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Master of Business Administration – MBA Semester 4-SMU

MB0037 – International Business Management

Assignment Set- 1 & Set- 2

3 Credits (60 Marks)

Submitted by : L.V.R.SASTRYReg No : 510910051

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Master of Business Administration – MBA Semester 4


Assignment Set- 1

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countries. But the amount accruing to developing countries would stillbe more than twice the level of aid they currently receive. Moreover,developing countries would gain more from global trade liberalizationas a percentage of their GDP than industrial countries, because theireconomies are more highly protected and because they face higher

barriers.Although there are benefits from improved access to other countries’markets, countries benefit most from liberalizing their own markets. The main benefits for industrial countries would come from theliberalization of their agricultural markets. Developing countries wouldgain about equally from liberalization of manufacturing and agriculture. The group of low-income countries, however, would gain most fromagricultural liberalization in industrial countries because of the greaterrelative importance of agriculture in their economies.

b. What are the merits and demerits of international trade? (4marks)

Answer

Advantages and Disadvantages of International Trade

Advantages to consider:• Enhance your domestic competitiveness• Increase sales and profits• Gain your global market share• Reduce dependence on existing markets• Exploit international trade technology

• Extend sales potential of existing products• Stabilize seasonal market fluctuations• Enhance potential for expansion of your business• Sell excess production capacity• Maintain cost competitiveness in your domestic market

Disadvantages to keep in mind:• You may need to wait for long-term gains• Hire staff to launch international trading• Modify your product or packaging• Develop new promotional material• Incur added administrative costs• Dedicate personnel for traveling• Wait long for payments• Apply for additional financing• Deal with special licenses and regulations

Q. 2 Discuss the impact of culture on International Business.(10 marks)

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that their juxtaposition in the present paper represents our attempt tohighlight their importance rather than their coherence as elements of an integrative framework.1 Cultural change, convergence and divergence in an era of partial globalization

An issue of considerable theoretical significance is concerned withcultural changes and transformations taking place in different parts of the world. In fact, since the landmark study of Haire et al. (1966) andthe publication of Industrialism and Industrial Man by Kerr et al. (1960),researchers have continued to search for similarities in culture-specificbeliefs and attitudes in various aspects of work related attitudes andbehaviours, consumption patterns, and the like. If cultures of thevarious locales of the world are indeed converging (e.g., Heuer et al.,1999), IB- related practices would indeed become increasingly similar.Standard, culture-free business practices would eventually emerge,

and inefficiencies and complexities associated with divergent beliefsand practices in the past era would disappear. In the following section,we review the evidence on the issue and conclude that such an outlookpertaining to the convergence of various IB practices is overlyoptimistic.2 Evolution of partial globalizationGlobalization refers to a ‘growing economic interdependence amongcountries, as reflected in the increased cross-border flow of three typesof entities: goods and services, capital, and know- how’ (Govindarajanand Gupta, 2001, 4). Few spoke of ‘world economy’ 25 years ago, andthe prevalent term was ‘international trade’ (Drucker, 1995). However

today, international trade has culminated in the emergence of a globaleconomy, consisting of flows of information, technology, money, andpeople, and is conducted via government international organizationssuch as the North American Free Trade Agreement (NAFTA) and theEuropean Community; global organizations such as the InternationalOrganization for Standardization (ISO); multinational companies(MNCs); and cross – border alliances in the form of joint ventures,international mergers, and acquisitions. These inter – relationshipshave enhanced participation in the world economy, and have becomea key to domestic economic growth and prosperity (Drucker, 1995,

153). Yet, globalization is not without its misgivings and discontents(Sassan, 1998). A vivid image associated with the G8 summits is thefervent protests against globalization in many parts of the world, asshown in television and reported in the popular media. Strongopposition to globalization usually originates from developing countriesthat have been hurt by the destabilizing effects of globalization, but inrecent times we have also seen heated debates in Western economiestriggered by significant loss of professional jobs as a result of off

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shoring to low – wage countries. Indeed, workers in manufacturing andfarming in advanced economies are becoming increasingly wary of globalization, as their income continues to decline significantly. Inparallel to the angry protests against globalization, the flow of goods,services, and investments across national borders has continued to fall

after the rapid gains of the 1990s. Furthermore, the creation of regional trade blocs, such as NAFTA, the European Union, and theAssociation of Southeast Asian Nations, have stimulated discussionsabout creating other trade zones involving countries in South Asia,Africa, and other parts of the world. Although it is often assumed thatcountries belonging to the World Trade Organization (WTO) haveembraced globalization, the fact is that the world is only partiallyglobalized, at best (Schaeffer, 2003). Many parts of Central Asia andEastern Europe, including the former republics of the Soviet Union,parts of Latin America, Africa, and parts of South Asia, have been

skeptical of globalization (Greider, 1997). In fact, less than 10% of theworld’s population is fully globalized (i.e., being active participants inthe consumption of global products and services) (Schaeffer, 2003). Therefore, it is imperative that we analyze the issues of culturalconvergence and divergence in this partially globalized world.‘Universal culture’ often refers to the assumptions, values, andpractices of people in the West and some elites in non-Westerncultures. Huntington (1996) suggested that it originates from theintellectual elites from a selected group of countries who meetannually in the World Economic Forum in Davos, Switzerland. Theseindividuals are highly educated, work with symbols and numbers, are

fluent in English, are extensively involved with internationalcommitments, and travel frequently outside their country. They sharethe cultural value of individualism, and believe strongly in marketeconomics and political democracy. Although those belonging to theDavos group control virtually all of the world’s important internationalinstitutions, many of the world’s governments, and a great majority of the world’s economic and military capabilities, the cultural values of the Davos group are probably embraced by only a small fraction of thesix billion people of the world.Popular culture, again mostly Western European and American in

origin, also contributes to a convergence of consumption patterns andleisure activities around the world. However, the convergence may besuperficial, and have only a small influence on fundamental issuessuch as beliefs, norms, and ideas about how individuals, groups,institutions, and other important social agencies ought to function. Infact, Huntington (1996, 58) noted that ‘The essence of Westerncivilization is the Magna Carta, not the Magna Mac. The fact that non-

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Westerners may bite into the latter has no implications for theiraccepting the former’. This argument is obvious if we reverse thetypical situation and put Western Europeans and Americans in theshoes of recipients of cultural influence. For instance, while ChineseKung Fu dominates fight scenes in Hollywood movies such as Matrix

Reloaded, and Chinese restaurants abound in the West, it seemsimplausible that Americans and Europeans have espoused moreChinese values because of their fondness of Chinese Kung Fu and food.A major argument against cultural convergence is that traditionalismand modernity may be unrelated (Smith and Bond, 1998). Strongtraditional values, such as group solidarity, interpersonal harmony,paternalism, and feminism, can co-exist with modern values of individual achievement and competition. A case in point is the findingsthat Chinese in Singapore and China indeed endorsed both traditionaland modern values (Chang et al., 2003; Zhang et al., 2003). It is also

conceivable that, just as we talk about Westernization of culturalvalues around the world, we may also talk about Easternization of values in response to forces of modernity and consumption valuesimposed by globalization (Marsella and Choi, 1993).Although the argument that the world is becoming one culture seemsuntenable, there are some areas that do show signs of convergence.We explore in the following the roles of several factors thatsimultaneously cause cultures of the world to either converge ordiverge, in an attempt to identify several productive avenues for futureresearch.3 Role of multiculturalism and cultural identity

The broad ideological framework of a country, corporation, or situationis the most important determinant of the cultural identity that peopledevelop in a given locale (Triandis, 1994). The ‘melting pot’ ideologysuggests that each cultural group loses some of its dominantcharacteristics in order to become the mainstream: this is assimilation,or what Triandis (1994) calls subtractive multiculturalism.In contrast, when people from a cultural group add appropriate skillsand characteristics of other groups, it may be called integration, oradditive multiculturalism. Both of these processes are essential forcultural convergence to proceed. However, if there is a significant

history of conflict between the cultural groups, it is hard to initiatethese processes, as in the case of Israelis and Palestinians. In general,although there has been some research on the typology of animosityagainst other nations (e.g., Jung et al., 2002), we do not know muchabout how emotional antagonism against other cultural groups affectstrade patterns and intercultural cooperation in a business context. Theissues of cultural identity and emotional reactions to other cultural

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groups in an IB context constitute a significant gap in our researcheffort in this area.4 Implications of convergence and divergence issuesOne message is clear: while convergence in some domains of IBactivity is easily noticeable, especially in consumer values and

lifestyles, significant divergence of cultures persists. In fact, Hofstede(2001) asserts that mental programs of people around the world do notchange rapidly, but remain rather consistent over time. His findingsindicate that cultural shifts are relative as opposed to absolute.Although clusters of some countries in given geographical locales (e.g.,Argentina, Brazil, Chile) might indicate significant culture shiftstowards embracing Anglo values, the changes do not diminish theabsolute differences between such countries and those of the Anglocountries (i.e., US, Canada, UK). Huntington, in his ‘The Clash of Civilizations’ (1996), presents the view that there is indeed a

resurgence of non-Western cultures around the world, which couldresult in the redistribution of national power in the conduct of international affairs. The attempt by the Davos group to bring aboutuniform practices in various aspects of IB and work culture, therebysustaining the forces of globalization, is certainly worthwhile. However,our analysis suggests that there is no guarantee that suchconvergence will come about easily, or without long periods of resistance.IB scholars need to understand that although some countries mightexhibit strong tendencies toward cultural convergence, as is found inWestern countries, there are countries that will reject globalization, not

only because of its adverse economic impacts (Greider, 1997) but alsobecause globalization tends to introduce distortions (in their view) inprofound cultural syndromes that characterize their national character.Furthermore, reactions to globalization may take other forms. Bhagatet al. (2003) have recently argued that adaptation is another approachthat could characterize the tendencies of some cultures in the face of mounting pressures to globalize. Other approaches are rejection,creative synthesis, and innovation (Bhagat et al., 2003). Thesedifferent approaches highlight once again the complex dynamics thatunderlie cultural convergence and divergence in a partially globalized

world. Also, in discussing issues of convergence and divergence, it isnecessary to recognize that the shift in values is not always fromWestern society to others, but can result in the change of Westerncultural values as well. For example, the emphasis on quality andteamwork in the West is partly a result of the popularity of Japanesemanagement two decades ago.

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Scholars of IB should recognize that the issue of convergence anddivergence in this era of partial globalization will remain as a persistentand complex issue whose direction might only be assessed on aregion-by-region basis. It is also wise to adopt an interdisciplinaryperspective in understanding the forces that create both convergence

and divergence of cultures in different parts of the world. For instance,in Understanding Globalization, Schaeffer (2003) has provided aninsightful discussion of the social consequences of political, economicand other changes, which have significant implications for IB. Thecause-effect relationships of globalization and its various outcomes,especially the cultural outcomes, are not only characterized by bi-directional arrows, but are embedded in a complex web of relationships. How these complex relationships and processes play outon the stage of IB remains to be uncovered by IB researchers.5 Processes of cultural changes

In the previous section, we make the point that, through the process of globalization, cultures influence each other and change, but whether ornot these changes will bring about cultural convergence is yet to beseen. In this section, we delineate a general model that describes andexplains the complex processes underlying cultural changes. Asexplained before, IB is both an agent and a recipient of culturalchange, and for international business to flourish it is important tounderstand its complex, reciprocal relationships with cultural change.In line with the view of Hofstede (2001) that culture changes veryslowly, culture has been treated as a relatively stable characteristic,reflecting a shared knowledge structure that attenuates variability in

values, behavioral norms, and patterns of behaviours (Erez and Earley,1993). Cultural stability helps to reduce ambiguity, and leads to morecontrol over expected behavioural outcomes (Weick and Quinn, 1999;Leana and Barry, 2000). For instance, most existing models of cultureand work behaviour assume cultural stability and emphasize the fitbetween a given culture and certain managerial and motivationalpractices (Erez and Earley, 1993). High fit means high adaptation of managerial practices to a given culture and, therefore, higheffectiveness. The assumption of cultural stability is valid as long asthere are no environmental changes that precipitate adaptation and

cultural change. Yet, the end of the 20th century and the beginning of the new millennium have been characterized by turbulent political andeconomical changes, which instigate cultural changes. In line with thisargument, Lewin and Kim (2004), in their comprehensive chapter onadaptation and selection in strategy and change, distinguishedbetween theories driven by the underlying assumption that adaptationis the mechanism to cope with change, and theories driven by the

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underlying assumption of selection and the survival of the fittest,suggesting that ineffective forms of organization disappear, and newforms emerge. However, although organizational changes as a reactionto environmental changes have been subjected to considerableconceptual analyses, the issue of cultural change at the national level

has rarely been addressed. There are relatively few theories of culture that pertain to the dynamicaspect of culture. One exception is the eco-cultural model by Berry etal. (2002), which views culture as evolving adaptations to ecologicaland socio-political influences, and views individual psychologicalcharacteristics in a population as adaptive to their cultural context, aswell as to the broader ecological and socio-political influences.Similarly, Kitayama (2002) proposes a system view to understandingthe dynamic nature of culture, as opposed to the entity view that seesculture as a static entity. This system view suggests that each person’s

psychological processes are organized through the active effort tocoordinate one’s behaviours with the pertinent cultural systems of practices and public meanings. Yet, concurrently, many aspects of thepsychological systems develop rather flexibly as they are attuned tothe surrounding socio-cultural environment, and are likely to beconfigured in different ways across different socio-cultural groups. These adaptive views of culture are supported by empirical evidence.For example, Van de Vliert et al. (1999) identified curvilinearrelationships between temperature, masculinity and domestic politicalviolence across 53 countries. Their findings showed that masculinityand domestic violence are higher in moderately warm countries than in

countries with extreme temperatures. Inglehart and Baker (2000)examined cultural change as reflected by changes in basic values inthree waves of the World Values Surveys, which included 65 societiesand 75% of the world’s population. Their analysis showed thateconomic development was associated with shifts away fromtraditional norms and values toward values that are increasinglyrational, tolerant, trusting, and participatory. However, the data alsoshowed that the broad cultural heritage of a society, whether it isProtestant, Roman Catholic, Orthodox, Confucian, or Communist,leaves an enduring imprint on traditional values despite the forces of

modernization. The process of globalization described before has introduced the mostsignificant change in IB, with its effects filtering down to the national,organizational, group and individual levels. Reciprocally, changes atmicro-levels of culture, when shared by the members of the society,culminate into macro level phenomena and change the macro-levels of culture. In the absence of research models that can shed light on this

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complex process of cultural change, Erez and Gati (2004) proposedthat the general model of multi-level analysis (Klein and Kozlowski,2000) could be adopted for understanding the dynamics of culture andcultural change.6 The dynamics of culture as a multi-level, multi-layer

construct The proposed model consists of two building blocks. One is a multi-level approach, viewing culture as a multi-level construct that consistsof various levels nested within each other from the most macro-level of a global culture, through national cultures, organizational cultures,group cultures, and cultural values that are represented in the self atthe individual level, as portrayed in Figure 2.1. The second is based onSchein’s (1992) model viewing culture as a multi – layer constructconsisting of the most external layer of observed artefacts andbehaviours, the deeper level of values, which is testable by social

consensus, and the deepest level of basic assumption, which isinvisible and taken for granted. The present model proposes thatculture as a multi – layer construct exists at all levels – from the globalto the individual – and that at each level change first occurs at themost external layer of behaviour, and then, when shared by individualswho belong to the same cultural context, it becomes a shared valuethat characterizes the aggregated unit (group, organizations, ornations).In the model, the most macro-level is that of a global culture beingcreated by global networks and global institutions that cross nationaland cultural borders. As exemplified by the effort of the Davos group

discussed earlier, global organizational structures need to adoptcommon rules and procedures in order to have a common ‘language’for communicating across cultural borders (Kostova, 1999; Kostova andRoth, 2003; Gupta and Govindarajan, 2000).

Figure 2.1: The dynamic of top-down–bottom-up processes acrosslevels of culture.

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Global organizations and networks are being formed by having local-level organizations join the global arena. That means that there is acontinuous reciprocal process of shaping and reshaping organizationsat both levels. For example, multinational companies that operate inthe global market develop common rules and cultural values that

enable them to create a synergy between the various regions, anddifferent parts of the multinational company. These global rules andvalues filter down to the local organizations that constitute the globalcompany, and, over time, they shape the local organizations.Reciprocally, having local organizations join a global company mayintroduce changes into the global company because of its need tofunction effectively across different cultural boarders. A study by Erez-Rein et al. (2004) demonstrated how a multinational company thatacquired an Israeli company that develops and produces medicalinstruments changed the organizational culture of the acquired

company. The study identified a cultural gap between the twocompanies, with the Israeli company being higher on the culturaldimension of innovation and lower on the cultural dimension of attention to detail and conformity to rules and standards as comparedwith the acquiring company. The latter insisted on sending the Israelimanagers to intensive courses in Six – Sigma, which is an advancedmethod of quality improvement, and a managerial philosophy thatencompasses all organizational functions. Upon returning to theircompany, these managers introduced quality improvement workmethods and procedures to the local company, and causedbehavioural changes, followed by the internalization of quality –

oriented values. Thus, a top-down process of training and educationled to changes in work behaviour and work values. Sharing commonbehaviours and values by all employees of the local company thenshaped the organizational culture through bottom–up processes. Thecase of cultural change via international acquisitions demonstrated thetwo building blocks of our dynamic model of culture: the multi-levelstructure explains how a lower-level culture is being shaped by top-down effects, and that the cultural layer that changes first is the mostexternal layer of behaviour. In the long run, bottom – up processes of shared behaviours and norms shape the local organizational culture.

7 Factors that facilitate cultural changeCulture itself influences the level of resistance or acceptance of change. Harzing and Hofstede (1996) proposed that certain culturalvalues facilitate change, whereas others hinder it. The values of lowpower distance, low uncertainty avoidance, and individualism facilitatechange. Change threatens stability, and introduces uncertainty, andresistance to change will therefore be higher in cultures of high rather

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than low uncertainty avoidance (Steensma et al., 2000). Change alsothreatens the power structure, and therefore will be avoided in highpower distance cultures. Finally, change breaks the existing harmony,which is highly valued in collectivistic cultures, and therefore will notbe easily accepted by collectivists (Levine and Norenzayan, 1999).

A recent study by Erez and Gati (2004) examined the effects of threefactors on the change process and its outcomes:

• the cultural value of individualism – collectivism;

• the reward structure and its congruence with the underlyingcultural values and

• the degree of ambiguity in the reward structure.

The change process examined was a shift from choosing to work aloneto a behavioural choice of working as part of a team, and vice versa.Working alone is more prevalent in individualistic cultures, whereasworking in teams dominates the collectivistic ones.8 Understanding when culture matters: increasing theprecision of cultural models

Beyond exploring new cultural constructs and the dynamic nature of culture, we also argue for the importance of examining contingencyfactors that enhance or mitigate the effect of national culture. Considerthe following scenario. A senior human resource manager in amultinational firm is charged with implementing an integrative trainingprogram in several of the firm’s subsidiaries around the globe. Overthe term of her career, the manager has been educated aboutdifferences in national culture and is sensitive to intercultural

opportunities and challenges. At the same time, she understands thestrategic need to create a unified global program that serves to furtherintegrate the firm’s basic processes, creating efficiencies andsynergies across the remote sites. She approaches the implementationwith trepidation. A key challenge is to determine whether the programshould be implemented in the same manner in each subsidiary ormodified according to the local culture at each site. Put another way, inthis complex circumstance, does culture matter?

Q.3. a. Explain the brief structure of WTO. (5 marks)

Answer

Structure of World Trade Organization (WTO) The WTO’s overriding objective is to help trade flow smoothly, freely,fairly and predictably.It does this by:

• Administering trade agreements

• Acting as a forum for trade negotiations

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• Settling trade disputes

• Reviewing national trade policies

• Assisting developing countries in trade policy issues, throughtechnical assistance and training programs

• Cooperating with other international organizations Structure

The WTO has nearly 150 members, accounting for over 97% of worldtrade. Around 30 others are negotiating membership.Decisions are made by the entire membership. This is typically byconsensus. A majority vote is also possible but it has never been usedin the WTO, and was extremely rare under the WTO’s predecessor,GATT. The WTO’s agreements have been ratified in all members’parliaments. The WTO’s top level decision-making body is the Ministerial Conferencewhich meets at least once every two years.Below this is the General Council (normally ambassadors and heads of delegation in Geneva, but sometimes officials sent from members’capitals) which meets several times a year in the Genevaheadquarters. The General Council also meets as the Trade PolicyReview Body and the Dispute Settlement Body.At the next level, the Goods Council, Services Council and IntellectualProperty (TRIPS) Council report to the General Council.Numerous specialized committees, working groups and working partiesdeal with the individual agreements and other areas such as theenvironment, development, membership applications and regionaltrade agreements.

Secretariat The WTO Secretariat, based in Geneva, has around 600 staff and isheaded by a director-general. Its annual budget is roughly 160 millionSwiss francs. It does not have branch offices outside Geneva. Sincedecisions are taken by the members themselves, the Secretariat doesnot have the decision-making role that other internationalbureaucracies are given with. The Secretariat’s main duties are tosupply technical support for the various councils and committees andthe ministerial conferences, to provide technical assistance fordeveloping countries, to analyze world trade, and to explain WTO

affairs to the public and media. The Secretariat also provides some forms of legal assistance in thedispute settlement process and advises governments wishing tobecome members of the WTO.

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Figure 5.1: Structure of WTO The WTO is ‘member-driven’, with decisions taken by consensusamong all member governments. The WTO is run by its member governments. All major decisions aremade by the membership as a whole, either by ministers (who meet atleast once every two years) or by their ambassadors or delegates (whomeet regularly in Geneva). Decisions are normally taken by consensus.In this respect, the WTO is different from some other internationalorganizations such as the World Bank and International Monetary Fund.

In the WTO, power is not delegated to a board of directors or theorganization’s head.When WTO rules impose disciplines on countries’ policies, that is theoutcome of negotiations among WTO members, the rules are enforcedby the members themselves under agreed procedures that theynegotiated, including the possibility of trade sanctions. But thosesanctions are imposed by member countries, and authorized by themembership as a whole. This is quite different from other agencieswhose bureaucracies can, for example, influence a country’s policy bythreatening to withhold credit.Reaching decisions by consensus among some 150 members can be

difficult. Its main advantage is that decisions made this way are moreacceptable to all members. And despite the difficulty, someremarkable agreements have been reached. Nevertheless, proposalsfor the creation of a smaller executive body – perhaps like a board of directors each representing different groups of countries – are heardperiodically. But for now, the WTO is a member-driven, consensus-based organization.

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Highest authority: the Ministerial ConferenceSo, the WTO belongs to its members. The countries make theirdecisions through various councils and committees, whosemembership consists of all WTO members. Topmost is the ministerialconference which has to meet at least once every two years. The

Ministerial Conference can take decisions on all matters under any of the multilateral trade agreements.Second level: General Council in three guisesDay-to-day work in between the ministerial conferences is handled bythree bodies:

• The General Council

• The Dispute Settlement Body

• The Trade Policy Review BodyAll three are in fact the same – the Agreement Establishing the WTOstates they are all the General Council, although they meet under

different terms of reference. Again, all three consist of all WTOmembers. They report to the Ministerial Conference. The General Council acts on behalf of the Ministerial Conference on allWTO affairs. It meets as the Dispute Settlement Body and the TradePolicy Review Body to oversee procedures for settling disputesbetween members and to analyze members’ trade policies.Third level: councils for each broad area of trade, and more back totop Three more councils, each handling a different broad area of trade,report to the General Council:

• The Council for Trade in Goods (Goods Council)

• The Council for Trade in Services (Services Council)• The Council for Trade – Related Aspects of Intellectual Property

Rights (TRIPS Council)As their names indicate, the three are responsible for the workings of the WTO agreements dealing with their respective areas of trade.Again they consist of all WTO members. These three also have thesubsidiary bodies.Six other bodies report to the General Council. The scope of theircoverage is smaller, so they are “committees”. But they still consist of all WTO members. They cover issues such as trade and development,

the environment, regional trading arrangements, and administrativeissues. The Singapore Ministerial Conference in December 1996decided to create new working groups to look at investment andcompetition policy, transparency in government procurement, andtrade facilitation. Two more subsidiary bodies dealing with thep lu ral-lateral agreements(which are not signed by all WTO members) keep the General Councilinformed of their activities regularly.

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Fourth level: down to the nitty-grittyEach of the higher level councils has subsidiary bodies. The GoodsCouncil has 11 committees dealing with specific subjects (such asagriculture, market access, subsidies, anti-dumping measures and soon). Again, these consist of all member countries. Also reporting to the

Goods Council is the Textiles Monitoring Body, which consists of achairman and 10 members acting in their personal capacities, andgroups dealing with notifications (governments informing the WTOabout current and new policies or measures) and state tradingenterprises. The Services Council’s subsidiary bodies deal with financial services,domestic regulations, GATS rules and specific commitments.At the General Council level, the Dispute Settlement Body also has twosubsidiaries: the dispute settlement “panels” of experts appointed toadjudicate on unresolved disputes, and the Appellate Body that dealswith appeals.Heads of Delegations and other boards: the need forinformalityImportant breakthroughs are rarely made in formal meetings of thesebodies, least of all in the higher level councils. Since decisions aremade by consensus, without voting, informal consultations within theWTO play a vital role in bringing a vastly diverse membership round toan agreement.One step away from the formal meetings is informal meetings that stillinclude the full membership, such as those of the Heads of Delegations(HOD). More difficult issues have to be thrashed out in smaller groups.

A common recent practice is for the chairperson of a negotiating groupto attempt to forge a compromise by holding consultations withdelegations individually, in twos or threes, or in groups of 20 – 30 of the most interested delegations. These smaller meetings have to behandled sensitively. The key is to ensure that everyone is keptinformed about what is going on (the process must be “transparent”)even if they are not in a particular consultation or meeting, and thatthey have an opportunity to participate or provide input (it must be“inclusive”).One term has become controversial, but more among some outsideobservers than among delegations. The “Green Room” is a phrasetaken from the informal name of the director- general’s conferenceroom. It is used to refer to meetings of 20 – 40 delegations, usually atthe level of heads of delegations. These meetings can take placeelsewhere, such as at Ministerial Conferences, and can be called by theminister chairing the conference as well as the director- general.Similar smaller group consultations can be organized by the chairs of committees negotiating individual subjects, although the term Green

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Room is not usually used for these. In the past delegations havesometimes felt that Green Room meetings could lead to compromisesbeing struck behind their backs. So, extra efforts are made to ensurethat the process is handled correctly, with regular reports back to thefull membership.

The way countries now negotiate has helped somewhat. In order toincrease their bargaining power, countries have formed coalitions. Insome subjects such as agriculture virtually all countries are membersof at least one coalition – and in many cases, several coalitions. Thismeans that all countries can be represented in the process if thecoordinators and other key players are present. The coordinators alsotake responsibility for both “transparency” and “inclusiveness” bykeeping their coalitions informed and by taking the positionsnegotiated within their alliances.In the end, decisions have to be taken by all members and by

consensus. The membership as a whole would resist attempts toimpose the will of a small group. No one has been able to find analternative way of achieving consensus on difficult issues, because it isvirtually impossible for members to change their positions voluntarilyin meetings of the full membership.Market access negotiations also involve small groups, but for acompletely different reason. The final outcome is a multilateralpackage of individual countries’ commitments, but those commitmentsare the result of numerous bilateral, informal bargaining sessions,which depend on individual countries’ interests. (Examples include thetraditional tariff negotiations, and market access talks in services.) So,

informal consultations in various forms play a vital role in allowingconsensus to be reached, but they do not appear in organizationcharts, precisely because they are informal. They are not separate from the formal meetings, however. They arenecessary for making formal decisions in the councils and committees.Nor are the formal meetings unimportant. They are the forums forexchanging views, putting countries’ positions on the record, andultimately for confirming decisions. The art of achieving agreementamong all WTO members is to strike an appropriate balance, so that abreakthrough achieved among only a few countries can be acceptable

to the rest of the membership.

b. Highlight the drawbacks of GATT. (5 marks)

AnswerGiven its provisional nature and limited field of action, the success of GATT in promoting and securing the liberalization of much of worldtrade over 47 years is incontestable. Continual reductions in tariffs

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alone helped spur very high rates of world trade growth – around 8 percent a year on average during the 1950s and 1960s. And themomentum of trade liberalization helped ensure that trade growthconsistently out-paced production growth throughout the GATT era. The rush of new members during the Uruguay Round demonstrated

that the multilateral trading system, as then represented by GATT, wasrecognized as an anchor for development and an instrument of economic and trade reform. The limited achievement of the Tokyo Round, outside the tariff reduction results, was a sign of difficult times to come. GATT’s successin reducing tariffs to such a low level, combined with a series of economic recessions in the 1970s and early 1980s, drove governmentsto devise other forms of protection for sectors facing increasedoverseas competition. High rates of unemployment and constantfactory closures led governments in Europe and North America to seek

bilateral market-sharing arrangements with competitors and to embarkon a subsidies race to maintain their holds on agricultural trade. Boththese changes undermined the credibility and effectiveness of GATT.Apart from the deterioration in the trade policy environment, it alsobecame apparent by the early 1980s that the General Agreement wasno longer as relevant to the realities of world trade as it had been inthe 1940s. For a start, world trade had become far more complex andimportant than 40 years before: the globalization of the world economywas underway, international investment was exploding and trade inservices – not covered by the rules of GATT – was of major interest tomore and more countries and, at the same time, closely tied to further

increases in world merchandise trade. In other respects, the GATT hadbeen found wanting: for instance, with respect to agriculture whereloopholes in the multilateral system were heavily exploited – andefforts at liberalizing agricultural trade met with little success – and inthe textiles and clothing sector where an exception to the normaldisciplines of GATT was negotiated in the form of the Multi-fibreArrangement. Even the institutional structure of GATT and its disputesettlement system were giving cause for concern. Together, these and other factors convinced GATT members that anew effort to reinforce and extend the multilateral system should be

attempted. That effort resulted in the Uruguay Round

Q.4. a. Give a short note on the regional economic integration.

(5 marks)

Answer

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Regional Economic IntegrationRegional integration can take many forms, and nowhere is this moreevident than in the vastly different integration processes taking placein the regions of Europe and East Asia. The subject of this paper isregional integration as it has developed in East Asia with a focus on the

drivers of that integration. While the paper is not intended as a directcomparison of integration in East Asia and Europe, it will include somecomparisons between the two regions.Integration in East Asia has progressed very slowly and is still in anearly stage despite that the process has continued for decades. In fact,it could be said that the process began centuries ago – even as farback as the 15th century. By comparison, European integration hasprogressed steadily and has gradually deepened over the last 50 yearsto reach an advanced stage today with a common currency and well-developed regional institutions. Thus, the speed of progression and the

level of integration attained in the two regions are quite dissimilar.In addition to these differences, the drivers behind the integrationprocess in each region are different. In Europe, the origins of integration have been institutional in nature, and the development of institutions has been prominent throughout the process. Thus, regionalinstitutions have been the driving force behind integration in Europe. InEast Asia, the development of regional institutions has also occurred;however, progress in this area has been slow and the few existinginstitutions are fairly weak and ineffective. Nevertheless, regionalintegration is taking place in East Asia, but the driving force is themarket rather than policy or institutions. Corporations and theproduction networks they have established are driving integration inEast Asia.

b. Mention the benefits of WTO. (5 marks)

Answer

Ten Benefits of WTO1. The system helps to keep the peace2. The system allows disputes to be handled constructively3. A system based on rules rather than power makes life easier for

all4. Freer trade cuts the cost of living5. It gives consumers more choice and a broader range of qualities

to choose from6. Trade raises incomes7. Trade stimulates economic growth and that can be good news

for employment

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8. The basic principles make the system economically moreefficient, and they cut costs

9. The system shields governments from narrow interests10. The system encourages good government

Q. 5 a. Explain five-element product wave model. (7 marks)

Answer

The Five-Element Product WaveAs illustrated in Figure 4.5, the wave model employs designengineering, process engineering, product marketing, production, andend-of-life activities as elements. The first wave is associated with the"A" version of a product or service, and survives through the traditionalPLC introduction and growth phases. A second wave begins with the

"B" version, the markedly improved second model. It starts just beforethe traditional life cycle maturity stage and lives until sales decline to apoint at which an EOL decision must be made.Note that design engineering has a peak of activity level at eachupgrade. Process engineering activity shadows that of designengineering, as system changes will be contemplated and made tofacilitate the changes made in the product or service. Productmarketing also has activity level spikes that closely match engineeringdesign activity, lagged somewhat for product introduction. Productionhas one activity peak that results from demand management andproduction planning through master production scheduling.Finally, the EOL curve peaks at each redesign. The last wave beginsshortly before original production ceases and ends when the product isno longer manufactured or supported by the EOL Company or division. The EOL element requires that a decision be made about the precedingversion at each major redesign: continue production, make a short-term run of spares, keep blueprints active so that parts can be madeas ordered, enter into a manufacturing and support agreement withanother entity, or discontinue production.For the sake of parsimony, Figure 4.5 shows only a two-product model("A" and "B" versions). In reality, there may be hundreds of significant

redesigns. The wave effect comes from the fact that the processrepeats for the successful firm, forming swells in design engineering,process engineering, product marketing, and manufacturing curvesbefore the final crest at EOL activity. The five-element product wave,or FPW, uses trigger points, rather than time, as the horizon over whichthe element curves vary. Changes in magnitude, represented by thevertical axis, result from differing activity levels within the five

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elements. Simple changes in levels of dollar or unit product sales, inand of themselves, do not necessarily determine the trigger points.Rather, the varying activity levels are a direct result of productintroductions and redesigns that, from the outset, must take intoaccount company strategy, core capabilities, and the state of the

competitive environment. For example, a product with strong salesmay be redesigned in a preemptive strike against competitors, furtherdistancing that product from the competition, such as with Caterpillar’sinnovative high-drive bulldozers. That the five-element wave is grounded in reality becomes apparentwhen considering the recent research that suggests productintroduction cycles are being compressed. Bayus (1994) claims thatknowledge is being applied faster, resulting in increasing levels of newproduct introductions. Yet since product removals are not keepingpace with introductions, there are an increasing number of product

variations on the market. Slater (1993) observes that product lifecycles are growing shorter and shorter. Vesey (1992) reports that thestrategy for the 1990s is speed to market and discusses the pressuresthe market is exerting to shorten product introduction lead times.Regardless of whether life cycles are actually being compressed orknowledge is simply being applied faster, it is apparent that firms areincreasing the speed with which they bring their products to market. The effect of this is a compression of the design engineering, processengineering, production, and product marketing elements of the wavemodel. (The EOL curve may remain unchanged because acceleratedintroductions do not necessarily affect EOL efforts.) The five-element

wave clearly shows the inefficiency of traditional "over-the-wall"systems as speed to market increases. As the elements compress,more and more information is thrown over the wall. Recipients findthemselves with less and less time to take action. Taken to theextreme, in-baskets, phone lines, conference rooms, desks, and floorsare soon gridlocked and littered with unanswered correspondence andthings to do. Forget quality; production itself grinds to a halt. Thesolution is to maximize the advantage of the relationships within thefive-element wave and work in concurrent teams, as illustrated inFigure 6. That way, responsibility is shared throughout the system.

Members from each discipline optimize the system. The method tearsdown barriers between departments and speeds the introductionprocess, thus decreasing costs. The focal point becomes the customer,rather than the task. The system is totally interactive and boundtogether. Each element is connected to all of the others and is focusedon the customer. (Note that the authors have taken a great deal of

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what they do best. Global markets offer greater opportunity for peopleto tap into more and larger markets around the world. It means thatthey can have access to more capital flows, technology, cheaperimports, and larger export markets. But markets do not necessarilyensure that the benefits of increased efficiency are shared by all.

Countries must be prepared to embrace the policies needed, and in thecase of the poorest countries may need the support of the internationalcommunity as they do so.

Q. 6. Give some examples of companies doing international

business and discuss how they have they have managed theirbusiness in the international markets. (10 marks)

AnswerA PERSPECTIVE OF THE NORTHEN ISLAND SOFTWARECOMPANIES, RAPD M– UPWithin six months of announcing it would invest $4.5 million toestablish its new software development center in Northern Ireland, IMRwas up and running with more than one-third its target staff."The fast start-up of the Belfast facility reaffirms our confidence tolocate in Northern Ireland," said Sanan. "The success to date inbuilding a quality work force has surpassed our expectations andopens up new ambitions for our interests in Northern Ireland."According to Arthur "Bro" McFerran, president of IMR (NI) Ltd., thecompany is hiring 12 to 18 programmers a month in Northern Irelandand is well on its way to meeting its staffing goal of 300 by 1999.McFerran credited Northern Ireland’s Training & Employment Agency(T&EA) with helping place the company’s staffing on the fast track."The T&EA not only has helped us to identify and recruit qualifiedsoftware graduates from Northern Ireland’s universities, it is alsoassisting us with a unique initiative to bring additional sources of high

quality talent to the company," McFerran said.Innovation In TrainingImpressed by the number and quality of information technologygraduates from the region’s universities, IMR recognized an untappedresource in the well-educated, versatile graduates of other fields inNorthern Ireland. Working with the T&EA, IMR developed "IMRAcademy," an intensive 20-week training program at the Belfast

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Institute of Further and Higher Education, to expand theskills of qualified applicants who are not computer software graduates,but who are equally well-educated in other Disciplines and who havedemonstrated aptitude for learning computer software programming. Tom Scott of the T&EA said IMR applicants are assessed throughout

the program and those who successfully complete the course areawarded a National Computing Certificate and full-time employmentwith IMR. Approximately 40 trainees have already participated in theprogram."IMR is extremely pleased with the T&EAs ability to design and delivera training program customized to our needs, and one that is deliveringus an impressive pool of incremental programming talent," McFerransaid.Smart And Available

"The recent software investments by IMR and other companies provide

a new opportunity for Northern Ireland’s computer graduates,"McFerrin said. Recruitment research by IMR indicates that traditionally,nearly half of the region’s computer graduates have been forced toseek jobs outside Northern Ireland due to the lack of availableinformation technology positions.Now IT graduates have the chance to find good jobs in NorthernIreland, and graduates from other fields can take advantage of the IMRAcademy training program to get a head start on a career in thegrowing software sector.McFerrin said. Recruitment research by IMR indicates that traditionally,nearly half of the region’s computer graduates have been forced to

seek jobs outside Northern Ireland due to the lack of availableinformation technology positions.Competitive Advantage

Northern Ireland recently has attracted information technology – basedinvestments from other multinational companies such as BT, Fujitsu,Liberty Mutual Group, Seagate Technology, STB Systems and UniComp. These companies cite Northern Ireland’s work force and favorable costbase in their decisions to locate in the region."The availability of high-quality graduates combined with the region’scompetitive operating costs and attractive incentives made Northern

Ireland the best possible location for STB," said Richard W. Cooke,STB’s director of engineering operations. With salaries and fringe costsfor well trained software engineers in Northern Ireland approximately50 percent lower than costs for US engineers, and low employeeturnover and favorable rates for office space, the overall annual percapita operational costs to develop high quality software can besignificantly less compared with these same costs in the United States. Typical starting salaries for IT graduates in Northern Ireland are

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$22,000 to $25,000 annually. At less than three percent annually,Northern Ireland’s employee turnover rate is a fraction of the ratestypically experienced in other parts of Europe and the United States.Annual costs per square foot for office space, exclusive of propertytaxes and service charges, range from as low as $5 per square foot in

some development areas, to approximately $14 in Belfast. These costscan be as much as 50 percent lower than office space costs in otherEuropean cities.

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Master Of Business Administration-MBA Semester 4


Assignment Set-2

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Q.1 Evaluate the monetary system and currency markets ininternational businessmanagement. (10 marks)

Answer

The IMF is an international organization of 185 member countries. Itwas established to promote international monetary cooperation,exchange stability, and orderly exchange arrangements; to fostereconomic growth and high levels of employment; and to providetemporary financial assistance to countries to help ease balance of payments adjustment. The International Monetary Fund (IMF) is the intergovernmentalorganization that oversees the global financial system by following themacroeconomic policies of its member countries, in particular thosewith an impact on exchange rate and the balance of payments. It is anorganization formed with a stated objective of stabilizing internationalexchange rates and facilitating development through the enforcementof liberalising economic policieson other countries as a condition forloans, restructuring or aid.[3] It also offers highly leveraged loans,mainly to poorer countries. Its headquarters is in Washington, D.C.,United States.Organization and purposeIMF "Headquarters 1" in Washington, D.C. The International Monetary Fund was created in July 1945, originallywith 45 members,[with a goal to stabilize exchange rates and assistthe reconstruction of the world's international payment system.

Countries contributed to a pool which could be borrowed from, on atemporary basis, by countries with payment imbalances (Condon,2007). The IMF was important when it was first created because ithelped the world stabilize the economic system. The IMF works toimprove the economies of its member countries.[ The IMF describes itself as "an organization of 187 countries (as of July2010), working to foster global monetary cooperation, secure financialstability, facilitate international trade, promote high employment andsustainable economic growth, and reduce poverty". With the exceptionof Cuba (left in 1964), Taiwan (expelled in 1980),North Korea, Andorra,

Monaco, Liechtenstein, Tuvalu and Nauru, all UN member statesparticipate directly in the IMF. Member states are represented on a 24-member Executive Board (five Executive Directors are appointed bythe five members with the largest quotas, nineteen Executive Directorsare elected by the remaining members), and all members appoint aGovernor to the IMF's Board of Governors.Data dissemination systems

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In 1995, the International Monetary Fund began work on datadissemination standards with the view of guiding IMF membercountries to disseminate their economic and financial data to thepublic. The International Monetary and Financial Committee (IMFC)endorsed the guidelines for the dissemination standards and they were

split into two tiers: The GDDS and the SDDS. The International Monetary Fund executive board approved the SDDSand GDDS in 1996 and 1997 respectively and subsequent amendmentswere published in a revised "Guide to the General Data DisseminationSystem". The system is aimed primarily at statisticians and aims toimprove many aspects of statistical systems in a country. It is also partof the World Bank Millennium Development Goals and PovertyReduction Strategic Papers. The IMF established a system and standard to guide members in thedissemination to the public of their economic and financial data.

Currently there are two such systems: General Data DisseminationSystem (GDDS) and its superset Special Data Dissemination System(SDDS), for those member countries having or seeking access tointernational capital markets. The primary objective of the GDDS is to encourage IMF membercountries to build a framework to improve data quality and increasestatistical capacity building. This will involve the preparation of metadata describing current statistical collection practices and settingimprovement plans. Upon building a framework, a country canevaluate statistical needs, set priorities in improving the timeliness,transparency, reliability and accessibility of financial and economic

data.

Q.2 a. Mention the different entry strategies to enter

international markets. (4 marks)

Answer

Entry Strategies

Methods of entryWith rare exceptions, products just don’t emerge in foreign marketsovernight – a firm has to build up a market over time. Several

strategies, which differ in aggressiveness, risk, and the amount of control that the firm is able to maintain, are available:

• Exporting is a relatively low risk strategy in which fewinvestments are made in the new country. A drawback is that,because the firm makes few if any marketing investments in thenew country, market share may be below potential. Further, thefirm, by not operating in the country, learns less about the

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market (What do consumers really want? Which kinds of advertising campaigns are most successful? What are the mosteffective methods of distribution?) If an importer is willing to do agood job of marketing, this arrangement may represent a "win-win" situation, but it may be more difficult for the firm to enter

on its own later if it decides that larger profits can be madewithin the country.

• Licensing and franchising are also low exposure methods of entry– you allow someone else to use your trademarks andaccumulated expertise. Your partner puts up the money andassumes the risk. Problems here involve the fact that you aretraining a potential competitor and that you have little controlover how the business is operated. For example, American fastfood restaurants have found that foreign franchisees often fail tomaintain American standards of cleanliness. Similarly, a foreign

manufacturer may use lower quality ingredients inmanufacturing a brand based on premium contents in the homecountry.

• Contract manufacturing involves having someone elsemanufacture products while you take on some of the marketingefforts yourself. This saves investment, but again you may betraining a competitor.

• Direct entry strategies, where the firm either acquires a firm orbuilds operations "from scratch" involve the highest exposure,but also the greatest opportunities for profits. The firm gainsmore knowledge about the local market and maintains greatercontrol, but now has a huge investment. In some countries, thegovernment may expropriate assets without compensation, sodirect investment entails an additional risk. A variation involves a joint venture, where a local firm puts up some of the money andknowledge about the local market.

b. How has E-commerce helped in international marketing? (6

marks)

Answer

Electronic Commerce

1 Prospects for electronic commerceElectronic commerce – usually in the form of sales, promotion, orsupport through the Internet – is a hot topic at the moment, evidencedby the high market capitalization of firms involved in this kind of business. Growth rates have been considerable over the last two yearsand are expected to persist, at least to some extent, for at least the

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next several years. Yet, it should be recognized that so far, sales overthe Internet account for only a small portion of sales – especiallyoutside the U.S.2 Obstacles to diffusion

Obstacles to the diffusion of Internet trade come both from enduring

sources and temporary roadblocks which may be overcome asconsumer attitudes change and technology is improved. Currently,Internet connections are slower than desired so that downloadingpictures and other information may take longer than consumers arewilling to wait. "Glitches" in online ordering systems may also frustrateconsumers, who are unable to place their orders at a given time orhave difficulty navigating through a malfunctioning site. The lack of non-English language sites in some areas may also be off-putting toconsumers, and registering domain names in some countries isdifficult. Further, shipping small packages across countries may be

inefficient due to high local postage rates and inefficiencies in customsprocessing. Most of these obstacles may be overcome within next fewyears.Other obstacles may, however, have considerably greater stayingpower. First, there are legal problems, as several different countriesmay seek to impose their jurisdiction on advertising and laws of product assortment and business practices. Further, the maintenanceof databases, which are essential to delivering on the promises of e-commerce, may conflict with the privacy rules of some countries – thisis currently a hot issue of contention between the United States andthe European Union. Finally, there are issues of taxation and collection.

While the Clinton Administration has sought to get the WTO to goalong with a three year tax "moratorium" on Internet purchases muchlike the one observed in the U.S., strong opposition is expected. Agreat attraction of e-commerce in Europe is that people may orderfrom other countries and thus evade local sales taxes, which can beprohibitive (e.g., 25% in Denmark and 16% in Germany). Some firmswill ship to customers in neighbouring countries without collectingsales taxes or duties, with the responsibility of paying falling on theconsumer. Although most consumers who order and do not arrange topay for these taxes get away with it, fines for those caught through

random checks can be severe.3 Locus of the siteSome firms have chosen to maintain a global site, with reference onlyto local sales or support offices; others, in contrast, have unique sitesfor each country. In some cases, global sites will hyperlink surfers to acountry or region relevant to the site. Note that some confusion existssince many sites outside the U.S. maintain the ".com" designationrather than their countries’ respective suffix (e.g., ".de" for Germany,

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".se" for Sweden, and ".au" for Australia). Some firms haveexperienced problems getting their banks to accept credit cardcharges in more than one currency, and thus it may be difficult toindicate precise prices in more than one denomination (one site basedin Britain offered its American customers to be as accurate as possible,

based on current exchange rates, although the charge could be off "bya few pennies.")4 Lifecycle stages across the WorldIt has been suggested that Europe runs some five years behind theU.S. in electronic commerce, but some sources dispute this, suggestingthat lack of success among American retailers may have other origins,such as inadequate adaptation (for example, some British users areput off by American English). There are, however, some factors whichcause most countries run behind. Even in Europe, Internet accesspenetration rates are lower than they are in the U.S., and the slower

speed associated with downloading Asian characters is discouraging. Insome countries, credit card penetration is lower, and even in Europeancountries with high penetration rates, consumers are reluctant to usethem. Further, the fact that consumers in most countries have to pay aper minute phone charge discourages the essential casual and relaxedbrowsing common in the U.S. so long as unlimited cable or hardwiredaccess is not offered.

Q.3 a. Explain Bill of Lading and Letters of credit. (8 marks)

Answer

A bill of lading (sometimes referred to as a BOL, or B/L) is adocument issued by a carrier to a shipper, acknowledging thatspecified goods have been received on board as cargo for conveyanceto a named place for delivery to the consignee who is usuallyidentified. A thorough bill of lading involves the use of at least twodifferent modes of transport from road, rail, air, and sea. The termderives from the verb "to lade" which means to load a cargo onto aship or other form of transportation.A bill of lading can be used as a traded object. The standard short formbill of lading is evidence of the contract of carriage of goods and itserves a number of purposes:

• It is evidence that a valid contract of carriage, or a charteringcontract, exists, and it may incorporate the full terms of thecontract between the consignor and the carrier by reference (i.e.the short form simply refers to the main contract as an existingdocument, whereas the long form of a bill of lading(connaissement intégral) issued by the carrier sets out all theterms of the contract of carriage);

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• It is a receipt signed by the carrier confirming whether goodsmatching the contract description have been received in goodcondition (a bill will be described as clean if the goods have beenreceived on board in apparent good condition and stowed readyfor transport); and

• It is also a document of transfer, being freely transferable but nota negotiable instrument in the legal sense, i.e. it governs all thelegal aspects of physical carriage, and, like a cheque or othernegotiable instrument, it may be endorsed affecting ownership of the goods actually being carried. This matches everydayexperience in that the contract a person might make with acommercial carrier like FedEx for mostly airway parcels, isseparate from any contract for the sale of the goods to becarried; however, it binds the carrier to its terms, irrespectivelyof who the actual holder of the B/L, and owner of the goods, maybe at a specific moment.

• A standard, commercial letter of credit is a document issuedmostly by a financial institution, used primarily in trade finance,which usually provides an irrevocable payment undertaking.

• The letter of credit can also be source of payment for atransaction, meaning that redeeming the letter of credit will payan exporter. Letters of credit are used primarily in internationaltrade transactions of significant value, for deals between asupplier in one country and a customer in another. They are alsoused in the land development process to ensure that approvedpublic facilities (streets, sidewalks, storm water ponds, etc.) willbe built. The parties to a letter of credit are usually a beneficiary

who is to receive the money, the issuing bank of whom theapplicant is a client, and the advising bank of whom thebeneficiary is a client. Almost all letters of credit are irrevocable,i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any.In executing a transaction, letters of credit incorporate functionscommon to giros and Traveler's cheques. Typically, thedocuments a beneficiary has to present in order to receivepayment include a commercial invoice, bill of lading, anddocuments proving the shipment were insured against loss ordamage in transit. However, the list and form of documents isopen to imagination and negotiation and might containrequirements to present documents issued by a neutral thirdparty evidencing the quality of the goods shipped, or their placeof origin.

b. What is UNCITRAL and what it does? (2 marks)

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Answer The United Nations Commission on International Trade Law(UNCITRAL) was established by the United Nations General Assemblyby its Resolution 2205 (XXI) of 17 December 1966 "to promote theprogressive harmonization and unification of international trade law.

When world trade began to expand dramatically in the 1960s, nationalgovernments began to realize the need for a global set of standardsand rules to harmonize national and regional regulations, which untilthen governed

Q.4. Explain the importance of STP in international markets.

(10 marks)

Answer

The importance of STP

Segmentation is the cornerstone of marketing – almost all marketingefforts in some way relate to decisions on who to serve or how toimplement positioning through the different parts of the marketingmix. For example, one’s distribution strategy should consider whereone’s target market is most likely to buy the product, and apromotional strategy should consider the target’s media habits andwhich kinds of messages will be most persuasive. Although it is oftentempting, when observing large markets, to try to be "all things to allpeople," this is a dangerous strategy because the firm may lose itsdistinctive appeal to its chosen segments.In terms of the "big picture," members of a segment should generallybe as similar as possible to each other on a relevant dimension (e.g.,preference for quality vs. low price) and as different as possible frommembers of other segments. That is, members should respond insimilar ways to various treatments (such as discounts or high service)so that common campaigns can be aimed at segment members, but inorder to justify a different treatment of other segments, their membersshould have their own unique response behaviour.

Q. 5 a. Write a short note on branding and trademarks. (6

marks)

Answer

Branding and trademarksAs mentioned in chapter four, it is difficult to protect a trademark orbrand, unless all countries are members of a convention. Brand"piracy" is widespread in many developing countries.

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Other aspects of branding include the promotional aspects. A familybrand of products under the Zeneca (ex ICI) label or Sterling Health arelikely to be recognised worldwide, and hence enhance the "subjective"product characteristics.Warranty

Many large value agricultural products like machinery requirewarranties. Unfortunately not everyone upholds them. It is commonpractice in Africa that if the original equipment has not been boughtthrough an authorized dealer in the country, that dealer refuses tohonour the warranty. This is unfortunate, because not only may theequipment have been legitimately bought overseas; it also actuallybuilds up consumer resistance to the dealer. When the consumer iseventually offered with a choice, the reticent dealer will suffer, forexample, with the new dealers coming up.Cotton Production/Marketing InterfaceSpinners

Machines are highly flexible, that is they can usually switch to a varietyof yarn requirements. The machines are geared to high production, areautomated and are of a precision for constant quality provision. Thereare strict process controls and built – in quality control. Poor rawmaterial, especially when contaminated with metal particles, damagesopening mills, grid knives, fans and card clothing. Previous devicesemployed to remove these (magnets) are becoming less effective. Theconsequences are damage in the blow room and carding and danger of fire. Quality is therefore defined as properties of the end use (clothingetc.), efficiency of weaving and knitting and the efficient running of the

spinning plant. Spinners require raw cotton which is free of trash; dust,sugar and honey dew contamination, seed coats, bark and foreignfibres and, will not nep the cloth. Further requirements are a certainlength (could be short, medium or long), uniformity of length, strength,fineness, maturity and a certain elongation and colour.SuppliersIn order to meet these high quality demands, the growers have toensure that the production, picking and ginning is of a very highstandard.Cotton grading

The Liverpool Cotton exchange, for one, relied on the skills of itsexperts to manually classify raw fibre purchases for its clients. It stillholds the "standards" for length, colour and trash content. As well asthe demands of modem machinery, the lack of standardised measuringand cotton classification procedures has resulted in commercialconflict and legal disputes about the true nature of traded cotton. Now,computer based high volume instrument listing systems of raw cotton(HVI systems) are available. The system can handle large numbers of

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bales, reduce variation in classification and the need for highly trainedbate classifiers.For cotton exporters the system offers the following advantages:

• enhanced objectivity in classification

• improve communication if similar systems are used by sellers or

buyers• reduced conflict and need for arbitration• enhanced competitiveness against synthetic fibres• improved integration with modern spinning machines

• reduced costs on training of experts and in measuring time. The system can process 2000 bales per day and give a printout on theseven parameters of grading. These include length and lengthuniformity, strength and elongation, micronaire or fineness, leaf andcolour. Manufacturers include SPINLAR INC. of Knoxville, USA.Service

In agricultural machinery, processing equipment and other items whichare of substantial value and technology, service is a prerequisite. Inselling to many developing countries, manufacturers have found theirnegotiations at stake due to the poor back-up service. Often, this is nofault of the agent, distributor or dealer in the foreign country, but dueto exchange regulations, which make obtaining spare parts difficult.Many organisations attempt to get around this by insisting that a ThirdWorld buyer purchases a percentage of parts on order with the originalitems. Allied to this problem is the poor quality of service due toinsufficient training. Good original equipment manufacturers will insiston training and updating as part of the agency agreement. In order toillustrate the above points, cotton can be used as an example. Cottonis a major foreign exchange earner for Zimbabwe. In 1990/91, 52,000tons were sold overseas at a value of Zim $ 238 million. As thespinners, particularly those in the export market are in a highlycompetitive industry, it is essential that the raw material is as clean aspossible. Also today’s spinning equipment is highly technical and thespinner wishes to avoid costly breakdowns by all means.Product strategies There are five major product strategies in international marketing.Product communications extension

This strategy is very low cost and merely takes the same product andcommunication strategy into other markets. However it can be risky if misjudgements are made. For example, CPC International believed theUS consumer would take to dry soups, which dominate the Europeanmarket. It did not work.Extended product – communications adaptation

If the product basically fits the different needs or segments of a marketit may need an adjustment in marketing communications only. Again

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this is a low cost strategy, but different product functions have to beidentified and a suitable communications mix developed.Product adaptation – communications extension The product is adapted to fit usage conditions but the communicationstays the same. The assumption is that the product will serve the same

function in foreign markets under different usage conditions.Product adaptation – communications adaptationBoth product and communication strategies need attention to fit thepeculiar need of the market.Product invention

This needs a totally new idea to fit the exclusive conditions of themarket. This is very much a strategy which could be ideal in a ThirdWorld situation. The development costs may be high, but theadvantages are also very high. The choice of strategy will depend on the most appropriateproduct/market analysis and is a function of the product itself definedin terms of the function or need it serves, the market defined in termsof the conditions under which the product is used, the preferences of the potential customers and the ability to buy the product in question,and the costs of adaptation and manufacture to the companyconsidering these product – communications approaches.

b. What are the features of exchange and currency markets? (4marks)

Answer

The exchange rate regimes adopted by countries in today’sinternational monetary and financial system, and the system itself, areprofoundly different from those envisaged at the 1944 meeting atBretton Woods establishing the IMF and the World Bank. In the BrettonWoods system:

• exchange rates were fixed but adjustable. This system aimedboth to avoid the undue volatility thought to characterize floatingexchange rates and to prevent competitive depreciations, whilepermitting enough flexibility to adjust to fundamentaldisequilibrium under international supervision;

• private capital flows were expected to play only a limited role infinancing payments imbalances, and widespread use of controlswould prevent instability in such flows;

• temporary official financing of payments imbalances, mainlythrough the IMF, would smooth the adjustment process andavoid unduly sharp correction of current account imbalances,with their repercussions on trade flows, output, and employment.

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developing and transition economies, in an environment of increasingcapital market integration, may also continue to maintain market-determined floating rates, although more countries could may adoptharder pegs over the longer term. Thus, prospects are that:

• exchange rates among the euro, the yen, and the dollar are

likely to continue to exhibit volatility, and schemes to reducevolatility are neither likely to be adopted, nor to be desirable asthey prevent monetary policy from being devoted consistently todomestic stabilization objectives;

• several of the transition countries of central and eastern Europe,especially those preparing for membership in the EuropeanUnion, are likely to seek to establish over time the policydisciplines and institutional structures required to make possiblethe eventual adoption of the euro.

The approach taken by the IMF continues to be to advise member

countries on the implications of adopting different exchange rateregimes, to consider the choice of regime to be a matter for eachcountry to decide and to provide policy advice that is consistent withthe maintenance of the chosen regime (Box 3).

Q. 6 Discuss the various International product and pricing

decisions. (10 marks)

Answer

Production decisions

In decisions on producing or providing products and services in theinternational market it is essential that the production of the product orservice is well planned and coordinated, both within and with otherfunctional area of the firm, particularly marketing. For example, inhorticulture, it is essential that any supplier or any of his "out grower"(sub-contractor) can supply what he says he can. This is especially vitalwhen contracts for supply are finalized, as failure to supply could incurlarge penalties. The main elements to consider are the productionprocess itself, specifications, culture, the physical product, packaging,labelling, branding, warranty and service.

International Pricing In New Open-Economy ModelsRecent developments in open-economy macroeconomics haveprogressed under the paradigm of nominal price rigidities, wheremonetary disturbances are the main source of fluctuations. Followingdevelopments in closed-economy models, new open-economy modelshave combined price rigidities and market imperfections in a fullymicro founded inter-temporal general equilibrium setup. This

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framework has been used extensively to study the properties of theinternational transmission of shocks, as well as the welfare implicationsof alternative monetary and exchange rate policies.Imperfect competition is a key feature of the new open-economyframework. Because agents have some degree of monopoly power

instead of being price takers, this framework allows the explicitanalysis of pricing decisions. The two polar cases for pricing decisionsare producer- currency pricing and local-currency pricing. The firstcase is the traditional approach, which assumes that prices are presetin the currency of the seller. In this case, prices of imported goodschange proportionally with unexpected changes in the nominalexchange rate, and the law of one price always holds.’ In contrast,under the assumption of local-currency pricing, prices are preset in thebuyer’s currency. Here, unexpected movements in the nominalexchange rate do not affect the price of imported goods and lead to

short-run deviations from the law of one price.Empirical evidence using disaggregated data suggests thatinternational markets for tradable goods remain highly segmented andthat deviations in the law of one price are large, persistent, and highlycorrelated with movements in the nominal exchange rate, even forhighly tradable goods. Moreover, there is strong evidence that thelarge and persistent movements that characterize the behaviour of real exchange rates at the aggregate level are largely accounted for bydeviations in the law of one price for tradable goods.In this article I make use of a simplified version of a two-country modelwhere the two markets are segmented, allowing firms to price

discriminate across countries, and where prices are preset in theconsumer’s currency. This model generates movements in the realexchange rate in response to unexpected monetary shocks, which area result of the failure of the law of one price for tradable goods. I thencompare this model to a version in which prices are preset in theproducer’s currency and examine the implications of these twoalternative price-setting regimes for several key issues. The price-setting regime determines the currency of denomination of imported goods and the extent to which changes in exchange ratesaffect the relative price of imported to domestic goods and the

international allocation of goods in the short run. That is, differentpricing regimes imply different roles for the exchange rate in theinternational transmission of monetary disturbances.As we shall see, this assumption has very striking implications forseveral important questions, namely real exchange rate variability, thelinkage between macroeconomic volatility and international trade, andthe welfare effects of alternative exchange rate regimes, among

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others. While generating deviations from the law of one price that areabsent from models assuming producer-currency pricing, theassumption of local-currency pricing still leaves important features of the data unexplained. The key role of this assumption in the propertiesof open- economy models suggests that it is necessary to keep

exploring the implications of alternative pricing structures in open-economy models.1 Some Evidence on Real Exchange RatesI first review some empirical evidence on the behaviour of realexchange rates using aggregate data. I then turn to a review of theevidence on the sources of movements in real exchange rates. Thereal exchange rate between two countries represents the relative costof a common reference basket of goods. For two countries, say theUnited States and Japan, the real exchange rate is given by whereP^sub US^ and P^sub JP^ represent the American and Japanese price

levels (measured in terms of dollars and yen, respectively) and wheree denotes the nominal exchange rate (defined as the dollar price of one yen). The theory of purchasing power parity (PPP) predicts that realexchange rates should equal one, or at least show a strong tendencyto quickly return to one when they differ from this value. Thefundamental building block of PPP is the law of one price: due toarbitrage in goods markets, and absent barriers to trade, similarproducts should sell in different countries for the same price (whenconverted in the same currency). Large international price differentialswould be only temporary, as profit-maximizing traders would quickly

drive international goods prices back in line. Therefore, if arbitrage ingoods markets ensures that the law of one price holds for a sufficientlybroad range of individual goods, then aggregate price levels (whenexpressed in a common currency) should be highly correlated acrosscountries.Because aggregate prices are reported as indices rather than levels,most empirical work has tested the weaker hypothesis of relative PPP,which requires only that the real exchange rate be stable over time.Figure 1 show the log changes in the CPI-based dollar-yen real andnominal exchange rates and the relative price level. In thisfigure,

which is typical for countries with floating exchange rates andmoderate inflation, it clearly stands out that short-run deviations fromPPP are large and volatile.(Delete) In the short run, movements in thereal exchange rate mimic those in the nominal exchange rate, with nooffsetting movements in the relative price level. Not surprisingly, earlyempirical work based on simple tests of short-run PPP produced strongrejections of this hypothesis for moderate inflation countries. However;

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these studies did not allow for any dynamics of adjustment to PPP andtherefore did not address the validity of PPP as a medium- or long-runproposition. The conventional explanation for the failure of short-run PPP is thepresence of nominal price rigidities. If the short-term volatility of

nominal exchange rates were due mostly to monetary and financialdisturbances, then nominal price stickiness would translate thesedisturbances into short-run fluctuations in the real exchange rate. If this were true, however, we should observe a substantial convergenceto PPP in one to two years, as the adjustment of prices and wagestakes place. Purchasing power parity, therefore, would be re-established in the medium to long run.An extensive body of empirical literature has tested the hypothesis of long run PPP by looking at the mean-reverting properties of realexchange rates. As is well known, it has proved rather difficult to find

evidence supporting convergence of real exchange rates to PPP evenin the long run.Earlier empirical studies, which used only post-Bretton Woods data,found it difficult to reject the hypothesis that bilateral real exchangerates for industrialized countries follow a random walk under floatingexchange rates. But if PPP deviations are very persistent, then it maybe difficult to distinguish empirically between a random walk modeland a slow mean-reversion model for the real exchange rate,especially when this variable is highly volatile. As shown in Frankel(1986), the post-Bretton Woods period may simply be too short toreliably reject the random walk hypothesis. To overcome this problem

of low power in tests of the random walk hypothesis, Frankel used anextended data set (annual data for the dollar-pound exchange ratesfrom 1869 to 1984) and rejected the random walk model in favour of amean-reverting model for the real exchange rate. His point estimatefor the rate of decay of real exchange rate deviations was 14 percentper year, which implies a half-life of PPP deviations of 4.6 years. Otherstudies that test convergence to PPP using long-horizon data sets tendto find values for the half-life of PPP deviations between three to fiveyears.An alternative way to increase the power of unit root tests is to expand

the number of countries in the sample and to perform panel tests of convergence to PPP. Frankel and Rose (1996), for example, use a panelset of annual data from 1948 to 1992 for 150 countries. They estimatehalf- lives for PPP deviations of about four years. Other studies usingpanel data sets report similar estimates. Interestingly, these estimatesare also similar to those obtained using long-time series data sets.

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tradable goods are highly segmented internationally and thatmovements in the international relative price of consumer tradable arevery persistent. Moreover, given the high volatility of nominalexchange rates, these findings indicate that consumer prices of mostgoods (either imported or domestically produced) seem to be sticky in

domestic currency terms.An alternative approach to studying the relationship betweenexchange rates and goods prices is examining how firms in an industry(or country) pass through changes in exchange rates to export prices.Knetter (1989, 1993) measures the degree of price discriminationacross export destinations that is associated with exchange ratechanges for U.S., U.K., German, and Japanese industry-level data. Hefinds that the amount of exchange rate pass-through differsconsiderably depending on the country and industry. Goldberg andKnetter (1997) provide an extensive survey of the literature and find

that local currency prices of foreign products do not respond fully toexchange rate changes. While the response varies by industry, onaverage exchange rate pass- through to U.S. import prices is onlyabout 50 percent after one year, mainly reflecting changes indestination-specific markups on exports.In brief, there is strong evidence that international markets fortradable goods remain highly segmented and that deviations from PPPare largely accounted for by movements in the relative price of tradable goods across countries. At the consumer level, exchange ratepass-through to import prices is virtually zero (suggesting thatconsumer prices are sticky in domestic currency). At the producer

level, however, exchange rate pass-through is generally positive, butsubstantially below one.Transaction Costs and the Adjustment of PPP and Law of OnePrice DeviationsSome recent empirical tests of long-run PPP and the law of one pricehave abandoned the conventional framework, which assumes a linearautoregressive process for the price differential. Instead, these studieshave started to look into nonlinear models of price adjustment, wherethe speed at which price differentials die out depends on the size of the deviation itself.

This alternative framework for the empirical analysis of pricedifferentials is motivated by the observation that commodity trade isnot costless. Persistent deviations from the law of one price are impliedas an equilibrium feature of models with transaction costs, fordeviations will be left uncorrected as long as they are sufficiently smallrelative to the shipping cost. The simplest econometric model that implements the notion of anonlinear adjustment for price differentials assumes that the process is

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well described by a random walk for small deviations (that is, whendeviations are within a "band of inaction") and an autoregressiveprocess for large deviations (that is, when deviations are outside theband). Taylor (2001) shows that the improper use of linear modelswhen the true model is nonlinear may produce a large bias towards

finding a low speed of convergence. Intuitively, a linear model will failto support convergence to PPP if the true model is nonlinear and theprocess spends most of the time in the random-walk band. Using bothmonthly data from the 1920s and annual data spanning two centuries,Michael, Nobay, and Peel (1997) reject the linear adjustment model infavour of a nonlinear model and provide strong evidence of mean-reverting behaviour for PPP deviations for every exchange rateconsidered.2 International Pricing in New Open-Economy MacroeconomicModels

The common starting point for most of the recent research in open-economy models with price rigidities is the model developed inObstfeld and Rogoff (1995). This model explores the internationalmonetary transmission mechanism in a general equilibrium setupcharacterized by nominal price rigidities, imperfect competition, andincomplete asset markets.Obstfeld and Rogoff’s model does not generate deviations from theCPI– based purchasing power parity. This feature reflects the fact thatpreferences are identical across countries and that all goods are freelytradable, with prices set in the seller’s currency. In this model, there iscomplete pass-through of exchange rate changes to import prices,

implying that the law of one price always holds for all goods and thatthe real exchange rate is constant.Motivated by the empirical evidence on the sources of real exchangerate fluctuations, several recent papers have extended Obstfeld andRogoff’s framework in order to allow for pricing-to- market anddeviations from the law of one price. This class of models assumes thathome and foreign markets are segmented, which allows imperfectlycompetitive firms to price discriminate between home and foreignconsumers. Consumers’ inability to arbitrage price differentialsbetween countries is exogenous, possibly reflecting arbitrarily high

transportation costs at the consumer level. In addition to marketsegmentation, this class of models also assumes that prices are stickyin each country’s local currency. That is, firms set prices in advance inthe buyer’s currency, as opposed to the standard assumption thatprices are set in the seller’s currency.

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