mb0053-winter drive-assignment-2011 - international business management - set 2

Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 2

Winter Drive – November 2011 Sikkim Manipal University

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Q1. Explain the importance of taxation. Ans. For the worldwide operation of firms, taxation plays a vital role. Taxation has become the core of various financing decisions which includes international investment decisions, international working capital decisions, fund raising decisions and the decisions related to dividend and other payments. The tax decision is also relevant in domestic firms also. The managing of taxation is an extremely difficult issue for the international corporations. The various reasons are given as follows:

The firms are supposed to work in several tax jurisdiction or authorities where the tax rates are diverse and also the administration of the tax system is not uniform.

The ultimate load of tax in the framework of international firms is determined by means of a more complex interaction of varying descriptions of the tax base.

The difference in tax treatment in different nations will direct to distortions in worldwide trade and investment. The companies which are situated in the low-tax country can have a periphery over other firms in worldwide market. There are possibilities to divert the investment to those countries that have low cost rates.

The overlapping takes place between the international firms with different tax jurisdictions, utilise the arbitrage opportunities and retain an edge over the domestic firms. The bases of international tax system are: Tax neutrality - The neutrality of international tax system is important because it must not affect the economic efficiency. If the tax is neutral then it will not influence the locality of the investment or nationality of the investor. The capital can shift from a nation with lesser return to a nation with higher return. Therefore, resources will be allocated well, and the gross world output in turn will be high. Tax equity - The principle of tax equity states that all equally positioned tax players contribute in the cost of operating the government according to the equal rules. The idea of equity can be understood in two ways. The first one states that the input of each tax player must be consistent with the amount of public services as received. The second idea is that the contribution of each tax player must be in terms of their ability to pay. The ability to pay means the one with greater ability is likely to pay a larger amount of tax. Avoidance of double taxation - The avoidance of double income states that one must not be taxed twice for the same income. However, if the post-tax income is sent to the foreign countries then in that case the receiver of such income is taxed again. This implies the same income is subjected to double taxation. As an alternative, the requirements of foreign tax credits may be formed in the domestic tax system. There also exist some tax laws which prevent the tax through artificial transactions such as transfer pricing. In addition, the corporate structures will help to reduce the overall tax burden to the enterprise. ==============================X===============================X======================



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Q2. Differentiate between foreign marketing and domestic marketing. Ans. Domestic marketing refers to the practice of marketing within a firms home country. Whereas International or foreign marketing is the practice of marketing in a foreign country; the marketing is for the domestic operations of the firm in that country. Domestic marketing finds the "how" and "why" a product succeeds or fails within the firms home country and how the marketing activity affects the outcome. Whereas, foreign marketing deals with these questions and tries to find answers according to the foreign market conditions and it provides a micro view of the market at the firms level. In domestic marketing a firm has insight of the marketing practices, culture, customer preferences, climate and so on of its home country, while it is not totally aware of the policies and the market conditions of the foreign country. The stages that have led to achieve global marketing are: Domestic marketing - Firms manufacture and sell products within the country. Hence, there is no

international phenomenon.

Export marketing - Firms start exporting products to other countries. This is a very basic stage of global marketing. Here, the products are developed based on the companys domestic market although the goods are exported to foreign countries.

International marketing - Now, Firms start to sell products to various countries and the approach is polycentric, that is, making different products for different countries.

Multinational marketing - In this stage, the number of countries in which the firm is doing business gets bigger than that in the earlier stage. And hence, the company identifies the regions to which the company can deliver same product instead of producing different goods for different countries. For example, a firm may decide to sell same products in India, Sri lanka and Pakistan, assuming that the people living in this region have similar choice and at the same time offering different product for American countries. This approach is termed regiocentric approach.

Global marketing - Company operating in various countries opts for a common single product in order to achieve cost efficiencies. This is achieved by analysing the requirements and the choice of the customers in those countries. This approach is called Geocentric approach. The practice of marketing at the international stage does not designate any country as domestic or foreign. The firm is not considered as the corporate citizen of the world as it has a home base. The firm must not have a 'single marketing plan', because there are differences between the target markets (that is domestic or international markets). There should never be a rigid marketing campaign. A firm that is successful internationally first obtains success locally.



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Few approaches that you can consider for an international marketing are: o Advertise as a foreign product - By doing so, the product will be considered as genuine and original in

some countries.

o Joint partnership with a local firm - finding a firm that has already established credibility will benefit a lot. The product will be considered as a local product by following this marketing approach.

o Licensing - You can sell the rights of your product to a foreign firm. Here the problem is that the firm

may not maintain the quality standard and therefore may hurt the image of the brand. Culture is a major factor which influences marketing decisions and practices in a foreign country. For example, in the middle-eastern countries the prior approval of the governing authorities should be taken if a firm plans to advertise a product related to womens apparel, as showcasing some aspects of women clothing is considered immodest and immoral. ==============================X===============================X======================



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Q3. What is transfer pricing? Ans. Transfer pricing is the process of setting a price that will be charged by a subsidiary (unit) of a multi-unit firm to another unit for goods and services, which are sold between such related units. Transfer pricing is a critical issue for a firm operating internationally. Transfer pricing is determined in three ways: market based pricing, transfer at cost and cost-plus pricing. The Arms Length pricing rule is used to establish the price to be charged to the subsidiary. Transfer pricing can also be defined as the rates or prices that are utilised when selling goods or services between a parent company and a subsidiary or company divisions and departments that may be across many countries. The price that is set for the exchange in the process of transfer pricing may be a rate that is reduced due to internal depreciation or the original purchase price of the goods in question. When properly used, transfer pricing helps to efficiently manage the ratio of profit and loss within the company. Transfer pricing is a relatively simple method of moving goods and services among the overall corporate family. Many managers consider transfer pricing as non-market based. The reason for transfer pricing may be internal or external. Internal transfer pricing include motivating managers and monitoring performance. External factors include taxes, tariffs, and other charges. Transfer Pricing Manipulation (TPM) is used to overcome these reasons. Governments usually discourage TPM since it is against transfer pricing, where transfer pricing is the act of pricing commodities or services. However, in common terminology, transfer pricing generally refers TPM. TPM assists in saving the organisations tax by shifting accounting profits from high tax to low tax jurisdictions. It also enables to fix transfer price on a non-market basis and thus enables to save tax. This method facilitates in moving the tax revenues of one country to another. A similar trend can be observed in domestic markets where different states try to attract investment by reducing the Sales tax rates, and this leads in an outflow from one state to another. Therefore, the Government is trying to implement a taxing system in order to curb tax evasion. ==============================X===============================X======================



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Q4. Explain briefly about accounting for international business Ans. An organisation's first contact to international accounting occurs as an outcome of an import or export opportunity. In exports, a domestic organisation may receive an unwanted inquiry, or obtain order from a foreign buyer. If this foreign buyer needs an addition of credit, then the buyer is examined once before exporting. This process is not as easy as it appears. The buyer is not always a scheduled buyer in the international credit rating directories. Either the seller will have to ask its bank to have foreign affiliations to check the buyer's credibility or the seller can ask the buyer to supply financial information. The buyer might be ready to supply financial statements, but these statements might be complicated for domestic organisations to understand. The statements might be in a foreign language, and based on accounting assumptions and measures that are strange to the organisation's accountants. Most of the organisations that are new to international business must get assistance either from a bank or from an accounting organisation with international proficiency. If the foreign buyers pay in their own currency, the selling organisation becomes familiar with the possible gains and losses from changes in the exchange rate that occurs between the moment the order is booked and the moment the payment is received. The selling company also has to deal with many international details, such as special international shipping and insurance documents, customers declaration forms, international legal documents, and so on. Here, again the services of lawyers, shippers, bankers, and accountants with international knowledge are essential. In case of a probable import, the foreign seller has all the responsibilities, therefore the international accounting aspects are not disturbed. Yet, if the foreign seller requires payments in his or her currency, or if the domestic buyer wishes to gain information about the dependability of the foreign supplier, the buyer might consult an international bank, lawyer, or accounting firm. Classification of accounting systems: All accounting systems are planned to supply information to people who take decisions. So, it is essential to classify accounting systems. The classification of accounting systems in financial and cost systems leads to this difference between the people, who take decisions. Investors, creditors, government agencies, tax authorities and others are people who involve in the accounting systems, but are outside the organisation. Whereas, managers are within the organisation and they also take part in the accounting decisions. Financial accounting Information in financial accounting is planned for decision makers and not for people who manage the organisation daily. These users are normally outside the organisation. The information for public organisations is public, and normally available on the websites of the organisations. Managers in the organisation are sincerely concerned about reports that produce the financial accounting, but the information would not be sufficient for making operational decisions of the organisation. Individuals, who take decisions by using information from the financial accounts, are normally interested in comparing their own organisation with other firms. For example, deciding whether to invest in the organisations like Apple Computer or Microsoft. An important characteristic of financial accounting information is that, it is comparable between organisations. This means that, when an investor looks at revenues from Apple Computers, these revenues signify the same thing for Microsoft. Due to this, financial accounting systems are characterised by a series of regulations that describe how transactions should be treated.



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Cost accounting Cost accounting information is planned for managers. As managers take decisions only about their own organisation, there is no need for the information to be compared with similar information from other organisations. Instead, the significant principle is that the information must be appropriately decided. Cost accounting information is generally used in financial accounting information, but first we should concentrate on its benefit to managers in making decisions. The accountants handle the cost accounting information, and add value by providing excellent information to managers who take decisions. The cost accounting system results from the decisions made by managers about an organisation. Some aspects of cost accounting in regard to its clients, with GAAP and ethics are given below: Cost accounting and GAAP - The key principle of financial accounting is to supply information about the organisation and the performance of the management to the investors or creditors. The financial information organised for this purpose is governed by the Generally Accepted Accounting Principles (GAAP), which supply consistency in the accountancy data used for the purpose of reporting from one organisation to another. The information of cost accounting used to estimate the expenditure of goods sold, inventory assessment, accounting and other financial information used for external reports should be arranged in accordance with GAAP. Clients of cost accounting - The administration must consider customer as important out of all the participants in a business. Without customers, the organisation loses its capability and reason to exist. The cost information itself is a product with its individual customers. The major problem with accounting system occurs, when managers utilise accounting information that was designed for external reporting, in decision-making. Cost accounting and ethics - The design of costing systems is finally about the payment of costs to various activities, products, projects and corporate units, and people. The method in which this is done, affects prices, reimbursement and payment. Based on the events, the cost accounting systems plan the potential to misuse and fraud the customers, employees or shareholders. As user or preparer of the cost information, you should be aware of what it implies, and how the information is utilised. The most important point is that, you should be aware of when the system has the potential to be ill-treated. Harmonising of accounting systems Though there are many differences in accounting standards and practices, a number of forces are leading to harmonisation. Some of these forces are: A movement to present information well-matched with the requirements of investors. The global mixing of capital markets, which means that investors have easier and quicker access to investment opportunities around the world, and thus require financial information that is more equivalent to other accounting standards. The need of MNCs to increase the capital outside their home-country capital markets, while generating few diverse financial statements. Regional, political and economic harmonisation, such as, the hard work of the European Union (EU), which affects accounting, trade and investment issues. Pressure from MNCs for consistent standards, which allows for reduced costs in each country, and in reporting that is used by investors in the organisations home-country. Differences in accounting systems are confusing and expensive to international business. Superiority in these systems makes it complex for organisations to examine their foreign operations and for investors to understand the relative performance of organisations that are based in different countries. To help in solving such problems, many accounting professionals and national regulatory bodies are trying to harmonise diverse national accounting practices. It is also important to understand the arguments in favour of harmonisation.



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Arguments supporting harmonisation Harmonisation of accounting and exterior financial reporting assists in the optimal global delivery of private-sector finance. Harmonisation is concerned with reducing the diversity that exists between accounting practices, in order to improve the comparability of financial reports prepared by companies from different countries. Investors should be able to realise a more proficient portfolio of organisations on national, as well as, international scale. This will benefit the investor. When global capital markets operate properly, then the financial information disclosed to the market-place must be global.

The standard of accounting disclosure needs and auditing vary from country to country, and makes cross-border investigation very difficult. These differences present a barrier to investors as they feel uncomfortable about the information presented to them, which is very different from what exists in their home-country. Harmonisation of accounting and auditing practices help to reduce the size of the barrier. Investors must deal with diverse accounting practices and disclosures, and have trust in the figures presented by accepting the standard of auditing. Harmonisation programme helps in this task. ==============================X===============================X======================

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Q5. Describe the role of WTO. Ans. WTO was established on 1st January 1995. In April 1994, the Final Act was signed at a meeting in Marrakesh, Morocco. The Marrakesh Declaration of 15th April 1994 was formed to strengthen the world economy that would lead to better investment, trade, income growth and employment throughout the world. The WTO is the successor to the General Agreement of Tariffs and Trade (GATT). India is one of the founder members of WTO. WTO represents the latest attempts to create an organisational focal point for liberal trade management and to consolidate a global organisational structure to govern world affairs. WTO has attempted to create various organisational attentions for regulation of international trade. WTO created a qualitative change in international trade. It is the only international body that deals with the rules of trades between nations. Objectives and functions The key objective of WTO is to promote and ensure international trade in developing countries. The other major functions include:

Helping trade flows by encouraging nations to adopt discriminatory trade policies. Promoting employment, expanding productions and trade and raising standard of living and

income and utilising the worlds resources. Ensuring that developing countries secure a better share of growth in world trade. Providing forum for trade negotiations. Resolving trade disputes.

The important functions of the WTO as stated in the WTO agreement are the following: Developing transitional economies Majority of the WTO members belong to developing countries. The developing countries such as India, China, Mexico, Brazil and others have an important role in the organisation. The WTO helps in solving the problems of developing economies. The developing states are provided with trade and tariff data. This depends on the countrys individual export interest and their participation in WTO-bodies. The new members benefit hugely from these services. Providing help for export promotion The WTO provides specialised help for export promotion to its members. The export promotion is done through the International Trade Center established by the GATT in 1964. It is operated by the WTO and the United Nations. The center accepts requests from member countries, usually developing countries for support in formulating and implementing export promotion programmes. The center provides information on export market and marketing techniques. The center also provides assistance in establishing export promotion and marketing services. Through this WTO proves its commitment in the upliftment of the world economy. Cooperating in global economic policy-making The main function of the WTO is to cooperate in global economic policy-making. In the Marrakesh Ministerial Meeting in April 1994, a separate declaration was adopted to achieve this objective. The declaration specifies the responsibility of WTO as, to improve and maintain the cooperation with international organisations such as the World Bank, International Monetary Fund (IMF) that are involved in monetary and financial matters. WTO analyses the impact of liberalisation on the growth and development of national economies which is the important factor in the success of the economy. Monitoring implementation of the agreement The WTO administers sixty different agreements that have the statue of international legal documents. The member-governments sign and confirm all WTO agreements on attainment.



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Providing forum for negotiations The WTO provides a permanent forum for negotiations among members. The negotiations can be on matters already in the WTO agreements or matters not addressed in the WTO law. Administrating dispute settlement The important function of WTO is the administration of the WTO dispute settlement system. It helps in settling multilateral trading dispute. A dispute arises when a member country adopts a trade policy and other fellow members consider it as a violation of WTO agreements. The Dispute Settlement Body (DSB) is responsible for the settlement of disputes. The dispute settlement system is prohibited from adding or deleting the rights and obligations provided in the WTO agreements. The WTO dispute settlement system helps to: Preserve the rights and responsibilities of the members. Clarify the current provisions of the agreements. Structure The structure of the WTO consists of the Ministerial Conference, which is the highest authority. This body consists of the representatives from all WTO members. The WTO members meet in every two years and take decisions on all matters under the multilateral trade agreements. The daily activities of the WTO are conducted by subsidiary bodies and principally by the General Council which is composed of WTO members. The members report to the Ministerial Conference. The General Council on behalf of the Ministerial Conference administers as the Dispute Settlement Body to manage the dispute settlement procedures. It also acts as the Trade Policy Review Body that conducts regular reviews of the trade policies of the individual WTO members. The General Council delegates responsibility to other major bodies. They are: Council for Trade in Goods manages the implementation and functioning of all agreements covering trade in goods. Trade in Services and Trade of Intellectual Property Rights are the two councils that have responsibility for their respective WTO agreements and can establish their own subsidiary bodies if required. The Committee on Trade and Development manages issues relating to the developing countries. The Committee on Balance of Payments conducts consultations between WTO members and countries that take trade-restrictive measures to handle balance-of-payments difficulties. Committee on Budget and Administration manages issues relating to financing and budget of WTO. Principles The WTO principles of the trading system are: Trading without discrimination One aspect of nondiscrimination is that foreigners and people within the home country must be treated equally. This implies that imported goods that are in the market must not face discrimination. There is also a Most Favoured Nation (MFN) principle which requires the nations to treat all WTO members equally. In case one nation grants a special trade deal to another nation, the deal must be extended to all WTO members. Trade barriers negotiated downwards To lower trade barriers such as import tariffs, red tape and encourage trade growth. Predictable trading The predictability in business helps to know the real costs. The WTO operates with tariff bindings and agreements that restricts raising a specific tariff over a given time. This provides the business people with realistic data. Making trade rules clear and accessible helps the business people to anticipate stable future. Competitive trading The WTO works towards trade liberalisation and understands that trade relationships between nations can be very complex. The WTO agreements support healthy competition in



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services and intellectual property and discourage subsidies and dumping of products at prices below the cost of their manufacturer. Encourage development and economic reforms The majority of the WTO members are developing economies that are changing to market economies. The developed nations must give market access to goods from the under developed countries and provide technical assistance. Developed countries are allowing duty-free and quota-free imports for all the products from the under developed countries. ==============================X===============================X======================



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Q6. Explain the challenges faced by Indian business in the wake of globalisation. Ans. India is a developing country and every developing country has its own organisational problems. In the past decade, some Indian companies have made remarkable progress by reaching the international platform in short time. India has transformed from being primarily domestic players into confident global corporations. The TATA Jaguar deal was one prominent example of an Indian global power house to acquire an internationally reputed automotive company Brand India Brand India is a phrase that describes the campaign which projects India as an emerging destination for business in various fields such as information technology, manufacturing, infrastructure, service sector and so on. Country names can amount to brand names and assist consumers in evaluating the products before purchasing them. Brand India is receiving a positive response. However, Brand India is weak in many ways. In developed countries, people are yet to associate India with world-class standards. The initial market entry strategy of a company from a developing country is to offer cheaper products of acceptable quality, example, China and Korea. The customers of developed countries buy those products only on the basis of price. Brand India is comprised of a large number of sub-brands that are relatively established. It reflects the economic reforms and liberalisation process that Indian economy has undergone. The famous brands from India are Indian information technology (IT) companies such as Infosys, Wipro and Tata. The positive image of these companies help in changing consumer perceptions and also help in re-branding India as a leading manufacturing and service hub by improving Indias brand equity. Brand equity is the worth derived from the goodwill and name recognition acquired over a period of time. It improves sales volume and profit margins. The India Brand Equity Foundation (IBEF) was established to promote brand India. Government and bureaucracy The political environment of a country influences the business to a large extent. The political environment includes political stability in the country, nature and extent of bureaucracy, ideology of government, party in power and so on. Another challenge that influences business is bureaucracy. Industrial incentives are administered by an elaborate and expensive bureaucracy. The relationship of government to international business is based on the concept of sovereignty. The concept identifies that the nation has complete control over the international affairs. The infrastructure such as airport, road or port upgradation takes years for completion or are stalled for many years. This affects the business in India negatively. Government policy and procedures in India are very complex and confusing. Government policy and bureaucratic culture in India do not encourage international business. Unnecessary government interference can hinder globalisation. Government support is essential to encourage globalisation. Government support is extended in the form of policy reforms, development of infrastructure, financial market, R&D support and so on. Changes in government and political instability disrupt business. Good business thrives on predictability which is lacking in India. Corporate governance Corporate governance is a process of promoting corporate transparency and accountability. It is set of policies that affect the way a company is administered and controlled. Quality corporate governance is a tool for socio-economic development. Corporate governance deals with power and accountability for the safety of assets and resources entrusted to the operating team of the firm.



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The objective of the corporate governance is to attain highest standards of procedures and practices that are followed by the corporate world. The new emerging corporate India needs guiding principles for corporate governance. The common aspects for the failure of corporate governance are misuse of power, frauds, misappropriation of funds and so on. Good corporate governance promotes accountability in relation to public satisfaction and responsive delivery of service. In India, corporate governance initiatives are undertaken by Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). Ethics Corporate governance is about ethical conduct of the business. Ethics is related to the code of values and principles that helps a person to choose between right or wrong. Managers make decisions based on a set of values and principles that are influenced by the culture of the organisation. Ethical leadership is important for the business to be conducted by meeting the expectations of all the stakeholders. Corporate governance is the ethical framework under which corporate decisions are taken. Ethics is a generalised value system avoiding discrimination in recruitment and adopting fair business practices. Business ethics provide a general guidelines within which a management can operate. An organisation has to be ethical because it has to exist in the competitive world. The varying ethical norms and social values make international business environment complex. The ethical norms vary from country to country. Labour practices Ethical concerns are at the core of dispute regarding the labour practices. The multinational enterprises are charged of unjust treatment of workers in developing nations. The labour law enforcement is weak. The laws that force firms to obtain permission from the government prior to retrenchment are not enforced properly. Hiring labors to contractor and subcontracting non-core activities to other companies provides flexibility to the firms that seek to manage their labour force in volatile context. Child labour is used in the manufacture of exports from the developing countries is criticised by people in the developed countries. For example, in India the carpet industry uses child labour and social activists in developed nations demand ban on the import goods embodying child labour. Consumers tend to boycott such goods and this in turn adversely affects the business. Managing diversity Most of the international businesses face problems in managing multicultural diversity. Previously, MNCs had a country specific business strategy but now it is moving towards a global one. Managing diversity is a process of establishing workforce to perform in an unbiased environment where no member has an advantage or disadvantage. For an international manager, managing diversity is a challenge. The challenge is to create a work environment where every person performs to his full potential and compete for rewards and promotions that based on merits. The success of an MNC is determined by its ability to manage diversity. In an international organisation, the workforce consists of variety of cultures. Today, a typical firm is a combination of diverse workforce in terms of gender, race and so on. Most companies encourage exchange programs where employees from one country come and interact with employees of other countries. There are some practical steps taken by managers to manage diversity. They are:

1) Focusing on bringing in best talent. 2) Establishing programmes among employees of same and different race. 3) Developing an age, gender and race profile of the workforce. 4) Promoting minorities and other sections to decision-making positions. 5) Providing extended leaves, flexible time, and job sharing opportunities.

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mb0053-winter drive-assignment-2011 - international business management - set 2

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