

Di!ersi(ication

rices and sales of agricultural products and raw materials fluctuate very much, which isa detriment to economies that depend on few of them. rice variations due touncontrollable factors, such as weather affecting supply or business cycles abroadaffecting demand, can wrea' havoc on economies that depend on the export of primary

products. greater dependence on manufacturing does not either guaranteediversification of export earnings.

=reater groth o( #anu(actured products

Aar'ets for industrial products grow faster than mar'ets for agricultural products. Theterms of trade are the 3uantity of imports that a given 3uantity of a countrys exports canbuy. The prices of raw materials and agricultural commodities do not rise as fast as theprices of finished products. ence, overtime it ta'es more low priced primary products tobuy the same amount of high priced manufactured goods. !o, emerging nations thatdepend on primary products have become increasingly poorer relative to industrial

countries.

I#port substitution !ersus e:port pro#otion

Traditionally emerging economies promoted industrialization by restricting imports inorder to boost local production for local consumption. !ome countries have achievedrapid economic growth by promoting the development of industries that export theiroutput. This approach is 'nown as export led development. Industrialization may result


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initially in import substitution, yet export development of the same products may befeasible later.

Nation /uilding

Industrial activity helps the nation building process. The performance of free mar'etssuggests a strong relationship between industrialization and aspects of the nation buildingprocess. Industrialization helps countries to build infrastructure, advance ruraldevelopment, enhance rural proples social life and boost the s'ills of the wor'force.

,. Increasing countryBs econo#ic poer relati!e to other

countries

)ountries monitor their absolute economic welfare as well as trac' how theirperformance compares to other countries. /overnments impose trade restrictions toimprove their relative trade positions. They also try to charge higher export and lower

import prices. To remain competitive and perform better economically, the countriesadopt the following five methods.

Improving Balance of payments =B-> through Balance of Trade

%estrictions as a egotiating tool

rice control on exports

Fair access$%eciprocity

-ptimal tariff theory

I#pro!ing /alance o( pay#ents through /O

/overnments can improve B- by improving their balance of trade. If B- difficultiesarise and persist, a government may restrict imports or encourage exports to balance itstrade account. -ne way to do this is to devalue the currency of the country, which ma'esall the products cheaper in relation to foreign products.

)estrictions as a Negotiating tool

The imposition of import restriction may be used as a means to persuade other countriesto lower their import barriers. To successfully use restriction as a bargaining tool re3uiredcareful consideration of what products to target. Basically the restrictions need to bebelievable and important to the influential parties in the other country. Believable implies

that there are either alternative sources to buy the same product or that consumers arewilling to do without it.

7rice control on e:ports

)ountries sometimes withhold goods from international mar'ets in an effort to raiseprices abroad. This policy may also encourage other countries to develop technology thatwill provide either substitute products or different ways of producing the same product.


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country may limit exports of a product that is in short supply worldwide in order tofavour domestic consumers. )ompanies sometimes export below cost or below theirhome country price, a practice called dumping. )ompanies do dumping to build a mar'etabroad.

Fair access')eciprocity

)ompanies and industries often argue that they are entitled to the same access to foreignmar'ets as foreign industries and companies have to their mar'ets. "conomic theorysupports this idea, reasoning that producers operating in industries where increasedproduction leads to steep cost decreases, but which lac' e3ual access to a competitorsmar'et will struggle to gain enough sales to be cost competitive.

Opti#al tari(( theory

This theory states that a foreign producer will lower its prices if the importing country

places a tax on its products. If this occurs, benefits shift to the importing country becausethe foreign producer lowers its profits on the export sales.

Nonecono#ic rationales (or go!ern#ent inter!ention

/overnments are involved in the following noneconomic rationales.

Aaintenance of essential industries

revention of shipment to unfriendly countries Aaintenance or extension of spheres of influence

rotecting activities that help preserve the national identity

aintenance o( essential industries

The essential industries include defence, education. !ome of these industries need to becontrolled through government. /overnments apply trade restriction to protect essentialdomestic industries during peacetime so that a country is not dependent on foreignsources of supply during war. This is called the essential industry argument. Because ofthe high cost of protecting an inefficient industry or a higher cost domestic substitute, theessential industry argument should not be accepted without a careful evaluation of costs,real needs and alternatives. -nce an industry receives protection, it is difficult to removethe protection.

7re!ention o( ship#ent to un(riendly countries

ere the governments is not to supply goods to rival countries. )ountries achieve thesepolitical goals using economic means i.e. trade controls. )ountries also start blac'listingother countries who supply to their rival countries. )ountries concerned about securityoften use national defence arguments to prevent the export, even to friendly countries, ofstrategic goods that might fall into the hands of potential enemies or that might be in


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short supply domestically. "xport constraints may be valid if the exporting countryassumes there will be no retaliation that prevents it from securing even more essentialgoods from the potential importing country. Trade controls on nondefense goods alsomay be used as a weapon of foreign policy to try to prevent another country from meetingits political ob(ectives.

aintenance or e:tension o( spheres o( in(luence

/overnments give aid and credits to, and encourage imports from countries that (oin apolitical alliance or vote a preferred way within international bodies. It is about exportingto another country and in turn generating employment and B-. countrys traderestrictions may coerce governments to follow certain political actions or punishcompanies whose governments do not.

7rotecting acti!ities that help preser!e the national identity

/ovtCs role is not only to govern the country but also to protect the country and put ittogether. For this the country re3uires national identity and a sense of belongingness.)ountries are held together partially through a unifying sense of identity that sets theircitizens apart from those in other nations. To sustain this collective identity, countrieslimit foreign products and services in certain sectors.

Instru#ents o( rade %ontrol

The following are some of the instruments of trade control

4. Tariffs

5. !ubsidies6. Tied id to countries8. )ustom valuation9. )onsular fees:. Kuotas;. OBuy 7ocalP 7egislation?. !tandards and 7abelsH. !pecific permission re3uirements4E. dministrative delays44. %eciprocal %e3uirements45. %estrictions on services

1. ari((s

tariff =duty> is the most common type of trade control and is a tax that governmentslevy on a good shipped internationally. /overnments charge a tariff when a good crossesits official boundary. Trade bloc's also charge common tariff rates to non membercountries.


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&:port ari((* Tariffs collected by the exporting country are called an export

tariff. "xport tariffs are imposed because these items going out would affect localindustries. "xport tariffs put essential items useful locally.

ransit ari((* Tariffs collected by a country through which the goods have

passed are called a transit tariff.

I#port ari((* Tariffs collected by an importing country are called import tariff.Import tariffs are imposed to ma'e local production more attractive andcompetitive.

Import tariffs raise the price of imported goods, thereby giving domestically producedgoods a relative price advantage. Tariffs also serve as a source of governmental revenue.lthough, revenue tariffs are most commonly collected on imports, many countries thatexport raw materials charge export tariffs. Tariffs are basically three types namelyspecific duty, ad valorem duty and compound duty.

@hen the government assess a tariff on a per unit basis, then it is called specific

duty. @hen the government assesses a tariff as a percentage of the value of the item,

then it is called ad valorem duty. @hen the government assesses a tariff based on both specific and ad valorem

duty, then it is called compound duty.

2. Subsidies

/ovt pays in various ways to local players in order to ma'e them competitive globallyand in turn expect them to become exporters. /overnments sometimes also provide othertypes of assistance li'e business development services =mar'et information, trade

expositions and foreign contacts> to ma'e it cheaper or more profitable to sell overseas.owever trade frictions result from disagreement on the definition of a subsidy.!ubsidies ma'e local players compete domestically as well as in foreign mar'ets.


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@hile imposing tariffs on exports or imports, custom officials first use the declaredinvoice price. If officials doubt the authenticity, then they impose tariff on the basis of thevalue of identical goods. If not possible, then officials may compute a value based onfinal sales value or on reasonable cost. !ometimes officials use their discretionary powerto assess the value too high, thereby preventing the importation of foreign made products.

. %onsular Fees

!ome countries re3uire consular fees. It is a very high amount and delays theproceedings. It ma'es the import to the country less attractive.

. Euotas

The 3uota is the most common type of 3uantitative import or export restriction. BJimplementing 3uotas the countries increase B- and B-T by decreasing imports andincreasing exports. n import 3uota prohibits or limits the 3uantity of a product that can

be imported in a given year. Kuotas usually increase the consumer price because there islittle incentive to use price competition to increase sales. Tariffs generate revenue for thegovernment. owever 3uotas generate revenues for the companies that are able to obtainand sell the intentionally limited supply.There are different variations of 3uotas.5oluntary e:port restraint 5&)"

ere the government of country as's the government of country B to reduce itscompanies exports to country voluntarily. ere either country B volunteers to reduceits exports or country may impose tougher trade regulations.d!antages o( 5&)

2"% is much easier to switch off than an import 3uota.

The appearance of OvoluntaryP choice by a country, does not damage the political

relations between those countries as much as an import 3uota does.

&:port Euotas

country may establish export 3uotas to assure domestic consumers of a sufficientsupply of goods at a low price to attempt to raise export prices by restricting supply inforeign mar'ets. The typical goal of an export 3uota is to raise prices to importingcountries.bargo

It is a specific type of 3uota that prohibits all forms of trade between the countries.)ountries or group of countries may place embargoes on either imports or exports, onwhole categories of products or specific products with specific countries. /overnmentsimpose embargoes in the effort to use economic means to achieve political goals.

3. /uy +ocalG +egislation


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!ometimes governments specify a domestic content restriction#that is , a certainpercentage of the product must be of local origin. /ovt has the option of buying locallyas well as internationally. !o by buying locally, the govt gives protection to the localplayers. !ometimes they favour domestic producers through price mechanisms. Aanynations prescribe a minimum percentage of domestic content that a given product must

have for it to be sold legally in their country. By doing this the local mar'et develops.Technology up gradation happens in the local mar'et. "xports also happen on thecomponent parts.

8. Standards and +abels

)ountries devise classification, labelling and testing standards to allow the sale ofdomestic products but obstruct that of foreign made ones. In case of labels, the companieshave to indicate on a product where it is made. 7abels provide information to consumerswho may prefer to buy products from certain nations. The purpose of standards is toprotect the safety or health of the domestic population. owever some foreign companies

argue that standards are (ust another means to protect domestic producers.


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!ervices are the fastest growing sector in international trade. )ountries restrict trade inservices for three reasons&ssentiality

)ountries sometimes prohibit private companies, foreign or domestic, in some sectors

because they feel the services should not be sold for profit. In other cases they set pricecontrols for private competitors or subsidize government owned service organizations,creating disincentives for foreign private participation. Aail, education, hospital, mediaare often not for profit sectors.Standards

/overnments limit foreign entry into many service professions to ensure practice by3ualified personnel.I##igration

/overnmental regulations often re3uire that an organization, domestic or foreign, search

extensively for 3ualified personnel locally before it can even apply for wor' permits forpersonnel it would li'e to bring in from abroad. "ven if no one is available, hiring aforeigner is still difficult.

aarti ibnotes

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