final answer for ib[1]
TRANSCRIPT
qwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmrtyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasd
INTERNATIONAL BUSINES
INTERNATIONAL BUSINESS
VARIOUS ORGANISATIONAL STRUCTURES IN IB
ORGANIZATION ARCHITECTURE AND PROFITABILITY
Totality of a firm’s organization, including structure, control systems, incentives,
processes, culture and people.
Superior organization profitability requires three conditions:
An organization’s architecture must be internally consistent.
Strategy and architecture must be consistent.
Strategy, architecture and competitive environments must be consistent.
ORGANIZATIONAL ARCHITECTURE
2
INTERNATIONAL BUSINESS
Organizational structure
Location of decision making responsibilities within the structure (vertical
differentiation)
Formal division of the organization into subunits e.g. product divisions (horizontal
differentiation)
Establishment of integrating mechanisms including cross-functional teams and or
pan-regional committees
Control systems
Metrics used to measure performance of subunits and judge managerial
performance
Incentives
Devices used to reward appropriate employee behaviour
Closely tied to performance metrics
Processes
Manner in which decisions are made and work is performed
Organizational culture
Values and norms shared among employees of an organization
Strategy used to manage human resources
3
INTERNATIONAL BUSINESS
People (Employees)
Strategy used to recruit, compensate, and retain individuals with necessary skills,
values and orientation
PURPOSE OF ORGANIZATIONAL STRUCTURE
To exercise control
To establish division of labour
To facilitate communications
To facilitate coordination & integration
To establish accountability
To delegate responsibility
To establish lines of authority and chain of command
To establish rules and regulations
VERTICAL DIFFERENTIATION
Concerned with where decisions are made.
Two Approaches
Centralization
Decentralization
CENTRALIZATION
Facilitates coordination.
Ensure decisions consistent with organization’s objectives.
Top-level managers have means to bring about organizational change.
Avoids duplication of activities.
4
INTERNATIONAL BUSINESS
DECENTRALIZATION
Overburdened top management.
Motivational research favours decentralization.
Permits greater flexibility.
Can result in better decisions.
Can increase control.
STRATEGY AND ORGANIZATION STRUCTURE
Major strategic decisions are centralized at the firm’s headquarters while operating
decisions are decentralized
GLOBAL STRATEGY
Aim to realize location and experience economies
Centralization of some operating decisions
Multi-domestic firms: aim for local responsiveness
Decentralizing operating decisions to foreign subsidiaries
INTERNATIONAL FIRMS
Maintain centralized control over their core competency and decentralize other decision to
foreign subsidiaries.
TRANSNATIONAL FIRMS
Aim to realize location and experience curve economies
Centralized control over global production centers
Need to be locally responsive
5
INTERNATIONAL BUSINESS
COMPANY’S INTERNATIONAL DIVISION STRUCTURE
Adopted in early stages of international business operations
Coordinate all IB activities
Develop international expertise & skills
Develop a global/international mindset
Champion of foreign business
DISADVANTAGES OF INTERNATIONAL DIVISION
Dependent on domestic product divisions for R&D, engg., etc.
Conflict over pricing and transfer pricing
Power struggles in firm: intl Vs. domestic
Cannot handle too many products
6
INTERNATIONAL BUSINESS
Not appropriate if foreign sales over 25%
Heads of foreign subsidiaries relegated to second-tier position
WORLDWIDE AREA STRUCTURE
Favoured by firms with low degree of diversification
Area is usually a country
Facilitates local responsiveness
Favoured by firms with low degree of diversification & domestic structure based on
function
World is divided into autonomous geographic areas
Operational authority decentralized
Facilitates local responsiveness
Fragmentation of organization can occur
Consistent with multi domestic strategy
A WORLDWIDE AREA STRUCTURE
7
INTERNATIONAL BUSINESS
PRODUCT DIVISION
Adopted by firms that is reasonably diversified
Original domestic firm structure based on product division
Value creation activities of each product division coordinated by that division
worldwide
Help realize location and experience curve economies
Facilitate transfer of core competencies
Problem: area managers have limited control, subservient to product division
managers, leading to lack of local responsiveness
A WORLDWIDE PRODUCT DIVISION STRUCTURE
8
INTERNATIONAL BUSINESS
MATRIX STRUCTURE
Helps to cope with conflicting demands of earlier strategies
Two dimensions: product division and geographic area
Product division and geographic areas given equal responsibility for operating
decisions
PROBLEMS
Bureaucratic structure slows decision making
Conflict between areas and product divisions
Difficult to make
Attempts to meet needs of transnational strategy
A GLOBAL MATRIX STRUCTURE
9
INTERNATIONAL BUSINESS
THE INTERNATIONAL STRUCTURAL STAGES MODEL
10
INTERNATIONAL BUSINESS
ADR & GDR
HOW DO WE RAISE FUNDS FROM INTERNATIONAL MARKET?
WHAT IS AN ADR / GDR?
There are some very good proxies that can be used by Non Resident Indians (NRIs)
and non-Indians for making investments in India.
ADR stands for American Depository Receipt. Similarly, GDR stands for Global
Depository Receipt.
Every publicly traded company issues shares – and these shares are listed and
traded on various stock exchanges. Thus, companies in India issue shares which
are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE
(National Stock Exchange), etc.
These shares are sometimes also listed and traded on foreign stock exchanges like
NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities
Dealers Automated Quotation).
But to list on a foreign stock exchange, the company has to comply with the
policies of those stock exchanges. Many times, the policies of these exchanges in
US or Europe are much more stringent than the policies of the exchanges in India.
This deters these companies from listing on foreign stock exchanges directly.
But many companies get listed on these stock exchanges indirectly- using ADRs
and GDRs.
The company deposits a large number of its shares with a bank located in the
country where it wants to list indirectly.
The bank issues receipts against these shares, each receipt having a fixed number
of shares as an underlying (Usually 2 or 4).
These receipts are then sold to the people of this foreign country (and anyone who
are allowed to buy shares in that country).
11
INTERNATIONAL BUSINESS
These receipts are listed on the stock exchanges. They behave exactly like regular
stocks- their prices fluctuate depending on their demand and supply, and
depending on the fundamentals of the underlying company.
These receipts, which are traded like ordinary stocks, are called Depository
Receipts.
Each receipt amounts to a claim on the predefined number of shares of that
company.
The issuing bank acts as a depository for these shares- that is, it stores the shares
on behalf of the receipt holders.
WHAT IS THE DIFFERNCE BETWEEN ADR AND GDR?
Both ADR and GDR are depository receipts, and represents a claim on the
underlying shares. The only difference is the location where they are traded.
If the depository receipt is traded in the United States of America (USA), it is called
an American Depository Receipt (ADR).
If the depository receipt is traded in a country other than USA, it is called a Global
Depository Receipt (GDR).
Since ADRs and GDRs are traded like any other stock, NRIs and foreigners can buy
these using their regular equity trading accounts.
INDIAN COMPANIES HAVING ADRs & GDRs
Company ADR GDR
Bajaj Auto No Yes
Dr. Reddys Yes Yes
HDFC Bank Yes Yes
Hindalco No Yes
ICICI Bank Yes Yes
Infosys Technologies Yes Yes
12
INTERNATIONAL BUSINESS
ITC No Yes
L&T No Yes
MTNL Yes Yes
Patni Computers Yes No
Ranbaxy Laboratories No Yes
FUTURE OF ADRs AND GDRs
If you look across the spectrum of companies in Central Europe (CE), GDR
programmes are becoming less popular because overall institutions are investing
directly.
For a newly listed CE company, a GDR programme still makes sense: the costs are
marginal, there are no extra efforts in terms of compliance and it’s a good way to get
exposure.
I’m not sure if having an ADR programme is really beneficial given the amount of
paperwork and additional lawyers time needed to comply with the Sarbanes Oxley
Act.
There is good empirical evidence to show that, on average, there is a 10 to 15 per
cent increase in stock price when a foreign company lists an American depositary
receipt.
The reason is that it has become a new company by agreeing voluntarily to play by a
different set of rules.
Terminating an ADR programme sends the reverse signal. It says to investors: ‘We, as
management, no longer want to be subjected to this additional layer of regulation
and scrutiny.’
There have been a lot of good names delisting over the past few months since the
rule change that allowed companies to exit if their ADR trading fell below five per
cent.
13
INTERNATIONAL BUSINESS
The US brokerage system, besides the large institutional system, is still dollar based.
Investors don’t want multiple brokerage accounts, which is why an ADR offers such
value because it’s a US dollar security.
With an ADR, you don’t face custody costs, tax issues or get your dividends in
another currency.
ADR programmes can either be in Pink Sheets, which means the issuer has no
relationship with us or they can apply for and go through the process of joining
International OTCQX.
RBI RULES FOR ADRs & GDRs
Indian companies are allowed to raise equity capital in the international market
through the issue of GDR & ADRs.
An applicant company seeking Government's approval in this regard should have a
consistent track record for good performance (financial or otherwise) for a minimum
period of 3 years.
This condition can be relaxed for infrastructure projects such as power generation,
telecommunication, petroleum exploration and refining, ports, airports and roads.
There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a
company or a group of companies in a financial year.
There is no such restriction because a company engaged in the manufacture of items
covered under Automatic Route is likely to exceed the percentage limits under
Automatic Route, whose direct foreign investment after a proposed
GDRs/ADRs/FCCBs is likely to exceed 50 % / 51 % / 74 %.
There are no end-use restrictions on GDRs/ADRs issue proceeds, except for an
express ban on investment in real estate and stock markets.
ADR & GDR NORMS FURTHER RELAXED
14
INTERNATIONAL BUSINESS
Indian bidders allowed raising funds through ADRs, GDRs and external commercial
borrowings (ECBs) for acquiring shares of PSEs in the first stage and buying shares
from the market during the open offer in the second stage.
Conversion and reconversion (a.k.a. two-way conversion or fungibility) of shares of
Indian companies into depository receipts listed in foreign bourses, while extending
tax incentives to non-resident investors, allowed. The re-coversion of ADRs/GDRs
would, however, be governed by the Foreign Exchange Management Act notified by
the Reserve Bank of India in March 2001.
Permission to retain ADR/GDR proceeds abroad for future foreign exchange
requirements, removal of the existing limit of $20,000 for remittance under the
employees stock option scheme (ESOP) and permitting remittance up to $ 1 million
from proceeds of sales of assets here.
Companies have been allowed to invest 100 per cent of the proceeds of ADR/GDR
issues (as against the earlier ceiling of 50%) for acquisitions of foreign companies and
direct investments in joint ventures and wholly-owned subsidiaries overseas.
Any Indian company which has issued ADRs/GDRs may acquire shares of foreign
companies engaged in the same area of core activity upto $100 million or an amount
equivalent to ten times of their exports in a year, whichever is higher. Earlier, this
facility was available only to Indian companies in certain sectors.
FIIs can invest in a company under the portfolio investment route upto 24 per cent
of the paid-up capital of the company. It can be increased to 40% with approval of
general body of the shareholders by a special resolution. This limit has now been
increased to 49% from the present 40%.
Two way fungibility in ADR/GDR issues of Indian companies has been introduced
subject to sectoral caps wherever applicable. Stock brokers in India can now
purchase shares and deposit these with the Indian custodian for issue of ADRs/GDRs
by the overseas depository to the extent of the ADRs/GDRs that have been
converted into underlying shares.
15
INTERNATIONAL BUSINESS
FOR EXAMPLE
Cipla to raise funds from international market
Cipla on Fridiay said it would raise Rs. 1,500 crore from the international market by issuing
non-convertible debentures, foreign currency convertible bonds, American Depository
Receipts and Global Depository Receipts, Cipla said in a filing to the Bombay Stock Exchange.
INTERNATIONAL LOGISTICS AND ITS IMPORTANCE IN IB
INTERNATIONAL LOGISTICS
An important dimension of the supply chain is logistics, also sometimes called
materials management.
According to the Council of Logistics Management, USA, logistics management is
the “process of planning, implementing and controlling the efficient, cost effective
flow and storage of raw materials, in process inventory, finished goods, and
related information from point of origin to point of consumption for the purpose of
conforming to customer requirements.”
The difference between supply chain management and materials management is
on degree. Materials management, or logistics, focuses much more on the
transport and storage of materials and final goods, whereas supply chain
management extends beyond that to include the management of supplier and
customer relations.
Logistics, also known by such other names as marketing logistics, industrial
logistics/ business logistics/ distribution/ channels of distribution logistics/
distribution engineering materials logistics management supply chain management
is a very important component of operations management.
16
INTERNATIONAL BUSINESS
COMPONENTS OF LOGISTICS
Logistics encompasses the total movement concept, covering the entire range of
operations concerned with the movement of materials and products to, through,
and out of the firm to the consumer.
It includes a variety of activities such as inventory management, warehousing and
storage, transportation, materials handling, order processing, distribution,
communications, packaging, salvage and scrap disposal, returned goods handling,
customer service etc.
Some of the major components of logistics are the following:
FIXED FACILITIES LOCATION
The major consideration is the location of fixed facilities like production and
warehousing in such a way as to maximize the total efficiency of the logistics
system.
Factors like future potential of the markets, future plans of the company,
competitive factors, political stability, etc. are also important considerations.
INVENTORY MANAGEMENT
The main objective of inventory management is to minimize the cost of the
inventory while ensuring smooth supplies.
Developments in inventory management by the customer’s order processing and
in the total logistics system have made inventory management both challenging
and efficient.
ORDER PROCESSING
17
INTERNATIONAL BUSINESS
The efficiency of order processing by the client as well as the company have
important implications for inventory levels and other aspects of the logistics. Rapid
order processing shortens the order cycle and allows for lower safety stocks on the
part of the client. Exporters from developing countries like India face the challenge
of coping up with such situations.
Material Handling and Transportation: Material handling and transportation are
also an important part of the logistics management. The technologies in use in
material handling and transportation affect the efficiency of logistics.
IMPORTANCE OF INTERNATIONAL LOGISTICS IN IB
Firms have begun to explore how the logistics function can provide certain
strategic advantages: more efficient distribution networks, improved quality,
reduced total cycle time, better post sale service, and efficient response to
customer needs.
When a firm becomes heavily involved in international business, logistics is seen as
a critical part of the strategic planning process.
An effective international logistics strategy not only offers significant cost savings
but also can help firms penetrate new foreign markets.
Indeed, international logistics is recognized as an integral part of the marketing mix
that furthers the global marketing process.
With the assistance of an efficiently managed international logistics function, firms
can gain economies of scale from increased production, obtain technological
advantages from other countries, and expand their markets.
As logistics activities become a substantial part of a firm's international operations,
the role played by international logistics managers also increases in importance.
In order to obtain a competitive advantage through such operations, a
comprehensive and complex logistics system (including infrastructure and control
systems) must be established. Various barriers in international markets, however,
tend to offset a firm's efforts to establish an efficient logistics system.
18
INTERNATIONAL BUSINESS
These often lead to higher total logistics costs and decreased flexibility, all of which
adversely affects the competitive position of the firm.
VARIOUS ENTRY METHODS FOR INTERNATIONAL BUSINESS
EXPORT
Exporting is the most traditional way of entering into International Business. Export can be
done in two ways:
1. Direct Export – Products are sold directly to buyers in target markets either through
local sales representatives or distributors. Sales representatives promote their
company’s products and do not take title to the merchandise. Distributors take
ownership of the goods (and the accompanying risk) and usually on-sell through
wholesalers and retailers to end-users.
Advantages of Direct Exports
o Give a higher return on your investment than selling through an agent or distributor
o Allows the exporting company to set lower prices and be more competitive
o Gives the company a close contact with its customers
Disadvantages of Direct Exports
o The company may not have the services of a foreign intermediary, so it may need
more time to become familiar with the market
o The customers or clients may take longer to get to know the company and its
products, and such familiarity is often important when doing business internationally
19
INTERNATIONAL BUSINESS
2. Indirect Export - Products are sold through intermediaries such as agents and trading
companies. Agents may represent one or more indirect exporters in return for
commission on sales.
FOREIGN DIRECT INVESTMENT
FDI are investments made to acquire a lasting interest by a resident entity in one economy
in an enterprise resident in another economy. FDI has come to play a major role in the
internationalization of business. This has happened due to changes in technologies,
improved trade and investment policies of governments, regulatory environment in terms
of liberalization and easing of restrictions on foreign investments and acquisitions, and
deregulation and privatization of many industries.
Advantages:
o It can provide a firm with new markets and marketing channels, cheaper production
facilities, access to new technologies, capital process, products, organizational
technologies and management skills.
o FDI can provide a strong impetus to economic development of the host country. This is
all the more true when large MNCs enter developing nations through FDI.
o FDI allows companies to avoid foreign government pressure for local production.
o It allows making the move from domestic export sales to a locally based national sales
office.
o Capability to increase total production capacity.
Depending on the industry sector and type of business, a foreign direct investment may be
an attractive and viable option. With rapid globalization of many industries and vertical
integration rapidly taking place on a global level, at a minimum a firm needs to keep abreast
of global trends in their industry. From a competitive standpoint, it is important to be aware
of whether a company’s competitors are expanding into a foreign market and how they are
20
INTERNATIONAL BUSINESS
doing that. Often, it becomes imperative to follow the expansion of key clients overseas if
an active business relationship is to be maintained.
New market access is also another major reason to invest in a foreign country. At some
stage, export of product or service reaches a critical mass of amount and cost where foreign
production or location begins to be more cost effective. Any decision on investing is thus a
combination of a number of key factors including:
o Assessment of internal resources
o Competitiveness
o Market Analysis
o Market expectations
LICENSING
Licensing is a legal agreement between the owner of intellectual property such as a
copyright, patent or trademark and someone who wants to use that IP. The licensee pays
“rent” to the licensor for the use of an idea/product/process that is otherwise protected by
IP law. Like a lease on a building, the license is for a specific period of time. The licensee uses
that idea/product/process to sell products or services and earns money.
Advantages:
o Licensing appeals to prospective global players because it does not require large capital
investment not detailed involvement with foreign customers. By generating royalty
income, licensing provides an opportunity to exploit research and development already
conducted. After initial costs, the licensor can reap benefits until the end of license
contract period.
o It reduces the risk of expropriation because the licensee is a local company that can
provide leverage against government action.
o Helps avoid host country regulations that are more prevalent in equity ventures.
o Provides a way of testing foreign markets without significant resources.
21
INTERNATIONAL BUSINESS
o Can be used as a pre-emption major in new market before the entry of competition.
Limitations:
o Limited form of market entry which does not guarantee a basis for expansion.
o Licensor may create more competition in exchange of royalty.
FRANCHISING
Franchising involves granting of rights by a parent company to another (franchisee) to do
business in a prescribed manner. This right can take the form of selling the franchiser’s
products, using its name, production and marketing techniques or using its general business
approach.
It allows provides a network of interdependent business relationships that allows a number
of people to share:
o Brand identification
o Successful method of doing business
o Proven marketing and distribution system
Franchise agreement typically requires the payment of a fee upfront and then a percentage
on sales. In return, the franchiser provides assistance and at times may require the purchase
of goods or supplies to ensure the same quality of goods or services worldwide.
Franchising is adaptable to international arena and requires minor modification for the local
market. It can be beneficial to both groups. Franchiser has a new stream of income and the
franchisee gets time proven concept/product which can be quickly bought to the market.
Major Forms of Franchising:
22
INTERNATIONAL BUSINESS
- manufacturer-retailer system (e.g. car dealership)
- manufacturer-wholesaler system (e.g. soft-drink companies)
- service firm – retailer system (fast-food, hotel) e,g, McDonald’s, Burger King
JOINT VENTURES
A joint venture is an agreement involving two or more organizations that arrange to
produce a product or service through a collectively owned enterprise. It has been one of the
most popular way of entering a new market.
Typically, it is a 50-50 joint venture in which each of the party holds 50% ownership stake
and contributes a team of managers to share operating control. At times, this stake can be a
majority one so as to ensure tighter control.
Advantages:
o Domestic company brings in the knowledge of the domestic market.
o The risk is divided between joint-venture partners.
o Normally, foreign partner has an option to sell its stake in the venture to another entity.
Limitations:
o Limited control over business approach for foreign entity.
o Profits have to be shared.
e.g. Danone-Brittania, Hero Honda, Maruti Suzuki
WHOLLY OWNED SUBSIDIARIES
In a wholly owned subsidiary, the company owns 100% of the equity. Establishing a wholly
owned subsidiary in a foreign market can be done in 2 ways:
1. Set up of new operation
2. Acquisition of established firm.
23
INTERNATIONAL BUSINESS
WOS allows a foreign firm complete control and freedom to execute its business strategy in
the foreign country. This freedom is accompanied by a greater risk due to lack of knowledge
of the market. Acquisition of an established company can reduce this risk to an extent.
INFLUENCE OF PEST FACTORS ON INTERNATIONAL BUSINESS
OR
RISK ANALYSIS IN INTERNATIONAL BUSINESS
Any business is affected by its external environment. The major macroeconomic factors in
the external environment that affect the business are political, environmental, social and
technological.
A. POLITICAL ENVIRONMENT
The political environment of a country greatly influences the business operating in those
countries or business trading with those countries. The success and growth of international
business depends on the stable, collaborative, conducive and secure political system in the
country.
The following factors affect the political environment in a country.
1. Tax Policy :
The tax policy of a country affects the profitability of the business there. The
Corporate Taxation laws affect the profitability directly. The direct taxation laws also
affect the business because it influences consumer spending. The structure of
indirect taxation in a country like its excise duty structure, customs and sales tax
greatly affects the input costs of a business.
For e.g. Countries like UAE have very low direct taxation levels inducing great
spending and hence trading and marketing based business are successful. But due to
very high indirect taxation levels the manufacturing business is not very successful.
24
INTERNATIONAL BUSINESS
2. Government support :
One of the most important political factor is the Government support to
international businesses. Business can be successful only if the local government
provides support in terms o infrastructure, license clearing if required, transparent
policy and quick dispute resolution mechanism. Also the nature of the political
system i.e. democracy, communism etc. in the country influences the Government
support.
For e.g. the RBI has provided single window clearance for FDI and hence has greatly
increased the FDI levels in our country.
3. Labour Laws :
The labour laws in a country affect the viability of a business in that country. The
pension laws also play a critical role especially in cross border acquisitions. Many
businesses had to be withdrawn or closed because of the labor unrest in the
country.
For e.g.: Withdrawal of Premier Automobiles due to union strikes in our country.
The problems faced by doctors and nurses in UK due to the restrictive laws in that
country.
4. Environmental policy :
The countries environmental policy (under the Kyoto Protocol or otherwise) affects
many business like chemicals, refineries and heavy engineering.
5. Tariffs and duty structure :
The level of duties and tariffs that are imposed by the country influence its imports
and exports greatly. Some countries follow a protectionist policy to the domestic
industry by raising import barriers For e.g. India in the pre liberalization era, Russia.
6. Political stability and political milieu :
25
INTERNATIONAL BUSINESS
Political stability greatly affects the longevity of the businesses in a country. Political
risk assessment should be done to determine the country risk on the basis of
following parameters:
a. Confiscation: The nationalization of businesses without compensation. For e.g.
India during the nationalist wave during Indira Gandhi’s tenure.
b. Nationalization : Resource nationalization is a major risk for businesses involving
local resources like oil, minerals etc. For e.g. the resource nationalization in
Columbia.
c. Instability risk : The possibility of military takeovers or huge government changes.
For e.g. the coups in Thailand or in Fiji has affected the profits of businesses
there by as much as 60% due to work stoppage and property destruction.
d. Domestication : The global company relinquishing control in favor of domestic
investors. For e.g. Barclays bank in South Africa
B. ECONOMIC FACTORS
The economic factors in a country greatly influence the business in that country. The
following factors are important in the macroeconomic environment.
1. Economic system :
The economic system in a country i.e. capitalism/ communism/ mixed economy
(India) is important for deciding the nature of the businesses. The nature of the
system decides the allocation of resources. Due to globalization there is a gradual
shift toward market forces to allocate resources even in the communist countries
like China.
2. Interest rates :
The interest rates in the country affect the cost of capital (if raised locally) and the
operational costs. Interest rates also determine the confidence of the Government in
the economy and consumer spending.
3. Exchange rates :
The exchange rates affect international trade and capital inflows in the country.
4. Income levels and spending pattern :
26
INTERNATIONAL BUSINESS
Though it is more of a demographic parameter has is very important bearing on the
sell side of all international businesses. For e.g. In a country like India, with rising a
spirer population there is a market opportunity for products like IPod (considered
luxury items till now)
C. SOCIAL FACTORS
Businesses are driven by people both as human capital and as consumers. It is necessary for
an international businessman to understand the social and cultural aspects of the country
they operate in. The following are the important social factors.
1. Age distribution :
The age distribution of the population is important to consider the consumption
patterns in the markets. Age distribution also determines the mindset of the market
and helps segmentation of the market accordingly. It also has a bearing on the
employee quality. A young population also determines a workforce.
2. Family system :
The family system has a bearing on the decision makers in consumption. For e.g. in
Islamic countries women have a less say in making consumption decisions. In
emerging economies like India children are gaining important role in consumption.
This helps in positioning of products.
3. Cultural aspects :
The cultural aspects influence the way the business is conducted in countries. In
Japan there is a different way in which contracts are signed and executed. In Russia
being a communist oriented mindset the business is conducted in a closed manner.
Italians have a seemingly lazy way of doing business and hence it is very difficult to
conduct business in the pacy US way.
4. Career attitudes :
The career attitude of the workforce is important social aspect.
27
INTERNATIONAL BUSINESS
D. TECHNOLOGICAL FACTORS
Technology has a very important role to play in determining the success of international
businesses because technology has made international business possible. The following are
the technological factors that influence the business.
1. R&D :
The support that the Government gives to R&D encourages setting up R&D business
levels. Also the ease of a qualified local workforce influence business.
For e.g. The semiconductor industry in Taiwan
2. Technology transfer :
The ease of technology transfer influences the business climate. The environment
where the technology transfer is not viable gradually loses out on business from
emerging countries that seek technology transfers. For e.g. in the early 40s countries
like Czechoslovakia (the Czech Republic) was a very technologically advanced country
but had very low business interest due to the less chances of technology transfers.
For e.g. GE withdrew operations from a JV as there as they could not access local
expertise)
28
INTERNATIONAL BUSINESS
INTERNATIONAL TRADE THEORIES
29
INTERNATIONAL BUSINESS
1. Classical Country-Based Theories
1.1. Mercantilism (pre-16th century)
This theory takes an “us-versus-them” view of trade; other country’s gain is our
country’s loss.
Neo-mercantilism views persist today.
A nation’s wealth depends on accumulated treasure.
Theory says you should have a trade surplus.
Maximize exports through subsidies.
Minimize imports through tariffs and quotas.
Flaw: “Zero-sum game”.
Mercantilism- Zero-Sum Game
In 1752, David Hume pointed out that:
Increased exports lead to inflation and higher prices
Increased imports lead to lower prices
Result: Country A sells less because of high prices and Country B sells more
because of lower prices
In the long run, no one can keep a trade surplus
1.2. Free Trade supporting theories
This theory shows that specialization of production and free flow of goods grow all trading
partners’ economies
Absolute Advantage (Adam Smith, The Wealth of Nations, 1776)
Mercantilism weakens a country in the long run and enriches only a few segments; it
robs individuals of the ability to trade freely.
Adam Smith claimed market forces, not government controls, should determine
the direction, volume and composition of international trade.
30
INTERNATIONAL BUSINESS
Under free (unregulated) trade each nation should specialize in producing those
goods it could produce most efficiently.
This theory states that a country is capable of producing more of a good with the
same input than another country. Hence, a country should specialize in and export
products for which it has absolute advantage; import others.
A country has absolute advantage - either natural or acquired when it is more
productive than another country in producing a particular product.
Trade between countries is, therefore, beneficial.
Assume that there are just two countries in the world, the India and Japan. Pretend also
that they produce only two goods, shoes and shirts. The resources of both countries can be
used to produce either shoes or shirts. Both countries make both products, spending half of
their working hours on each. But India makes more shoes than shirts, and Japan makes
more shirts than shoes.
TABLE A
Shoes Shirts
India 100 75
Japan 80 100
Total 180 175
What will happen when each country specializes and spends all its working hours making
one product? It will make twice as much of that product and none of the other, as shown in
Table B.
TABLE B
Shoes Shirts
India 200 0
31
INTERNATIONAL BUSINESS
Japan 0 200
Total 200 200
The world now has both more shoes and more shirts. India can trade 100 units of shoes for
100 units of shirts, and both countries will benefit.
In this example, India could make more shoes than Japan with the same resources. It has an
absolute advantage at shoemaking. Japan, on the other hand, had an absolute advantage
at shirt making.
Assumptions:
Perfect competition and no transportation costs in a world of two countries and two
products
One unit of input (combination of land, labor, and capital)
Each nation has two input units it can use to produce either rice or automobiles
Each country uses one unit of input to produce each product
Comparative Advantage (David Ricardo, Principals of Political Economy, 1817) – Also
known as Opportunity Cost Theory
David Ricardo, in his theory of comparative costs, suggested that countries will
specialize and trade in goods and services in which they have a comparative
advantage.
A country has a comparative advantage in the production of a good or service that it
produces at a lower opportunity cost than its trading partners.
The theory of comparative costs argues that, put simply, it is better for a country
that is inefficient at producing a good to specialize in the production of that good it is
least inefficient at, compared with producing other goods.
32
INTERNATIONAL BUSINESS
Now suppose one country has an absolute advantage in both products. Table C shows what
production might be like if India had an absolute advantage at making both shoes and shirts.
TABLE C
Shoes Shirts
India 100 80
China 80 75
Total 180 155
In this case, the India can produce more of each good with the same set of resources than
China can. The India could produce either 200 units of shoes or 160 units of shirts. China
could produce either 160 units of shoes or 150 units of shirts. If the India produces only
shoes, it gives up 80 units of shirts to gain 100 units of shoes. If China produces only shoes,
it gives up 75 units of shirts to gain 80 units of shoes. For India, the opportunity cost of
producing shirts is higher and the opportunity cost of producing shoes is lower; vice-versa
for China. Hence, India has a comparative advantage in shoemaking and China has a
comparative advantage in shirt making.
Table D shows what happens when each country specializes in the product in which it has a
comparative advantage.
TABLE D
Shoes Shirts
India 200 0
China 0 150
Total 200 150
33
INTERNATIONAL BUSINESS
By specializing in this way, the India and China have increased the production of shoes by
twenty units over what they produced before, from 180 to 200. But the world has lost five
units of shirts, going from 155 to 150.
Production in the India could be adjusted to make up the difference. For example, if the
India gave up 10 units of shoes, it could produce 8 units of shirts. Table E shows the results
of such a tradeoff.
TABLE E
Shoes Shirts
India 190 8
China 0 150
Total 190 158
In this way, the total production of both goods could be increased.
For India, the opportunity cost of choosing to produce 80 units of shirts was the 100 units of
shoes that could have been produced with the same resources. In the like manner, China's
opportunity cost of producing 80 units of shoes was 75 units of shirts.
In the terms of trade each reduce each country's opportunity cost of acquiring the good
traded for, trade will take place. In this example, China will not accept fewer than 80 units
of shoes for 75 units of shirts and the India will not pay more than 100 units of shoes for 80
units of shirts. Both countries must benefit for trade to occur.
34
INTERNATIONAL BUSINESS
The real world is much more complex than this two-country, two-product mode. Trade
involves many different countries and products. And it is not always clear where a country's
comparative advantage lies.
Summary
Country should specialize in the production of those goods in which it is relatively
more productive, even if it has absolute advantage in all goods it produces.
This extends free trade argument.
Efficiency of resource utilization leads to more productivity.
1.3. Free Trade refined
1.3.1. Factor-proportions (Heckscher-Ohlin, 1919)
Eli Heckscher and Bertil Ohlin developed the theory of relative factor endowments,
now often referred to as the Heckscher-Ohlin theory. The theory states that the
pattern of international trade depends on differences in factor endowments not on
differences in productivity.
Relative endowments of the factors of production (land, labour, and capital)
determine a country's comparative advantage.
Countries have comparative advantage in those goods for which the required factors
of production are relatively abundant. This is because the prices of goods are
ultimately determined by the prices of their inputs.
Goods that require inputs that are locally abundant will be cheaper to produce than
those goods that require inputs that are locally scarce.
For example, a country where capital and land are abundant but labour is scarce will have
comparative advantage in goods that require lots of capital and land, but little labour -
grains, for example.
35
INTERNATIONAL BUSINESS
Since capital and land are abundant, their prices will be low. Those low prices will ensure
that the price of the grain that they are used to produce will also be low - and thus attractive
for both local consumption and export.
Labour intensive goods on the other hand will be very expensive to produce since labor is
scarce and its price is high. Therefore, the country is better off importing those goods.
Summary
Factor endowments vary among countries
Products differ according to the types of factors that they need as inputs
A country has a comparative advantage in producing products that intensively use
factors of production (resources) it has in abundance
Assumptions
A given technology was universally available.
Relative factor endowments are different in each country
Tastes and preferences are identical in both countries
A given product was either labor- or capital-intensive
The theory ignored transportation costs.
1.3.2. Product Life Cycle (Ray Vernon, 1966)
As products mature, both location of sales and optimal production changes
Affects the direction and flow of imports and exports
Globalization and integration of the economy makes this theory less valid
Classic Theory Limitations:
All the classical theories are based on the following assumptions that no longer hold true –
36
INTERNATIONAL BUSINESS
Simple world (two countries, two products)
No transportation costs
No price differences in resources
Resources immobile across countries
Constant returns to scale
Each country has a fixed stock of resources & no efficiency gains in resource use
from trade
Full employment
2. Modern Trade Theory
In industries with high fixed costs:
Specialization increases output, and the ability to enhance economies of scale
increases
Learning effects are high.
These are cost savings that come from “learning by doing”
New Trade Theory-Applications
Typically, requires industries with high, fixed costs
o World demand will support few competitors
o Competitors may emerge because of “ First-mover advantage”
Economies of scale may preclude new entrants
o Role of the government becomes significant
Some argue that it generates government intervention and strategic trade policy
Theory of National Competitive Advantage
The theory attempts to analyze the reasons for a nation’s success in a particular
industry
Porter studied 100 industries in 10 nations
37
INTERNATIONAL BUSINESS
- Postulated determinants of competitive advantage of a nation were based on
four major attributes
Factor endowments
Demand conditions
Related and supporting industries
Firm strategy, structure and rivalry
Factor endowments: A nation’s position in factors of production such as skilled labor or
infrastructure necessary to compete in a given industry
Basic factor endowments
Advanced factor endowments
Basic Factor Endowments
Basic factors: Factors present in a country
- Natural resources
- Climate
- Geographic location
- Demographics
While basic factors can provide an initial advantage they must be supported by
advanced factors to maintain success
38
INTERNATIONAL BUSINESS
Advanced Factor Endowments
Advanced factors: The result of investment by people, companies, and
government are more likely to lead to competitive advantage
If a country has no basic factors, it must invest in advanced factors
- Communications
- Skilled labor
- Research
- Technology
- Education
Porter’s Theory-Predictions
Porter’s theory should predict the pattern of international trade that we observe in
the real world.
Countries should be exporting products from those industries where all four
components of the diamond are favourable, while importing in those areas where
the components are not favourable
3. Other Theories:
3.1. The productivity theory by H. Myind
It is criticized that the comparative cost theories are not applicable to developing
countries. Hence, H. Myint proposed productivity theory and the vent for surplus
theory.
The productivity theory points toward indirect and direct benefits. This theory
emphasizes that the process of specialization involves adapting and reshaping the
production structure of a trading country to meet the export demands.
Countries increase productivity in order to utilize the gains of exports. This theory
encourages the developing countries to go for cash crops, increase productivity by
enhancing the efficiency of human resources, adapting latest technology etc.
Limitations:
Labour productivity did not increase after certain level
39
INTERNATIONAL BUSINESS
Increase in working hours
Increase in proportion of gainfully employed labour in proportion to disguised
unemployed labour
3.2. The vent for surplus theory
International trade absorbs the output of unemployed factors.
If the countries produce more than the domestic requirements, they have to export
the surplus to other countries. Otherwise, a part of the productive labour of the
country must cease and the value of its annual Produce diminishes.
In the absence of foreign trade, they would be surplus productive capacity in the
country. This surplus productive capacity is taken by another country and in turn
gives the benefit under international trade.
Appropriateness of this Theory for Developing Countries:
According to this theory, the factors of production of developing countries are fully
utilized.
The unemployed labour of the developing countries is profitably employed when the
vent for surplus is exported.
3.3. Mills’ theory of reciprocal demand
Comparative cost advantage theories do not explain the ratios at which commodities
are exchanged for one another. J.S. Mill introduced the concept of ‘reciprocal
demand’ to explain the determinations of the equilibrium terms of trade.
Reciprocal demand indicates a country’s demand for one commodity in terms of the
other commodity; it is prepared to give up in exchange. It determines the terms of
trade and relative share of each country.
40
INTERNATIONAL BUSINESS
Equilibrium:
Quality of a product exported by country A = Quality of another product exported by
country B
Assumptions:
Existence of two countries
Trade in only two goods – both the goods are produced under the law of constant
returns
Absence of transportation Costs.
Existence of perfect competition
Existence of full employment
TEN REASONS WHY FDI HAPPENS
1. Foreign Direct Investments (FDI) as defined in the BOP Manual, are investments made to
acquire a lasting interest by a resident entity in one economy in an enterprise resident in
another economy. The purpose of the investor is to have a significant influence, an
effective voice in the management of the enterprise. The definition of the Organization
for Economic Cooperation and Development (OECD) which considers as direct
investment enterprise an incorporated or unincorporated enterprise in which a direct
investor who is resident in another economy owns ten percent or more of the ordinary
shares or voting power (for incorporated enterprise) or the equivalent (for an
unincorporated enterprise).
41
INTERNATIONAL BUSINESS
2. It provides a firm with new markets and marketing channels, cheaper production
facilities, access to new technology, products, skills and financing. For a host country or
the foreign firm which receives the investment, it can provide a source of new
technologies, capital, processes, products, organizational technologies and management
skills, and as such can provide a strong impetus to economic development.
3. FDI inflows are considered as channels of entrepreneurship, technology, management
skills, and of resources that are scarce in developing countries. Hence, they could help
their host countries in their industrialization.
4. For small and medium sized companies, FDI represents an opportunity to become more
actively involved in international business activities. In the past 15 years, the classic
definition of FDI as noted above has changed considerably, over 2/3 of direct foreign
investment is still made in the form of fixtures, machinery, equipment and buildings.
5. FDI is viewed as a basis for going “global”. FDI allows companies to accomplish following
tasks:
Avoiding foreign government pressure for local production
Circumventing trade barriers, hidden and otherwise
Making the move from domestic export sales to a locally-based national sales office
Capability to increase total production capacity.
Opportunities for co-production, joint ventures with local partners, joint marketing
arrangements, licensing, etc
6. Foreign direct investment is viewed as a way of increasing the efficiency with which the
world's scarce resources are used. A recent and specific example is the perceived role of
FDI in efforts to stimulate economic growth in many of the world's poorest countries.
Partly this is because of the expected continued decline in the role of development
assistance (on which these countries have traditionally relied heavily), and the resulting
search for alternative sources of foreign capital.
7. FDI enables the firm owns assets to be profitably exploited on a comparatively large
scale, including intellectual property (such as technology and brand names),
organizational and managerial skills, and marketing networks. And it is more profitable
42
INTERNATIONAL BUSINESS
for the production utilizing these assets to take place in different countries than to
produce in and export from the home country exclusively.
8. FDI may result in a greater diffusion of know-how than other ways of serving the market.
While imports of high-technology products, as well as the purchase or licensing of
foreign technology, are important channels for the international diffusion of technology,
FDI provides more scope for spillovers. For example, the technology and productivity of
local firms may improve as foreign firms enter the market and demonstrate new
technologies, and new modes of organization and distribution, provide technical
assistance to their local suppliers and customers, and train workers and managers who
may later be employed by local firms.
9. FDI increases employment in host country. Inflows of FDI also increase the amount of
capital in the host country. Even with skill levels and technology constant, this will either
raise labour productivity and wages, allow more people to be employed at the same
level of wages, or result in some combination of the two.
10. Proponents of foreign investment point out that the exchange of investment flows
benefits both the home country (the country from which the investment originates) and
the host country (the destination of the investment). Opponents of FDI note that
multinational conglomerates are able to wield great power over smaller and weaker
economies and can drive out much local competition. The truth might lie somewhere in
between but they surely become reasons for companies to invest in foreign markets.
WTO ROUNDS WRT INDIA
The WTO came into being on January 1, 1995, and is the successor to the General
Agreement on Tariffs and Trade (GATT), which was created in 1948. India was one of the 76
countries that signed the accession to the WTO and is one of the founder members of the
WTO.
TRADE IMPLICATIONS OF SIGNING THE WTO FOR INDIA
43
INTERNATIONAL BUSINESS
The implications of signing the WTO agreement for Indian trade have been mixed. India has
benefited in the areas of garment exports, agricultural products exports and in market
access to foreign markets in automobiles and electronics. India has a disadvantage mainly
in areas of TRIPs, drug prices, patents in agriculture, TIS ( trade in services ) and TRIMS
especially in biomedical areas, AoA export subsidies etc.
BENEFITS
1. Garment exports :
The Multi Fiber Arrangement (MFA) that required Indian garment exporters to have
quotas for exporting to developed countries was phased out in 2005. The readymade
garment exports from India has reached Rs 800 crores in 2007 and expected to reach Rs
1000 crores in 2008. This is thrice the exports in 2004-05.
2. Market access :
As a signatory to the WTO India automatically gets the MFN ( most favored nation )
status. This gives India access to markets in Europe and US in sectors like automobiles
and engineering. India also benefits from the clauses related to trade without
discrimination and benefit from capital good exports.
3. Anti Dumping measures :
India suffered from persistent dumping by Romanian and Russian steel majors in the
areas of steel casings, pipes affecting Indian domestic industry greatly. Also India
suffered from dumping by Chinese steel industry. The anti dumping provisions and
countervailing duties lend security to India’s domestic industries.
4. The Agreement on Agriculture :
The AOA stipulates that the developed countries will reduce tariffs on agriculture
imports (up to 35%) thus helping India’s agriculture exports. It also promises reduction
of domestic subsidies in the developed countries helping exports from India.
5. Competitive advantage : India has competitive advantage in the areas of merchandise
trade. India can utilize its competitive advantage in processing, beverages, gems and
44
INTERNATIONAL BUSINESS
jeweller compared to the traditional centers in Europe like Amsterdam or Manchester
etc increasing its trade with both the Euro region and the US.
DISADVANTAGES
1. TRIPS :
The Indian Patent Act is not compatible with the TRIPS agreement under the WTO. The
Indian Patent Act allows only process patents in areas of foods, chemicals and
medicines. Under the TRIPS the IPA will have to modify to allow product patents also.
Also products developed outside India can claim international patents applicable to
India. This will hurt our agriculture foods. E.g. the Alphanso mango and the Basmati
strand controversy.
2. Drug prices :
The granting of the product patents in India will hurt the Indian generic drugs industry
and benefit the foreign pharma companies that own the formulation patents. This will
lead to increase in drug prices in India. (This resulted in regulatory intervention in the
recent budget in life saving drugs) e.g. The Pfizer controversy
3. Genetics :
Indian seed and genetic research organizations are Government funded and will not be
able to compete with the MNCs like Montessanto etc that have economies of scale. This
will increase seed prices for Indian farmers and also lend our genetic resources to the
MNCs
4. Services :
The opening up of the banking sector in 2009 will affect Indian banks due to the foreign
banks with huge balance sheets.
5. TRIMS :
45
INTERNATIONAL BUSINESS
The Trade Related Investment Measures resulted in problems in trade in investment
issues like transit charges, formalities etc. together called as Singapore issues. Indian
companies would have to lose in the differential charges that are applied. These issues
were dropped in the Chachun ministerial conferences.
6. Anti dumping:
The anti dumping rules were imposed on Indian linen in EU. Similarly Indian textiles
faced anti dumping regulations in US. There is no mechanism to resolve anti dumping
duties issues.
INDIA’S STAND IN THE DOHA ROUND AND THE FOLLOWING MINISTERIAL CONFERENCES
1. Doha round:
The Doha Development Round commenced at Doha, Qatar in November 2001 and is
still continuing. Its objective is to lower trade barriers around the world, permitting free
trade between countries of varying prosperity. As of 2008, talks have stalled over a
divide between the developed nations led by the European Union, the United States and
Japan and the major developing countries (represented by the G20 developing nations),
led and represented mainly by India, Brazil, China and South Africa.
Singapore issues: The issues related to the trade facilitation and differential charges in
investment vehicles affected Indian investment and venture companies. This affected the
Indian services.
Agricultural subsidies: The EU, US and Japan support domestic agriculture by subsides. This
was opposed by countries like India and Brazil.
2. Cancun conference 2003 :
The objective of this conference was to forge the agreement discussed in Doha.
Issues: Market access to foreign markets. This agreement on market access for the
developing countries in capital and industrial goods increased strength of G20 countries.
46
INTERNATIONAL BUSINESS
India benefited greatly in the capital goods export.
The Singapore issues were resolved that resulted in removing the undue advantage for
countries like US and Japan in investment arena. This also benefited the Indian financial
sector internationally.
3. Geneva 2004: In Geneva conference the developed nations reduced subsidiaries on
manufactured goods. This resulted in Indian small manufacturers like steel forging,
casting to export largely and benefit from the construction boom in US.
4. Paris 2005: France reduced subsidies on farm products. However US and Japan did not
relent. Hong Kong 2006 and Potsdam 2007 talks failed in resolving the farm subsidies. So
the recent rounds are in a stalemate situation from India’s point of view.
DISCUSS NAFTA/ EU/ ASEAN/ SAARC/ MERCUSOR
MERCOSUR
Mercosur is a regional trade agreement among Argentina, Brazil ,Paraguay & Uruguay
founded in 1991 by the Treaty of Asunción, which was later amended and updated by the
1994 Treaty of Ouro Preto. Its purpose is to promote free trade and the fluid movement of
47
INTERNATIONAL BUSINESS
goods, people, and currency. Bolivia, Chile, Colombia, Ecuador and Peru currently have
associate member status. Venezuela signed a membership agreement on 17 June 2006, but
before becoming a full member its entry has to be ratified by the Paraguayan and the
Brazilian parliaments.
The bloc comprises a population of more than 263 million people, and the combined Gross
Domestic Product of the full-member nations is in excess of US$2.78 trillion a year
(Purchasing power parity, PPP) according to International Monetary Fund (IMF) numbers,
making Mercosur the fifth largest economy in the World.
OBJECTIVES OF MERCOSUR
Free transit of production goods, services and factors between the member states with
inter alia, the elimination of customs rights and lifting of nontariff restrictions on the
transit of goods or any other measures with similar effects;
Fixing of a common external tariff (TEC) and adopting of a common trade policy with
regard to non member states or groups of states, and the coordination of positions in
regional and international commercial and economic meetings;
Coordination of macroeconomic and sectorial policies of member states relating to
foreign trade, agriculture, industry, taxes, monetary system, exchange and capital,
services, customs, transport and communications, and any others they may agree on, in
order to ensure free competition between member states; and
The commitment by the member states to make the necessary adjustments to their laws
in pertinent areas to allow for the strengthening of the integration process. The
Asuncion Treaty is based on the doctrine of the reciprocal rights and obligations of the
member states.
MERCOSUR initially targeted free-trade zones, then customs unification and, finally, a
common market, where in addition to customs unification the free movement of manpower
and capital across the member nations' international frontiers is possible, and depends on
equal rights and duties being granted to all signatory countries. During the transition period,
as a result of the chronological differences in actual implementation of trade liberalization
by the member states, the rights and obligations of each party will initially be equivalent but
48
INTERNATIONAL BUSINESS
not necessarily equal. In addition to the reciprocity doctrine, the Asuncion Treaty also
contains provisions regarding the most-favored nation concept, according to which the
member nations undertake to automatically extend--after actual formation of the common
market--to the other Treaty signatories any advantage, favor, entitlement, immunity or
privilege granted to a product originating from or intended for countries that are not party
to ALADI.
SAARC
The South Asian Association for Regional Cooperation (SAARC) is an economic and political
organization of eight countries in Southern Asia. It was established on December 8, 1985 by
India, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives and Bhutan. In April 2007, at the
Association's 14th summit, Afghanistan became its eighth member.Sheelkant Sharma is the
current secretary & Mahinda Rajapaksa is the current chairman of SAARC which is
headquartered at Kathmandu.
OBJECTIVES OF SAARC
To promote the welfare of the peoples of South Asia and to improve their quality of
life;
To accelerate economic growth, social progress and cultural development in the
region and to provide all individuals the opportunity to live in dignity and to realize
their full potential;
To promote and strengthen collective self-reliance among the countries of South
Asia;
To contribute to mutual trust, understanding and appreciation of one another's
problems;
To promote active collaboration and mutual assistance in the economic, social,
cultural, technical and scientific fields;
To strengthen cooperation with other developing countries;
To strengthen cooperation among themselves in international forums on matters of
common interest; and
49
INTERNATIONAL BUSINESS
To cooperate with international and regional organizations with similar aims and
purposes.
FREE TRADE AGREEMENT
Over the years, the SAARC members have expressed their unwillingness on signing a free
trade agreement. Though India has several trade pacts with Maldives, Nepal, Bhutan and Sri
Lanka, similar trade agreements with Pakistan and Bangladesh have been stalled due to
political and economic concerns on both sides. India has been constructing a barrier across
its borders with Bangladesh and Pakistan. In 1993, SAARC countries signed an agreement to
gradually lower tariffs within the region, in Dhaka. Eleven years later, at the 12th SAARC
Summit at Islamabad, SAARC countries devised the South Asia Free Trade Agreement which
created a framework for the establishment of a free trade area covering 1.4 billion people.
This agreement went into force on January 1, 2006. Under this agreement, SAARC members
will bring their duties down to 20 per cent by 2007.
The last summit (15th) was held in Colombo where four major agreements - the SAARC
development fund, the establishment of a SAARC standard organization, the SAARC
convention on mutual legal assistance in criminal matters, and the protocol on Afghanistan's
admission to the South Asia Free Trade Agreement (SAFTA) were adopted with emphasis on
region-wide food security.
NAFTA
The North American Free Trade Agreement (NAFTA) is a trilateral trade bloc in North
America created by the governments of the United States, Canada, and Mexico. In terms of
combined purchasing power parity GDP of its members, as of 2007 the trade bloc is the
largest in the world and second largest by nominal GDP comparison. It also is one of the
most powerful, wide-reaching treaties in the world.
50
INTERNATIONAL BUSINESS
The North American Free Trade Agreement (NAFTA) has two supplements, the North
American Agreement on Environmental Cooperation (NAAEC) and the North American
Agreement on Labor Cooperation (NAALC).
Implementation of the North American Free Trade Agreement (NAFTA) began on January 1,
1994. This agreement will remove most barriers to trade and investment among the United
States, Canada, and Mexico.
Under the NAFTA, all non-tariff barriers to agricultural trade between the United States and
Mexico were eliminated. In addition, many tariffs were eliminated immediately, with others
being phased out over periods of 5 to 15 years. This allowed for an orderly adjustment to
free trade with Mexico, with full implementation beginning January 1, 2008.
The agricultural provisions of the U.S.-Canada Free Trade Agreement, in effect since 1989,
were incorporated into the NAFTA. Under these provisions, all tariffs affecting agricultural
trade between the United States and Canada, with a few exceptions for items covered by
tariff-rate quotas, were removed by January 1, 1998.
Mexico and Canada reached a separate bilateral NAFTA agreement on market access for
agricultural products. The Mexican-Canadian agreement eliminated most tariffs either
immediately or over 5, 10, or 15 years.
U.S. trade with Mexico and Canada has grown more rapidly than total U.S. trade since 1994.
The automotive, textile, and apparel industries have experienced the most significant
changes in trade flows, which may also have affected employment levels in these industries.
The five major U.S. industries that have high volumes of trade with Mexico and Canada are
automotive industry, chemicals and allied products, computer equipment, textiles and
apparel, and microelectronics.
The effects of NAFTA, both positive and negative, have been quantified by several
economists. Some argue that NAFTA has been positive for Mexico, which has seen its
poverty rates fall and real income rise (in the form of lower prices, especially food), even
after accounting for the 1994–1995 economic crisis. Others argue that NAFTA has been
51
INTERNATIONAL BUSINESS
beneficial to business owners and elites in all three countries, but has had negative impacts
on farmers in Mexico who saw food prices fall based on cheap imports from U.S.
agribusiness, and negative impacts on U.S. workers in manufacturing and assembly
industries who lost jobs. Critics also argue that NAFTA has contributed to the rising levels of
inequality in both the U.S. and Mexico.
EU
The European Union (EU) is a political and economic union of 27 member states, located
primarily in Europe. The EU generates an estimated 30% share of the world's nominal gross
domestic product (US$16.8 trillion in 2007). Thus EU presents an enormous export and
investor market that is both mature and sophisticated.
The EU has developed a single market through a standardised system of laws which apply in
all member states, guaranteeing the freedom of movement of people, goods, services and
capital. It maintains a common trade policy. Fifteen member states have adopted a common
currency, the euro.
OBJECTIVES OF THE EU
Its principal goal is to promote and expand cooperation among members’ states in
economics, trade, social issues, foreign policies, security, defense, and judicial matters.
Another major goal of the EU is to implement the Economic and Monetary Union, which
introduced a single currency, the Euro for the EU members.
The single market refers to the creation of a fully integrated market within the EU, which
allows for free movement of goods, services and factors of production. The EU, in
conjunction with Member States, has a number of policies designed to assist the functioning
of the market. Some of the policies are given below:
Competition Policy: The main competition lied in energy and transport sector. The union
designed this strategy to prevent price fixing, collusion (secret agreement), and abuse of
monopoly.
52
INTERNATIONAL BUSINESS
Free movement of goods: A custom union covering all trade in goods was established and a
common customs tariff was adopted with respect to countries outside the union.
Services: Any member nation has a right to provide services in other Member States.
Capital: There are no restrictions on the movement of capital and on payments with the EU
and between member states and third countries.
TRADE BETWEEN THE EUROPEAN UNION AND INDIA
India was one of the first Asian nations to accord recognition to the European Community in
1962. The EU is India’s largest trading partner and biggest source of FDI. It is a major
contributor of developmental aid and an important source of technology. Over the years, EU
– India trade has grown from 4.4 bn to 28.4 bn US$.
Top items of trade between India and EU
India’s exports to EU % India’s Imports from EU %
Textile and clothing 35 Gemstones and jewellery 31
Leather and leather products 25 Power generating equipment 28
Gemstones and jewellery 12 Chemical products 15
Agriculture products 10 Office machinery 10
Chemical products 9 Transport equipment 6
India is EU’s 17th largest supplier and 20th largest destination for exports.
Tariff and non-tariffs have been reduced, but compared to International standards they
are still high.
Under the Bilateral trade between India and EU, it accounts for 26% of India’s exports
and 25% of its imports.
53
INTERNATIONAL BUSINESS
The European Union (EU) and India agreed on September 29,2008 at the EU-India
summit in Marseille, France's largest commercial port, to expand their cooperation in
the fields of nuclear energy and environmental protection and deepen their strategic
partnership.
Trade between India and the 27-nation EU has more than doubled from 25.6 billion
euros ($36.7 billion) in 2000 to 55.6 billion euros last year, with further expansion to be
seen.
ASEAN
The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in
Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines,
Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July
1995, Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999.
OBJECTIVES
The ASEAN Declaration states that the aims and purposes of the Association are:
(i) To accelerate the economic growth, social progress and cultural development in the
region through joint endeavors.
(ii) To promote regional peace and stability through abiding respect for justice and the
rule of law in the relationship among countries in the region and adherence to the
principles of the United Nations Charter.
(iii) To maintain close cooperation with the existing international and regional
organizations with similar aims.
WORKING OF ASEAN
The member countries of ASEAN have Preferential Trading Arrangements (PTA), which
reduces tariffs on products traded among member countries. In 1992, ASEAN developed a
Common Effective Preferential Tariffs (CEPT) plan to reduce tariffs systematically for
manufactured and processed products.
54
INTERNATIONAL BUSINESS
The members have also established a series of co-operative efforts to encourage joint
participation in industrial, agricultural and technical development projects and to increase
foreign investments in their economies. These efforts include an ASEAN finance corporation,
the ASEAN Industrial Joint Ventures Programme (AJIV) etc. ASEAN nations have introduced
some programmes for greater diversification in their economies.
INDIA AND ASEAN
India is interested in maintaining close economic relations with the members of ASEAN, as
these countries are closer to India. The ASEAN countries are offering co-operation to India in
the field of trade, investment, science and technology and training of personnel. Also,
India’s trade with ASEAN countries is satisfactory in recent years.
EFFECT OF CURRENT ECONOMIC MELTDOWN ON INTERNATIONAL BUSINESS
1. Slower global growth: Global growth stood at 5 percent in 2007, but the IMF expects
world growth to slow to 3 percent in 2009 - 0.9 percentage points lower than forecasted
in July 2008.
55
INTERNATIONAL BUSINESS
2. Economic contraction in some countries: In G7 countries except for the United States
and Canada, GDP growth was slower in Q2 of 2008 compared to Q1. Three major
European economies (Italy, France and Germany) experienced negative GDP growth in
Q2, and forecasts are for a continued decline in Q3. The IMF forecasts around 0 percent
growth for advanced economies in 2009.
3. Depth of slowdown: It is observed that economic slowdowns, preceded by financial
stress tend to be more severe. Although employment has contracted in several
countries in recent months, it has not been as severe as that during 1990-91.
4. Financing challenges for governments: State and local governments may be faced with
financial crisis. Even administrative costs may be difficult to come by. The governments
would be hard pressed for funds for guarantees and development work. For e.g. In the
case of Iceland the banking sector has assets of around 300% of GDP, something no
government could ever guarantee, at least not on a short-term basis.
5. Rising unemployment: According to IMF, unemployment in the advanced economies
will rise from 5.7 percent in 2008 to 6.5 percent in 2009.
6. Large employment losses in sectors: Some sectors like construction, real estate services
will experience disproportionate employment declines. In addition there will be
significant job losses in the financial sector.
7. Reduced world trade volume: According to the IMF, the world trade will grow only at
the rate of 1.9% as against the earlier estimate of 4.1% for 2009. A drop in exports, as
well as capital inflow, may trigger a falloff in investments.
8. Rising income insecurity and disproportionate impact on low-income groups: As stock
markets around the world have eroded trillions of dollars in wealth and rolled back some
of the investment gains of the past 5 years, the investment and retirement savings of
many individuals have lost significant value. There is a risk that low-income countries
and lower-income groups within countries will bear the brunt of challenges, as “the
most poor are the most defenseless,” says World Bank President Robert Zoellick.
9. Return to Tariff and Non-Tariff Barriers: Developed economies in order to ward off
unemployment and financial crisis may erect barriers to free trade. This might start a
56
INTERNATIONAL BUSINESS
local business environment. For e.g. President-elect Barrack Obama has already
announced his intention to reduce outsourcing from US by 30%.
10. Surplus Production Capacities: In line with demand destruction, many branded products
may face surplus capacities. For e.g. Car, Steel & Aircrafts manufacturers are already
staring at excess capacity.
11. Increase in Government Controls: In order to bail out sinking Corporates the
governments, would buy out or control the operations of large companies. For e.g. AIG
and Citibank
12. Impact on India:
a. BPO Operations: India is likely to face a severe crunch on the IT and ITes services,
rendered by Indian BPO Companies.
b. Increase in Trade Deficit: Already in the last quarter, India’s trade deficit has grown
where exports are not meeting the set targets while imports continue to grow.
c. Falling Currency: as the demand for dollars increases the Indian rupee is likely to
weaken. The rupee has already depreciated to Rs. 50 a dollar.
d. Pressure on Services Sector: As the demand for services is destroyed, these sunshine
industries such as BPOs, Airlines, and Telecommunication etc. will face salary and
employment cutbacks.
DISCUSS SWAPS, OPTIONS, FUTURES
SWAPS
a) A swap is a derivative in which two counterparties agree to exchange one stream of cash
flows against another stream. These streams are called the legs of the swap.
57
INTERNATIONAL BUSINESS
b) The cash flows are calculated over a notional principal amount, which is usually not
exchanged between counterparties. Consequently, swaps can be used to create
unfunded exposures to an underlying asset, since counterparties can earn the profit or
loss from movements in price without having to post the notional amount in cash or
collateral.
c) Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on
changes in the underlying prices.
d) Most swaps are traded over-the-counter (OTC), "tailor-made" for the counterparties.
Some types of swaps are also exchanged on futures markets such as the Chicago
Mercantile Exchange Holdings Inc., the largest U.S. futures market, the Chicago Board
Options Exchange and Frankfurt-based Eurex AG.
e) The five generic types of swaps, in order of their quantitative importance, are: interest
rate swaps, currency swaps, credit swaps, commodity swaps and equity swaps.
FUTURES
a) A futures contract is a standardized contract, traded on a futures exchange, to buy or
sell a standardized quantity of a specified commodity of standardized quality at a certain
date in the future, at a price determined by the instantaneous equilibrium between the
forces of supply and demand among competing buy and sell orders on the exchange at
the time of the purchase or sale of the contract.
b) The future date is called the delivery date or final settlement date. The official price of
the futures contract at the end of a day's trading session on the exchange is called the
settlement price for that day of business on the exchange.
c) A futures contract gives the holder the obligation to make or take delivery under the
terms of the contract,
d) Both parties of a "futures contract" must fulfill the contract on the settlement date. The
seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures
contract, then cash is transferred from the futures trader who sustained a loss to the
one who made a profit. To exit the commitment prior to the settlement date, the holder
58
INTERNATIONAL BUSINESS
of a futures position has to offset his/her position by either selling a long position or
buying back (covering) a short position, effectively closing out the futures position and
its contract obligations.
e) Futures contracts, or simply futures, are exchange traded derivatives. The exchange's
clearinghouse acts as counterparty on all contracts, sets margin requirements, and
crucially also provides a mechanism for settlement.
OPTIONS
a) An option is a contract written by a seller that conveys to the buyer the right — but not
the obligation — to buy (in the case of a call option) or to sell (in the case of a put
option) a particular asset, such as a piece of property, or shares of stock or some other
underlying security, such as, among others, a futures contract. In return for granting the
option, the seller collects a payment (the premium) from the buyer.
b) For example, buying a call option provides the right to buy a specified quantity of a
security at a set strike price at some time on or before expiration, while buying a put
option provides the right to sell. Upon the option holder's choice to exercise the option,
the party who sold, or wrote, the option must fulfill the terms of the contract.
c) The theoretical value of an option can be evaluated according to several models. These
models, which are developed by quantitative analysts, attempt to predict how the value
of the option will change in response to changing conditions. Hence, the risks associated
with granting, owning, or trading options may be quantified and managed with a greater
degree of precision, perhaps, than with some other investments.
d) Exchange-traded options form an important class of options which have standardized
contract features and trade on public exchanges, facilitating trading among independent
parties. Over-the-counter options are traded between private parties, often well-
capitalized institutions that have negotiated separate trading and clearing arrangements
with each other.
59
INTERNATIONAL BUSINESS
e) Another important class of options, particularly in the U.S., are employee stock options,
which are awarded by a company to their employees as a form of incentive
compensation
f) Other types of options exist in many financial contracts, for example real estate options
are often used to assemble large parcels of land, and prepayment options are usually
included in mortgage loans.
INTERNATIONAL HUMAN RESOURCE MANAGEMENT
International human resource management (HRM) involves ascertaining the
corporate strategy of the company and assessing the corresponding human
resource needs; determining the recruitment, staffing and organizational strategy;
recruiting, inducting, training and developing and motivating the personnel;
putting in place the performance appraisal and compensation plans and industrial
relations strategy and the effective management of all these.
“The strategic role of HRM is complex enough in a purely domestic firm, but it is
more complex in an international business, where staffing, management
development, performance evaluation, and compensation activities are
complicated by profound differences between countries in labour markets, culture,
legal systems, economic systems, and the like.”
It is not enough that the people recruited fit the skill requirement, but it is equally
important that they fit in to the organizational culture and the demand of the
diverse environments in which the organization functions.
FACTORS AFFECTING INTERNATIONAL HRM
60
INTERNATIONAL BUSINESS
The following are some of the important factors, which make international HRM complex
and challenging:
DIFFERENCES IN LABOUR MARKET CHARACTERISTICS
The skill levels, the demand and supply conditions and the behaviour
characteristics of labour vary widely between countries. While some countries
experience human resource shortage in certain sectors, many countries have
abundance.
In the past, developing countries were regarded, generally, as pools of unskilled
labour. Today, however, many developing countries have abundance of skilled and
scientific manpower as well as unskilled and semiskilled labour.
This changing trend is incasing significant shift of location of business activities.
Hard disk drive manufacturers are reported to be shifting their production base
from Singapore to cheaper locations like Malaysia, Thailand and China.
While in the past unskilled and semiskilled labour intensive activities tended to be
located in the developing countries, today sophisticated activities also find favour
with developing countries.
The changing quality attributes of human resources in the developing countries
and wage differentials are causing a location shift in business activities, resulting in
new trends in the global supply chain management.
India is reported to be emerging as a global R&D hub. India and several other
developing countries are large sources of IT personnel.
In short, the labour changing labour market characteristics have been causing
global restructuring of business processes and industries. And this causes a great
challenge for strategic HRM.
CULTURAL DIFFERENCES
61
INTERNATIONAL BUSINESS
Cultural differences cause a great challenge to HRM.
The behavioural attitude of workers, the social environment, values, beliefs,
outlooks etc., are important factors, which affect industrial relations, loyalty,
productivity etc.
There are also significant differences in aspects related to labour mobility. Cultural
factors are very relevant in inter personal behaviour also.
In some countries it is common to address the boss Mr. so and so but in countries
like India addressing the boss by name would not be welcome.
In countries like India people attach great value to designations and hierarchical
levels. This makes delivering and organisational restructuring difficult.
DIFFERENCES IN REGULATORY ENVIRONMENT
A firm operating in different countries is confronted with different environments
with respect to government policies and regulations regarding labour.
The attitude of employers and employees towards employment of people show
great variations is different nations. In some countries hire and fire is the common
thing whereas in a number of countries the ideal norm has been lifetime
employment.
In countries like India workers generally felt that while they, have the right to
change organisations, as they preferred, they had a right to lifetime employment in
the organisation they were employed with.
In such situations it is very difficult to get rid of inefficient or surplus manpower.
The situation, however, is changing in many countries, including India.
DIFFERENCE IN CONDITIONS OF EMPLOYMENT
62
INTERNATIONAL BUSINESS
Besides the tenancy of employment, there are several conditions of employment
the differences of which cause significant challenge to international HRM.
The system of rewards, promotion, incentives and motivation, system of labour
welfare and social security etc., vary significantly between countries.
CASE STUDY: ORGANIZATIONAL CHANGE AT UNILEVER
Unilever is a very old multinational with worldwide operations in the detergent and food
industries. For decades, Unilever managed its worldwide detergents activities in an arm's-
length manner. A subsidiary was set up in each major national market and allowed to operate
largely autonomously, with each subsidiary carrying out the full range of value cre ation
activities, including manufacturing, marketing, and R&D. The company had 17 autonomous
national operations in Europe alone by the mid-1980s.
In the 1990s, Unilever began to trans form its worldwide detergents activities from a loose
confederation into a tightly managed business with a global strategy. The shift was
prompted by Unilever's realization that its traditional way of doing business was no longer
effective in an arena where it had become essential to realize substantial cost economies, to
innovate, and to respond quickly to changing market trends.
The point was driven home in the 1980s when the company's archrival, Procter & Gamble,
repeatedly stole the lead in bringing new products to market. Within Unilever,
"persuading" the 17 European operations to adopt new products could take four to five years.
In addi tion, Unilever was handicapped by a high-cost structure from the duplication of
manufacturing facilities from country to country and by the company's inability to enjoy the
same kind of scale economies as P&G. Unilever's high costs ruled out its use of competitive
pricing.
63
INTERNATIONAL BUSINESS
To change this situation, Unilever established product divisions to coordi nate regional
operations. The 17 Euro pean companies now report directly to Lever Europe. Implicit
in this new approach is a bargain: The 17 companies are relinquishing autonomy in their
tradi tional markets in exchange for opportuni ties to help develop and execute a unified pan-
European strategy. As a consequence of these changes, manufacturing is now being
rationalized, with detergent production for the European market concentrated in a few
key loca tions. The number of European plants manufacturing soap has been cut from 10 to
2, and some new products will be manufactured at only one site. Product sizing and packaging
are being harmonized to cut purchasing costs and to pave the way for unified pan-European"
advertis ing. By taking these steps, Unilever estimates it may save as much as $400 million a
year in its European operations.
Lever Europe is attempting to speed its development of new products and to synchronize the
launch of new products throughout Europe. Its efforts seem to be pay ing off: A dishwasher
detergent introduced in Germany in the early 1990s was available across Europe a year later
—a distinct improvement.
But history still imposes constraints. Procter & Gam ble's leading laundry detergent carries
the same brand name across Europe, but Unilever sells its product under a variety of names.
The company has no plans to change this. Having spent 100 years building these brand
names, it believes it would be foolish to scrap them in the interest of pan-European
standardization. http://www.unilever.com
64
INTERNATIONAL BUSINESS
G20
WHAT IS THE G-20
The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was
established in 1999 to bring together systemically important industrialized and developing
economies to discuss key issues in the global economy. The inaugural meeting of the G-20
took place in Berlin, on December 15 & 16, 1999, hosted by German and Canadian finance
ministers.
MANDATE
The G-20 is an informal forum that promotes open and constructive discussion between
industrial and emerging-market countries on key issues related to global economic
stability. By contributing to the strengthening of the international financial architecture
and providing opportunities for dialogue on national policies, international co-operation,
and international financial institutions, the G-20 helps to support growth and
development across the globe.
ORIGINS
The G-20 was created as a response both to the financial crises of the late 1990s
and to a growing recognition that key emerging-market countries were not
adequately included in the core of global economic discussion and governance.
The proposals made by the G-22 and the G-33 to reduce the world economy's
susceptibility to crises showed the potential benefits of a regular international
consultative forum embracing the emerging-market countries.
Such a regular dialogue with a constant set of partners was institutionalized by the
creation of the G-20 in 1999.
65
INTERNATIONAL BUSINESS
MEMBERSHIP
The G-20 is made up of the finance ministers and central bank governors of 19 countries:
Argentina
Australia
Brazil
Canada
China
France
Germany
India
Indonesia
Italy
Japan
Mexico
Russia
Saudi Arabia
South Africa
South Korea
Turkey
66
INTERNATIONAL BUSINESS
United Kingdom
United States of America
The European Union, who is represented by the rotating Council presidency and
the European Central Bank, is the 20th member of the G-20.
To ensure global economic for a and institutions work together, the Managing
Director of the International Monetary Fund (IMF) and the President of the World
Bank, plus the chairs of the International Monetary and Financial Committee and
Development Committee of the IMF and World Bank, also participate in G-20
meetings on an ex-officio basis.
The G-20 thus brings together important industrial and emerging-market countries
from all regions of the world. Together, member countries represent around 90 per
cent of global gross national product, 80 per cent of world trade (including EU
intra-trade) as well as two-thirds of the world's population.
The G-20's economic weight and broad membership gives it a high degree of
legitimacy and influence over the management of the global economy and financial
system.
ACHIEVEMENTS
The G-20 has progressed a range of issues since 1999, including agreement about
policies for growth, reducing abuse of the financial system, dealing with financial
crises and combating terrorist financing.
The G-20 also aims to foster the adoption of internationally recognized standards
through the example set by its members in areas such as the transparency of fiscal
policy and combating money laundering and the financing of terrorism.
In 2004, G-20 countries committed to new higher standards of transparency and
exchange of information on tax matters. This aims to combat abuses of the
67
INTERNATIONAL BUSINESS
financial system and illicit activities including tax evasion. The G-20 also plays a
signficant role in matters concerned with the reform of the international financial
architecture.
The G-20 has also aimed to develop a common view among members on issues
related to further development of the global economic and financial system and
held an extraordinary meeting in the margins of the 2008 IMF and World Bank
annual meetings in recognition of the current economic situation.
MEETINGS AND ACTIVITIES
It is normal practice for the G-20 finance ministers and central bank governors to
meet once a year.
The ministers' and governors' meeting is usually preceded by two deputies'
meetings and extensive technical work.
This technical work takes the form of workshops, reports and case studies on
specific subjects, that aim to provide ministers and governors with contemporary
analysis and insights, to better inform their consideration of policy challenges and
options.
INTERACTION WITH OTHER INTERNATIONAL ORGANIZATIONS
The G-20 cooperates closely with various other major international organizations
and for a, as the potential to develop common positions on complex issues among
G-20 members can add political momentum to decision-making in other bodies.
The participation of the President of the World Bank, the Managing Director of the
IMF and the chairs of the International Monetary and Financial Committee and the
Development Committee in the G-20 meetings ensures that the G-20 process is
well integrated with the activities of the Bretton Woods Institutions.
68
INTERNATIONAL BUSINESS
The G-20 also works with, and encourages, other international groups and
organizations, such as the Financial Stability Forum, in progressing international
and domestic economic policy reforms. In addition, experts from private-sector
institutions and non-government organisations are invited to G-20 meetings on an
ad hoc basis in order to exploit synergies in analyzing selected topics and avoid
overlap.
EXTERNAL COMMUNICATION
The country currently chairing the G-20 posts details of the group's meetings and
work program on a dedicated website.
Although participation in the meetings is reserved for members, the public is
informed about what was discussed and agreed immediately after the meeting of
ministers and governors has ended.
After each meeting of ministers and governors, the G-20 publishes a communiqué
which records the agreements reached and measures outlined. Material on the
forward work program is also made public.
69