CHAPTER 1:-

INTERNATIONAL BUSINESS

Q 1.State with the reason the following statements are true or false:

a. International firms operate in environment that is highly uncertain.

   Ans: TRUE.    

       Reason: International firms operates in environment that are highly uncertain because the of the rules of international business are often ambiguous, contradictory, and subject to rapid change, as compared to the domestic environment. There must be a constant reiteration as one moves around the decision circle.

b. Domestic market is wider then international market.

  Ans : FALSE

           Reason: The International market is wider and has greater scope as compared to the domestic market. The size of the domestic market is limited either due to the smaller size of the population or due to the lower purchasing power of the people or both .However, the size of international market is big or wider then domestic market.

c. The Global economy is mostly shaped by the flow of capital across the countries.

Ans: TRUE.

    Reason: The Global economy is mostly shaped by the flow of capital across the countries rather than by the flow of goods and services. The trends in the international money market ad capital market s influence the monetary policies and fiscal policies of the sovereign governments.

d. International business is indirectly influenced by the economic environment of the various countries.

Ans: FALSE. 

       Reason: International Business houses establish their manufacturing centre’s on various countries and distribute the goods to the customers of the number of countries thus, International economic environment and global business interact with each either so its directly influenced by the economic environment  of various countries. 

e. India followed a strong inward-outward policy with the adoption of import substitution.

Ans: TRUE. 

       Reason: In four decades since the commencement of planned economic development in 1951, India followed a strong inward-oriented policy. With the adoption of the import substitution, industrialization strategy in the second five year plan, the inward orientation become powerful outright ban on the import of various products, quantitative restriction, tariffs which were highest in the world, administrative restrictions like import licensing, foreign exchange regulations were important instrument used as strategy   

Q 2. What is International Business?(MAY-06)

Ans: International business defined as “A specific entity, such as a multinational corporation or international business company that engages in business among multiple countries.”

It includes any type of business activity that crosses national borders. There are institutional arrangements that provide some managerial directions of economic activity taking place.

 An international business has many options for doing business, it includes,

1. Exporting goods and services.2. Giving license to produce goods in the host country.3. Starting a joint venture with a company.4. Opening a branch for producing & distributing goods in the host country.5. Providing managerial services to companies in the host country.

International business can affect development by complementing domestic investment and by undertaking trade and transfer of knowledge, skill and technology, changes in technology, demand and economic structure can make the exchange of services an increasingly important from the trade in the 21st century. 

Q 3. What is International Business? What is the Importance?(NOV-06,08)

Ans: Definition:

“International Business is defied as activities that buys and sells goods and services across two or more national boundaries, even if the management is located in a one country. It includes any type of business activity that crosses national boundaries”. 

IMPORTANCE OF INTERNATIONAL BUSINESS-

Every company is trying to expand its business by entering foreign markets. International business helps in the following ways- 1. Helps as growth strategy- Geographic expansion may be used as a business strategy. Even though companies may expand their business at home. 2. Helps in managing product life cycle- Every product has to pass through different stages of product life cycle-when the product reaches the last stages of life cycle in present market; It may get proper response at other markets. 3. Technology advantages- Some companies have outstanding technology advantages through which they enjoy core competency. This technology helps the company in capturing other markets. 4. New business opportunities- Business opportunities in overseas markets help in expansion of many companies. They might have reached a saturation point in domestic market. 5. Proper use of resources-Sometimes industrial resources like labor, minerals etc. Are available in a country but are not productively utilized. 6. Availability of quality products- When markets are open, better quality goods will be available everywhere. Foreign companies will market latest products at reasonable prices. Good product will be available in the markets. 7. Earning foreign exchange- International business helps in earning foreign exchange which may be used for strategic imports .India needs foreign exchange to import crude oil, deface equipment, raw material and machinery. 8. Helps in mutual growth- Countries depend upon each other for meeting their requirements. India depends on gulf countries for its crude oil supplies. 9. Investment in infrastructure- International business necessitates proper development of infrastructure. A company entering international business must invest in roads.

10.Industrial development- Restructuring the economy to integrate with global economy is common theme for industrial countries, developing countries. At the same time, basic development challenges remain for sustainable development.   

Q 4.Distinguish between international business and domestic business?(MAY-09)

Sr.No International Business Domestic Business1. It is extension of Domestic Business

and Marketing Principles remain same.

The Domestic Business Follow the marketing Principles

2. Difference is customs, cultural factors No such difference. In large countries languages like India, we have many languages.

3. Conduct and selling procedure changes

Selling Procedures remain unaltered

4. Working environment and management practices change to suit

No such changes are necessary

local conditions.5. Will have to face restrictions in trade

practices, licenses and government rules.

These have little or no impact on Domestic trade.

6. Long Distances and hence more transaction time.

Short Distances, quick business is possible.

7. Currency, interest rates, taxation, inflation and economy have impact on trade.

Currency, interest rates, taxation, inflation and economy have little or no impact on Domestic Trade.

8. MNC’s have perfected principles, procedures and practices at international level

No such experience or exposure.

9. MNCs take advantage of location economies wherever cheaper resources available.

No such advantage once plant is built it cannot be easily shifted.

10. Large companies enjoy benefits of experience curve

It is possible to get this benefit through collaborators.

11. High Volume cost advantage. Cost Advantage by automation, new methods etc.

12. Global Standardization No such advantage13. Global business seeks to create new

values and global brand image.No such advantage

14. Can Shift production bases to different countries whenever there are problems in taxes or markets

No such advantage and get competition from some spurious or SSI Unit who get patronage of Government.

 Q 5. what  is Global Business Environment? What factors affect the Global Business Environment?

                        The global business environment can be defined as the environment in different sovereign countries, with factors exogenous to the home environment of the organization, influencing decision making on resource use and capabilities. The global business environment can be classified into the external environment and the internal environment. The external environment includes the social, political, economic, regulatory, tax, cultural, legal, and technological environments.                          Business environment means the factors which affects the business. Global company has to formulate strategies based on its missions, objectives and goals. The study of business environment helps the management to formulate strategies and run the business effectively in the competitive global market. Business environment should enhance its strength in order to face the challenges posed by the environment. business environment provides the opportunities to the business to produce and sell particular product.

The factors which affect the international business are as follows

1. Social and Cultural Environment:-

                    Social environment consist of religious, aspects , language, customs, traditions, beliefs, tastes, and preference, social institutions , living habits, eating habits etc. it influence the level of consumption. Culture is the thought and behavior pattern that members of a society learn through language and other forms of symbolic interactions such as customs, habits , belief and values. Cultures changes gradually picking up new ideas and dropping old ones. It is derived mostly from the climatic condition of the geographical region and economic condition of the country. Culture is based on social interaction and creation. 

2. Technological Environment :-

                        Technological changes have enabled international business to take up the shape of transnational business through the concept of global business. International business has gained significance due to the amazing advancements in the technology. It has significance and direct influence on business in general and international business in particular. It flows from the advance countries to the developing world through the multinational , joint ventures, technology alliances, licensing and franchising . the technology changes at the faster rate. Advanced countries spend considerable amount on research and development for further advancement of technology. Technology is one of the significant factors which determines the level of economic development of a country. The difference between the nations is mostly reflected by the level of technology. Developing countries like India, allow MNCs entry into their countries in order to have benefits of latest technology and to develop the domestic industries.    Thus,    technology and    global business are interdependent. 

3. Economic Environment:-

                  International business is directly influenced by the economic environment of various countries. International economic environment and global business interact with each other . business help for identification of needs of the people , their wants, production of goods, supply of goods etc. it creates for the conversation of output an enables for consumption. Thus , it leads  to economic development . The international business contributes for the economic development of the countries.  

Major changes in the economic environment are as follows

o Establishment of production facilities in various countries.o Primary products are delinked from the industrial economics.o Capital flow rather than trade or product flow across the globe.

o Technological revolution delinked the relationship between the size of production and level of employment.

o The competition between capitalism and communism is over capitalism has succeeded over communism.

o The macroeconomic factors of individuals countries independently do not significantly control the global economic outcomes.

 

4. Political Environment:-

              The success and growth of international business depends upon the stable, dynamic, honest, people oriented government and political system in the country. The influence of the political system of the country influences the business from different angles such as deciding, promoting fostering, encouraging , sheltering , directing and controlling the business activities. The political environment includes the policies and characteristics of political parties , the nature of the constitution and government system. The communistic countries have been progressively shifting towards liberalization, privatization and globalization.

                The political philosophy of the developing countries shifted from self-sufficient to self – reliant. The political philosophy of most of the government seems to be broadly one of convergence. Appraisal of political system help in having an idea of political system and their impact on international business. Political risk cannot completely eliminated they can be minimized by contributing to the change of the attitudes of the people and government of the host countries like stimulation of the host country’s economy, employment of national, sharing ownership observation of political mood and reduction of exposure.  

Q 6. Explain the Important of the economic and political environment in the process of internationalization?

International business is directly influence by the economic environment of various countries.  International economic environment and global business interact with each other. Economic system is an organization of institutions established to satisfy human wants. There are three types of economic systems. I.e. capitalism, communism and mixed economy. Economic systems are based on resource allocation in the system. There are market allocations in use of capitalistic economy, and central allocations in case of communistic economies.

Different countries in the world are at different stages of development. These countries are segment based on GNP per capita. There countries are divided into four categories:

1. Low-income countries: These countries are having less than US$400 per capita GNP in the year 1992. These countries are also called as third world countries. The characteristics of these countries are: high birth rates, limited industrialization, low literacy rates, political instability, technological backwardness, the vicious circle of poverty. These countries are concentrated in Africa, and south of the Sahara. 

2. Lower-middle income countries: These countries are having GNP per capital of $ between 400 and2000 (1992). These are also known as less developed countries. The characteristics are early stage of industrialization, expansion of consumer markets, availability of cheap labour, and competitive advantage over labour intensive product. Domestic markets are dominated with the product like clothing, tyres, building materials and packaged foods.    

3. Upper middle income countries:-These countries are having GNP per capita of us$ ranging from 2000 to 12000. These are also known as industrialization countries.  The characteristics of these countries are less dependent on agriculture, increase in literacy, low wages cost, high export ND Rapid economic development. 

4. High income countries:-These countries are industrialized countries having per capita GNP (1992) more than US $12000. The characteristics of these countries are high income, industrialization, services sectors, development of technology, development in information sector etc. 

Economic factor which affects business are long term – down in GNP growth, strikes rapid rise in production costs, fall in export earning, sudden increase in food or energy import. Economic environment which effects international business also includes investment trends, inflation, monetary policy, fiscal policy, budget deficits, balance of trade and balance of payment.

Political environment factors also influence the operation af international business. Countries with stable political system enjoyed the successful business operations. The political environment helps in thw growth of bilateral or multilateral trade. 

  Q 7.What is the impact of technology on global business environment?

ANS:- THE IMPACT OF TECHNOLOGY:-

1. Important to Economic Development:-

Technology has always been important to economic development. This has been rapidly transforming all productive systems and facilitating globalization.

2. Management:-

Technological management is one of the principal source of competitive advantage. Economic growth in recent veers has been achieved largely through technology innovations in various fields of science and industry.

3. Progressive and Productive Technology:-

The economically developed countries in the world usually have a strong research and development capability and a history of technological innovation. Thus, a progressive and productive technology is very essential for economic well being.

4. Application of Information Technology:-

The application of information technology is a good example. In most developed and newly industrialized countries, activities with greater innovation developed and newly potential have growth faster than that of other countries. Exports have risen faster than total productions and within exports high technology products have grown more rapidly. Sustained economic growth increasingly calls not only for the application of new technologies but a so for a shift in the productive structure from low to high technology activities.

5. Competition:-

Developing world is facing not just rapid technical change, but also shrinking economic space and dramatically intensifying competition. The parameters of competition are changing with the nature of the innovation process and the organization of production. In most of the modern activities, competitiveness entails new and more rapid product innovation, flexible response, greater networking and closely integrated production systems across firms and region.

6. Transfer of Technology:-Transfer of Technology is very important factor which fosters international business. Technology transfer is the process by which commercial technology is disseminated. This will take the form of a Technology transfer transaction , which may or may not be legally binding contract, but which will involve the communication, by the transfer of the relevant knowledge to the recipient. Broadly, there are two forms of TT. viz., internalized and externalized forms of technology transferer. The transferer, normally, holds the majority or full equity ownership. Externalized forms refer to all other forms, such as joint ventures with local control, licensing strategic alliances and international such contracting.    

Q 8. Impact of technology on global Business?(MAY-07) 

Information, communication and computer technology have already changed the business world in several ways. Laptops and mobile devices offer more constant and efficient methods of communication that aid businesses in improving their networking skills in a global market, and new software and advanced applications help companies improve the way they conduct their research and develop their products and services.

1. Accessibility

Communication and mobile technology has introduced mobile devices like tablet computers and PDAs to the workforce, enabling employees to conference and chat with peers and customers anywhere in the world instantly. With a drastic increase in both the frequency and speed in which businesses can communicate and receive feedback from customers, contact peers and learn more about their competitors around the world, companies have become more accessible than ever.

2. Application

o Many businesses have maintained websites for years and more continue to join, aware that this technology increases global awareness of their existence. Now, more companies are also utilizing more recent advances in social networking technology by creating profiles on websites like Facebook, LinkedIn and Twitter. These tools help them share industry-related news and stay in direct and constant contact with their clients. Thanks to the interactive technology these websites provide, businesses receive immediate feedback from customers, increasing the speed of their research and development.

3. Benefits

o Faster development plays a key role in staying on top of the competition, particularly in an increasingly global business world. Communication technology allows companies to utilize video conferences and create "mobile offices," which help to create a more equal opportunity for employers and employees because jobs that were once tied down to location are now open to a wider selection of potential workers. In addition, small businesses have the same access to the large pool of customers as big businesses if they develop an online presence.

4. Potential

o Because all forms of technology are advancing consistently, the global business world also continues to advance. New developments in advanced multi-media applications and software are constantly allowing companies new tools and methods with which to develop the effectiveness of their products and the quality of their services. 

Q 9. What is an international business? How is it different from domestic business?(NOV-07,08)

ANS:- International business is defined as “activities that buys and sells goods and services across two or more national boundaries, even if the management is located in one country “. It includes any type of business activities that crosses national borders. International business is related only with those big enterprises which have operating units outside their own country. There are institutional arrangements who provides some managerial directions of economic activity taking place abroad.

1. There is higher rate of profits in international business as compared to domestic business.

2. Some of the domestic companies expand their production capacities more than the demand for the product in the domestic markets. These companies can sell the excess production in the foreign markets which is not possible to sell in the domestic market.

3. The countries oriented towards market economies since 1960 had severe competition from other business firms in the home country. The weak companies cannot meet the competition of the strong companies in the domestic market. As compared to domestic market the competition may be less in international market because every company which deals in the domestic market does not enter into the international market. Similarly every company which deals in international market does not enter into the business of all the countries in the world.

4. The international market is wide and has greater scope as compared to the domestic market.

5. Availability of advance technology and managerial competence is also important factor for domestic and international business.

6. Companies in domestic market market have to spend less cost of transportation because their distribution network is at local or at national level. Therefore, they enjoy higher profit margins. However, the companies who enter into international business have to spend higher cost of transportation which lowers their profit margins.

7. International business involves foreign exchange because every country has its own currency. However, no foreign exchange is involved in domestic business.

 Q.10 Discuss the factors responsible for growth      of international business?

Ans: Starting a International Business in UK is not simple as in other countries.  UK is most prominent country in the field that every overseas company wants to invest and expand their firm here. The ultimate goal for each and every business  firm  is to  begin a stabilized new plant for long time run.  The location portal is a standalone location geographical map provider in UK.  The quick search can search for specific user’s keyword targeted for any geographical locations in UK. The search and find option with geographical area map help customers to find locations for business.  The search can also filtered with individual need of

business like communication infrastructure, funding and support, location in UK, workforce requirement, property and cost availability.  Communication Infrastructure:  A business crucial need for growth is a better communication infrastructure. A particular location of a production group with bad infrastructure accessibility can affect the commerce growth.  The location for a business infrastructure depend on the kind of trade  for the industry.  An area near main roads, ports and airport is a good indication for a firm engaged in business of import and export. An internet based business prefers a locality not too close to an airport.

Business Funding and Supporting:  Some companies depends more on expenditure, credit, condensed charges and discounted premises availability. The customized search provided find out the list of agencies providing different type of funding availability within specific area.  Workforce:  Staff is the need of every firm to continue success. Search is also available according to the work force availability and labour cost.  Workforce search can filter with dissimilar combination like profession, annual salary and talent area.  Cost Factor and Property Availability:  Property availability and cost factor are other two important factors for a new plant. The explore is obtainable with yearly cost range for rental location.  Research and Development:  The UK is one of the most industrial and developed country in field of research and growth  The research and development area in big business include biotechnology and healthcare, communication technologies, electronics and photonics, advanced manufacturing, advanced materials, information technologies, emerging energy technologies, design engineering, and sustainable production and consumption.   Any business firm relevant to one of the mentioned factors or fields will underprofit, if it’s location is near to the universities and other coaching centers. The avail search finds locations most relevant to the business.  Future Development Plans:  The promotion agencies interested in investment have different criteria for business location. Current benefits are not the goal for these types of firms.   The ideal location is the one that is under constructional and a development plan. Search by future development plans in specific areas. Superiority of Living Life:  Quality of life is very complex and wide thing to understand and define.   The definition for the term is not fixed and variable to different people.  

Q 11.what is PEST analysis? discuss the social and economic environment of international business? Ans: PEST analysis is concerned with the key external environmental influences on a business.  In fact, it would be better to call this kind of analysis a business environmental

analysis but the acronym PEST is easy to remember and so has stuck. PEST stands for Political, Economic, Sociocultural and Technological. (Technological factors in this case, include ecological and environmental aspects - the second E in STEEP and PESTLE, while the L in PESTLE stands for legal or legislative). The analysis examines the impact of each of these factors (and their interplay with each other) on the business. The results can then be used to take advantage of opportunities and to make contingency plans for threats when preparing business and strategic plans.

The acronym stands for the Political, Economic, Social and Technological issues that could affect the strategic development of a business.

Identifying PEST influences is a useful way of summarizing the external environment in which a business operates. However, it must be followed up by consideration of how a business should respond to these influences.

The table below lists some possible factors that could indicate important environmental influences for a business under the PEST headings:

Political / Legal Economic Social Technological

Environmental regulation and protection

Economic growth (overall; by industry sector)

Income distribution (change in distribution of disposable income;

Government spending on research

Taxation (corporate; consumer)

Monetary policy (interest rates)

Demographics (age structure of the population; gender; family size and composition; changing nature of occupations)

Government and industry focus on technological effort

International trade regulation

Government spending (overall level; specific spending priorities)

Labour / social mobility New discoveries and development

Consumer protection

Policy towards unemployment (minimum wage, unemployment benefits, grants)

Lifestyle changes (e.g. Home working, single households)

Speed of technology transfer

Employment law Taxation (impact on consumer disposable income, incentives to invest in capital equipment, corporation tax rates)

Attitudes to work and leisure

Rates of technological obsolescence

Government organisation / attitude

Exchange rates (effects on demand by overseas customers; effect on

Education Energy use and costs

cost of imported components)

Competition regulation

Inflation (effect on costs and selling prices)

Fashions and fads Changes in material sciences

  Stage of the business cycle (effect on short-term business performance)

Health & welfare Impact of changes in Information technology

  Economic "mood" - consumer confidence

Living conditions (housing, amenities, pollution)

Internet!

 

  

                                                                 OR In fact, it would be better to call this kind of analysis a business environmental analysis but the acronym PEST is easy to remember and so has stuck. PEST stands for Political, Economic, Sociocultural and Technological. (Technological factors in this case, include ecological and environmental aspects - the second E in STEEP and PESTLE, while the L in PESTLE stands for legal or legislative). The analysis examines the impact of each of these factors (and their interplay with each other) on the business. The results can then be used to take advantage of opportunities and to make contingency plans for threats when preparing business and strategic plans. 

Political: 

Government type and stability. Freedom of press, rule of law and levels of bureaucracy and corruption. Regulation and de-regulation trends. Social and employment legislation. Tax policy, and trade and tariff controls. Environmental and consumer-protection legislation. Likely changes in the political environment .

Economic: 

Stage of business cycle. Current and projected economic growth, inflation and interest rates. Unemployment and labor supply. Labor costs. Levels of disposable income and income distribution. Impact of globalization. Likely impact of technological or other change on the economy. Likely changes in the economic environment.

Socio-Cultural: 

Population growth rate and age profile. Population health, education and social mobility, and attitudes to these. Population employment patterns, job market freedom and attitudes to work. Press attitudes, public opinion, social attitudes and social taboos. Lifestyle choices and attitudes to these. Socio-cultural changes.

Technological Environment: 

Impact of emerging technologies. Impact of Internet, reduction in communications costs and increased remote

working. Research & Development activity. Impact of technology transfer.

 

Other forms of PEST – PESTLE, PESTLIED, STEEPLE and SLEPT: Some people prefer to use different flavors of PEST Analysis. These are:

PESTLE/PESTEL: Political, Economic, Sociological, Technological, Legal, Environmental.

PESTLIED: Political, Economic, Social, Technological, Legal, International, Environmental, Demographic.

STEEPLE: Social/Demographic, Technological, Economic, Environmental, Political, Legal, Ethical.

SLEPT: Social, Legal, Economic, Political, Technological.

 Q 12. Short Notes:

a. INTERNATIONAL BUSINESS IN THE 21 ST CENTURY

                     Global economy has expanded at a higher rare. The global trade which was just of world GDP in 19622 has increased to 30% of the world GDP in 1993. The value of global exports amounted to US $ 3755 billion in 1992 to 1998. Leading growth rate of global exports was 5.92% during 1992 to 1998. Leading global exports United States, UK, France, Germany, Italy and Japan. The share of USA in global exports in 1999 was 12.4% followed by Germany 9.3% and Japan 7.5%. The globalization helped  Indian companies to operate in various countries like united states, UK, France , Germany, Italy and Japan more freely than before. Foreign business firms like General Motors, IBM, and Xerox L.G. etc. are helped to operate in India.

The global economy is mostly shaped by the flow of capital across the countries rather than by the flow of goods and services. The trends in the international money market

and capital markets influence the monetary policies and fiscal policies of the sovereign governments. Management of international business in the 21st century is the primary and decisive factor whereas the other factor whereas the other factors of production like land, capital and human resources are secondary in the transactional economy.

The last quarter of twentieth century has seen rapid changes the global economy. Barriers to the free flow of goods, services and capital have come down. The volume of cross-border trade and investment has been growing more rapidly than global output, indicating that national economies are becoming more closely integrated into a single, interdependent and global economic system. Doing Business in 21st Century India: How to Profit Today in Tomorrow's Most Exciting Market is a 2008   non- fiction   marketing   book written by Gunman Bangle, an Indian-American   author   and businessman   and the managing director   of Amrita, Inc.. The book is a guide for North American   and European   firms on doing business in the rapidly developing Indian   market. It was published in hardcover in July 2008 by Business Plus, an imprint of Hachette Book Group USA. The book was released in hardback in the United States in July 2008 and in paperback to the rest of the world in September 2008.Globalization stimulates economic growth, raises the income consumers and helps to create jobs in all countries that participate in the global trading system. 

b. Global Environment The ICFAI center for management research state that the global business environment can be defined as the environment in different sovereign countries, with factors exogenous to the home environment of the organization, influencing decision making on resource use and capabilities. This includes the social, political, economic, regulatory, tax, cultural, legal, and technological environments.   The political environment in a country influences the legislations and government rules and regulations under which a foreign firm operates. The economic environment relates to all the factors that contribute to a country's attractiveness for foreign businesses.   Every country in the world follows its own system of law. A foreign company operating in that particular country has to abide with its system of law as long as it is operating in that country. The technological environment comprises factors related to the materials and machines used in manufacturing goods and services. Receptivity of organizations to new technology and adoption of new technology by consumers influence decisions made in an organization.    As firms have no control over the external environment, their success depends upon how well they adapt to the external environment. A firm's ability to design and adjust its internal variables to take advantage of opportunities offered by the external environment, and its ability to control threats posed by the same environment, determine its success. 

c. SOCIAL AND CULTURAL ENVIRONMENT

Social and cultural aspects of a society form its very nature. As "culture" is the essence of a society, this chapter will concentrate on a discussion of it only. Of

all the so called "environmental uncontrollable", culture, or at least the study of it, is one of the most difficult to comprehend, take account of and harness to advantage. This is particularly so when the product or service is "culture bound". Such products and services include those which are generally indigenous by nature and/or of relatively small value and very common. This is particularly true of foodstuffs. Sadza in Zimbabwe, a staple food made from maize meal, would not go down well in Beverley Hills, California. Neither would Middle Eastern sheep’s eyes menus. Products of a more technical nature, like computers, on the other hand, have a universal appeal. However there is plenty of evidence to suggest that, with shrinking communications and with more people than ever travelling, even the most culture bound product or service can, and is, finding a world market niche. So even the infamous Veldschoen footwear of the South African pioneers has found its way into most corners of the world.The social factors that affect a firm include the values, attitudes beliefs, opinions and lifestyles of person’s in the firm’s external environment as developed from demographic cultural, religious, educational and ethnic conditioning. Like other forces in the external environment social factors change continually. As social attitudes, beliefs and values change, so does the demand for various types of dresses, books, leisure activities etc. Let’s examine these factors in greater detail. 

Demographic Factors:-

1. Demographic characteristics such as population, age, distribution, religious composition, literacy levels, interstate migration, rural urban mobility, income distribution, etc. influence a firm’s strategic plans significantly. The entry of women into the labor market has, in recent times affected the hiring and compensation policies of their employers. This has also expanded the market for a wide range of products and services necessitated by their absence from their homes (such as convenience foods, microwave ovens, day care centers etc.). The shifts in age distribution caused by improved birth control methods have literally compelled producers to go after youth oriented goods (beauty products, hair, and skin care preparations fitness equipment etch). The growing number of senior citizens has made many a government to pay more attention to tax exemptions, social security benefits etc. Another important concern is the desire for a better quality of work life. Employees expect more from organizations than simply a pay cheque. They want cleaner air and water as well as more leisure time to enjoy life more fully.

2. Labor mobility across different occupations and regions in recent times has cut down wage differentials greatly. If labor is heterogeneous as is the case in India, managing people becomes a tough and demanding task. The Explosive population growth during the last decade has serious implications for the Indian government which is wanting to go after sophisticated technologies and discarding the traditional.

3. Labor intensive methods: The presence of a large number of English speaking engineers, at the same time, has encouraged many software giants to set up shop in India. Cheap labor, rise in income levels, favorable governmental initiatives have made the Indian market more attractive to multinationals in recent times.

Cultural factors:

1. Social attitudes values, customs, beliefs, rituals and practices also influence business practices in a major way. Christmas offers great financial opportunities for card companies, toy retailers, tree growers, mail order catalogue firms and other related businesses. Social values refer to abstract thinking about what is good, right and desirable. Beliefs on the other hand reflect the characteristics of physical and social phenomena. We may believe for example that a high fat diet causes cancer or that chocolate causes acne. Beliefs are important (whether right or wrong) in that they affect how we may behave and what we buy. For example, McDonald’s does not serve the beef burgers in India because Indians consider the cow as a sacred animal (Hindu traditions prohibit the consumption of beef in any form). Values and beliefs vary from culture to culture and before going ahead in a big way, companies must study the socio-cultural environment of a country thoroughly to avoid costly mistakes. To market soup in Japan the manager / marketer must realize that soup is regarded as a breakfast drink in Japan rather than as a dish served with lunch or dinner. The loyalty shown by Japanese workers towards their employees to take another example is far greater than that shown by Indian workers for their employers the distinction obviously can be traced back to their respective socio-cultural.

2. Most Indians still believe in work, in getting married, in offering prayers to God daily, in giving to charity and in being honest .These core values are passed on from parents to children and are reinforced by major social institutions such as schools, temples, churches, government etc. Increasing pressure from social activists has forced the government to ban cow slaughter in India. Rural women likewise joined hands in getting certain evil habits (drinking, drugs) rooted out of villages and educational institutions. Marketers should respect the core values of a society and respond in an appropriate manner. 

d. TECHNOLOGICAL ENVIRONMENT “Technological Environment means the development in the field of technology which affects business by new inventions of productions and other improvements in techniques to perform the business  work.  "We see that in 21st century, technology is changing fatly. Now, all work is done online and business shops are using machinery at high level. There are following technological environment factors which affects business.  Technological changes have enabled international business to take-up the shape of transactional business through the concept of global business. International  and direct influence on business in general and international business in particular. Technology has advanced phenomenally during the last

50 years. If flows from the multinationals, joint ventures, technological alliances, licensing and franchising. Thus, technology and global business are interdependent. The further revolution of information technology is expected to reduce the need for environment scanning by the MNC for the purpose of deciding where to enter. Therefore, MNCs have to understand and analysis more of economic environment of the foreign country for strategy formulation. While this process is still prevalent in today’s business environment, what is new is the creation of innovation procedures that aim to achieve continual cost reductions and improvements in products and services.  What is new is the conscious pursuit of knowledge that can lead to ongoing competitive advantages for the firm. What is new is the development of a learning organization whose culture and practices are designed to stimulate and facilitate the innovation process on a continual basis. This vision of the firm often includes the involvement of all of the firm’s employees, as well as the involvement of customers and suppliers throughout the value chain. For many firms, this vision also includes new partnerships, particularly with universities and government research institutes. This pervasive impact of technological forces has created new paradigms for strategies and management. New success indicators relate to the firm’s capability in acquiring and managing knowledge. A “balanced scorecard” includes more than just financial results, and intellectual capital focuses on the firm’s strategy for building and managing its knowledge activities. 

Assignment on Chapter no 2:- Foreign Direct Investment

(1) Answer the following in brief:

(a) What is FDI?According to the International Monetary Fund, foreign direct investment,

commonly known as FDI, refers to an investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor." The investment is direct because the investor, which could be a foreign person, company or group of entities, is seeking to control, manage, or have significant influence over the foreign enterprise. The investing corporation must control 10 percent or more of the voting power of the new venture.

(b) What is Bilateral Investment Treaty?A bilateral investment treaty (BIT) is an agreement establishing the terms

and conditions for private investment by nationals and companies of one state in another state. This type of investment is called foreign direct investment (FDI). BITs are established through trade pacts. A nineteenth-century forerunner of the BIT is the friendship, commerce, and navigation treaty (FCN).

Most BITs grant investments made by an investor of one Contracting State in the territory of the other a number of guarantees, which typically include fair and equitable treatment, protection from expropriation, free transfer of means and full protection and security. The distinctive feature of many BITs is that they allow for an alternative dispute resolution mechanism, whereby an investor whose rights under the BIT have been violated could have recourse to international arbitration, often under the auspices of the ICSID (International Center for the Settlement of Investment Disputes), rather than suing the host State in its own courts

The world's first BIT was signed on November 25, 1959 between Pakistan and Germany There are currently more than 2500 BITs in force, involving most countries in the world. Influential capital exporting states usually negotiate BITs on the basis of their own "model"

(c) What is Regional Integration Framework?Regional integration can be understood as a convergent cooperation at

the macro or micro level. Whereas at the macro level it is connected with theintegration of large-scale geographical areas (such as already mentionedMediterranean groupings), at the micro-level we speak about such forms ofnew regionalism as euro regions, working communities etc. These newforms are connected with the phenomenon of cross-border cooperation,which has been developing in Europe since 1950s.

(d) What is the impact of FDI on distribution of wealth?The investment made by a company in new manufacturing facilities

in a foreign country is referred as foreign direct investment. The investment made by a company in a foreign country over a given period of time is called flow of FDI. FDI has a powerful force on distribution of wealth in the country or world. The flow of FDI had been increasing during 1975-1995 due to the desire of many foreign companies to establish manufacturing facilities in foreign countries in spite of decline in trade tariffs, etc. The development of globalization is the other reason. USA has been the major source of FDI and the followers are Germany, France, UK, China, etc.

(e) What is the trend of FDI in recent years?Location-specific rewards are further classified by three types of FDI motives.1. Market-seeking investment is undertaken to uphold existing markets or to

exploit new markets. For example, due to tariffs and other forms of barriers, the firm has to relocate production to the host country where it had previously served by exporting

2. When firms invest abroad to obtain resources not available in the home country, the investment is called resource- or asset-seeking. Resources may be natural resources, raw materials, or low-cost inputs such as labor

3. The investment is streamlined or efficiency-seeking when the firm can gain from the general governance of organically dispersed activities in the presence of economies of scale and scope

The host country factors or fundamentals can be grouped in two categories: the first group comprises of natural resources, most kinds of labor, and proximity to markets. The second group include of a range of environmental variables that act as a function of political, economic, legal, and infra-structural factors of a host country.

India’s inward investment rule went through a series of changes since economic reforms were escorted in two decades back. The expectation of the policy-makers was that an “investor friendly” command will help India establish itself as a preferred destination of foreign investors. These expectations remained largely unfulfilled despite the consistent attempts by the policy makers to increase the attractiveness of India by further changes in policies that included opening up of individual sectors, raising the hitherto existing caps on foreign holding and improving investment procedures. But after 2005‐06, official statistics started reporting steep increases in FDI inflows. Portfolio investors and round-tripping investments have been important contributors to India’s reported FDI inflows thus blurring the distinction between direct and portfolio investors on one hand and foreign and domestic investors on the other. These investors were also the ones which have exploited the tax haven route most.

Inward investments have been constantly rising since the sharp drop witnessed in 2009, following the global financial crisis. Hiccups apart, foreign investors see huge long-term growth potential in the country. As much as 75 percent of global businesses already present in the country are looking to considerably expand their operations going forward according to the Indian attractive survey by Ernst & Young. This also confirms that India is undergoing a changeover, both in terms of investor perception of its market potential, and in reality.

With GDP growth anticipated to surpass 8 percent yearly and the number of people in the Indian middle class set to triple over the next 15 years, with an equivalent impact on disposable income, domestic demand is expected to grow exponentially. India’s young demographic profile also helps it in providing an increasingly well-educated and cost-competitive labor force. These factors put India in a good position to attract an increasing proportion of global FDI.

As project numbers and jobs created are still some way off highs reached in 2008, which saw 971 projects, the trend over the last decade has shown a steady, if not dramatic, upward movement. Generally project numbers in 2010 were up 60 percent over 2003 and the number of jobs created up 30 percent.The strong domestic market enabled India to deliver a flexible performance during the global economic slowdown. India today is rising as a manufacturing destination, both for the domestic and global markets. As business leaders battle for growth in the new economy, there is a sense of urgency among leading players to grab the prospects offered by the Indian market.

With the liberty of the simplified compendium on foreign direct investment, numerous processes on FDI and associated routes of investment too are being ratified with a view to speed up the process of inflows into India.

The out of the country Indian investors too would find it simpler to entry nodal bodies and invest in India. Though, a note of caution – the Reserve Bank of India too is attempting to legalize certain sections in Foreign Exchange Management Act (FEMA) which also allow NRIs, routes to invest in India. Its argument is that NRIs tend to invest much more than the cap allowed in the sectors through these other routes, thereby exceeding allowed limits for FDI. The government may also remove the liberties provided to NRIs in sectors such as aviation, real estate etc.

More reforms to make investing in India a simpler process, such as FDI in multi-brand retail, defense production, and agriculture, are in the discussion stage and the government intends to bring out tangible policies in this direction. Proposals can also be sent to DIPP online. This facility will allow all abroad investors to speed up their investment proposals.

(2) State with reasons whether the following statements are true or false

(a) The source and direction of FDI remained unchanged during the 1990s in IndiaThis statement is a true statement.REASON:The companies registered in Mauritius and the US were the principal source of FDI during 2000-01 followed by Japan and Germany. The bulk of FDI was channeled into computer hardware and software, engineering industries, services, electronics and electrical equipments, chemical and allied products and food and dairy product.

(b) Trade liberalizing aspect of regional integration have no repercussion for FDIThis statement is a true statement

REASON:The firms increase their investment in response to a large market or rationalize their production to lower-cost location within the bloc, and then there will be benefits in terms of efficiency and welfare. On other hand, if trade diversion provides the catalyst for foreign direct investment, there will be a loss of economic efficiency and welfare.

(c) FDI inflows to and FDI inflows from the United States were at record high in 1998.This statement is true statementREASON:FDI inflows nearly doubled to $ 193 billion mainly due to large scale mergers and acquisitions. The two investor countries i.e. Germany and UK contributed almost 60% to total FDI inflows to US in 1998.

(d) The European Union as a whole continued to be the world’s most important inward investor in 1998.This statement is false statementREASON:The European Union as a whole continued to be the world’s important outward investor in 1998, with $ 386 billion, FDI outflows registered during the year. The United Kingdom maintained its position as the largest EU investor, followed by Germany, France and the Netherlands.

(e) There is no impact of FDI on distribution of wealth.This statement is false statementREASON:FDI has a powerful impact on distribution of wealth in the country or world. There is impact of FDI on distribution of wealth because of the desire of many foreign companies to establish manufacturing facilities in foreign countries in spite of decline in trade tariffs, etc. The development of globalization is the other reason.

(3) What is Foreign Direct Investment?FDI stands for Foreign Direct Investment. Foreign direct investment (FDI)

is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. Thus it is distinct from portfolio investment which may cross borders, but does not offer such control Consistent economic growth; de-regulation, liberal investment rules, and operational flexibility are all the factors that help increase the inflow of Foreign Direct Investment or FDI. 

FDIs require a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.

According to the International Monetary Fund, foreign direct investment, commonly known as FDI, “refers to an investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor." The investment is direct because the investor, which could be a foreign person, company or group of entities, is seeking to control, manage, or have significant influence over the foreign enterprise.

The simplest explanation of FDI would be a direct investment by a corporation in a commercial venture in another country. A key to separating this action from involvement in other ventures in a foreign country is that the business enterprise operates completely outside the economy of the corporation’s home country. The investing corporation must control 10 percent or more of the voting power of the new venture.

According to history the United States was the leader in the FDI activity dating back as far as the end of World War II. Businesses from other nations have taken up the flag of FDI, including many who were not in a financial position to do so just a few years ago.

The practice has grown significantly in the last couple of decades, to the point that FDI has generated quite a bit of opposition from groups such as labor unions. These organizations have expressed concern that investing at such a level in another country eliminates jobs. Legislation was introduced in the early 1970s that would have put an end to the tax incentives of FDI. But members of the Nixon administration, Congress and business interests rallied to make sure that this attack on their expansion plans was not successful.

(4) “Foreign investment brings advantages of technology transfer and marketing expertise” comment.

In the global economy today, we see many developing countries competing for foreign direct investment. FDI is said to be an important factor for spurring the development of a nation.

Let's take a look at some advantages of foreign direct investment to a host country:

Integration into global economy - A developing country, which invites FDI, can gain a greater foothold in the world economy by getting access to a wider global market.

Technology advancement - FDI can introduce world-level technology and technical know-how and processes to developing countries. Foreign expertise can be an important factor in upgrading the existing technical processes in a host country. For example, the civilian nuclear deal between India and the United States would lead to transfer of nuclear energy know-how between the two countries and allow India to upgrade its civilian nuclear facilities.

Increased competition - As FDI brings in advances in technology and processes, it increases the competition in the domestic economy of the developing country, which has attracted the FDI. Other companies will also have to improve their processes and products in order to stay competitive in the market. Overall, FDI improves the quality of a products and processes in a particular sector.

Improved human resources - Employees of a host country in which there is an FDI get exposure to globally valued skills. The training and skills up gradation can enhance the value of the human resources of the host country.

The advantages of foreign direct investment to the investor includes access to a larger market in the host country, ability to tap the potential of a cheap and skilled labor, making use of resources in the host country and pursuing growth goals by diversification and optimizing costs.

(5) Explain the impact of FDI on distribution of wealth among different countries?

Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development.    Foreign direct investment, in its classic definition,  is defined as a company from one country making a physical investment into building a factory in another country.  The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest  in a company or enterprise outside the investing firm’s home country. As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property,   In the past decade, FDI has come to play a major role in the internationalization of business. Reacting to changes in technology, growing liberalization of the national regulatory framework

governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI. New information technology systems, decline in global communication costs have made management of foreign investments far easier than in the past. The sea change in trade and investment policies and the regulatory environment globally in the past decade, including trade policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privatization of many industries, has probably been been the most significant catalyst for FDI’s expanded role.

The most profound effect has been seen in developing countries, where yearly foreign direct investment flows have increased from an average of less than $10 billion in the 1970’s to a yearly average of less than $20 billion in the 1980’s, to explode in the 1990s from $26.7billion in 1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a large portion of global FDI..   Driven by mergers and acquisitions and internationalization of production in a range of industries, FDI into developed countries last year rose to $636 billion, from $481 billion in 1998 (Source: UNCTAD)

Proponents of foreign investment point out that the exchange of investment flows benefits both the home country (the country from which the investment originates) and the host country (the destination of the investment).  Opponents of FDI note that multinational conglomerates are able to wield great power over smaller and weaker economies and can drive out much local competition.  The truth lies somewhere in the middle.

For small and medium sized companies, FDI represents an opportunity to become more actively involved in international business activities.  In the past 15 years, the classic definition of FDI as noted above has changed considerably.  This notion of a change in the classic definition, however, must be kept in the proper context. Very clearly, over 2/3 of direct foreign investment is still made in the form of fixtures, machinery, equipment and buildings. Moreover, larger multinational corporations and conglomerates still make the overwhelming percentage of FDI. But, with the advent of the Internet, the increasing role of technology, loosening of direct investment restrictions in many markets and decreasing communication costs means that newer, non-traditional forms of investment will play an important role in the future.   Many governments, especially in industrialized and developed nations, pay very close attention to foreign direct investment because the investment flows into and out of their economies can and does have a significant impact.  In the United States, the Bureau of Economic Analysis, a section of the U.S. Department of Commerce, is responsible for collecting economic data about the economy including information about foreign direct investment flows.  Monitoring this data is very helpful in trying to determine the impact of such investments on the overall economy, but is especially helpful in evaluating industry

segments. State and local governments watch closely because they want to track their foreign investment attraction programs for successful outcomes.

(6) What is FDI? Explain the changing pattern of FDI flows in the world market?

According to the International Monetary Fund, foreign direct investment, commonly known as FDI, refers to an investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor." The investment is direct because the investor, which could be a foreign person, company or group of entities, is seeking to control, manage, or have significant influence over the foreign enterprise. The investing corporation must control 10 percent or more of the voting power of the new venture.

The changing pattern of FDI flows in the world marketThe rising prominence of inflows of foreign direct investment (FDI) into

Japan, which has traditionally been one of the top regional and global outward investors, is a significant element of several overall changes taking place in international capital flows. At one level, the increasing dominance of foreign direct investment (FDI) in international capital flows since the mid-1980s and its trade-linkages have led to substantial policy changes and harmonization efforts across the globe at the national, regional and multilateral levels, aimed at capturing the expected benefits of these trends. In turn, such deregulation and liberalization initiatives are serving to establish and reinforce the dominance of FDI across an expanding range of countries and in an increasing number of sectors and industries. It is also widely acknowledged that one of the dominant changes in the global structure of FDI flows has been the increasing role of brown-field investment compared to green-field investment, particularly among FDI flows between developed countries. Among other factors, this increasing dominance of cross-border mergers and acquisitions (M&As) has been an outcome of the worldwide reorganization and consolidation taking place across various highly competitive and increasingly deregulated technology-intensive manufacturing and service sector industries. In general, manufacturing sector M&As have been dominated by electronics & IT equipment, automobiles and pharmaceuticals, while those in the service sector have been dominated by finance and telecommunications. While Japanese corporations have indeed been part of the above process through their outward investment activities particularly since the late-1980s, the ownership changes signified by the rising FDI inflows into Japan since the late 1990s, is leading to a far greater integration of Japanese domestic firms into this world-wide restructuring process.

Increased foreign penetration of the Japanese economy is being driven by the emergence of cross border M&As as a significant channel for market-led financial and corporate sector restructuring since the late 1990s, which has traditionally been effectively closed to foreign participation in most sectors, particularly in finance, due to the prevalence of cross shareholdings. The weakening of Japanese corporate control signified by these rising FDI inflows can be seen to have come about as a consequence of the dilution of the traditional intermediation role of the Japanese financial sector vis-a-vis the corporate sector, following the financial liberalization agenda since the mid-1980s. Meanwhile, the ongoing economic restructuring, which has accelerated since the late 1990s, is transforming the Japanese economic system to closely resemble the increasingly discredited Anglo-Saxon corporate and financial systems of governance. Given the import of such changes for Japan as well as for the regional economies, this paper attempts to examine the trends underlying this remarkable increase in FDI inflows into Japan, the factors driving these trends and their implications for Japan’s own foreign direct investment in Asia. The Overall Picture of Rising FDI Inflows into Japan Foreign direct investment into Japan, which began increasing in the second half of the 1990s, has gained in momentum considerably in the recent years, as evident from the following trends. While FDI outflow from Japan had reached a historical peak (7352 billion yen) in 1990, FDI inflows into Japan had recorded only about 262 billion yen. At this point, (net) inward investment into Japan was some 28 times lower than outward investment by Japan. However, the surge in inflows in 1992 and their subsequent linear growth during 1996-99 led to a drop in this gap to as low as 1.8 times in 1999. This was also aided by the massive drop in outflows from 1991 onwards. Although the gap between net inflows and outflows increased again to 3.5 times in 2002, inward FDI into Japan grew at about 53% in 2002 and marked the second highest value on record. This rising trend in FDI inflows into Japan is all the more significant, when considered against the fact that following the historical boom during 1999-2000, global FDI flows fell sharply in 2001 and 2002 -- the largest decline in at least three decades. Thus, Japan’s share in global FDI inflows, which was an average of only 0.5% during 1990-95, increased to 1.2% in 1999.When compared to the share of the US, which accounted for about 26% of global FDI inflows in 1999,6Japan’s share does look miniscule. However, for a country which began courting inward FDI only recently, Japan’s share is comparable to that of the EU countries of France, Germany and the UK, with their shares in global FDI inflows at 4.3%, 5% and 8% respectively in that year. Further, among these major global outward investors, a comparison of the gaps between their respective shares in global outward FDI and inward FDI between1990-95 and 1999 clearly reveals that for both France and the UK, this gap had actually increased reflecting the fact that inflows into these countries were growing less faster than outflows from them. It is only for the US that has become a net FDI recipient and for Germany that this gap declined, mirroring a faster growth in inflows relative to outflows. On the other hand, since the early nineties, on an average inflow

have grown much faster than outflows for Japan, except for the two years 2000 and 2001.

(7) What is the impact of liberalization on FDI?India has sought to increase of FDI flows with a much liberal policy since

1991, after four decades of cautious attitude to it. The timings of policy liberalization by India has coincided with the dramatic upsurge in the global FDI outflows from US $ 50billion a year in the mid 1980s to cross a peak of $350 in 1996. The 1990s have witnessed a sustained rise in annual inflows to India. They have grown from a rather small figure of $ 200 million in 1991 to $ 3.2 billion in 1997 in actual terms. Although, they would appear quiet small relative to the kinds of magnitudes that some of India’s counter-parts in South-east or East Asia attract, the rise would appear to be impressive. In recent analysis of changing patterns of global FDI inflows during 1998 has found the rate of growth of investment directed to India to be well above average although absolute rise has been provoked by the policy liberalization alone or has resulted from expansion of scale of global FDI activity. The inflows in the 1990s have also changed from the past patterns in terms of sources sectoral composition and organizational form.

According to official figures, approvals worth RS 157356 crores of us $ 5.25 billion of FDI’s have been granted from the period from august 1991 to June 1994 out of these almost 80% of FDI’s are in the high priority industrial sectors like power, metallurgical industry, fuels etc. the main reason for the increase is that India is considered a much safer bet then china by majority of investors in the USA and UK. Till the end of March, 1993, the power and oil refinery units have attracted maximum foreign direct investment, 47% of the total amount flows in power and oil refinery sectors.

There has been continuous increase in the number of FII’s registered with SEBI and in the volume of investment effected by them in India. Till the January, 1994, SEBI has registered 134 FII’s who have 175 broad based institutional fund under them, about $ 1billion have already been invested. In order to get maximum benefit from FDI, the host country must implement policies to maximize the linkage effects created by foreign firms. It was a remarkable change in attracting FDI inflows giving a boost to Indian economy. Government of India has simplified the procedure for FDI approvals after 1991. The policy of privatization has also helped for attracting FDI inflows. European countries had been major sources of FDI inflows in India till 1990. However, their relative importance has steadily declined in the post liberalization period. Major European countries like UK, Germany, France, Switzerland, Sweden, Italy, and Netherlands accounted for 69% of FDI in 1980 which was reduced to 66% in 1990. However the countries FDI accounted for only 18% between 1991 and

1997. The United States has emerged as the most important source of FDI after liberalization with a share of 27%. The traditional sources of FDI in the trade like Europe, United States and Japan have contributed only 50%.

Economic survey 2000-2001 showed that FDI flows in India for the year 99-00 where US $ 2462 million which were lower than the previous year. Despite progressively declining volume of Inflows, Mauritius and USA continue to be the largest sources of FDI for India. Japan, Italy and Netherlands were the other major contributors of FDI during 1999-2000. The engineering industry continues to attract the largest volume of FDI inflows. In 1999-2000, this sector experienced aggregate inflows worth US $ 362 million. Electronics and electrical equipment industries were the second largest recipient of FDI with aggregate inflows amounting to US $ 172 million. Food and dairy products had a sharp increase in FDI with inflows increasing from US $ 10 million in 1998-1999 to US $ 121 million in 1999-2000. Pharmaceutical industry has been witnessing increasing in FDI with US $ 54 million in 1999-2000.

(8) What is FDI? What is the effect of FDI on international trade?

According to the International Monetary Fund, foreign direct investment, commonly known as FDI, refers to an investment made to acquire lasting or long-term interest in enterprises operating outside of the economy of the investor." The investment is direct because the investor, which could be a foreign person, company or group of entities, is seeking to control, manage, or have significant influence over the foreign enterprise. The investing corporation must control 10 percent or more of the voting power of the new venture.

The effect of FDI on international trade:

Regional integration takes a number of forms. It involves arrangements for preferential trade. Trading blocks involve the removal of trade barriers but stop short of further economic integration. A common market allows not only for the free trade movement of commodities, but also for the free movement of factors of Production. Economic Union is used to describe the situation where member states not only participate in a common market, but also promote a high degree of integration in the fiscal, monetary, commercial and welfare policies.

Trade liberalizing aspects of regional integration have repercussions for Foreign Direct Investment. To the extent that firms increase their investment in response to a larger market or rationalize their production to lower-cost locations within the block then there will be benefits in terms of efficiency and welfare. On the other hand, if trade diversion provides the catalyst for Foreign Direct Investment, there will be a loss of economic efficiency and welfare. Other provisions of deeper regional integration will also have an effect on Foreign

Direct Investment. The removal of restrictions on the movement of factor of production would facilitate both intra-block FDI and the FDI from the third countries. FDI should also be stimulated by the relaxation of ownership and entry requirements and other liberalizing measures to open market to greater competition. The companies or firms are motivated to invest in foreign markets for various reasons; some of these reasons are given below:

1) Access to factors of production: FDI is undertaken to gain access to specific factors of production such as technical knowledge, managerial know-how, patents, brand names and other resources owned by the firms; in the host country. It will involve an equity stake in appropriate host-country firm, although the factor of production may take the form of a public good, available to all firms in the industry.

2) Access to products: FDI involves international competitors to undertake mutual investment in each other’s products in order to gain access to product ranges. It is also the result of Research and Development as induced specialization. Two firms from different countries may invest in each other’s are of expertise and promote sub-products.

3) Access to customers: FDI is also undertaken in order to secure access to customers in the host country market. The limited tradability of many services like banking and insurance has been an important factor promoting the growth of FDI in these sectors.

4) Access to markets: The foreign firms jump the barriers by establishing a local presence within the host economy in order to gain access to the local market. The local manufacturing presence is sufficient to remove the trade barriers because the foreign firm can maintain much of the value-added in its home country. Tarrif-jumping FDI occurs when these are locational advantages for foreign firms in their home country, but the firms are prevented from exporting to the host economy by the existence of tarrifs on other barriers to trade.

5) Protection for domestic industry: FDI can be undertaken by foreign firms not with the intentions of jumping protective barriers, but with a view to defusing the threat of protection to domestic industries. The defusion may be achieved either by enhancing directly the benefits that FDI confers on the host economy or by co-opting local firms in joint ventures and allocating them the share of potential benefits.

Foreign investment brings advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new technologies for promotion of exports. Promotion of exports of Indian products calls for a systematic explanation of world markets possible only through intensive and highly professional marketing activities. To the extent that expertise of this nature in not well developed so far in India, government will encourage foreign trading companies to assist in the export activities. Attraction of substantial investment and access to high technology involves interaction with some of the world’s largest international manufacturing and marketing firms. Thus, with a view to

injecting the desired level of technological dynamism in Indian industries, the policy provides for automatic approval of technology agreements related to high priority industries within specified parameter.

(9) What is FDI? Discuss different types of FDI? Explain the effects of FDI for host country.

India is a country that has been able to restore investor confidence in its markets, even during the toughest of times. Increase in capital inflows, foreign direct investments (FDI) and overseas entities’ participation reflect the fact that Indian markets have fared well in recent times. Moreover, foreign companies are viewing the South-Asian nation as a strategic hub for their operations and investments owing to investor-friendly policy environment, positive eco-system and huge potential for growth.

India Inc’s increasing presence over the global canvas and Indian government’s consistent support to the FDI space have facilitated remarkable developments and investments from overseas partners.

Five Different Types of Foreign Direct Investment (FDI)

    According to Chryssochoidis, Millar & Clegg, 1997 there are five different types of foreign direct investment (FDI).

The first type of FDI is taken to gain access to specific factors of production, e.g. resources, technical knowledge, material know-how, patent or brand names, owned by a company in the host country. If such factors of production are not available in the home economy of the foreign company, and are not easy to transfer, then the foreign firm must invest locally in order to secure access.

The second type of FDI is developed by Raymond Vernon in his product cycle hypothesis. According to this model the company shall invest in order to gain access to cheaper factors of production, e.g. low-cost labour. The government of the host country may encourage this type of FDI if it is pursuing an export-oriented development strategy. Since it may provide some form of investment incentive to the foreign company, in form of subsidies, grants and tax concessions. If the government is using an import-substitution policy instead, foreign companies may only be allowed to participate in the host economy if they possess technical or managerial know-how that is not available to domestic industry. Such know-how may be transferred through licensing. It can also result in a joint venture with a local partner.

The third type of FDI involves international competitors undertaking mutual investment in one another, e.g. through cross-shareholdings or through establishment of joint venture, in order to gain access to each other's product ranges. As a result of increased competition among similar products and R&D-induced specialisation this type of FDI emerged. Both companies often find it difficult to compete in each other's home

market or in third-country markets for each other's products. If none of the products gain the dominant advantage, the two companies can invest in each other's area of knowledge and promote sub-product specialization in production.

The fourth type of FDI concerns the access to customers in the host country market. In this type of FDI there are not observed any underlying shift in comparative advantage either to or from the host country. Export from the companies' home base may be impossible, e.g. certain services, or the capability to request immediate design modifications. The limited tradability of many services has been an important factor explaining the growth of FDI in these sectors.

The fifth type of FDI relates to the trade diversionary aspect of regional integration. This type occurs when there are location advantages for foreign companies in their home country but the existence of tariffs or other barriers of trade prevent the companies from exporting to the host country. The foreign companies therefore jump the barriers by establishing a local presence within the host economy in order to gain access to the local market. The local manufacturing presence need only be sufficient to circumvent the trade barriers, since the foreign company wants to maintain as much of the value-added in its home economy.

Effects of FDI for host country:Fears that production abroad would cause home country exports and

employment to fall have not been confirmed by evidence. Multinational operations have led to a shift by parent firms in the United States toward more capital- intensive and skill- intensive domestic production. However, that type of reallocation does not appear to have taken place in Japan or Sweden. Within host countries, foreign- owned firms almost always pay higher wages than domestically- owned firms. It is not always the case that they cause wages in locally- owned firms to rise, but their presence does generally raise wage levels in host countries.

Foreign firms generally have higher productivity than local firms, but the evidence for spillovers to local firms' productivity is mixed. It seems to depend on host country policies and environments and on the technological levels of industries and of host- country firms. The same mixture of impacts applies to host- country growth in general. The impact of FDI in promoting the growth of host country exports and linkages to the outside world is clearer. The major role of FDI in the transformation of host economies from being exporters of raw materials and foods to being exporters of manufactures, and in some cases relatively high- tech manufactures, is also evident in some cases. Much of the impact is from the transfer of knowledge of world markets and of ways of fitting into worldwide production networks, not visible in standard productivity measurements.

(10) Discuss the role of UNCTAD with focus on World Investment Report, 2000.The United Nations Conference on Trade and Development (UNCTAD)

was established in 1964 for the purpose of removing barriers in international trade and also to promote international business. The UNCTAD works very closely with and oversees all commodity agreements because of the impact of

commodity prices on poverty and development. The World Investment Report, 2000-01 was published by UNCTAD in 2002 which includes India’s inward FDI performance. The performance was calculated from 1998-2000. India’s performance is very low, in fact it ranks 119th country among the 140 countries listed in the World Investment Report, 2002. However, India is the only country whose performance is improved in 1998-2000 over the decade 1988-90. There are various reasons for this poor performance. Some are lack of comprehensive and consistent FDI policies, tight bureaucrat controls and delays in the implementation of various schemes, high-cost of production inspite of cheap labour, rigid labour laws, non-existence of sufficient backward linkages, reservation of various items for the small-scale sector, poor finance, institutional framework and low investment in research & development.

This index reflects the ratio of the country’s global FDI inflows to its share in GDP. India’s performance index is very low, in fact it ranks 119 th among the 140 countries listed in the World Investment Report, 2002. However, India is the only country whose performance index shows an improvement in 1998-2000 over the decade 1988-90. There are various reasons for the poor performance. Some of the reasons are lack of comprehensive and consistent FDI policies, tight bureaucrat controls and delays in implementation of various schemes, high cost of production inspite of cheap labour, rigid labour laws, non-existence of sufficient backward linkages, reservation of various items for the small-scale sector, poor finance and institutional framework and low investment in R & D.

(11)WHAT DO YOU MEAN BY PROTECTIONIST APPROACH? DISCUSS THE DIFFERENT TYPES OF BARRIERS IMPOSED BY THE COUNTRIES?

Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow (according to proponents) "fair competition" between imports and goods and services produced domestically. This policy contrasts with free trade, where government barriers to trade are kept to a minimum. In recent years, it has become closely aligned with anti-globalization. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which protect businesses and workers within a country by restricting or regulating trade with foreign nations.

Trade barriers are that restrict imports but are not in the usual form of a tariff. Some common examples of NTB's are anti-dumping measures and

countervailing duties, which, although they are called "non-tariff" barriers, have the effect of tariffs once they are enacted.

Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use. Some non-tariff trade barriers are expressly permitted in very limited circumstances, when they are deemed necessary to protect health, safety, or sanitation, or to protect depletable natural resources. In other forms, they are criticized as a means to evade free trade rules such as those of the World Trade Organization (WTO), the European Union (EU), or North American Free Trade Agreement (NAFTA) that restrict the use of tariffs.

Some of non-tariff barriers are not directly related to foreign economic regulations, but nevertheless they have a significant impact on foreign-economic activity and foreign trade between countries.

Trade between countries is referred to trade in goods, services and factors of production. Non-tariff barriers to trade include import quotas, special licenses, unreasonable standards for the quality of goods, bureaucratic delays at customs, export restrictions, limiting the activities of state trading, export subsidies, countervailing duties, technical barriers to trade, sanitary and phyto-sanitary measures, rules of origin, etc. Sometimes in this list they include macroeconomic measures affecting trade.

(12) Write Short Note on:

(a) FDI in India

IntroductionIndia is a country that has been able to restore investor confidence in its markets,

even during the toughest of times. Increase in capital inflows, foreign direct investments (FDI) and overseas entities’ participation reflect the fact that Indian markets have fared well in recent times. Moreover, foreign companies are viewing the South-Asian nation as a strategic hub for their operations and investments owing to investor-friendly policy environment, positive eco-system and huge potential for growth.

India Inc’s increasing presence over the global canvas and Indian government’s consistent support to the FDI space have facilitated remarkable developments and investments from overseas partners. Some of them are discussed hereafter:

Key Statistics

FDI inflows rose by 36 per cent to US$ 23.69 billion during January-October 2011, while the cumulative amount of FDI equity inflows from April 2000 to October 2011 stood at US$ 226.05 billion, according to the latest data released by the Department of Industrial Policy and Promotion (DIPP).The services (including financial and non-financial) sectors attracted highest

FDI equity inflows during April-October 2011-12 at US$ 3.43 billion. India received maximum FDI from countries like Mauritius, Singapore, and the US at US$ 61.2 billion, US$ 15.2 billion and US$ 10 billion, respectively, during April 2000-October 2011.

Global consultancy firm Ernst & Young (E&Y) has stated that the value of mergers and acquisition (M&A) deals involving Indian companies aggregated to US$ 34.4 billion in 2011 involving 806 transactions. There were 177 outbound deals with an aggregate disclosed value of US$ 8.8 billion in 2011; forming 25.6 per cent of the total M&A pie.

Adani Enterprises’ acquisition of Abbot Point Coal Terminal in Australia (US$ 2 billion) and the GVK Group’s purchase of Australia-based Hancock Coal’s Queensland coal assets (US$ 1.3 billion) were among the biggest outbound deals recorded in 2011.

According to data released by auditing and consultancy firm KPMG, India Inc witnessed a 31 per cent increment in private equity (PE) investment to US$ 7.89 billion during the first three quarters of 2011. PE firms like Blackstone India and Kohlberg Kravis Roberts & Co (KKR & Co) are betting high on Indian markets. The Blackstone India chief was reported to have said that he intends to close 5-6 deals a year in India whose financial valuations would revolve around roughly US$ 100 million to US$ 120 million each.

According to the weekly statistical supplement of the Reserve Bank of India (RBI), India’s foreign exchange reserves (forex) stood at US$ 293.54 billion for the week ended January 6, 2012. Foreign currency assets aggregated to US$ 259.80 billion and the value of gold reserves stood at US$ 26.62 billion for the week. The value of special drawing rights (SDRs) was calculated at US$ 4.41 billion, and India's reserves with the International Monetary Fund (IMF) came out to be US$$ 2.69 billion.

(b) Growth of FDI FDI inflows plummeted in 2009 in all three major groupings –

developed, developing and transition economies. This global decline reflects the weak economic performance in many parts of the world, as well as the reduced financial capabilities of TNCs. Following their 2008 decline, FDI flows to developed countries further contracted by 44 per cent in 2009. Falling profits resulted in lower reinvested earnings and intra-company loans, weighing on FDI flows to developed countries. At the same time, a drop in leveraged buyout transactions continued to dampen cross-border M&As.

Developing and transition economies, which proved relatively immune to the global turmoil in 2008, were not spared in 2009 but did better than developed countries. After six years of uninterrupted growth, FDI flows to developing countries declined by 24 per cent in 2009. The recovery of FDI inflows in 2010 – if modest in global terms – is expected to be stronger in developing countries than in developed ones. As a result, the shift in foreign investment inflows towards developing and transition economies is expected to accelerate. This shift was already apparent during 2007–2009, due to

these economies’ growth and reform, as well as their increased openness to FDI and international production. As a result, developing and transition economies now account for nearly half of global FDI inflows. While part of this relative increase may be temporary, most of it reflects a longer-term shift in TNC activity.

Global rankings of the largest FDI recipients confirm the emergence of developing and transition economies: three developing and transition economies ranked among the six largest foreign investment recipients in the world in 2009, and China was the second most popular destination. While the United States maintained its position as the largest host country in 2009, a number of European countries saw their rankings slide. Developing and transition economies attracted more greenfield investments than developed countries in 2008–2009. Although the majority of cross-border M&A deals still take place in developed regions, the relative share of such transactions in developing and transition economies has been on the rise.

UNCTAD’s World Investment Prospects Survey 2010–2012 (WIPS) also confirms that interest in developed countries as foreign investment destinations compared to other regions has declined over the past few years and is likely to continue to do so in the near future. Besides the relative shift between developed and developing economies, FDI inflows in 2009 also accentuated existing trends in other country groupings, reflecting non-economic considerations. FDI inflows to tax haven economies, for example, declined in 2009 with the implementation of higher standards of transparency.

(c) Foreign Investment Policy India welcomes investors in Electronics and IT sector. Government

of India is striving to bring greater transparency in policies and procedures to provide an investor friendly platform.

A foreign company can start operations in India by registration of its company under the Indian Companies Act 1956. Foreign equity in such Indian companies can be up to 100%. At the time of registration it is necessary to have project details, local partner (if any), structure of the company, its management structure and shareholding pattern. A joint venture entails the advantages of established contracts, financial support and distribution-marketing network of the Indian partner. Approval of foreign investments is through either automatic route or Government approval. Government of India facilitates Foreign Direct Investment (FDI) and investment from Non-Resident Indians (NRIs) including Overseas Corporate Bodies (OCBs), predominantly owned by them to complement and supplement domestic investment. Foreign technology induction is encouraged both through FDI and through foreign technology collaboration agreement. Foreign Direct Investment and Foreign

technology collaboration agreements can be approved either through the automatic route under powers delegated to the Reserve Bank of India (RBI) or otherwise by the Government.

The government has undertaken various liberal policy decisions to make the whole process of foreign investment in India hassle free. Some of the foreign investment policies include:1. The list of industries that are eligible for automatic approval of foreign

investment has been expanded by the Ministry of industry.2. Indian companies will no longer need prior clearance from the reserve

Bank of India, RBI for inward remittance of foreign exchange or for issuing of shares to foreign investors.

3. The exchange control regulations have been amended by the government.

4. The ban against the use of foreign brand names/trademarks has been removed.

5. The corporate rate of corporate tax on foreign companies has been reduced from 65% to 55% by the government in the annual budget of 1994-95.

6. The government reduced long term capital gains rate for overseas companies to 20%

7. 100% inflow of foreign investment is permitted in strategic sectors such as roads, ports, tunnels, highways and harbors on the condition that the total investment in any of the sector should not exceed ` 1500 crore.

8. Any increase within the prescribed limit does not require permission from the foreign investment promotion board.

(d) International Trade and FDI International Trade

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), it’s economic, social, and political importance has been on the rise in recent centuries.

Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders.

International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture.

Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production.

Instead of importing a factor of production, a country can import goods that make intensive use of that factor of production and thus embody it. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor, the United States imports goods that were produced with Chinese labor. One report in 2010 suggested that international trade was increased when a country hosted a network of immigrants, but the trade effect was weakened when the immigrants became assimilated into their new country.

International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.

FDIForeign direct investment (FDI) refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. [1] It is the sum of equity capital, other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.[2] FDI is one example of international factor movements.

CHAPTER 3

Legal Aspects Of International Business

ANSWER IN BRIEF

1) What is FEMA?

A: The Foreign Exchange Management Act(FEMA) was an act passed in the winter session of Parliament in 1999 which replaced Foreign Exchange Regulation Act. This act seeks to make offenses related to foreign exchange civil offenses. It extends to the whole of India.

FEMA, which replaced Foreign Exchange Regulation Act(FERA), had become the need of the hour since FERA had become incompatible with the pro-liberalization policies of the Government of India. FEMA has brought a new management regime of Foreign Exchange consistent with the emerging framework of the World Trade Organization (WTO). It is another matter that the enactment of FEMA also brought with it the Prevention of Money Laundering Act 2002, which came into effect from 1 July 2005.

Unlike other laws where everything is permitted unless specifically prohibited, under this act everything was prohibited unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It required imprisonment even for minor offences. Under FERA a person was presumed guilty unless he proved himself innocent, whereas under other laws a person is presumed innocent unless he is proven guilty.

1) What are TRIPS?

A: WTO Agreement on Trade Related Intellectual Property Rights came into effect for developed countries on 1-1-1996. The Agreement provides a transitional period of five years (upto January 2000) for developing countries to bring their Intellectual Property Rights legislation in conformity with the provisions of the agreement. The transitional period for the least developed countries is 11 years i.e. upto January 2006. In India, the general public opinion is not favorable to TRIPS Agreement. The agreement on TRIPS goes against Indian patent Act, 1970. Therefore, the Patents Act, was amended in 1999 to provide for exclusive marketing rights. Patents shall be available foe any invention whether product or process in all fields of industrial technologies. TRIPS will have wider coverage and the entire industrial and agricultural sectors and to some extent bio-technology sector will be covered under the patent provisions. TRIPS have impact on patent protection. TRIPS are also likely to trouble our agricultural system.

2) What is EURO?

A: The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal,

Slovakia, Slovenia, and Spain. The currency is also used in a further five European countries and consequently used daily by some 332 million Europeans.Additionally, over 175 million people worldwide - including 150 million people in Africa - use currencies which are pegged to the euro.

The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar. As of November 2011, with nearly €891 billion in circulation, the euro has the highest combined value of banknotes and coins in circulation in the world, having surpassed the US dollar. Based on International Monetary Fund estimates of 2008 GDP and purchasing power parity among the various currencies, the eurozone is the second largest economy in the world.

The name euro was officially adopted on 16 December 1995. The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1. Euro coins and banknotes entered circulation on 1 January 2002.

Since late 2009 the euro has been immersed in the European sovereign debt crisis which has led to the creation of the European Financial Stability Facility as well as other reforms aimed at stabilizing the currency.

3) What is Labelling?

A: Labelling may be regarded as a part of packaging. Packaging decision making also involves the consideration of the labelling requirements. According to the regulations in some countries, labelling of food items should disclose information about a number of aspects like date of manufacturing, expiry date, composition, storage conditions and methods of use. In some countries, labelling certain products like cigarettes should also include a statutory warning that cigarette smoking is injurious to health. Many countries insist that labelling should be done in the popular languages of the country.This should perfectly be done even in the absence of such a statutory requirement. Besides satisfying the statutory and social requirements, labelling should help promote sales. In self-service stores, labelling should impart, to the extent desirable and feasible, the services of a salesman in informing and attracting the customers.

4) What is dumping?

A: Dumping means selling goods in the foreign market at a price below the domestic price. Thus, it is the sale of goods abroad at a price which is lower than the selling price of the same goods at the same time in the same circumstances at home, taking account of difference in transport costs.

Dumping is of three types i.e. intermittent dumping, persistent dumping and predatory dumping. Dumping affects both the importing and exporting countries. The effects are more on importing country. The industry of the importing country experiences the decline in sales and profits. If dumping continues for a longer period, it affects the survival of the industry and also changes the industrial structure in the foreign country. If the dumping company increase the price at the later stage, the importing country would be at loss both in terms of high cost of imports and change in the structure of domestic industry. Dumping also changes the preferences of the consumers of the domestic country. It also increases the deficit of the balance

of payments of the importing country. Dumping also has some effects on exporting country. The consumer of exporting country pay higher price when the consumers of foreign country enjoy the product at lower price. Therefore, the exporting country finds market for excess production. The exporting country earns valuable foreign exchange and it contributes for the surplus balance of trade.

2) STATE WITH REASONS WHETHER THE FOLLOWING STATEMENTS ARE TRUE OR FALSE:

a) Letter of credit is a letter given by importer to the exporter.

Ans: The above statement given is false. Following is the justification of statement is given.

A letter of credit is an authorization issued by the importer’s bank to the negotiating bank stating that if the exporter presents the relevant set of documents, bank will make the payment.

If the exporter wants that he should be paid for the goods exported before the title to the goods passes on the importer, he will insist upon a letter of credit.

A letter of credit creates a contractual relationship between the opening bank and the exporter.

The bank would make the payment of the sum indicated in the letter of credit subject to the condition that all the requisite documents are submitted to the bank and are founded in order.

The opening and negotiation of the letter of credit are governed by the International Chamber of Commerce, Brochure No. 500 entitled, Uniform Customs and Practice for Documentary Credits.

b) The agreement on TRIPs is in favor of Indian Patents Act, 1970.

Ans: The above statement given is false. Following is the justification of statement is given.

WTO agreement on Trade Related Intellectual Property Rights (TRIPs) came into effect for developed countries on 1-1-1996.

The agreement provides the transitional period of five years (up to January 2000) for developing countries to bring their Intellectual Property Rights legislation in conformity with the provisions of the agreement.

The basic obligation in the area of patents is that inventions in all fields of technology, whether product or processes, shall be patentable if they meet the three tests of being novel, involving an incentive step and being capable of industrial application.

In the addition to the general security exemption which applies to the entire TRIPs Agreement , exclusion from patentability are permissible for inventions whose commercial exploitation is necessary to protect public order or morality, human, animal, plant life or health or to avoid serious prejudice to the environment.

In India, the general public opinion is not favorable to TRIPs agreement. The agreement on TRIPs goes against Indian Patent Act, 1970.

Therefore, the Patents Act was amended in 1999 to provide for exclusive marketing rights.

c) Euro coins and notes began circulating in January, 2002 and local currencies were no longer accepted as legal tender.

Ans: The above given statement is true.

The European Currency Unit (ECU) which was established in 1979, was the forerunner of the Euro derived from a basket of varying amount of the currencies of the EU nations, the ECU was a unit of accounting used to determine exchange rates among the national currencies.

The growth of the Eurodollar market is one of the significant developments in the international economic sphere after the World War II.

In a narrow sense, Eurodollars are financial assets and liabilities denominated in US dollars but traded in Europe.

Thus, the US dollar still predominates the market and most of the transactions are still conducted in the money market of Europe, especially in London.

Today, the scope of the market stretches far beyond Europe and the dollar in the sense that the Euro dollar transactions are held also in money markets other than the European and I currencies other than the U dollar, interpreted in a currency deposited outside the country of issue.

Therefore, Euro coins and notes began circulating in January, 2002 an local currencies were no longer accepted as legal tender.

d) Australia and New Zealand are the two traditional economic powers in Pacific Asia.

Ans: The above given statement is true. Because,

Australia is the world’s 13th largest economy with a GDP of $ 392 billion in 1996.

It has a population of 18.3 million having area of land of 2.97 million square miles.

It is rich in natural resources but poor in human resources. Its exports are mostly concentrated in gold, iron ore, coal, wool, beef and wheat.

New Zealand was growing slowly until 1984 due to over regulations. It government started systematically deregulating since 1984.

Privatization of key industries like telecommunication, transportation and financial services was started in 1984.

Thereafter, New Zealand achieve fastest growth rate. Its major exports are dairy products, meat and wool.

Hence, Australia and New Zealand are the two traditional economic powers in Pacific Asia.

e) WTO Agreement has prescribed a number of disciplinary rules for non-member countries.

Ans: The above statement given is false. Following is the justification of statement is given.

WTO agreement has prescribed a number of disciplinary rules for member countries because they relate to anti-dumping, subsidies, safeguards and dispute settlement and countervailing measures.

Such measures will provide security and predictability in international trade. This is likely to benefit developing countries including India.

3. EXPLAIN THE LEGAL ENVIRONMENT FOR INTERNATIONAL BUSINESS

Most existing laws predate the World Wide Web. Adjusting these laws to the needs of the Internet is a difficult task. Activities sponsored by a web site may be legal in one country but not in another. This box discusses steps the United States and other countries have taken to deal with some of these issues.

Differences in Legal Systems

Legal systems vary across countries for historical, cultural, political, and religious reasons. Access to the legal system also varies from country to country. lists the

number of lawyers per 100,000 people in 14 different countries. The basis of different legal systems is discussed below.

The United Kingdom and its former colonies all follow a legal system based on common law. Common law is law based on the cumulative wisdom of judges’ decisions on individual cases through history. Thus, each country’s legal system evolves as individual cases set precedents.

Statutory laws, those enacted by legislative action, also vary among common law countries, as does the administration of the law. The text provides examples of differences between the United States and Britain in terms of statutory laws and the administration of law.

Civil law is the world’s most common form of legal system. It is based on a detailed listing, or codification, of what is and is not permissible. A main difference between common law and civil law lies with the role of the judge. In the common law system, the judge acts as a neutral referee, while in a civil law system, the judge takes on many of the tasks that would be completed by lawyers in a common law system.

Religious law is based on the officially established rules governing the faith and practice of a particular religion. A country that follows such a system is called a theocracy. The text provides an example of how religious law affects a company’s loan opportunities in a Muslim society.

Bureaucratic law, followed by communist countries and dictatorships, is whatever the country’s bureaucrats say it is, regardless of the formal law of the land. Bureaucratic law is frequently inconsistent, unpredictable, and lacking in appeal procedures.

4. WHAT IS THE IMPORTANCE OF Intellectual Property Rights and PATENTS IN INTERNATIONAL BUSINESS

Before considering how IPRS influence economic activity and growth, consider their intended roles in the economy. Economic analysis of IPRS is utilitarian, asking For reviews see Evenson and Westphal (1995), Maskus (1998b), and Primo Braga, et al (1998). Whether the benefits of any system outweigh its costs, both in static and dynamic terms.

The anticipated benefits and costs depend on characteristics of markets, products, and social institutions. Thus, a “one size fits all” approach to harmonizing international IPRS makes little economic sense.

The Purposes and Mechanisms of Intellectual Property Rights. There are two central economic objectives of any system of intellectual property protection. The first is to promote investments in knowledge creation and business innovation by establishing exclusive rights to use and sell newly developed technologies, goods, and services. Absent such rights, economically valuable information could be appropriated without

compensation by competitive rivals. Firms would be less willing to incur the costs of investing in research and commercialization activities. In economic terms, weak IPRS create a negative dynamic externality. They fail to overcome the problems of uncertainty in R&D and risks in competitive appropriation that are inherent in private markets for information.

The second goal is to promote widespread dissemination of new knowledge by encouraging (or requiring) rights holders to place their inventions and ideas on the market. Information is a form of public good in that it is inherently non-rival and, moreover, developers may find it difficult to exclude others from using it. In economic terms it is socially efficient to provide wide access to new technologies and products, once they are developed, at marginal production costs. Such costs could be quite low for they may entail simply copying a blueprint or making another copy of a compact disk or video.

Patent and Trademark

USPTO's patent and trademark depository library (PTDL) program is a nationwide network of public, state and academic libraries authorized to disseminate patent and trademark information and to support inventors, intellectual property attorneys and agents, business people, researchers, entrepreneurs, students, historians and the general public who are not able to come to USPTO's offices in Alexandria, Va. Services at the libraries are free, and include assistance in accessing and using patent and trademark documents, training on USPTO databases, obtaining access to the USPTO website, and hosting public seminars on intellectual property topics for novice and experienced innovators.

5.what is Regulatory Mechanism Why isit needed ?

Regulators must take special interest in supply and demand forecasting. Distribution companies must have freedom (subject to Regulatory Orders) to sell their Energy supplies over which they have contractual rights, to any customer.

Vertically integrated operations (where one entity controls all operations from fuel,to final supply to consumers) will require special attention from Regulators to ensure that transfer pricing is fair to consumers.

Regulators must also deal suo moto with issues that push up cost of projects (such as red tape, bureaucratic delays, padding of equipment costs, efficiencies, etc).

The electricity regulators have to find ways to improve the distribution, improve efficiencies in subsidy targeting and costs, reduce or eliminate subsidies to the non-poor and make the subsidy reach the needy.

This requires data on the poor and non-poor and a system to ensure that the non-poor are kept out of the subsidy mechanism. Cross-subsidies must be replaced by direct government funding.

6.What are the Laws Relating to product Packaging & Labelling in International market ?

Given that the supply-demand balance for Energy is unlikely to be in surplus even in 2025, Regulators will continue with cost-plus tariffs even in 2025. But the balance will change as competitive bidding comes into force for new projects and transmission capacity expands.

Cost plus regulation by which the Regulator looks at all costs including investment and allows or disallows costs for tariff purposes might become increasingly confined to long-term contracts.

Predictability is an essential requirement from Regulators. One-year tariffs do not offer this. Tariffs must be determined for at least three years at a time. Tariffs must ensure reimbursement of prudent expenditures.

Independence must not be carried so far that Regulators do not interact with different stakeholders, at least to understand different points of view. Independent regulators must have the requisite powers to make policy in relation to the tasks assigned to them.

All data submitted to regulators for tariff determination must be accessible to anyone who is interested. If any information is to be withheld, the Regulators must give reasons in writing for nondisclosure. Involvement of consumers must be ensured in the regulatory process.

This should extend beyond well- informed and large consumers and must focus on the relatively ill-informed small groups. They must be supported with funding so that they can build their expertise.

The office of a Consumer Advocate must be created in each Regulatory Commission to look after the interests of consumer groups. They can also help in selecting consumer group to be encouraged.

A good way to fund the regulatory commissions might be to put regulatory costs as an item in all consumer bills. The consumer then knows at all times what he is paying for the Regulator and evaluate the benefit in relation to the cost.

Funding could also be by the creation of a corpus from which the income is available to cover regulatory expenditures and subject to external audit.

It is undesirable that license fees and other fees levied on petitioners before the Commission, be used to fund the Regulatory expenses since there is an obvious conflict of interest.

The Regulator must demand that he be supplied all the information he needs from all parties: utilities, users, input suppliers and government. Appointment/reappointment of a Regulator must not be left to the Minister or his bureaucrats. Government should be definite on whether cross-subsidies are to be eliminated and within what period. If consumers are to be subsidized governments must be compulsorily made to make up the difference to the utility. Independent commissions must use all possible ways to know the different shades of public opinion. For this purpose, the regulators must visit different locations, meet a variety of interests, use conferences and consultation papers to elicit opinion, conduct formal public hearings and in contentious matters, issue draft Orders that can be finalized after further opinions have been elicited.

7.WTO [ World Trade Organization]

One of the most significant developments of the Uruguay Round of Trade Negotiations (1986-94) was the inclusion of intellectual property rights (IPRs) issues on the agenda of the multilateral trading system. The resulting Agreement on Trade-Related Intellectual Property Rights (TRIPS) is one of three pillar agreements, setting out the legal framework in which the World Trade Organization (WTO) has operated since the end of the Uruguay Round.2

8.Impact on Developing Countries Business

For the multilateral trading system, TRIPS marked the departure from narrow negotiations on border measures such as tariffs and quotas toward the establishment of multilateral rules for trade-affecting measures beyond borders. This move reflected underlying trends in international commerce. Due to the growth of trade in knowledge and information-intensive goods, the economic implications of imitation, copying, and counterfeiting had in many industries become at least as relevant for international commerce as conventional border restrictions to trade. Yet the TRIPS negotiations on intellectual property were marked by significant North- South differences. Developed countries, which host the world’s largest intellectual property-producing industries, were the key advocates for comprehensive minimum standards of protection and enforcement of IPRs. By contrast, many developing countries, which see themselves mostly as a consumer of intellectual property, felt that stronger standards of protection would serve to limit access to new technologies and products, thereby undermining poor countries’ development prospects. Not surprisingly, the TRIPS Agreement remains one of the most controversial agreements of the WTO. This short paper seeks to provide an introduction to the main instruments used to protect intellectual property

(Section II), the key economic trade-offs of stronger IPRs (Section III), the basic provisions of the TRIPS Agreement (Section IV), and recent TRIPS developments affecting access to medicines in developing countries (Section V). The paper draws heavily from Primo Braga, Fink, and Sepulveda (2000), Fink and Primo Braga (2001), and Fink (2003). A more extensive treatment of many issues raised here can be found in these papers, as well as in Maskus (2000) and World Bank (2001).

What is WTO?

The World Trade Organization (WTO) is the only body making global trade rules with binding effects on its Members. It is not only an institution, but also a set of agreements. The WTO regime is known as the rules-based multilateral trading system. The history of the Organization dates back to 1947, when the General Agreement on Tariffs and Trade (GATT), was set up to reduce tariffs, remove trade barriers and facilitate trade in goods. Over the years, GATT evolved through eight rounds of multilateral trade negotiations, the last and most extensive being the Uruguay Round (1986-1994). The WTO came into being at Marrakesh on 1 January 1995, following the conclusion of the Uruguay Round. GATT then ceased to exist, and its legal texts were incorporated into the WTO as GATT 1994..

Objectives of WTO

Important objectives of WTO are mentioned below:

(i) To implement the new world trade system as visualized in the Agreement;

(ii) To promote World Trade in a manner that benefits every country;

(iii) To ensure that developing countries secure a better balance in the sharing of the advantages resulting from the expansion of international trade corresponding to their developmental needs;

(iv) To demolish all hurdles to an open world trading system and usher in international economic renaissance because the world trade is an effective instrument to foster economic growth;

(v) To enhance competitiveness among all trading partners so as to benefit consumers and help in global integration;

(vi) To increase the level of production and productivity with a view to ensuring level of employment in the world;

(vii) To expand and utilize world resources to the best;

(viii) To improve the level of living for the global population and speed up economic development of the member nations.

Write short notes :

1) Customs Act,1962

The customer department of the central government is entrusted with the task of carrying out physical and documentary checks of all the articles crossing Indian borders. All export consignments are to be checked by the customs authorities located near the port to ascertain whether the goods shipped are those declared in the documents and that there is no over or under invoicing. The customer Act,1962 has given powers to the customs department to check the goods and documents in case of exports and imports transaction.

2) Intellectual Property Right

Intellectual property (IP) is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized under the corresponding fields of law.[1] Under intellectual property law, owners are granted certain exclusive rights to a variety of intangible assets, such as musical, literary, and artistic works; discoveries and inventions; and words, phrases, symbols, and designs. Common types of intellectual property rights include copyrights, trademarks, patents, industrial design rights and trade secrets in some jurisdictions. The term intellectual property is used to describe many very different, unrelated legal concepts.

An enterprise's assets may be broadly divided into two categories: physical assets - including buildings, machinery, financial assets and infrastructure - and intangible

assets - ranging from human capital and know-how to ideas, brands, designs and other intangible fruits of a company's creative and innovative capacity. Traditionally, physical assets have been responsible for the bulk of the value of a company, and were considered to be largely responsible for determining the competitiveness of an enterprise in the market place. In recent years, the situation has changed significantly. Increasingly, and largely as a result of the information technologies revolution and the growth of the service economy, companies are realizing that intangible assets are often becoming more valuable than their physical assets.

In short, large warehouses and factories are increasingly being replaced by powerful software and innovative ideas as the main source of income for a large and growing proportion of enterprises worldwide. And even in sectors where traditional production techniques remain dominant, continuous innovation and endless creativity are becoming the keys to greater competitiveness in fiercely competitive markets, be it domestic or international. Intangible assets are therefore taking center stage and SMEs should seek how to make best use of their intangible assets.

3) Inspection and Quality control :

Inspection means checking the characteristics of a product to ensure that conformity to a set of specifications is met. Sometimes it means checking 100% of a batch of product; sometimes it means checking only some samples (in that latter case, it is exactly the same as "statistical quality control".Quality control usually means only checking the conformity of products already made. It comprises inspection and other tests such as labtests. Some people use quality control to designate some more upstream activities that aim at preventing quality issues (usually these activities are called "quality assurance").

4) Anti-Dumping Measures

"Dumping" is defined as a situation in which the export price of a product is lower than its selling price in the exporting country. A bargain sale, in the sense of ordinary trade, is not dumping. Where it is demonstrated that the dumped imports are causing injury to the importing country within the meaning of the WTO Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 ("Anti-dumping Agreement"), pursuant to and by investigation under that Agreement, the importing country can impose anti-dumping measures to provide relief to domestic industries injured by imports.1

The country's imposition of an anti-dumping duty is determined by the dumping margin--the difference between the export price and the domestic selling price in the exporting country. By adding dumping margin to export price, the dumped price can be rendered a "fair" trade price.

When it is impossible to obtain a comparable domestic price because there are none or low volume sales in the ordinary course of trade in the domestic market, either export prices to third countries or a "constructed value" is used in price comparison. A "constructed value" is the cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits.

Similarly, when the export price is found to be unreliable, the price at which the product is first resold to independent buyers, or another price according to a reasonable basis determined by the authorities may be used in price comparison.

Because anti-dumping measures are an exception to the rule of most-favoured-nation treatment, the utmost care must be taken in invoking them. However, unlike safeguard measures, which are also instruments for the protection of domestic industry, the implementation of anti-dumping measures does not require the government to provide offsetting concessions or consent to countermeasures taken by the trading partner. This has increasingly led to the abuse of anti-dumping measures. For example, anti-dumping investigations are often commenced based on insufficient evidence, and anti-dumping duties may be retained long after the conditions for their levy have been eliminated.

Some countries have applied anti-dumping measures in an arbitrary manner to restrict imports, rather than to achieve the limited, remedial objective authorized in the Agreement. In light of this situation, one of the focal points of the Uruguay Round negotiations was to establish disciplines to rein in the abuse of anti-dumping measures as tools for protectionism and import restriction. Although considerable progress was seen in this process, many countries still express much concern over this abuse.

CHAPTER 4:- Economic Integration

Q1 What is economic integration

Definition of 'Economic Integration'

An economic arrangement between different regions marked by the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. The aim of economic integration is to reduce costs for both consumers and producers, as well as to increase trade between the countries taking part in the agreement.

There are varying levels of economic integration, including preferential trade agreements (PTA), free trade areas (FTA), customs unions, common markets and economic and monetary unions. The more integrated the economies become, the fewer trade barriers exist and the more economic and political coordination there is between the member countries.

By integrating the economies of more than one country, the short-term benefits from the use of tariffs and other trade barriers is diminished. At the same time, the more integrated the economies become, the less power the governments of the member nations have to make adjustments that would benefit themselves. In periods of economic growth, being integrated can lead to greater long-term economic benefits; however, in periods of poor growth being integrated can actually make things worse. Economic integration is an economic alliance or network-based on cooperation, collaboration, flexibility, closeness and a commitment between two countries on an integrating, ongoing basis. Thus, economic integration means that it is a creation of a network of like-minded states together and design economic goals and work together to attain these goals. It can be accomplished on a case to case basis, or it can be an ongoing collaboration over a long period of time. For example, the cooperation between Tronio in Finland and Harparanda in Sweden. These two border towns have decided to cooperate on a number of issues to enhance the quality and economic activity in the region. Both the cities have been benefited from the enhanced city provided services which each town not have been able to afford on their own. These two cities have been successful enough in their economic integration that are now talks about integrating the

entire region straddling the sea of Bothnia. The successful economic integration of this region can be used as a model for other areas both in Scandinavia and throughout the world.

 FORMS OF ECONOMIC INTEGRATION

Q2 Preferential Trading Agreements (PTA):

A trade pact between countries that reduces tariffs for certain products to the countries who sign the agreement. While the tariffs are not necessarily eliminated, they are lower than countries not party to the agreement. It is a form of economic integration. See also Trade and Investment Framework Agreement (TIFA), bilateral investment treaty, free trade area, customs union, common market, monetary union

A preferential trading agreement is the simplest form of economic integration.A group of countries has formal agreement to allow each other goods to be traded on preferential terms. The preferential treatment may in the form of reduced tariff or special quota for the goods of the countries.

Q3) Free Trade Area:

Free trade area is a permanent arrangement between neighboring countries. There is a complete removal of tariff on goods traded between the members of the free trade area. It involves tariff free trade among the member countries. The members are free to impose their own trade restrictions on imports from countries outside Free Trade Area. As a result of this, the goods from outside FTA may enter into free trade area through the member country levying the lowest tariffs. To overcome this problem, the members have to maintain customs points at their common borders to make sure that imports do not enter into the free trade area through the member levying the lowest tariff on each item. They should also agree on rules of origin to establish when a good is made in a member country and therefore, it is able to pass duty free across their borders.

Q4 What is competitive advantage?

An advantage that firms has over its competitors, allowing it to generate greater sales or margins and/or retain more customers than its competition. There can be many types of competitive advantages including the firm's cost structure, product offerings, distribution network and customer support.

Competitive advantages give a company an edge over its rivals and an ability to generate greater value for the firm and its shareholders. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the

advantage.

There are two main types of competitive advantages: comparative advantage and differential advantage. Comparative advantage, or cost advantage, is a firm's ability to produce a good or service at a lower cost than its competitors, which gives the firm the ability sell its goods or services at a lower price than its competition or to generate a larger margin on sales. A differential advantage is created when a firm's products or services differ from its competitors and are seen as better than a competitor's products by customers.

   Competitive advantage is any feature of a business firm that enables it to earn higher return on investment in the competitive market. Competitive advantage is gained at the corporate level through synergy and strategic business unit level through market share. Large size of the business can grow further by entering into new markets of various countries. The comparative cost theory concludes that the countries can specialize in producing certain products in which they have the competitive advantage of producing at a low cost. It means that the customers in all the countries can have the goods at low price.

 Q5 What are regional trade group..?

 The Regional Trade Groups are another potential source for locating high quality products. They can offer many services, including putting you in direct contact with U.S. exporters, producers and suppliers.

One of the interesting phenomena in the contemporary world economy is the emergence of new and extension trading blocks. In the 1950’s and 1960’s, a first phase of regional integration saw the formation of the European Economic Community (EEC) and the European Free Trade Area (EFTA) together with a number of short lived trading blocks in Latin American, the Caribbean and Africa. A second phase in the late 1990’s has brought initiative not only in Europe and America but also in North America, Australia and South East Asia. This New Phase o regionalism has generated considerable concern about whether the relatively open, multilateral world trading system will be superseded by a small number of large, relatively closed regional blocks.

Regional integration involves arrangements for preferential trade and it may take a number of forms. The term block is usually reserved by economic theorists for arrangements which take the form of either of a free trade area or of custom union. A free trade area involves the elimination of tariffs on trade between members of states but each member maintains its own national policy towards trade with third countries.

True or false with reasons:

(a) Common market is a Customs Union where internal non-tariff barriers have also been removed.

Ans. The above statement is TRUE due to the following reasons:

Common market allows free movement of goods, services and capital among the member countries.

A Common market implies that there is an internal market, comprising all the member nations, which is common to all firms trading within that market.

(b) Economic Union is the most complete form of economic integration between countries.

Ans. The above statement is TRUE because of the following reasons:

Economic Union involves common market and also the harmonization of economic policies in particular monetary union and the coordination of fiscal policies.

There is also likely coordination of other economic policies such as agricultural, industrial and other policies.

Thus, Economic Union ties up its members’ economies closely so that in effect, they function as a single economy.

(c) The benefits of comparative cost advantage provide social as well as cultural transformation.

Ans. The given statement is TRUE because of the following reasons:

The international business helps to achieve this transformation. There is a close cultural transformation and integration. The flow of capital, technology and goods from country to country helps to

achieve cultural transformation in the world.(d) The International Bank for Reconstitution and Development is the new

name for World Bank.

Ans. The mentioned statement is FALSE due to the following reasons:

The World Bank was established in June 1946 with the objective of reconstructing the economies of the devasted countries to reduce the disparities of incomes and wealth as between the developed western countries and the underdeveloped Agro-Asian countries and to raise the living standards of these countries.

(e) Regional integration does not involve arrangements for preferential trade.

Ans. The above given statement is FALSE because of the following reasons:

Regional integration involves arrangements for preferential trade and it may take a member of forms.

The term trading block is usually reserved by economic theorists for arrangements which take the form of either of a free trade area or of a customs union.]

Q-3 What is comparative cost Advantage? What is its importance in international Business?

COMPARATIVE COST THEORY:

David Ricardo illustrated the Comparative Cost Theory in 1817. He used a two country, two commodity model. According to Ricardo, business between two countries is profitable when one country produce one commodity at a lower cost than other country produces other commodity at a lower cost than the former country. Both the countries can engage in international business when one country specializes in the production in which it has greater efficiency in production.

It is quite clear that same countries have the advantage of producing some goods at a lower cost compared to other countries. This may be due to the availability of cheap labour, skilled labour, cheap and quality raw materials, advanced technology, competent management practices and administrative efficiency. For example, Japan has the advantage 0f producing cheaper textiles. The countries in the long rub will tend to specialize in the business of those goods in whose business they enjoy comparative low cost advantage and import other goods in which the countries have comparative cost disadvantage, if free trade is allowed. This type of specialization helps for the mutual advantage of the countries participating in there international business.

IMPORTANCE IN INTERNATIONAL BUISNESS:

(1)Cultural Transformation:

The benefits of comparative cost advantage provide social as well as cultural transformation. The international business helps to achieve this transformation. There is a close cultural transformation and integration. The flow of capital, technology and goods from country to country helps to achieve cultural transformation in the world. For Example in these days the west is slowly tending towards the east and vice-versa.

(2)Opportunities to Domestic Business:

Comparative advantage in the international business provides the opportunities to the domestic companies. These opportunities include advanced technology, management expertise, market intelligence, product development etc.

(3)Standards of living are high:

Comparative cost theory indicates that the countries which have the advantage it raw materials, human resources, natural resources and conditions in producing the goods at low cost and high quality, the customers in the various countries can buy more goods with the same money. This can improve the living standards of the people through purchasing power.

(4)The Large Scale Economies:

Multinational companies can produce larger quantities of goods because of larger and wider markets in the world. Therefore the get the benefit of large scale economies like reduced cost of production, availability of expertise and good quality of product.

(5)Helps to Widen Markets:

The comparative cost theory helps to widen the market and increase the size of the market. The companies need not depend for the product in a single country.

(6)Reduced Risk:

Commercial and political risks can be reduced by the companies engage in international business due to spared

In different countries, as a result of competitive advantage.

(7)The division of labour and specialization:

International business leads to division of labour and specialization due to advantage of comparative of advantage cost. For example Brazil is specialized export of coffee, Japan is specialized in automobiles and India has specialized in textiles and garments.

(8)Overall Economic growth:

Comparative cost theory provides for the flow of raw materials, natural resources and human resources from the countries where they are in excess supply to those countries which are in short supply. Thus specialization, division of labour, productivity, innovations etc lead to achieve overall economic growth of a country.

(9)Economic and social Welfare:

Competitive advantage of some countries enhances consumption level and economic welfare of the people of the respective countries. The Chinese consumption levels as well as socio economic welfare have been enhanced in recent years due to the competitive advantage.

(10)Yardstick for Exploring and Exploiting Potential Market:

Competitive advantage in the international business provides the chance of Exploring and Exploiting Potential untapped markets in the world. These markets also provide the opportunities of selling the product at higher prices than the domestic market.

Q-4 what is WTO? What are its objectives?

INTRODUCTION:

World Trade Organization is the successor to the General Agreement on Tariffs and Trade (GATT), came into being on 1st January, 1995. It is the only international organization dealing with the rules of trade between nations. In July, 1995 there were 128 signatories of WTO while in August 2003 the total membership rose to 146 countries. China re-entered the WTO in January, 2002.

The Uruguay Round was finally approved by the members of GATT on 15th December; 1993and was signed by 125 nations on 15th April, 1994. GATT got switched to WTO in January, 1995. As per results of the Uruguay Round are to be implemented within 10 years since 1995.

Objective of WTO:

1) Reduction in Export subsidies, Tariffs:

The main highlights which help the developing countries are the tarriffication of quota and other trade barriers to highly protected industries like Dairy products and Agricultural products. Reduction in export subsidies, are the other features of the new pact. In the long run the benefited due to larger agricultural exports and better access for our textile go in international markets.

2) Opportunities for MNC’s:

Multinationals can now apply for product patents in India for their newly patented products, agricultural chemicals, pharmaceutical chemicals etc. The amendments to Patents Rules would enable the government to grant for seven years in the above product range.

3) Liberalization of Exim Policies:

Many member countries, including India, have liberalized their Exim policies, whereby restrictions have been remove to a great extent on export as well as imports. This is due to the commitment made by member nations at WTO conventions.

4) Evolve a consensus of social clause on the Trade Agenda:

WTO is taking steps to evolve a consensus of social clause on the trade agenda. The challenge of the WTO is to build a consensus on the subject of trade and labour standards with a view to avoid this becoming a divisive issue. Being the rule bound, WTO may be able to compel the member to abandon many health and environmental standards, if they are of contrary to international trade rules. The panel reports are voted as per rules and decision of the whole body are binding on the members. As the power and sovereignty of the USA is now terminated the USA along with some other developed countries has asked for a full review of disputes settlement mechanism and to improve the transparency in WTO operation.

5) Organized Mechanism:

WTO is the only multilateral forum to discuss trade liberalizations and settle disputes. It provides a more powerful mechanism to solve disputes over trade among the members’ countries. Multilateral disputes-mechanism is used more frequently by developing countries than the advanced countries. The phenomenon is more prominent is WTO compared to that in GATT. The disputes settled between Singapore and Malaysia is the first bilateral settlement.

6) Focus on Financial Services:

In December 97, WTO members signed an agreement of financial services. This aims to do away barriers to expansion of the banking insurance and securities sector. Multilateral Agreements on Investment (MAI) aims to give MNCs the right to establish any business in any country without foreign MNCs. It would also give member nations the right to settle any disputes arising out of non- compliance with the MAI at the WTO.

7) WTO Arrived at Information Technology Agreement (ITA):

December 1996, at the Singapore meeting WTO arrived at information Technology Agreement (ITA). This agreement seeks to eliminate tariffs to zero level by the year 2000 on the rapidly $ 600million world market in computer related products.

8) The ultimate beneficiaries- consumers:

An individual should be aware of the WTO because he is a consumer. Trade and trade policies are of great importance to consumers everywhere. Consumers are the ultimate beneficiaries of free trade. They get better access to and choice of products to be consumed and increased competition results in the availability of hotter quality goods at fair prices. With a minimum level of knowledge on the international trade

system as governed by the WTO, an empowered consumer will be able to protect his rights and interests in areas as diverse as medicines, vehicles and financial services.

9) Overall changes in anti-dumping laws:

Anti-dumping laws are made more precise and specific and government can impose countervailing duties to prevent subsidized exports from abroad coming into India. Changes in anti-dumping laws and the power of the government to impose countervailing duties to prevent subsidized exports are all made in tune with the final act of the Uruguay round of multilateral trade negotiations.

Q-5: What is IMF? What are its objectives?

INTRODUCTION:

The international monetary fund (IMF) was set up at the end of World War II against the background of the painful international currency experience of the inter-war years. The creation of IMF was a important landmark in the history of international monetary cooperation. It is a pool of central bank reserves and national currencies which are available to its members under certain conditions. The mission of the IMF was to supply member countries with money to help them overcome short-term balance of payment difficulties. Such money is made available after the recipients have agreed to policy reforms in their economies i.e. to implement a structural adjustment programme. The establishment of IMF was the outcome of a conference held at Bretton woods in December, 1944. It began with 29 countries as its embers. There were 182 member countries of IMF as on 01.09.2000.

Objectives of IMF:

1) Restore conditions for sustainable economic growth:The main role of the IMF is to provide loans to countries experiencing balance of

payments problems so that they can restore condition for sustainable economic growth. The financial assistance provided by the IMF enables countries to rebuild their international reserves, stabilize their currencies, and continue paying for imports without having to impose trade restrictions or capital control

2) Overall promotion of international monetary cooperation.3) Leads to sustained non inflationary economic growth that benefits all people of the

world.4) Exchange stability is promoted; to maintain orderly exchange arrangement among

members and to avoid competitive exchange deprecations.5) Open institution, learning from experience and dialogue, and adapting to changing

circumstances.

6) Facilitate the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high level of employment and real income and to develop the productive resources of all members.

7) IMF shortens the duration and lowers the degree of disequilibrium in the international balance of payment of members.

8) Members feel confident by making the general resources of the fund temporarily available to them under adequate safeguards, thus providing them with opportunities to correct maladjustment in their balance of payment without resorting to measures destructive of national or international prosperity.

9) Focus on its core macroeconomics and financial areas of reasonability, working in a company fashion with other institution establish to safeguard global public goods.

Q-6 What is the need and importance of World Bank?

Introduction:

The World Bank group of five closely of associated institutions, each institution playing a distinct role in the mission to fight poverty and improve living standards for people in the developing world. The term World Bank refers specially to two of the five. The international bank for reconstruction and development (IBRD) and the international development association (IDA). The World Bank was established in June 1946 with the objectives of reconstructing the economies of the devasted countries to reduces the disparities of incomes and wealth as between the developed western countries and the underdeveloped Agro-Asian countries and to raise the living standards of these countries.

The World Bank is an inter-governmental institution. It is in a corporate for m. its capital is owned by its members of governments. All countries paying the subscription or members of IMF are also members of World Bank. There are 182 members’ countries of the bank at present. Subscription determines the eligibility to become a member. All powers are vested on board of governor consisting of one governor and one alternative governor appointed for 5 years by the members. The board of governors meets once a year. Powers of board of governor are delegated to board of executive director which works full time. There are 22 board of executive director responsible for the conduct of general operation of the bank. Board of executive director meets once in a month. The capital of the bank includes the subscription of member countries, borrowing from the world capital markets, retained earnings and repayment of its loans.

Objectives of world banks:

1) Provide long-term capital to member countries to rehabilitate the war affected economies.

2) Ensure the implementation of development projects in war ruined economies 80 as to convert them into peace economies.

3) Promote capital investment in member countries by providing guarantee of loans.

4) Small and large units are provided with guarantee for loans and other projects of members countries.

5) Induce long-term capital investment for assuring balance of payment equilibrium and balanced development of international trade.

Q-7 “if theories, like girls, could win beauty contests, the theory of comparative advantage would certainly rate high in that it is on elegantly logical structure”. Explain this theory and point out its limitation.

Differences in prices are the basic causes of trade and reflect international differences in costs. Some goods may be cheaper to produce at home and will be exported to other countries. Some goods may be cheaper to produce abroad and will be imported from that country. This generalization is basic to the theory of comparative advantage. It asserts that a country will export the products which it can produce at the lowest relative cost.A country’s comparative advantage and trade pattern are heavily affected by its resources endowment both natural and man-made. Nature has decreed important and enduring differences between countries. Some of them are rich in copper, others in petroleum, some have huge waterfalls and others have fertile plains. Some countries have just enough rainfall, for rice or cotton cultivation while others have too much. Furthermore, some countries have the resources combination required for the performance of certain vital tasks. Some countries have population large enough to man and support great and complex industries but others are so very under populated that their land cannot even be worked or their ores extracted. In others sense, people are a natural resources and in another they are a major man made resources. More numbers is the gift of nature. But the skills and attitudes of population are the work of man and strongly influence a country’s comparative advantage. A country rich in people but poor in skills may be suited to certain tasks but not the production and export of manufactured goods. A country that has very few persons per square mile but has lavished its energies on technical training is likely to enjoy a comparative advantage in the production of precision goods.

Limitation of comparative cost theory:

producers and consumers have perfect knowledge and are aware of where the least expensive goods can be purchased (in perfect competition)

- there are no transport costs - in reality, transport costs may decrease a country's competitive advantage because it may eliminate international trading's competitiveness

- only two economies that produce two goods

- costs don't change and that there are constant returns to scale 

- identical goods are being traded

- the factors of production remain in the country - but instead of goods that move from country to country, it may be the factors of production e.g. labour

- free trade among countries - in reality, many industries are most likely to have government-imposed trade barriers

Q.8) What is the role of WTO in economic integration?

Answer:-World Trade Organizations- WTO is the successor to the general Agreement on Tariffs and Trade (GATT), came into being on 1st January, 1995. It is the only international organizations dealing with the rules of trade between nations. In July, 1995 there were 128 signatories of WTO while in August 2003 the total membership rose to 146 countries. China re-entered the WTO in January, 2002.

The Uruguay Round was finally approved by the members of GATT on 15th December, 1993 and was signed by 125 nations on 15th April, 1994. GATT got switched to WTO in January, 1995. As per results of the Uruguay Round are to be implemented within 10 years since 1995.

Role of WTO in economic integration:-

1. Reduction in Export Subsidies, Tariffs:

The main highlights which help the developing countries are the tarriffication of quota and other trade barriers to highly protected industries like dairy products and Agricultural products. Reduction in export subsidies, tariffs on textile industries, and opening up of further markets for, services are the other features of the new pool.

2. Opportunities for MNC’s:

Multinationals can now apply for product patents in India for their newly patented products, agricultural chemicals, pharmaceutical chemicals etc. The amendments to Patents Act and Patent Rules would enable the Governments to grant patents rights for seven years in the above product range.

3. Liberalization of Exim Policies:

Many member countries, including India, have liberalized their Exim policies, whereby restrictions have been remove to a great extent on exports as well as imports. This is due to the commitment made by member nations at WTO conventions.

4. Evolve a Consensus of social Clause on the Trade Agenda:

WTO is taking steps to evolve a consensus of social clause on the trade agenda. The challenge of the WTO is to build a consensus on the subject of trade and labor standards with a view to avoid this becoming a divisive issue. Being the rule bound, WTO may be able to compel the member to abandon many health and environmental standards, if they are of contrary to international trade rules. The panel reports are voted as per rules and the decisions of the whole body are binding on members.

5. Organized Mechanism:-

WTO is the only multilateral forum to discuss trade liberalizations and settle disputes. It provides a more powerful mechanism to solve disputes over trade among the member countries. Multilateral disputes-mechanism is used more frequently by developing countries than the advanced countries. The phenomenon is more prominent in WTO compared to that in GATT. The dispute settles between Singapore and Malaysia is the first bilateral settlements.

6. Focus on Financial Services:

In December 97, WTO member signed an agreement of financial services. This aims to do away with barriers to expansion of the banking insurance and securities sector. Multilateral Agreements on Investment (MAI) aims to give MNCs the right to establish any business in any Country without foreign MNCs. It would also give member nations the right to settle any dispute arising out of non-compliance with the MAI at the WTO.

7. WTO Arrived at Information Technology Agreement(ITA):

December 1996, at the Singapore meeting WTO arrived at information Technology Agreement (ITA). This agreement seeks to eliminate tariffs to zero level by the year 2000 on the rapidly $600 million world market in computer related products.

8. The Ultimate Beneficiaries- Consumers:

An individual should be aware of the WTO because he is a consumer. Trade and trade policies are of great importance to consumers everywhere. Consumers are the ultimate beneficiaries of free trade. They get better access to and choice of products to be consumed and increased competition results in the availability of hotter quality goods at fair prices.

9. Overall Changes in Anti-Dumping Laws:

Anti-Dumping laws are made more precise and specific and government can impose countervailing duties to prevent subsidized exports from abroad coming into India. Changes in anti-dumping laws and the power of the government to impose countervailing duties to prevent subsidized exports are all made in tune with the final act of the Uruguay Round of Multilateral Trade Negotiations

Q.9) What are regional trade groups? Why they are created?

One of the interesting phenomena in the contemporary world economy is the emergence of new and extension of existing trading blocks. In the 1950s and 1960s, a first phase of regional integration saw the formation of the European Economic Community (EEC) and the European Free Trade Area (EFTA) together with a number of other short-lived trading blocks in Latin America, the Caribbean and Africa. A second in the late 1980s and early 1990s has brought initiatives not only in Europe and Latin America, but also in North America, Australia and South-East Asia. The new phase of regionalism has generated considerable concern about whether number of large, relatively closed regional blocks.

Regional integration involves arrangements for preferential trade and it may take a member of forms. The term trading block is usually reserved by economic theorists for arrangements which take the form of either of a free trade area or of a customs union. A free trade area involves the elimination of tariffs on trade between the member states but each member maintains its own national policy towards trade with third countries.

Trading blocks involve the removal of trade harriers but stop short of further economic integration. A common market allows not only for the free movement of commodities, but also for the free movement of factors of production. Economic Union is used to describe the situation where member states not only participate in a common market but also promote a high degree of integration in their fiscal, monetary, and commercial and welfare policies.

Q. 10) What is economic integration? What is its significance for international business? Discuss the different types of economic integration in brief.

Answer: - Economic integration is an economic alliance or network-based on co-operation, collaboration, flexibility, adaptation, risk and a commitment between two countries on an integrating, ongoing basis. Thus, economic integration means that it is a creation of a network of like-minded states together and design economic goals and work together to attain these goals. Economic integration is not an easy task. This is clearly evident from its nature an s even more so a problem in the Baltic region where there have been so many political changes in recent years.

SIGNIFICANCE OF ECONOMIC INTEGRATION TO INTERNATIONAL BUSINESS:-

The economic integration of the countries of the same region or areas increases the size of market aggregate demand for products and services, quantity of production, employment and ultimately the economic activity of the region. Further, the people of the region get a variety of products at comparatively lower prices. This factor, in turn, enhances the purchasing power and living standards of the people.

The resources of the region are pooled. In other words, the factors of production of the countries are combined. The pooling increases from output or productivity due to large-scale economies. Further, it enables to have economies of division of labor and specialization.

Rapid technological innovations and development and consequent large size operations demand heavy investment. Economic integration enables the group of countries to pool required financial resources for large scale operations.

The elimination or reduction of tariffs and barriers reduces the imports duties and thereby reduces the prices of the products/services. Customer gets the advantage of having the product at less price.

TYPES OF ECONOMIC INTEGRATION:-

The important forms of economic integration between countries are given below:

1. Preferential Trading Agreements (PTA): A Preferential Trading Agreement is the simplest form of economic integration. A group of countries have formal agreement to

allow each other’s goods to be traded on preferential terms. The preferential treatment may be in the form of reduced tariff or special quota for the goods of the countries.

2. Free Trade Area(FTA): Free trade area is a permanent arrangement between neighboring countries. There is a complete removal of tariffs on goods traded between the members of the free trade area. It involves tariff free trade among the member countries. The members are free to impose their own trade restrictions on imports from countries outside Free Trade Area As a result of this, the goods from outside FTA may enter into the free trade area through the member country levying the lowest tariffs. To overcome this problem, the members have to maintain customs points at their common borders to make sure that imports do not enter into the free trade area through the member levying the lowest tariff on each item. They should also agree on rules of origin to establish when a good is made in a member country and therefore, it is able to pass duty free across their borders.

3. Customs Unions: Customs Union is a free trade area plus an agreement to establish common barriers to trade with the rest of the world. They have a common tariff against the outside world; therefore, the members need not have their customs control on goods moving among themselves or rules of the origin. Agreement is needed on the level of the common external tariff and on the administration of the tariff revenues.

4. Common Market: Common market is a customs union where internal non-tariff barriers have also been removed. It allows free movement of goods services and capital among the member countries. A common market implies that there is an internal market, comprising all the member nations, which is common to all firms trading within that market.

5. Economic Union: Economic Union is the most complete form of economic integration between countries. This involves common market and also the harmonization of economic policies in particular Monetary Union and the coordination of fiscal policies. Monetary Union may involve a fixed exchange rate system between the member countries with a single or common currency and control over interest rates and other instruments of monetary policy. Fiscal policy co-ordination involves rationalization of tax rates and some degree of control over government budgets and budget deficits. There is also likely co-ordination of other economic policies such as agricultural, industrial and other policies. Thus, Economic Union ties up its members’ economies closely so that in effect, they function as a single economy.

Q.11) What is economic integration? Discuss different types of economic integrations in brief.

Answer: - Economic integration is an economic alliance or network-based on co-operation, collaboration, flexibility, adaptation, risk and a commitment between

two countries on an integrating, ongoing basis. Thus, economic integration means that it is a creation of a network of like-minded states together and design economic goals and work together to attain these goals.

Economic integration refers to trade unification between different states by the partial or full abolishing of customs tariffs on trade taking place within the borders of each state. This is meant in turn to lead to lower prices for distributors and consumers (as no customs duties are paid within the integrated area) and the goal is to increase trade.

Economic integration is not an easy task. This is clearly evident from its nature an s even more so a problem in the Baltic region where there have been so many political changes in recent years.

TYPES OF ECONOMIC INTEGRATION:-

The important forms of economic integration between countries are given below:

1) Preferential Trading Agreements (PTA): A Preferential Trading Agreement is the simplest form of economic integration. A group of countries have formal agreement to allow each other’s goods to be traded on preferential terms. The preferential treatment may be in the form of reduced tariff or special quota for the goods of the countries.

2) Free Trade Area(FTA): Free trade area is a permanent arrangement between neighboring countries. There is a complete removal of tariffs on goods traded between the members of the free trade area. It involves tariff free trade among the member countries. The members are free to impose their own trade restrictions on imports from countries outside Free Trade Area As a result of this, the goods from outside FTA may enter into the free trade area through the member country levying the lowest tariffs. To overcome this problem, the members have to maintain customs points at their common borders to make sure that imports do not enter into the free trade area through the member levying the lowest tariff on each item. They should also agree on rules of origin to establish when a good is made in a member country and therefore, it is able to pass duty free across their borders.3) Customs Unions:

Customs Union is a free trade area plus an agreement to establish common barriers to trade with the rest of the world. They have a common tariff against the outside world; therefore, the members need not have their customs

control on goods moving among themselves or rules of the origin. Agreement is needed on the level of the common external tariff and on the administration of the tariff revenues.4) Common Market:

Common market is a customs union where internal non-tariff barriers have also been removed. It allows free movement of goods services and capital among the member countries. A common market implies that there is an internal market, comprising all the member nations, which is common to all firms trading within that market.

5) Economic Union: Economic Union is the most complete form of economic integration between countries. This involves common market and also the harmonization of economic policies in particular Monetary Union and the coordination of fiscal policies. Monetary Union may involve a fixed exchange rate system between the member countries with a single or common currency and control over interest rates and other instruments of monetary policy. Fiscal policy co-ordination involves rationalization of tax rates and some degree of control over government budgets and budget deficits. There is also likely co-ordination of other economic policies such as agricultural, industrial and other policies. Thus, Economic Union ties up its members’ economies closely so that in effect, they function as a single economy.Q.12) Discuss absolute advantage and comparative cost advantage theory in brief.

Answer:-

In economics, the principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input.

Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything; in that case, according to the theory of absolute advantage, no trade will occur with the other party. It can be contrasted with the concept of comparative advantage which refers to the ability to produce a particular good at a lower opportunity cost.

Examples:-

Party B has the absolute advantage.

Party A can produce 5 widgets per hour with 3 employees. Party B can produce 10 widgets per hour with 3 employees.

Assuming that the employees of both parties are paid equally, Party B has an absolute advantage over Party A in producing widgets per hour. This is because Party B can produce twice as many widgets as Party A can with the same number of employees.

Comparative Cost Advantage:-

David Ricardo illustrated the Comparative Cost Theory in 1817. In economics, the theory of comparative advantage refers to the ability of a person or a country to produce a particular good or service at a lower marginal and opportunity cost. Even if one country is more efficient in the production of all goods (absolute advantage) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies.

Example:-

Two men live alone on an isolated island. To survive they must undertake a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated. He is also faster, better, and more productive at everything. He has an absolute advantage in all activities. The second man is old, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great; in others it is small.

Despite the fact that the younger man has absolute advantage in all activities, it is not in the interest of either of them to work in isolation since they both can benefit from specialization and exchange. If the two men divide the work according to comparative advantage then the young man will specialize in tasks at which he is most productive, while the older man will concentrate on tasks where his productivity is only a little less than that of the young man. Such an arrangement will increase total production for a given amount of labor supplied by both men and it will benefit both of them.

ASSUMPTIONS OF THE THEORY:-

The theory of comparative cost advantage is based on the following assumptions.

1. The only element of cost of production is labour.2. Production is subject to the law of constant returns.3. There are no trade barriers between the two countries.4. The trade is free from cost of transport.

Thus, the basis for international business is the comparative cost advantage of the countries to produce certain goods at lower cost than the other countries. The advantages derived from this theory are as follows:

1. Product prices become more or less equal among world markets.2. There is efficient allocation of global resources.3. It is possible to maximize global production at the lowest possible cost.

The demand for resources and goods among the world will be optimized

Q8 Write short notes

Q1 Market agreements

One of the interesting phenomena in the contemporary world economy is the emergence of new and extension of existing trading blocks. in the 1950s and 1960s, a first phase of regional integration saw the formation of the European economic community and the European free trade area together with a number of other short lived trading blocks in Latin America, the Caribbean and Africa. A second phase in the late 1980s and early 1990s has brought initiatives not only in Europe and Latin America, but also in North America, Australia and south-east Asia. This new phase of regionalism has generated considerable concern about whether the relatively open, multilateral world trading system will be superseded by a small number of large, relatively closed regional blocks.

Regional integration involves arrangements for preferential trade and it may take a member of forms. The term trading block is usually reserved by economic theorists for arrangements which take the form of either of a free trade area or of a customs union. A free trade area or of a customs union. A free trade area involves the elimination of tariffs on trade between the member states but each member maintains its own national policy towards trade with third countries. Customs inspectors monitor trade at the frontiers between the member states in order to tax trade that might otherwise circumvent high tariff barriers by entering the area through the member state with the lowest external tariff commodities,thus,flow freely between member states and there is no need for customs inspection at national borders.

Trading blocks involve the removal of trade barriers but stop short of further economic integration. A common market allows not only for the free movement of commodities, but also for the free movement of commodities, but also for the free movement of

factors of production. Economic union is used to describe the situation where member states not only participate in a common market but also promote a high degree of integration in their fiscal monetary, commercial and welfare policies.

Compared to the ideal of free world trade, any preferential trading arrangement which discriminates against third countries typically leads to an inefficient pattern of production. In reality, however, the world is already characterized by widespread barriers to trade and thus the pattern if production is already inefficient. Regional integration leads to reductions in tariffs and other barriers to trade between the member countries and this liberalization has a number if effects in both trade and FDI. There are static effects of trade creation and trade diversion. Then, there is the dynamic effect on trade through the creation of a large unrestricted domestic market which allows efficient domestic manufacturers to take advantage of economies of scale, with a resultant fall in average cost production

Q2 Principles of bank lending

It is widely held that a bank is an institution that accepts deposits from customers and looks after their money, offers cheque books to customers to enable them make payments to others and provides some other financial services which include lending. In a nutshell, a bank’s major operation is the acceptance of deposits and granting of loans to different kinds of customers.

Since banks depend largely on lending, the need to adhere to the basic principles of lending is quite inevitable. The principles, if strictly followed, will guarantee depositors and shareholders’ funds, increase profitability and make a healthy turn over. Such advances in turn assist in the transformation of rural environment, promote rapid expansion of banking habit and improve and boost the nation’s economy.

The basic considerations in bank lending are the character of the client seeking loan from the bank. The client must be an honest, upright customer whose record of transaction with the financial institution or in the society is remarkable. The information on the character of the borrower could be obtained through a completed form of his guarantor or his statement of account.

The bank ensure for the following guiding principles before making or guaranteeing loans:

1 The project for which loan is asked has been carefully examined by a committee as regards to the merits of the project

2 It also assesses the repayment capacity of the borrowing country such as productive plant capacities, availability of natural resources etc

3 It concentrates on lending for projects, which are designed to contribute directly to productive capacity.

4 It lends only to enable a country to meet the foreign exchange content of any project cost.

5 It keeps a check on the progress of project with on the spot inspections by its representatives.

6 Interests charged is relate to banks cost of borrowing

7 It prefers to indirectly promote local private enterprise

Q3 Goals of economic integration

Economic integration refers to trade unification between different states by the partial or full abolishing of customs tariffs on trade taking place within the borders of each state. This is meant in turn to lead to lower prices for distributors and consumers (as no customs duties are paid within the integrated area) and the goal is to increase trade.The trade stimulation effects intended by means of economic integration are part of the contemporary economic Theory of the Second Best: where, in theory, the best option is free trade, with competition and no trade barriers whatsoever. Free trade is treated as an idealistic option, and although realized within certain developed states, economic integration has been thought of as the "second best" option for global trade where barriers to full free trade exist.

Following are the objectives of economic integration

1 To promote domestic industries or certain other sectors of the economy

2 To guard against dumping

3 To promote indigenous research and developments

4 To conserve the foreign exchange resources of the country

5 To make the balance of payment position more favourable

Q4 ROLE OF IMF

The origins of the Fund and its objectives.The midwives at the Fund's birth in 1944 were political tragedy and economic despair. During the inter-war depression years, countries, suffering from overcapacity and unemployment, tried to export their way out of trouble by devaluing their currency, even while raising their own tariffs to protect against imports. Of course, other countries had the same problem, and tried the same solution — known colloquially as beggar-thy-

neighbor policies. The result? Global trade collapsed, while exchange rates and capital flows became volatile.What the world needed, according to the Fund's founders, John Maynard Keynes and Harry Dexter White, were rules to govern international exchange and flows, and an impartial arbitrator to point out when those rules were being violated. With the spirit of internationalism reinforced by recent memory, the Fund was conceived at the 1944 Bretton Woods Conference with the prime objective of facilitating "...the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income...". i

It was to do this, in part, by "promoting exchange [rate] stability" and avoiding "competitive exchange depreciation". This required the Fund to "exercise firm surveillance" over the exchange rate policies of members so that they "avoid manipulating exchange rates or the international monetary system" to prevent adjustment or "gain an unfair competitive advantage over other members"In addition to monitoring country policies through surveillance, the Fund was set up to work as a sort of credit union, lending to countries that suffered balance of payments problems. The availability of this line of credit helped a member in a number of ways. The IMF could help countries correct balance of payments difficulties by providing temporary financing to smooth the required adjustment and limit the impact on economic activity at home and abroad. Thus the country's incentives to export its problems to the rest of the world were mitigated; in fact, the IMF's financing would be conditional on policies that would limit or avoid such effects. Furthermore, countries became more welcoming of trade, knowing that they could borrow resources to weather adverse external shocks. The importance of Fund financing should therefore not be underestimated — it was a carrot that gave countries an incentive to play by the rules.

THE FOLLOWING WERE THE OBJECTIVES OF IMF

1 To promote international monetary cooperation

2 To facilitate the expansion and balanced and balance growth of international trade and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to develop the productive resources of all members

3 To promote exchange stability; to maintain orderly exchange arrangements among members and to avoid competitive exchange depreciations

4 To assist the establishment of a multilateral system of payments in respect of current transaction between members and elimination of foreign restrictions which hamper the growth of world trade

5 To give confidence to members by making the general resources of the fund temporarily available to them under adequate safeguards, thus providing them with

opportunity to correct maladjustment in their balance of payment without resorting to measures destructive of national or international prosperity

Q5 ROLE OF WORLD TRADE ORGANISATION

World Trade Organizations- WTO is the successor to the general Agreement on Tariffs and Trade (GATT), came into being on 1st January, 1995. It is the only international organizations dealing with the rules of trade between nations. In July, 1995 there were 128 signatories of WTO while in August 2003 the total membership rose to 146 countries. China re-entered the WTO in January, 2002.

The Uruguay Round was finally approved by the members of GATT on 15th December, 1993 and was signed by 125 nations on 15th April, 1994. GATT got switched to WTO in January, 1995. As per results of the Uruguay Round are to be implemented within 10 years since 1995.

Role of WTO in economic integration:-

1. Reduction in Export Subsidies, Tariffs:

The main highlights which help the developing countries are the tarriffication of quota and other trade barriers to highly protected industries like dairy products and Agricultural products. Reduction in export subsidies, tariffs on textile industries, and opening up of further markets for, services are the other features of the new pool.

2. Opportunities for MNC’s:

Multinationals can now apply for product patents in India for their newly patented products, agricultural chemicals, pharmaceutical chemicals etc. The amendments to Patents Act and Patent Rules would enable the Governments to grant patents rights for seven years in the above product range.

3. Liberalization of Exim Policies:

Many member countries, including India, have liberalized their Exim policies, whereby restrictions have been remove to a great extent on exports as well as imports. This is due to the commitment made by member nations at WTO conventions.

4. Evolve a Consensus of social Clause on the Trade Agenda:

WTO is taking steps to evolve a consensus of social clause on the trade agenda. The challenge of the WTO is to build a consensus on the subject of trade and labor standards with a view to avoid this becoming a divisive issue.

Being the rule bound, WTO may be able to compel the member to abandon many health and environmental standards, if they are of contrary to international trade rules. The panel reports are voted as per rules and the decisions of the whole body are binding on members.

5. Organized Mechanism:-

WTO is the only multilateral forum to discuss trade liberalizations and settle disputes. It provides a more powerful mechanism to solve disputes over trade among the member countries. Multilateral disputes-mechanism is used more frequently by developing countries than the advanced countries. The phenomenon is more prominent in WTO compared to that in GATT. The dispute settles between Singapore and Malaysia is the first bilateral settlements.

Q6 Economic union

A common market across more than one sovereign state with a united currency and the free exchange of capital and labor. This involves the transfer of a portion of sovereignty, especially control over monetary policy, to a central organization. Neo-Liberal economists, notably Ludwig von mises and Friedrich von Hayek, consider an economic and monetary union the fifth stage of economic integration. The largest and most famous example of an economic union is the euro zone.

It is the most complete form if economic integration between countries. This involves common market and also the harmonization of economic policies in particular monetary union and the coordination of fiscal policies. Monetary union may involve a fixed exchange rate system between the member countries with a single or common currency and control over interest rates and other instruments of monetary policy. Fiscal policy coordination involves rationalization of tax rates and some degree of control over government budget deficits. There is also likely coordination of other economic policies such as agricultural, industrial and other policies. Thus, Economic Union ties up its member’s economies closely so that in effect, they function as a single economy

Q7 common market

Group formed by countries within a geographical area to promote duty free trade  and free movement of labour and capital; among its members. European community (as a legal entity within the framework of European Union is the best known example. Common markets impose common external tariff (CET) on imports from non-member countries.

Common market is a customs union where internal non-tariff barriers have also been removed. It allows free movement of goods services and capital among the member

countries. A common market implies that there is an internal market, comprising all the member nation, which is common to all firms trading within that market

Chapter.5 International strategy

Q.1 Answers the following in brief:

(a) What is globalization?

Ans. Interdependence and integration of individual countries of the world is known as

globalization. The globalization integrates not only economies but also societies. The

globalization process includes globalization markets, production technology and

investment. However, globalization has two important components, one is globalization

of markets and the on other is globalization of production. Crossing national and political

boundaries for the purpose of business may be called as globalization.

(b) Why companies go global?

Ans. Companies go international for a variety of reasons, but the goal is typically

company growth or expansion. Whether a company hires international employees or

searches for new markets abroad, an international strategy can help diversify and

expand a business.

(c) What is business expansion strategy?

Ans. Management and expansion of international business is a crucial venture due to

the various political, social, cultural and economic factors which vary from country to

country. The business houses need accurate information to make an appropriate

decision. The size of the business should be large in order to have impact on the foreign

economies. International strategic management is concerned with the flow of goods and

services across the countries. It deals with the opportunities, threats, challenges and

risks in the international business. Strategies of global corporations are formulated for

the cluster of markets or countries.

(d) What are turnkey contract?

Ans. A turnkey operation is an arrangement by the seller to supply a buyer with a facility

fully equipped and ready to be operated by the buyer’s personnel who will be trained by

the seller. This is used in fast food franchising when a franchises agrees to select a

store site, building up the store, equip it, train the franchise and employees and

sometimes financing also.

(e) What is strategic alliance?

Ans. This strategy seeks to enhance the long-term competitive advantage of a company

by forming alliance with its competitors. The objective of this alliance is to leverage

critical capabilities, increase the flow of innovation and flexibility in responding to market

and technology changes. Strategic alliance, more than entry strategy, is a competitive

strategic. It enables companies to increase resource productivity and profitability by

avoiding unnecessary fragmentation of resources and duplication of investment and

efforts.

Q.3 what is globalization of an existing business?

Ans. Interdependence and integration of individual countries of the world is known as

globalization. The globalization integrates not only economies but also so societies. The

globalisation process includes globalisation markets, production technology and

investment. However, globalisation has two important components, one is globalization

of markets and the on other is globalisation of production. Crossing national and political

boundaries for the purpose of business may be called as globalisation. Globalization

has the following features:

(1) Planning and operating to expand business throughout the world.

(2) Removing the difference between domestic and foreign markets.

(3) Buying and selling goods and services from one country to another in the world.

(4) Establishing manufacturing and distribution facilities in different parts of the world

based on the feasibility and viability.

(5) Product planning and development are based on market consideration of the entire

world.

(6) Factors of production and inputs like raw materials, machinery, finance, labour,

managerial skill are taken the entire world.

7) Global orientation in strategies, organizational structures, organizational culture and

managerial expertise.

(8) Setting the mind and attitude to view the entire world as a single market for

business. They make investment based on the resources and ether inputs from various

parts of the world where these are available at low cost with good quality.

Q.4 Explain the process of globalization of business.

Ans. Globalization of business does not take place in a single phase. it takes gradually

through an evolutionary approach. Thus, the following are the stage in globalization:

(1) A domestic company exports to foreign countries through the dealers or agents.

(2) The domestic company then exports to foreign countries directly on its own.

(3) Slowly, the domestic company become an international company or

multinational company by establishing production and marketing operations in various

countries in the world.

(4) After sometime, the domestic company replaces a foreign company in the foreign

country with all the facilities including research and development and full-fledged with

qualified human resources.

(5) Finally, the domestic company becomes a true foreign company by serving the

needs of foreign customers just like a host countries company serves.

Q.5 what are business expansion strategies for globalization?

Ans. 1.Licensing or Franchising:-

Licensing or franchising involve minimal commitment of resources and effort on the part

or the international organization. These are the easy ways of entering the foreign

markets:

Under international licensing, a firm in one country permits a firm in another

country to use its intellectual property.

The monetary benefit to the licensor is the royalty or fees which the licensee has

to pay.

A licensing agreement may also be one of cross licensing in which there is a

mutual exchange of knowledge or patents.

Franchising is a form of licensing in which a parent company grants another

independent entity the right to do business in a prescribed manner.

One of the growing trends has been trademark licensing.

2. Exporting:-

Exporting is an appropriate strategy when the volume of foreign business is not large,

and licensing is not a better alternative. It is also used when the cost of production in the

foreign market is high and there are political and other risks involved in the foreign

country. Exporting makes the first stage in the evolution of international business of

many companies.

3. Contract manufacturing:-

A company doing international marketing contracts with firms in foreign countries to

manufacture or assemble the products while retaining the responsibility of marketing the

product. In contract manufacturing the company does not require to commit resources

for setting up production facilities and there is no risk of investing in foreign countries.

The cost of product is lower and therefore it is a less risky way to expand business.

4. Management contracting:-

Management contracting the supplier brings together a package or skills that

provides an integrated service to the client without incurring the risk and benefit of

ownership. Management contracting is a low risk method of getting into a foreign market

and it starts yielding income right from the beginning. Management contracting brings

additional benefits for the managing company. It also enables a company to

commercialize existing know-how that has been built –up with significant investments.

Management contracts can provide organizational skills, expertise and management

assistance to their clients.

5. Turnkey contracts:-

A turnkey operation is an arrangement by the seller to supply a buyer with a facility fully

equipped and ready to be operated by the buyer’s personnel who will be trained by the

seller. This is used in fast food franchising when a franchises agrees to select a store

site, building up the store, equip it, train the franchise and employees and sometimes

financing also.

6. Assembly Operations:-

Assembly operation represent cross between exporting and overseas manufacturing.

Having assembly facilities in foreign markets is a very ideal when the economies of

scale in the manufacture of parts and components and when assembly operations are

labour intensive and labour is cheap in foreign country.Products meant for domestic

marketing can also be assembled abroad. It has an advantage low cost and low import

duty on parts and components than the finished product.

7. Joint Ventures:-

Joint venture is a common strategy of entering the foreign market. Any form of

association which implied collaboration for more than a transitory period is a joint

venture. In Joint venture the ownership and arrangement and shared between a foreign

firm and a domestic firm. Such a strategy may enables the international firm to retain

much control despite a monitory holding as the power of the remaining shares is spread

out. The research has shown that the median life span of joint venture is about seven

years. Thus joint ventures are not permanent.

8. Mergers and Acquisitions:-

Merger and acquisitions have been very important expansion strategy.

Mergers means a domestic company takes initiative to take over a foreign

company through take over code and hence the business of foreign company is

merged with a domestic company.

Acquisition is also similar way and a domestic company acquires the business of

a foreign company in the similar way.

The important objective of mergers and acquisitions is to obtain access to new

technology and patent right.

It helps to reduce the foreign competition.

9. Strategic Alliance:-

This strategy seeks to enhance the long-term competitive advantage of a company by

forming alliance with its competitors.

The objective of this alliance is to leverage critical capabilities, increase the flow

of innovation and flexibility in responding to market and technology changes.

Strategic alliance, more than entry strategy, is a competitive strategic. It enables

companies to increase resource productivity and profitability by avoiding

unnecessary fragmentation of resources and duplication of investment and

efforts.

10. Countertrade:-Countertrade is a form of international trade in which certain export

and import transactions are directly linked with each other and in which import of goods

are paid for by export of goods, instead of money payments.

Countertrade refers to a variety of unconventional international trade practices

which link exchange of goods, directly or indirectly, in an attempt to dispense with

currency transactions

It has been used by a number of companies as an entry strategy. Counter trade

takes in different forms.

One of them is a barter which refers to direct exchange of goods of equal value

with no money and no third party involved in it.

The form is buy-back agreement under which the supplier of plant, equipment or

technology. Under this scheme, the full payment may be made in kind and the

balance in cash.

The third form is compensation deal under which the seller receives a part

payment in cash and the rest in goods.

The fourth form is counter purchase agreement under which the seller an

equivalent currency of money in that country within a specific period.

Q.6 what is joint venture? How is it used to expand business?

Ans. A joint venture (JV) is a business agreement in which parties agrees to develop,

for a finite time, a new entity and new assets by contributing equity. They exercise

control over the enterprise and consequently share revenues, expenses and assets. A

joint venture takes place when two parties come together to take on one project. In a

joint venture, both parties are equally invested in the project in terms of money, time,

and effort to build on the original concept. While joint ventures are generally small

projects, major corporations also use this method in order to diversify

Its importance to expand business:

1. Linking up with a Reputable Partner

One of the most important features a business can flaunt to attract a new customer

base is their reliability and reputation. However, any company can say they offer reliable

service, but saying the words doesn't always make it so. It can be much more powerful

to have a larger, more established business sing your company's praises to potential

customers, and this is precisely what a joint venture does. 

When you partner with a business that has already built a strong reputation with your

targeted market base, you can gain a positive name for yourself much more quickly. 

2. Getting Your Name into the Market 

Small business owners understand that the best way to attract new customers is to get

your name, products and services out in the public domain. However, advertising can

be expensive, whether you are looking at mass mailings, print ads or online marketing. 

To get your name out with minimal cost to you, check out a joint venture. These

partnerships allow business to share marketing costs so they get a bigger bang for their

advertising dollar. Of course, posting your company name on your partner's website

may also gain you significant exposure and cost little more than signing on the bottom

line of your JV agreement.

3. Targeting Your Market

The most effective advertising strategies target the market most likely to buy your

products and services. If you want to expand your business, finding ways to target your

marketing efforts offers the best value. When you join together with a related business

in your industry, the targeted market base is already covered. The customers who are

loyal to your JV partner are the precise individuals that will be more likely to buy from

you as well. This is an effective way of growing your business with the least amount of

cost and effort to you, which is one of the top reasons JV marketing is such a popular

choice with small business owners today.

If your business doesn't grow, it will eventually falter, so savvy business owners know

they must be constantly on the prowl for ways to expand their customer base. Joint

ventures offer a great value for the money because they address direct marketing

concerns like targeting your audience and building your reputation for the least amount

of time, effort and money. Once you have selected a JV partner that can provide you

with these specific benefits, you will be on your way to a broader market base and a

healthier bottom line.

Q.7 what is a countertrade? Explain with examples.

Ans. Countertrade is exchanging goods or services that are paid form in whole or part,

with other goods or services.

Types of countertrade

There are five main variants of countertrade:

Barter: exchange of goods or services directly for other goods or services without

the use of money as means of purchase or payment.

Switch trading: practice in which one company sells to another its obligation to

make purchase in a given country.

Counter purchase: sale of goods and services to a country by a company that

promises to make a future purchase of a specific product from the country.

Buyback: occurs when a firm builds a plant in country – or supplies technology,

equipment, training, or other services to the country and agrees to take a certain

percentage of the plant’s output as partial payment for the contract.

Offset: agreement that a company will offset a hard – currency purchase of an

unspecified product from that nation in the future. Agreement by one nation to

buy a product from another, subject to the purchase of some or all of the

components and raw materials from the buyer of the finished product, or the

assembly of such product in the buyer nation.

Necessity

Countertrade also occurs when countries lack sufficient hard currency, or when other

types of market trade are impossible.

For Example:

In 2000, India and Iraq agreed on an Oil for wheat and rice barter deal, subject to UN

approval under Article 850 of the UN Gulf War sanctions, that would facilitate 300,000

barrels of oil delivered daily to India at a price of $6.85 a barrel while Iraq oil sales into

Asia were valued at about $22 a barrel. In 2001, India agreed to swap 1.5 million tones

of Iraqi crude under the oil-for-food program.

The Security Council noted: although locally produced food items have become

increasingly available throughout the country, most Iraqis do not have the necessary

purchasing power to buy them. Unfortunately, the monthly food rations represent the

largest proportion of their household income. They are obliged to either barter or sell

items from the food basket in order to meet their other essential needs. This is one of

the factors which partly explain why the nutritional situation has not improved in line with

the enhanced food basket. Moreover, the absence of normal economic activity has

given rise to the spread of deep-seated poverty.

Role of countertrade in the world market

This article contains weasel words, vague phrasing that often accompanies biased or

unverifiable information. Such statements should be clarified or removed.

The volume of countertrade is growing. In 1972, it was estimated that countertrade was

used by business and government’s in15 countries in 1979m 27 countries by the start of

1990s, around 100 countries.

Q.8 what is need for studying country and company competitiveness while

entering into international business?

Ans. Strategic management of a global company requires an understanding and

analysis of international business environment in order to assess opportunities and

threats. The management has to formulate alternative strategies to exploit the

opportunities provided by the environment by using company strengths. Many MNCs

having the strength of technology and the environment of developing countries provide

the opportunities of high quality and low priced products. Therefore, it is necessary to

study the competitiveness of global business.

The comparative cost theory concludes that the countries can specialize in

producing certain product In which they have the competitive advantage of producing

goods at low cost. it mean that the costumers in all the countries can have the goods at

low price. Comparative cost theory also indicates that the countries which have the

advantage of row materials, labour, and natural resources in producing particular goods

can produce the goods at low cost with good quality. Thus, customer in various

countries can buy more goods with the same money.

International business also enhances the consumption level and economic

welfare of the people of the trading countries. It also widens the market and increase

the market size. Therefore, the companies need not depend upon the demand for the

product in a single country or costumer’s tastes and preference of a single country.

International business provides the chance of a single of exploring and exploiting the

potential markets which are untapped. These markets provide the opportunity of selling

the product at higher price as compared to domestic markets.

International business has many problems. Therefore, it is necessary to study the

competency of political factors, exchange stability, tariffs, quotas and other trade

barriers. Political instability is the major factor that discourages the spread of

international business. Currencies of countries are depreciated due to imbalances in the

balance of payments, instability in the exchange rates of domestic currencies in terms of

foreign countries. Governments of various countries impose tariff, domestic business.

Technology plays a major role in global business. Some developing countries

expect from the technologically advanced foreign companies assistance to local

entrepreneurs, establishment of research and development facilities and introduction of

product relevant to the home country. These relationships provide on the job training to

local employees but the overall long-term contribution to the host countries is

questionable in the minds of some leaders of developing countries. The developing

world needs labour-intensive technology to solve their problems of unemployment.

Every country has its own culture. This indicates the generally accepted values,

traditions; patterns of behavior etc. cross-cultural differences in norms that are not well

understood by outsiders often affect the business transactions adversely. These social

setting are also the important requirement for serious business relationships.

Q.9 what is market research? What is its importance in international business?

Ans. The systematic gathering, recording and analyzing of data about problem relating

to the marketing of goods and services is known as marketing research. Marketing

Research is conducted by the company concerned or it may be entrusted to an external

agency like marketing research or consultancy organization etc. Marketing Research is

very important to keep pace with the changing environment characterized by the factor

of increasing competition, fast technological developments, changing consumer

attitudes and changing tastes and requirements of the people.

Importance of market research in international business:

1. The task of marketing research is to provide management with relevant,

accurate, reliable, valid, and current information.

2. Competitive marketing environment and the ever-increasing costs attributed to

poor decision making require that marketing research provide sound information.

Sound decisions are not based on gut feeling, intuition, or even pure judgment.

3. Marketing managers make numerous strategic and tactical decisions in the

process of identifying and satisfying customer needs. They make decisions about

potential opportunities, target market selection, market segmentation, planning

and implementing marketing programs, marketing performance, and control.

4. These decisions are complicated by interactions between the controllable

marketing variables of product, pricing, promotion, and distribution.

5. Further complications are added by uncontrollable environmental factors such as

general economic conditions, technology, public policies and laws, political

environment, competition, and social and cultural changes.

6. Another factor in this mix is the complexity of consumers. Marketing research

helps the marketing manager link the marketing variables with the environment

and the consumers.

7. It helps remove some of the uncertainty by providing relevant information about

the marketing variables, environment, and consumers. In the absence of relevant

information, consumers' response to marketing programs cannot be predicted

reliably or accurately.

8. Ongoing marketing research programs provide information on controllable and

non-controllable factors and consumers; this information enhances the

effectiveness of decisions made by marketing managers.

9. Traditionally, marketing researchers were responsible for providing the

relevant information and marketing decisions were made by the managers.

However, the roles are changing and marketing researchers are becoming more

involved in decision making, whereas marketing managers are becoming more

involved with research.

Q.10 short notes.

(a) Globalization of Business:

Interdependence and integration of individual countries of the world is known as

globalization. The globalization integrates not only economies but also so societies. The

globalisation process includes globalisation markets, production technology and

investment. However, globalisation has two important components, one is globalization

of markets and the on other is globalisation of production. Crossing national and political

boundaries for the purpose of business may be called as globalisation. Globalization

has the following features:

(1) Planning and operating to expand business throughout the world.

(2) Removing the difference between domestic and foreign markets.

(3) Buying and selling goods and services from one country to another in the world.

(4) Establishing manufacturing and distribution facilities in different parts of the world

based on the feasibility and viability.

(5) Product planning and development are based on market consideration of the entire

world.

(6) Factors of production and inputs like raw materials, machinery, finance, labour,

managerial skill are taken the entire world.

7) Global orientation in strategies, organisational structures, organisational culture and

managerial expertise.

(8) Setting the mind and attitude to view the entire world as a single market for

business. They make investment based on the resources and ether inputs from various

parts of the world where these are available at low cost with good quality.

(b) Licensing and Franchising:

1. Licensing and Franchising:-

Licensing and franchising involve minimal commitment of resources and effort on the

part or the international organization. These are the easy ways of entering the foreign

markets.

Under international licensing, a firm in one country permits a firm in another

country to use its intellectual property.

The monetary benefit to the licensor is the royalty or fees which the licensee has

to pay.

A licensing agreement may also be one of cross licensing in which there is a

mutual exchange of knowledge or patents.

Franchising is a form of licensing in which a parent company grants another

independent entity the right to do business in a prescribed manner.

One of the growing trends has been trademark licensing.

(c) Countertrade:

Countertrade is exchanging goods or services that are paid form in whole or part, with

other goods or services. Countertrade also occurs when countries lack sufficient hard

currency, or when other types of market trade are impossible. This article contains

weasel words, vague phrasing that often accompanies biased or unverifiable

information. Such statements should be clarified or removed.

The volume of countertrade is growing. In 1972, it was estimated that countertrade was

used by business and governments in15 countries in 1979m 27 countries by the start of

1990s, around 100 countries.

Types of countertrade

There are five main variants of countertrade:

Barter: exchange of goods or services directly for other goods or services without

the use of money as means of purchase or payment.

Switch trading: practice in which one company sells to another its obligation to

make purchase in a given country.

Counter purchase: sale of goods and services to a country by a company that

promises to make a future purchase of a specific product from the country.

Buyback: occurs when a firm builds a plant in country – or supplies technology,

equipment, training, or other services to the country and agrees to take a certain

percentage of the plant’s output as partial payment for the contract.

Offset: agreement that a company will offset a hard – currency purchase of an

unspecified product from that nation in the future. Agreement by one nation to

buy a product from another, subject to the purchase of some or all of the

components and raw materials from the buyer of the finished product, or the

assembly of such product in the buyer nation.

(d) Competitive advantage:

Competitive advantage is defined as the strategic advantage one business entity has

over its rival entities within its competitive industry. Achieving competitive advantage

strengthens and positions a business better within the business environment.

1. Competitive advantage rests on the notion that cheap labor is ubiquitous and

natural resources are not necessary for a good economy.

2. Comparative advantage, can lead countries to specialize in exporting primary

goods and raw materials that trap countries in low-wage economies due to terms

of trade.

3. Competitive advantage attempts to correct for this issue by stressing maximizing

scale economies in goods and services that garner premium prices.

4. Competitive advantage occurs when an organization acquires or develops an

attribute or combination of attributes that allows it to outperform its competitors.

5. These attributes can include access to natural resources, such as high grade

ores or inexpensive power, or access to highly trained and skilled personnel

human resources.

6. New technologies such as robotics and information technology either to be

included as a part of the product, or to assist making it.

7. ' Information technology has become such a prominent part of the modern

business world that it can also contribute to competitive advantage by

outperforming competitors with regard to internet presence

8. Competitive advantage is a key determinant of superior performance and it will

ensure survival and prominent placing in the market.

9. Superior performance being the ultimate desired goal of a firm, competitive

advantage becomes the foundation highlighting the significant importance to

develop same.

(e) Data collection:

Data Collection helps your team to assess the health of your process. To do so, you

must identify the key quality characteristics you will measure, how you will

measure them, and what you will do with the data you collect. A formal data

collection process is necessary as it ensures that data gathered are both defined

and accurate and that subsequent decisions based on arguments embodied in the

findings are valid. The process provides both a baseline from which to measure from

and in certain cases a target on what to improve.

The research design specifies the data requirements, sources, methods and

sampling technique as well as sample size`.

Basically, there are of two sources of information primary data and secondary

data

Primary data are first hand data collected by the researcher.

Secondary data are the data which have already been gathered by somebody

else and are available to the public for any purpose. Such data may be available

in publish form such as books, periodicals, newspaper, reports etc.

Secondary data are available

Quickly and easily. However primary data collection is time consuming and

costly.

There is a need to prepare data collection forms like questionnaires. It may also

be necessary to pre-test the questionnaires before the data collection starts.

The data collection can be done in broadly two methods i.e observation and

survey.

The observation may be done in natural situation. An alternative is to observe

the consumer behaviour in simulated situation.

This method is useful to collect the information that people are unwilling or

unable to provide.

The survey method enables collection of information directly from the

consumers

Q. 11. State with reasons whether the following statements are true or false.

1. Crossing national and political boundaries for the purpose of business may be called as Globalization.

Ans: This statement is true.

Reason –today, a company can view the entire world as one country for its business operations. In fact, the businessmen were doing their operations even in the past. It shows business operations were existing across the countries even in the old days. Therefore, the concept of global business is as old as civilization.

Hence crossing national and political boundaries for the purpose

Of business may be called as Globalization.

2. Expansion of international business is an easy venture. Ans: This statement is false.

Reason- Management and expansion of international business is an crucial venture due to the various political, social, cultural and economic factors which vary from country to country. The business houses need accurate information to make an

appropriate decisions. The size of the business should be large in order to have impact on the foreign economies. An organization dealing in international business should have a vision.

Hence Expansion of international business is an easy venture.

3. Mergers and acquisitions have been very important expansion strategies.Ans: This statement is true.

Reason- Mergers and acquisitions have been very important expansion strategy. A merger is an instant access to market and distribution network. A domestic company takes initiative to take over a foreign company through take over code and hence the business of foreign company is merged with a domestic company. Acquisition is also similar way and a domestic company acquires the business of a foreign company in the similar way. The important objective of mergers and acquisitions is to obtain access to new technologies and patent rights.

Hence Mergers and acquisitions have been very important expansion strategies.

4. Countertrade means trading between two countries for the same goods or services.

Ans: This statement is false.

Reason- Countertrade is form of international trade in which certain export and import transactions are directly linked with each other and in which import of goods are paid for by export of goods, instead of money payments. Countertrade refers to a variety of unconventional international trade practices which link exchange of goods, directly or indirectly, in an attempt to dispence with currency transactions. It has been used by a number of companies as an entry strategy. Countertrade takes in different forms.

Hence Countertrade means trading between two countries for the same goods or services is false.

5. A domestic company can extend its products to foreign markets by exporting, licensing and franchising.

Ans: This statement is true.

Reason- Strategic management of a global company is different from that of a domestic company due to its peculiarities. It is concerned with deciding on strategy and planning how that strategy is put into effect. International strategy management is concerned with the flow of goods and services across the countries. It deals with the opportunities, threats, challenges and risks in the international business. Strategies of the global corporations are formulated for the cluster of markets or countries.

Hence A domestic company can extend its products to foreign markets by exporting, licensing and franchising.

Chapter 6 INTERNATIONAL MARKETING

Q1.Answer the following in brief:

1.What is an international marketing?

A: International marketing is not the same as international trade. International marketing includes the marketing of goods and services across the national boundaries and the marketing operations of an organisation that sells or produces within a given country when that organisation is part of an enterprise which also operates in other countries.

2.What is a market segmentation?

A: Market segmentation is the process of dividing the total market for a product or service into groups of customers so that each such group or segment is considered as a separate marketing mix.

3.What is Niche marketing?

A: Niche marketing is the form of concentrated marketing strategy.It is concentrating on a market segment that is not satisfactory served or which is ignored by the major international players.

4.What is a marketing strategy?

A: Marketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage.

5.What is concentrated marketing strategy?

A: The concentrated marketing strategy is based on a decision to achieve a maximum penetration in one or more segments to the exclusion of the rest of the market.

Q2.STATE WITH REASONS WHETHER THE FOLLOWING STATEMENTS ARE TRUE OR FALSE:

1. International marketing and international trade are same.- false

A: "International marketing is the multinational process of planning and executing the conception, pricing, promotion and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives." Whereas International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events.

2.Cost of production in international market depends upon cost of labour.-false

A: Labour is an important element of cost of product but cost of production depends on various factors.

3.The companies willing to enter the foreign markets should consider the cost benefit analysis.- false

A: The companies must consider present and future levels of competition while selecting the foreign markets.

4. Market segmentation is desirable when the market is homogeneous.- false

A: Market segmentation is desirable when the market is heterogenous i.e.the relevant customer characteristics are different.

5.Competition may not become a driving force behind internationalisation.-false

A: Competition may become a driving force behind internationalisation

Q.3 What is the international marketing? Explain the factor to be considered while selection of international market for an existing business. (May’06)

Ans:

Marketing is the process of planning and execution the conception, pricing, promotion and distribution of ideas, goods or services in order to create exchange that would satisfy individual and organizational objectives.

Extension of these activities across the globe is called international marketing. Companies entering into international markets have to deal with varying

economic, social, cultural, political and legal environments. International marketing is not the same as international trade.

The market selection is normally based on two sets of factors such as firm related factors and market related factors:

1. Firm related factors: Firm related factors include the objectives, resources product mix, international

orientation of the firm. The firm resources comprising financial, human, technological and managerial

factors are also useful in the selection of the market. It is also influenced by the international orientation of the firm.

The dynamism and philosophy of the top management and the internal power relations may also influence the market selection decision of a firm.

The planned business strategy may also influence the market selection of the firm. Thus a firm which has plans for large expansion of foreign business may choose a market, to start with, which can serve as a hub of international business.

2. Market related factors : Market related factors should also be carefully evaluated while selecting the

market for international business. These markets related factors can be grouped into general factor and specific factors.

General factors are to the market as a whole while specific factors are the factors which are specific to the industry concerned.

General factors which affect the decision of market selection are economic, policy, business regulations, currency stability, political factors, ethnic factors, infrastructure and bureaucracy.

The ability of a market to act as a hub, a base from where the company can operate in a continuous region is a very important factor in the market selection of a company with plans for expansion of the international business.

For example, a large number of Indian companies have e offices in Singapore to use it as a hub to trade with the booming markets of South Asia and the Pacific.

There are a number of factors specific to the industry which needs to be analyzed for evaluating the selection of market for international business. These factors are given below:1. Nature of competition.2. Trends in exports and imports and estimates for the future.3. Trends in domestic production and consumption. 4. Trade practices and customs.5. Cultural factors and consumer characteristics.6. Infrastructure available to the industry.7. Government policy and regulations.8. Supply conditions relating to materials and other inputs.

Q.4 Explain the dynamics of product and market selection. (May’09)

Cost of production depends on various factors; labour is an important element of cost of product. Therefore, the strategies to be followed in selection of market for international business are as follows:

a) Automation of the production process and introduction of robotics.b) Introduction of standardized products to reduce necessary operations and

thereby reduce the cost of production per unit.c) Locating some of the production process units in cheap labour countries.d) Out-sourcing for buying some of the components to reduce the cost of

production.e) Contract manufacturing in different countries.f) The companies should concentrate on producing sophisticated version of product

once it reaches maturity.g) Production of an industry’s standard product, in case of high-tech product. The uniqueness of product in the marketing mix is that all the other elements of

the marketing mix. These are designed to achieve successful exchange of the product for consumer satisfaction.

If the product fails to satisfy the consumer any amount of effort to boost the sales will not have long-term success. Therefore, the important product decisions in international marketing are as follows:a) Market segment decision.b) Product mix decision.c) Product specifications.d) Positioning and communication decisions.

A company has to make a strategies decision about the segments of the foreign market in which it wants to enter.

The segments that a company may enter depends on a number of factors like firm related factors such as size, resources, product mix, marketing characteristics and product related factors, competitive factors and other market related factors such as size, and characteristics of a different segments, and their growth prospects.

A firm with an innovative product and marketing strength may choose the most lucrative segments of the market. A small firm may not be in a position of compete directly with large established firms.

Small and new firms, often look for niches for an entry into the market. Product mix decisions are related to the type of products and product variations to be offered in the target market.

Product specifications involves specifications of the details of each product items in the product mix which includes size, shape, style and other attributes like packaging and labeling.

Positioning is the image projected for the product. Communication refers to the promotional message designed for the product. Both positioning and marketing communication are very much inter-related.

Q.5 What is systematic selection of international markets? (Nov’06)

Market selection is based on a thorough evaluation of the different markets with reference to certain well defined criteria. The selection is also based on company resources and objectives.

Therefore, it is required to prepare a profile of the selected markets to help the company to formulate the marketing strategy.

In order to achieve their goals successfully, the companies have to analyze alternative foreign markets and evaluate the respective cost, benefits and risks.

1) Analyze alternative foreign markets : The companies have to analyze the foreign markets by taking into account the following factors:

a) Current and potential size of the alternative market.b) Level of competition the company will face in each of these alternative markets.c) Legal and political environment in these markets.d) Socio-cultural environment of the markets.

Again, the company has to assets the market potential on the basis of the following factors:

a) Size of population of the market.b) GDP of the country and per capita GDP.c) Spread of urban and rural markets.d) Purchasing power of the people. Companies producing high quality and high priced goods can find rich

markets whereas companies producing low quality and low priced goods can find poor markets. Companies can also use data regarding prospects for growth of the market.

The companies should consider both present and likely future levels of competition while selecting the foreign markets. They should consider the following points:

a) Number and size of existing firms in the market.b) Relative strength and weaknesses of the existing firms.c) Product, price and distribution strategies of these companies.d) Actual market conditions at the time of entry in the foreign market.

The companies planning to enter the global markets should know the legal and political environment in these markets.

2) Assess costs benefits and risks: The companies willing to enter the foreign markets should consider costs, benefits and risks associated with carrying out business in a particular country or market. The companies should consider costs like direct cost, opportunity cost, etc. the direct costs are those which the company incurs in entering and setting up of operations in the global market. The benefits are the opportunities which the companies get by entering in the foreign markets. The following benefits can be achieved by the companies from entering in the foreign markets.

a) Higher sales and profits.b) Lower acquisition and manufacturing costs.c) Foreclosing of markets to competitors.d) Competitive advantages.e) Access to advanced technology.f) Cheap labour and other resources of the host country.g) Opportunity to achieve synergy-i.e. group efforts.

Similarly the risks involved in entering a new foreign market are as follows.

a) Exchange rate fluctuations.b) Operating complexities.c) Direct financial loss due to wrong assessment of market potential.d) Seizure of property by the government.

Q6.What is market segmentation? What is its importance in international marketing?

A market segment is a classification of potential private or corporate customers by one or more characteristics, in order to identify groups of customers, which have similar needs and demand similar products and/or services concerning the recognized qualities of these products, e.g. functionality, price, design, etc. The term segmentation is also used when customers with identical product and/or service needs are divided up into groups so they can be charged different amounts for the services.

A customer is allocated to one market segment by the customer´s individual characteristics. Often cluster analysis and other statistical methods are used to figure out those characteristics, which lead to internally homogeneous and externally heterogeneous market segments.

Examples of characteristics used for segmentation:

Gender Price Interests Location Religion Income Size of Household

While there may be theoretically 'ideal' market segments, in reality every organization engaged in a market will develop different ways of imagining market segments, and create differentiation strategies to exploit these segments. The market segmentation and corresponding product differentiation strategy can give a firm a temporary commercial advantage.

Criteria for segmenting:

Homogenity (within a segment)

similar responses to marketing mix similar segmenting dimensions

Heterogenity (between segments)

different responses to marketing mix different segmenting dimensions

Substantial

segment is big enough to be profitable

Operational

useful for identifying customers useful in deciding on marketing mix

Basis for segmenting consumer markets:

Geographic segmentation

The market is segmented according to geographic criteria- nations, states, regions, counties, cities, neighborhoods, or zip codes. Geo-cluster approach combines demographic data with geographic data to create a more accurate profile of specific 

Demographic Segmentation

-Segmentation by Age, gender, Income, social class, etc.

Psychographic Segmentation

Psychographics is the science of using psychology and demographics to better understand consumers. Psychographic segmentation: consumer are divided according to their lifestyle, personality, values. People within the same demographic group can exhibit very different psychographic profiles.

Behavioral Segmentation

In behavioral segmentation, consumers are divided into groups according to their knowledge of, attitude towards, use of or response to a product.

Occasions

-Segmentation according to occasions. We segment the market according to the occasions.

Benefits

-Segmentations according to benefits sought by the consumer.

Users status

-nonusers, ex-users, first time users, etc.

Niche Marketing

A niche is a more narrowly defined customer group who seek a distinct set of benefits. Identified by dividing a segment into subsegments, distinct and unique set of needs, requires specialization, and is not likely to attract too many competitors.

Local Marketing

Marketing programs tailored to the needs of local customer groups.

Importance of market segmentation:

Companies must work harder to ensure that their marketing has the greatest impact possible.

Increasing competition makes it difficult for a mass marketing strategy to succeed. Customers are becoming more diversified and firms are constantly differentiating their products relative to competitors.

Market segmentation focuses on that subset of prospects that have the greatest potential of becoming customers and generating revenue.

Companies who segment their markets match their strengths and offerings to the groups of customers most likely to respond to them.

Differentiate your products and services to meet your customer needs and desires.

Design or redesign new products and services to meet your market needs. Find hidden needs and make improvements to your existing products. by selecting and focusing on the most responsive segments to the exclusion of

others, marketing can be created to more effectively fit your consumers. Finding, understanding and focusing on the needs of your best customers can make you a market leader.

Target your marketing mix to the customers most likely to want your products or services

Identify behaviors and buying motives for your products. Identify your most and least profitable customers. Help you avoid unprofitable markets. Increase brand loyalty and decrease brand switching. Learning more about your competitors makes you more effective Improve your competitive positioning to be more accurate and better differentiate

you from the competition. Reduce competition by competing in a more narrowly defined market and

establishing a niche. Market segmentation is a proven way of improving profitability. By focusing on individualized sub groups, you're better able to meet their needs and gain higher market share and profits.

Refine your pricing to maximize revenue. Find markets where you can increase your price. optimize your marketing resources and get the most impact for your investment

Focus and match your activities to things you can do effectively and profitably When segmentation is done right, you get the highest return for your marketing expenditure.

Q7. How to analyze the international competition?

International marketing is defined as marketing in an internationally competitive environment, no matter the market is home or foreign.A protected market does not normally motivate companies to seek business outside the home market.

Indian market was a highly protected market till 1991.Domestic competition was also restricted by several policy induced entry barriers, operated by such measures as industrial licensing and MRTP regulations. Being a seller’s market, the Indian companies, did not take the foreign market seriously. The economic liberalisation since 1991, has increased the competition from foreign firms as well as those from domestic firms.

The companies must consider present and future levels of competition while selecting the foreign markets. In this respect the companies should consider the following points:

Number and size of existing firms in the market Relative strength and weaknesses of the existing firms.

Product price and distribution strategies of these firms. Actual market conditions.

Competition is the driving force behind internationalisation. For example, the competition which Nirma has been facing in India is indeed a international one. It’s major competitiors are Hindustan lever,Proctor & Gamble and Colgate Palmolive. There is also competition from foreign companies. Thus, the companies in their own home market face the technological, financial, organisational, marketing and other managerial powers of multinationals.

International marketing is not the same thing as international trade. The sale of goods in foreign countries which are produced in India is considered as an international trade. But from a truly managerial point of view it can be regarded as international marketing if it is sold to the ultimate buyer under the brand name of the exporter. Many of India’s exports are further processed and sold to the ultimate buyer under the foreign brand names. For example, Indian spices are sold in bulk quantities in foreign markets and these are packed in consumer packs after processing or in the same condition and sold under the foreign brands in foreign markets.Certain products are exported in consumer packs from India and these are repacked abroad without any further processing and sold under foreign brand names. In such cases, Indian exports are considered as international trade but not an international marketing.

Many companies take an offensive international competitive strategy by way of counter- competition. The strategy of counter competition is to penetrate the home market of the potential foreign competitor so as to reduce its competitive strength and to protect the domestic market share from foreign penetration.Effective counter- competition has a destabilising impact on the foreign company’s cash flows, product related competitiveness and decision making about integration. Direct market penetration can drain vital cash flows from the foreign company’s domestic operations.This drain can result in loss of opportunities, reduced income and limited production. This may result into impairing the competitor’s ability to make overseas thrusts. For example, IBM moved early to establish a position of strength in the Japanese computer industry before two key competitors, Fujitsu and Hitachi could gain dominance. Holding competitior’s vital cash flow and production experience to discover the U.S. market. They did not have sufficient resources to develop the distribution and software capabilities essential to get success in America. Therefore, Japanese had finally entered into joint venture with U.S. companies which were having distribution and software skills.

Q.8 What is international marketing? Discuss the different methods of international marketing. (Nov’08)

Marketing is the process of planning and execution the conception, pricing, promotion and distribution of ideas, goods or services in order to create exchange that would satisfy individual and organizational objectives.

Extension of these activities across the globe is called international marketing. Companies entering into international markets have to deal with varying

economic, social, cultural, political and legal environments. International marketing is not the same as international trade. A company has to decide whether it wants to concentrate on one or a few markets

or should spread over all the markets. Thus, there are three alternative marketing methods which are given below:

1. Concentrated marketing strategy: The concentrated marketing strategy is based on a decision to achieve a

maximum penetration I one or more segments to the exclusion of the rest of the market.

A company decides to concentrate its force on a few positions in the market by concentrating its resources and competencies over it.

A small company with limited resources can compete effectively in one or two market segments.

Niche marketing: Niche marketing is the form of concentrated marketing strategy. It is concentrating on a market segment that is not satisfactory served or which is ignored by the major international players.

2. Undifferentiated marketing strategy: Undifferentiated marketing strategy is characteristics by market aggregation. It

means treating a whole market as a single unit whose parts are alike in all major respects.

The entire market is sought to be tapped with a single marketing mix. Market aggregation and undifferentiated marketing talk a shotgun approach. This strategy is appropriate when the market is homogeneous and the customer characteristics are the same.

In this marketing strategy the seller assumes that there is a single demand curve for his product. In effect, the product is assumed to have a broad market appeal.

3. Differentiated marketing strategy: Differentiated marketing strategy essentially involves market segmentation which

is opposite of market aggregation. Market segmentation is the process of diving heterogeneous market for a product into groups of customers so that each segment is responsible to a separate marketing mix.

The objective of market segmentation is to increase the business of the company by more effectively serving the needs of the different segments of the customers.

Market segmentation is a rifle approach. In this case, the total market is viewed as a series of demand curve.

Each one represents a separate market segments calling for a different product promotional appeal and other elements in the marketing mix.

Q.9 What is international marketing? How it differ from domestic marketing? (May’08)

Marketing is the process of planning and execution the conception, pricing, promotion and distribution of ideas, goods or services in order to create exchange that would satisfy individual and organizational objectives.

Extension of these activities across the globe is called international marketing. Companies entering into international markets have to deal with varying

economic, social, cultural, political and legal environments. International marketing is not the same as international trade. International markets present more potentials than the domestic markets. This is

because the international markets are wide in scope varied in consumer tastes, preferences and purchasing abilities, size of the population etc. thus, the difference between domestic and international markets are as follows:

1. Higher rate of profits : There is higher rate of profits in international market as compared to domestic market. In India, the profits from exports business are exempt from income tax whereas profit from domestic business is subject to tax as per Income-tax Act.

2. Expansion of production capacities : Some of the domestic companies expand their production capacities more than the demand for the product in the domestic markets. These companies can sell the excess production in the foreign markets which is no possible to sell in the domestic market.

3. Competition : The weal companies cannot meet the competition of the strong companies in the domestic market. As compared to domestic market, the competition may be less in the international market because every compaby which deals in the domestic market does not enter into the international market.

4. Wide market : The international market is wide and has greater scope as compared to the domestic market. The size of the domestic market is limited either due to the smaller size of the population or due to the smaller size of the population or due to the lower purchasing power of the people or both. However, the size of the international market is big and therefore, many companies internationalize their market.

5. Political stability : Business firms prefer to enter the politically stable countries and they are restrained from locating their market operations in politically

instable countries. However, this is not required for the companies who trade only in the domestic market. It is viewed that USA, UK, France, Italy and Japan are politically stable countries, whereas most of the African countries, and Asian countries like Malaysia, Indonesia, Pakistan, India are politically instable countries.

6. Technology : availability of advanced technology and managerial competence is also important factor for domestic and international market. Companies from developing countries have advanced technology and therefore they can enter into international market.

Short notes:

1.Concentrated Marketing Strategy:

The concentrated marketing strategy is based on a decision to achieve a maximum penetration in one or more segments to the exclusion of the rest of the market.A company decides to concentrate its force on a few clearly defined areas. The company may be able to achieve a strong position in the market by concentrating its resources and competencies over it. A small company with limited resources can compete effectively in one or two market segments. Using this strategy of market segmentation a company can design products which really match the market demands.

Companies with ethnocentric orientation may adopt the concentrated marketing strategy in respect of the foreign markets by the product extension strategy. Thus, the company may concentrate on the foreign markets or segments where it can sell the same product which is sold in the domestic market.

2.Market Segmentation:

Market segmentation is the process of dividing the total market for a product or service into groups of customers so that each such group or segment is considered as a separate marketing mix. Market segmentation helps global company more in serving the needs of the different segments of the customers as the global market is heterogeneous i.e. the relevant customer characteristics are different. Market segmentation is necessary because the global market is big but there are different countries and groups of customers in different areas. The income levels, tastes and preferences, usage conditions purpose of the use of product and other consumer characteristics differ from segment to segment.

There are number of bases of market segmentation in the global market. The total market may be segmented geographically such as middle-East, North America, Western Europe and South Asia. A global company may resort to geographical segmentation of even individual countries, when the country is very large in size like

India or USA, when the weather and climatic conditions vary significantly between different regions of a country.

Demographic factors such as age, sex, income religion form bases for market segmentation for a number of products. Consumer durables products market is segmented on the basis of income. The markets for footwear, cosmetics and toiletries are segmented on the basis of age, sex and income. Similarly, markets for dress and ornaments may be segmented on the basis of religious factors. Whatever may be the basis of market segmentation, a market segment should possess certain essential characteristics such as measurability, differentiality, substantiality and accessibility.

3.International Competition:

Indian market was a highly protected market till 1991. Domestic competition was also restricted by several policy induced entry barriers, operated by such measures as industrial licensing and MRTP regulations. Being a seller’s market, the Indian companies, did not take the foreign market seriously .A protected market does not normally motivate companies to seek business outside the home market. The economic liberalization since 1991, has increased the competition from foreign firms as well as those from domestic firms.

The companies must consider present and future levels of competition while selecting the foreign markets. In this respect the companies should consider the following points:

1) Number and size of existing firms in the market.2) Relative strength and weaknesses of the existing firms.3) Product price and distribution strategies of these firms.4) Actual market conditions.

Thus, competition is a driving force behind internationalization.

4.Market Selection:

Market selection is based on a thorough evaluation of the different markets with reference to certain well defined criteria and also on company resources and objectives. In order to achieve their goals successfully, the companies have to analyze alternative foreign markets and evaluate the respective costs, benefits and risks in order to systematically select the correct market industry and company. Market research is necessary to obtain the data required for evaluating the markets. The firms have alternative markets to enter in the international business.

5.Consumer Selection:

Consumer selection is based on a thorough evaluation of the different consumer with reference to certain well defined criteria and also on company resources and objectives. In order to achieve their goals successfully, the companies have to analyze alternative foreign markets and evaluate the respective costs, benefits and risks in order to systematically select the correct market industry and company. Market research is necessary to obtain the data required for evaluating the markets. The firms have alternative markets to enter in the international business

Chapter 7

TRANSNATIONAL CORPORATION

Q.1 WHAT IS A MULTINATIONAL CORPORATIONS? WHY ARE MNC’S INCREASING?

Ans: The term “Multinational Corporation” is widely used to denote the large company having vast financial, technical, managerial and marketing resources .According to International Labour Organization “The essential nature of the multinational enterprise lies in the fact that its managerial headquarters are located in one country, while the enterprise carries out operations in number of other countries” .Multinational Corporations is an enterprise whose ownership and activities are spread in more than one country. Multinational Corporations earn huge profit & dominate global marketing activities. There are certain reasons that why MNC’s increasing they are as follows. Today we know that corporations, for good or bad, are major influences on our lives. For example, of the 100 largest economies in the world, 51 are corporations while only 49 are countries. In this era of globalization, marginalized people are becoming especially angry at the motives of multinational corporations, and corporate-led globalization is being met with increasing protest and resistance. How did corporations ever get such power in the first place? What was the impact of giving corporations the same right as individuals in 1886 in the United States?

1) transfer of technology, capital and entrepreneurship

2) They increase the investment level and thus the income and employment in

the host country

3) Greater availability of products for local consumers

4) Greater access to high quality managerial talent which tens to be scarce in

host countries.

5) Increase in exports and decrease in imports, thereby improving the balance of

payment of host countries.

6) Help in equalizing of cost of factors of production around the world

7) They provide an efficient means of integrating economics.

8) Training of local labor with more sophisticated techniques which on the long

run will bring external benefits to the host country when these techniques can

be used in all economic sector.

9) Raise the growth rate of host nation by introducing new investment and new

technology.10)Induce their local rivals to become more innovative and competitive.

promote improvement or development to various supporting industry or complementary industries .contributions of taxation, plus providing the host country with foreign exchange that can be used to purchase vital imports.

Q.2 WHAT IS TRANSNATIONAL CORPORATION? HOW IS IT DIFFERENT FROM MNC?

Ans: Transnational Corporation is a step towards global corporation.TNC is a type of multinational having its own productive assets and foreign direct investment in a number of countries.The Transnational Corporation may be defined as a “type of multinational company which conducts research in one country, manufactures components in another country, assemble them in yet another country, marketing internationally and investing in many other countries in the world”.Transnational Corporations operate more as an integrated group and treat their subsidiaries as part and parcel of a regionally or globally coordinated network of production, marketing and distribution activities.The first modern TNC is generally thought to be the Dutch East India company.

What is the difference between Multinational and Transnational?• Transnational corporations are a type of multinational corporations.• MNC have an international identity as belonging to a particular home country where they are headquartered. On the other hand, transnational corporations are more or less borderless in this regard as they do not consider a particular country as their base.• Multinationals have branches in other countries, whereas they have separate identities. There is some difference between the two concepts which is given below:MNC is a large corporation operating in different countries through branches or subsidiaries which conduct their business activities independently but within the policy decisions of their head office. TNC is a large corporation which operates at the global level through a group of companies which operate in different countries but are integrated with each other.

a) There is Centralizations of management of MNC because all important policy decisions are taken by the head office. However the management of TNC is decentralized. Each unit of TNC is given equal status and will have almost total autonomy. The parent company functions as a coordinator.

b) The branches or subsidiaries of MNC in different countries create demand for the parent company for improvement of international trade. However the members of TNC ensure that the comparative advantages of factors of production obtainable in their company are used for the benefit of all the members.

c) There is absence of close co-operation among the subsidiaries of MNC as they operate as independent units. However there is better cooperation among the members of TNC as they are integrated and well connected with each other for business purposes.

Q 3.What are the benefits of Multinational Companies (MNCs) to host control?

Ans: Multinational companies (MNCs) are not without benefits, which may be to the

government, the economy, and the people or even to itself.

The benefits of multinational companies are:

1. There is usually huge capital investment in major economic activities 

2. The country enjoys varieties of products, services and facilities, brought to their door

steps 

3. There is creation of more jobs for the populace 

4. The nation's pool of skills are best utilized and put to use effectively and efficiently 

5. There is advancement in technology as these companies bring in state-of-the-art-

technology for their businesses 

6. The demand for training and retraining and advancement in the people's education

becomes absolutely necessary. This will in turn help strengthen the economy of the

nation 

7. The living standard of the people is boosted 

8. Friendliness between and among nations in trade i.e. it strengthen international

relation 

9. The balance of payments of nations in trade are improved on

10. There is significant injection into the local economy in respect to investment 

11. Best utilization of the country's natural resources.

12. They help in strengthening domestic competition.

13. They are good source of technological expertise.

14. Expansion of market in the host country.

The above mentioned are the benefits of MNC’s to the host country where they operate and as well highlighted the derivable benefits to the MNCs themselves from the host country.

4 MNCS ARE SAID TO BE A BOON AND A CURSE FOR DEVELOPING COUNTRIES…EXPLAIN?

Ans: Multinational corporations (MNCs) are key players in international business; they are defined as "a business that has direct investments (in the form of marketing of manufacturing subsidiaries) abroad in multiple countries" (Wild, Wild, et al., 21). Transnational corporations are among the world's biggest economic institutions.

The vast numbers of MNCs are located all around the world; they vary widely in size

and interest. Their intention is to "take a package of capital, technology, managerial

know-how, and/or marketing skills to carry out production or business services abroad"

(Lecture Notes). Their effects are far reaching, affecting the daily lifestyle of the average

consumer. Partly because of their size, MNCs tend to dominate the sectors in which

they specialize. As a result, their transnational business ventures offer much debate

about their impact on developing countries; many arguments have been proposed on

this subject alone.

BOON

Multinational companies (MNCs) are believed to play a major role in the economies of developing countries. Ideally MNCs have contributed substantially towards the growth of developing countries.

MNC is most simply defined as a corporation or enterprise that conducts and controls productive activities in more than one country with the head office being established in a developed country. Big companies mostly from America, Europe and Japan but also increasingly from newly industrializing countries like South Korea, Taiwan and Brazil, create development opportunities. The issues created by these companies are serious ones that must be considered.

It is believed among many economists that MNCs fill various gaps within a host country's economy. The first and most often cited one is that, when domestic investment

and savings doesn't meet the required rate of growth in the economy, the gap in investment is filled by the MNCs' investment.

Secondly when the targeted foreign exchange is not met by the net foreign exchange derived from imports and exports together with net public debt, the gap is constituted by MNCs' net exports and capital inflow. These giant companies also fill the gap between targeted government tax revenues and locally raised taxes. Lastly the gap of management skills, entrepreneurship and technological skills are believed to be filled by the MNCs.

CURSE Majority believe that MNCs are not the panacea for development for developing countries. This has been proved for many years. - WHY? Even though it is said that MNCs provide capital and savings, they charge a higher interest on capital borrowed by the government in the host country. Apart from that, MNCs repatriate the profits to their home country apparently hindering the re-investment possibility of those profits in the host country. Further MNCs import the required intermediate goods without purchasing from domestic producers, thereby reducing the opportunity to grow for the domestic producers.

In the long run the recipient country's current account balance may worsen because of the substantial importation of intermediate goods. Furthermore the capital account's balance may worsen because of repatriation of the profits to overseas companies. The expected contribution from the tax may be less than it should be as a result of liberal tax policies vested upon MNCs. The salary structure of MNCs increases the unequal income distribution in developing countries. The cultural problems arise in the industrial zones where the MNCs are being set up.

Apart from that MNCs produce inappropriate products that are mostly targeted towards a niche market - affluent class. At the same time the technology that is being used to produce these products may not be compatible with the developing countries' systems.

Those products are advertised in such a manner that the consumer is forced to purchase the product no matter what economic conditions they are faced with. This will lead to an undesirable allocation of local resources creating undesirable consumption patterns. MNCs use their economic power over the host country's government when formulating fiscal policies. MNCs demand tax holidays, investment allowances, cheap provision of factory sites etc. As a result the MNCs private profits may be higher than the social benefits.

MNCs use their economic power, advertising effect, superior technological knowledge, worldwide contacts and competition to wipe out the host country's small-scale entrepreneurs from their business. During elections in host countries, MNCs fund a particular political party which is likely to come to power. After that party is elected, their policies are influenced by the MNCs.

Taking into account all these negative contributions, those who argue against the activities of MNCs suggest that the governments of host countries must have stringent regulations over the activities of MNCs. It is also suggested that governments should bargain for better deals and demand that MNCs adhere to certain criteria set by the government.

In conclusion, MNCs are beneficial to less developed countries. They improve the

foundations of a "backwards" economic environment through the diffusion of capital,

technology, skills, and exports. MNCs have a direct effect on the development of a more

citizen welfare conscious government. Accordingly, the number of jobs increases,

consumer spending increases, the tax base grows and health care is more widely

accessible. They also have an apparent lasting effect on the values and institutions of

the host country. The values of the country change to reflect a country committed to

staying in pace with a rapidly changing global environment; extending to political norms

and nationalistic tendencies. Once there is openness to capitalism, or a more developed

capitalist society emerges then there will be a more stable global society. However, in

the end there really is no other more reliable way to improve the social, economic, and

political environment of a state than by allowing a MNC to invest.

Q.5 transnational’s is more convenient in the context of globalization of business. Explain?

Ans: Transnational Corporations are universally accepted as more convenient and

operationally more viable in the present global economy. The process of globalization is

moving with first speed and all the countries are moving towards world-wide economic

integration. The MNCs and other corporations are not suitable to operate efficiently

under the new environment created by global economic integration. Therefore, the

alternative is TNC with the stronger top management of the entire group and greater

freedom and responsibility of the member companies. According Peter F. Druker, “the

multinationals, if it survives, will surely look different tomorrow will have a different

structure and will be transnational rather than multinational. It is suggested that along

with the globalization of business integration of economies of different countries I s

bound to take place.

Q.6 Explain the role of TNCs in the international business.

Ans: TNC produces, markets, invests and operates across the world. It is integrated

global enterprise which links global resources with global markets at profit. These

corporations have sales offices and manufacturing facilities in many countries.

Configuration of assets and capabilities are dispersed, interdependent and specialized.

The roles of overseas operations are differentiated contributions by national units to

integrated worldwide operations.

Knowledge of TNC developed jointly and shared worldwide.

TNCs are incorporated or unincorporated enterprises comprising parent enterprises and

their foreign affiliates. A parent enterprise is denned as an enterprise that controls

assets of other entities in countries other than its home country, usually by owning a

certain equity capital stake. An equity capital stake of 10% or more of the ordinary

shares or voting power for an incorporated enterprises.

Role of transnational corporation

1. They help to increase the investment level and thereby increase the income and

employment levels to the host countries.

2. They provide latest technology with a productive capacity and low cost of

production.

3. They handle a managerial revolution in the host countries through professional

management.

4. They enable the host countries to increase their exports.

5. They also help to increase competition and break the domestic monopolies.

6. They stimulate domestic enterprise in order to support their own operations

through supplies.

7. They provide an efficient means of integrating national economies.

8. They make a commendable contribution to invention and innovations. Their

enormous resources enable them to have very efficient research and

development.

9. They work to reduce the cost of production around the world.

10.They help to increase competition with the domestic enterprises which helps to

increase the competitive capacity of domestic enterprises and leading towards

specialization.

Q 7.Explain the Role of MNC’s in development of the International business?

Ans : Multinationals have played a more dynamic role in the Indian Economy particularly after 1991. They have accelerated the pace of industrial advancement and technological up gradation. Under the new liberalized economic policy MNC’s have been assigned an important role in Indian Economic scene. They can have equity stakes ranging from 51 percent to 76 percent rather than tying up with an Indian partner as was inevitable in the pre-liberalization era. They are seeking ownership controls in the areas where they have strong brands, low investment levels and with their technology. MNC’s are potentially the most powerful vehicles for the transfer of technology from the developed countries to the developing countries. They also repatriate profits which may deplete foreign exchange resources of host countries. A multinational corporation is a corporation that manages production or delivers services in more than one country. It can be referred to as an International corporation. The International Labour Organization has defined an MNC as a corporation that has its management headquarters in one operates in several other countries known as host countries. Some MNC are very big with revenues that exceed some nation’s gross domestic products. Multinational corporations can have a powerful influence in local economies and even the world’s economy. The role of MNC’s is very important for the host country in respect of the following points:

1. They help to increase the investment level thereby increase the income and employment levels to the host countries.

2. They provide latest technology with a productive capacity and low cost of production.

3. They handle a managerial revolution in the host countries through professional management.

4. They enable the host countries to increase their exports.5. They also help to increase competition and break the domestic monopolies.6. They stimulate domestic operations through supplies.7. They provide an efficient means of integrating national economies.8. They make a commendable contribution to invention and innovations. Their

enormous resources enable them to have very efficient research and development.

9. They work to reduce the cost of production around the world.10.They help to increase competition with the domestic enterprises which helps to

increase the competitive capacity of domestic enterprises and leading towards specialization.

Q.8 why do firms become multinational?

Ans. Multinational corporations are like big corporations. A company can become

Multinational Corporation either by way of expansion and diversification. The following

are the method used by the companies to grow and become big.

1. Merger and acquisition- merger and acquisition have played a vital role in the

growth of most of the leading corporations in the world. Nearly 2/3 of the giant

public Corporation in the U.S.A. is the outcome of merger and acquisition.

Merger means combination of the two companies, in which one company

mergers with another. After merger acquired company loses its identify forever.

British Leyland Motor Corporation and associated cement company are the

example of merger.

2. Subsidiaries- this is another method of forming multinational corporations. Under

this method a subsidiary or new company is opened in another company. The

subsidiary again opens its subsidiary in another country. For example Uni-lever is

a Multinational Corporations, and Hindustan Lever is a subsidiary. Suppose

Hindustan Lever opens its subsidiary in another country say Nepal, Bangladesh,

etc, then automatically the parent company will become large.

3. Joint venture- it is a type of partnership between Multinational Corporations and

domestic company. Multinational Corporations enters into joint venture through-

a. Direct Foreign Investment: it means supply of capital through equity

participation. Investment can also be made in this subsidiary. The profits

earned by subsidiary and joint venture is re-invested or returned back to the

parent company.

b. Technical know-how: Multinational Corporations agrees to supply raw

materials, machinery or technical know-how. For supplying technology to

subsidiary or joint venture, it may charge royalty, commission or fees for

consultancy or share in the profits.

4. Production and Marketing- multinational Corporations can use the production

facilities available in a developing country to produce goods and to be sold in

other countries. For example, Modi Company of India and Rank Xerox have

started a joint venture, which manufactures Xerox machines, which will be

marketed by Rank Xerox in East European Markets.

5. Production- to use the production facilities from other country, Multinational

Corporations may invest in a domestic company. For example, texas Instrument

and boeing Corporation have proposed to manufacture some of their parts in

India, to be used in their product. Though this does not result into growth of

Multinational Corporations but it generally leads to extension of activities.

6. Turn key projects- Multinational Corporations can undertake the completion of

project from its conception to completion stage at an agreed contract price

sometimes Multinational Corporations also agree to operate and maintain the

project for a specific period. Big projects like petro-chemical, steel plants,

fertilizer projects, etc, requiring huge finance and state of art technology, can be

given to multinational corporations for construction purpose.

Q 9. Short Note on:

1. GOVERNMENT POLICY ON MNC’S : The government policy on MNC’S has been changed considerably in recent year’s .As a result of introduction of liberal economic policies and more towards globalization. MNC’S are permitted to expand their activities in India .At the same time Indian companies have also been permitted in global markets .The entry of MNC’S is made due to the amendments to different acts such as MRTP and foreign exchange regulation acts .The government policy is favorable for new investment by MNC’S in the infrastructure sector. The expansion of the activities of MNC’s in India is reality and it must be accepted .It is the result of global factors and economic policies of the government .However; the government policies on MNC’s need to be flexible and cautious .Complete freedom to the MNC’s may be dangerous in the long run. They should be allowed to raise competitive capacity of Indian industries for industrial growth .They should not be allowed to establish their industrial empires in India. Similarly, the interests of the Indian consumers ,farmers ,investors and the society at large must be protected even in the ongoing process of globalization .The government has to impose certain restriction on MNC’s as regard to their operation and activities.

2. ROLE OF INDIAN MNC’S : Indian MNC’s are on shopping spree, Buying companies everywhere in the world .The year 2003 has witnessed a spurt in mergers and acquisition activities, expanding the footprint of Indian companies in the global market place .The CMIE report states that Indian companies have acquired 40 foreign firms in April – October, 2003 .The

Indian companies acquisition were to cross $ 1 billion or over Rs 4500 corers mark. India’s top line companies are cash rich .The big boost has come with financial reforms and a strong rupee .The trend setters in this line are A V Birla group and Ranbaxy, Indian companies want to maximize share holder’s wealth. The following are the reasons for Indian companies to invest abroad:

They get the new sources of demand. They get new sources of funds. They want to enter new markets to increase their earnings and to realize the full

benefits of economic scale. Some companies are increasingly establishing or acquiring existing overseas

plants to learn about the technology of foreign countries .This technology can be used by them to improve their production process of their subsidiaries in other countries.

Some countries become internationalized when they possess an advantage not available to competitive firms. They can exploit this monopolistic advantage in the foreign countries.

Capital market imperfections may motivate these companies to undertake foreign direct investment.

Some companies enter into foreign markets for the purpose of gaining information and experience which will be useful to them in entering into other markets.3. MULTI – LOCATION MANUFACTURING : Multi nationals and transnational

carry out business in many countries. In case of MNC’s there is a parent company in one country and branches or subsidiaries in other countries .However, in case of transnational’s, the different companies carry out business in different countries but their activities are integrated .Each manufacturing unit is concerned with specific manufacturing activities and in addition conducts certain additional functions for other group companies. One member company of transnational confederation may be operating in Japan and it may be in a better position to conduct research and development activities for the entire group .In that case .research activities of all member companies may be conducted from this company and the benefit may be given to concerned member companies .similarly, the production of one member company operating in England may be used as a raw material for further processing or manufacturing by another member company operating in Germany. Location is an important factor even in international business. Therefore, the following factors should be considered while selecting an ideal location for manufacturing:

a) Easy availability of raw material and labour.b) Uninterrupted supply of power.c) Nearness to the market.d) Availability of transport facilities.e) Availability of warehousing facilities.

In case of an international business, there can be multi location manufacturing as in case of domestic business .however, in case of domestic business .However, in case of domestic business there is only one company having different plants in different part of the country .The MNC has to consider all these factors and decide about the locations for manufacturing. However, TNC’s operate in many countries with economic integration .Each Company or member unit is separate and unit has to decide whether to manufacture or buy the from the other member company.

4. THE PROCESS OF BUILDING OF A MNC’S: business organization wants to become bigger in assets, operations and earnings. The purpose of such growth is to secure the advantages of large scale operations. Growth is certainly useful to all business enterprise .Today’s multinationals were small enterprise in the initial period but have developed in different directions over a period of time. Small companies become bigger and even multinational due to growth of business activities .this has happened in the case of ford Motor Corporation of U.S.A, Honda Corporation of Japan .The same is the case of Tata, Bajaj groups in India.

There are several alternative methods of entering international business which are less risky and also involve smaller initial outlay than the direct investment. These alternatives are joint ventures, mergers and acquisitions and franchising.

A joint venture is a form of business combination .two or more companies form temporary partnership at an international level for a special purpose. These companies arrive at an agreement on certain issues of mutual interest. It is a fast and economic route for gaining increasing competitiveness to combining units. Joint venture is useful for the inflow of foreign capital, machinery, technology, for rapid industrial growth in developing countries

A merger is a combination of normally two companies in which one exits and the other ceases to exist. The asset and liabilities of the non existing company are taken over by surviving company. Acquisition refers to acquiring controlling interest in a company by another company

Liberalization, privatization, and growing competition have been stimulating restructuring of industries globally and cross border mergers and acquisition has become a necessitating and facilitating force. The takeover code put in place by the SEBI has imparted clarity and order to acquisition scene in India.

In India, internal and external growth strategies are used by the business enterprise. Big companies have enlarged the scope of their activities by raising the scale of operations or by extending the product line.

CHAPTER NO 8:- INTERNATIONAL HUMAN RESOURCE MANAGEMENT

(1) ANSWER THE FOLLOWING IN BRIEF:

(a) What is Business Ethics?

Business can be defined as a primary economic institution through which people in

modern societies carry on the task of producing and distributing goods and services and

business ethics refers to the application of ethical judgments to business activities.

Business ethics explains that business can generate profits being ethical. But business

ethics till last decade was being contradicted due to expansion of practicing business

ethics. Today more and more importance is being given to the application of ethical

practices in business dealings and the ethical implications of business decisions.

(b) What are Requite Business Values?

In order to meet the stakeholder expectation the following values from the age

Old Indian philosophical tradition, consistent with similar values from other

Civilization may be consider for individuals and institution, including business, the

Indian tradition commands four objectives in the following ethical order priority.

• Dharma: The right path which will up hold the family, organizational

Social fabric.

• Artha: The pursuit, creation and acquisition of wealth.

• Karma: The fulfillment of all legitimate desires and enjoyment of all

Socially sanctioned pleasures

• Moksha: Seeking release, transcendences and liberation from mundane Pursuits

(c) What is corruption?

Ans. Corruption is payment for services or material which the recipient is not due, under

law. This may be called as bribery or kickback

(d) What is relationship marketing?

Relationship marketing is to build relationship the company and the costumers.

The relation could be public relation or industry relation. Building a good public relation

helps in enhancing its corporate image which further helps to increase its sales.

Industrial relation helps to understand the type of institution, laws and standards in

place with respect to trade unions and their collective bargaining rights, and labour

management relations.

(e) What is HRM strategy?

The focus of human resource management (HRM) is on managing people within the

employer-employee relationship. It involves the productive use of people in achieving

the organization’s strategic business objectives and the satisfaction of individual

employee needs.

'Strategy defines the direction in which an organization intends to move and establishes

the framework for action through which it intends to get there.' It involves the

productive use of people in achieving the organization’s strategic business objectives

and the satisfaction of individual employee needs.

(2) State true or false with reasons:-

(a) Organization which are very successful are all ethical

Ans. TRUE

Reason :-If you have difficulty distinguishing the World Bank from the International

Monetary Fund, you are not alone. Most people have only the vaguest idea of what

these institutions do, and very few people indeed could, if pressed on the point, say why

and how they differ. Even John Maynard Keynes, a founding father of the two

institutions and considered by many the most brilliant economist of the twentieth

century, admitted at the inaugural meeting of the International Monetary Fund that he

was confused by the names: he thought the Fund should be called a bank, and the

Bank should be called a fund. Confusion has reigned ever

(b) Human dignity and respect is religious or spiritual but globally acceptable

Ans. FALSE

Reason:- Human resource management practices vary from country to country due to

the variation in culture, government police , labour laws . The core functions of an

International Human Recourse Management are recruitment, selection expatriates

Performances appraisal, training and development and compensation .Recruitment

Labour.

(c) The Enron case is failure due to corruption and politics.

Ans. TRUE

Reason: The Enron case is a combination of corruption and politics. Politics leads to

corruption and vice-versa. Therefore, more and more people enter into politics.

(d) Multinational cannot respond to the charging environment of industrial Relations

Ans. FALSE

Reason:- Today, the focus labour discrimination and child labour the trade union have

been trying to incorporate social clause in international trade and Man labour the

international trade and investment agreement the main idea worker right’s and trade to

include social clause in trade agreement .Multinational are considered as better

channels through which better labour standard can be disseminated. There is several

ways like

1) Home countries may enforces MNCs same requirement in their affiliates

2) There may be adoption of global standards in safety and technology

3) There may be influence of trade unions.

(e) International marketing need not develop closer economic and cultural relations

between different countries?

Ans. FALSE

Reason: - Culture influences the behavior of the consumer through the valid

generalization have not yet been developed. At the multinational level, the companies

must co-ordinate and integrate business activities that are operating in many countries

with different culture environments.

Hence, International marketing needs to develop closer economic and cultural relations

between different countries.

(3) What is business ethics? Why is it needed in international business?

Business ethics has both normative and descriptive dimensions. As a corporate practice

and a career specialization, the field is primarily normative. Academics attempting to

understand business behavior employ descriptive methods. The range and quantity of

business ethical issues reflects the interaction of profit-maximizing behavior with non-

economic concerns. Interest in business ethics accelerated dramatically during the

1980s and 1990s, both within major corporations and within academia. For example,

today most major corporations promote their commitment to non-economic values

under headings such as ethics codes and social responsibility charters. Adam Smith

said, "People of the same trade seldom meet together, even for merriment and

diversion, but the conversation ends in a conspiracy against the public, or in some

contrivance to raise prices." Governments use laws and regulations to point business

behavior in what they perceive to be beneficial directions. Ethics implicitly regulates

areas and details of behavior that lie beyond governmental control. The emergence of

large corporations with limited relationships and sensitivity to the communities in which

they operate accelerated the development of formal ethics regimes.

NEED AND IMPORTANCE OF BUSINESS ETHICS:

Need and Importance of ethics in the business world is superlative and global. New

trends and issues arise on a daily basis which may create an important burden to

organizations and end consumers.

Nowadays, the need for proper ethical behavior within organizations has become crucial

to avoid possible lawsuits. The public scandals of corporate malfeasance and

misleading practices, have affected the public perception of many organizations. It is

widely known that advertising does not promote the advancement of human moral

sensibility.

The recent expansion of global business and fall of trade barriers worldwide have

further underlined the interest in the topics of ethical behaviour and social responsibility.

In addition, as many scholars believe, human rights and environmental conservation are

gaining increasing more recognition in both academic and commercial settings.

As multinational companies expand globally and enter foreign markets, ethical conduct

of the officers and employees assume added importance since the very cultural

diversity associated with such expansion may undermine the much shared cultural and

ethical values observable in the mores homogeneous organizations. Although

understanding of other cultures and recognition of differences among them will enhance

the cross-cultural communication, it may not be sufficient to provide viable guidelines of

proper ethical behaviour in organizations. Thus, concerns about unethical behaviour of

corporations in other countries, are manifested in legislations such as The Foreign

Corrupt Practices Act of 1977, and the Sarbanes- Oxley Act of 2002. In the academic

arena, on the other hand, the culture-based consequentiality model is developed to

explain, among other things, how cultural differences alter the ethical perception and

actions of individuals engaged in making decisions with ethical overtones.

(4) What is HRM strategy in international business?

Ans. “The strategic role of HRM is complex enough in a purely domestic firm, but it is

more complex in an international business, where staffing, management development,

performance evaluation, and compensation activities are’ complicated by profound

differences between countries in labor markets, culture, legal systems, economic

systems, and the like.” It is not enough that the people recruited fit the skill requirement,

but it is equally important that they fit in to the organizational culture and the demand of

the diverse environments in which the organization functions.

Therefore the study of hrm needs an altogether different approach. However , the

functions of hrm are as follows :

1) Global recruitment

2) Global selection process

3) Expatriates

4) Performance appraisal

5) Training & development

6) Compensation and benefits

7) Women in international business

8) Dual career groups

9) International industrial relations

10) Quality circles

11) Participative management

The rise of multinational and transnational corporations has placed new requirements

on HR managers. For instance, HR managers must ensure that the appropriate mix of

employees in terms of knowledge, skills, and cultural adaptability is available to handle

global assignments

Types of International employees

1) Foreign parent expatriates

2) Host Country nationals

3) Third Country expatriates of foreign parent

4) Managing international assignments

• Employee and family adjustment

• Selecting the right person for a foreign assignment

• Culture, communication and langauge

Recruitment and Selection by Multinationals

International Labour Market Sources

•Parent Country Nations (PCN ) PCNs are managers who are citizens of the Country

where the mnc is headquartered. The reasons for using pcns include-the desire to

provide the company’s more promising managers with international experience-the

need to maintain and facilitate organizational coordination and control-the unavailability

of managerial talent in the host country-the company’s view of the foreign operation as

short lived-the host country’s multi-racial population-the belief that a parent country

manager is the best person for the job.

• host country nationals (hcns) hcns are local managers hired by mncs the reasons for

using hcns-familiar with the culture, language-less expensive, know the way things

done, rules of local market-hiring them is good public relation

• third country nationals (tcns) tcns are managers who are citizens of countries other

than the one in which the mnc is headquartered or the one in which it is assigned to

work by the mnc. the reason for using tcns-these people have the necessary expertise-

they were judged to be the best ones for the job.

Given the seriousness of offences against the OECD Convention, it is imperative that

enterprises involved in global business take active steps to manage their potential

exposure. Also, although the OECD Convention currently addresses the supply side of

corruption in the public sector, it is likely that the ambit of the Convention will be

expanded to include bribery in the private sector in addition to the demand side of

bribery.

(5) Explain the conflicts between corporate and National pressures?

Ans. Corruption is payment for services or material which the recipient is not due,

under law. This may be called as bribery or kick Having no domestic partner, the deal

secrecy coupled with the company Effort to keep the detail confidential the lack of

competitive bidding Govement load guarantees and a high rate of return (23percent) all

Contributed to a negative public perception. The company failed of Janata Party. The

BJP’s 1995 campaign for state elections called for A revaluation of the 2015 megawatt

Dadhal project-Eron responded By the Bharatiya the construction believing that, it would

became more Difficult for a new state government to reverse the process since the

Coalition pledged during the campaign that they would review the is .The Enron case is

a combination of corruption and politics . Politics lending government of the host country

economy employment of National sharing.

(6) What is the impact of religions and culture on international business?

Most of the organizational prefer to depend upon internal sources in order to build

good public relations and Employee as well as past employee morale and development

and compensation Organizational .internal sources are less expensive. There is a good

selection of Performances is in accordance with the organizational requirement and the

Employees become their performances is in accordance with the organizational

Requirement and the employees are the employees are adjusted to the company.

Culture

Variation in culture, government police, labours laws. The core functions of an

International Human Recourse Management are recruitment, selection expatriates

Performances appraisal, training and development and compensation .Recruitment

Labour customs and other capabilities acquired by people as member of society.

Culture in this sense, includes system of values, and values are among the building

blocks of culture. Thus, Culture is a system of ideas and these ideas constitute a design

for living. Culture influences the behavior of the consumer though the valid

generalizations have not yet been developed. Culture and custom factors vary widely

from country to country. These factors include dressing habits, eating habits, religious

factors, etc. multinational companies should consider these factors of the host country

while operating in that country.

(7) Explain the need and importance of recruitment and training in international

business?

Training is given on four basic grounds:

1. New candidates who join an organization are given training. This training

familiarizes them with the organizational mission, vision, rules and regulations and the

working conditions.

2. The existing employees are trained to refresh and enhance their knowledge.

3. If any updating and amendments take place in technology, training is given to

cope up with those changes. For instance, purchasing new equipment, changes in

technique of production, computer impartment. The employees are trained about use of

new equipments and work methods.

4. When promotion and career growth becomes important. Training is given so that

employees are prepared to share the responsibilities of the higher level job.

IMPORTANT OF TRAINING IN INTERNATIONAL BUSINESS

1. Improves morale of employees- Training helps the employee to get job security

and job satisfaction. The more satisfied the employee is and the greater is his morale,

the more he will contribute to organizational success and the lesser will be employee

absenteeism and turnover.

2. Less supervision- A well trained employee will be well acquainted with the job

and will need less of supervision. Thus, there will be less wastage of time and efforts.

3. Fewer accidents- Errors are likely to occur if the employees lack knowledge and

skills required for doing a particular job. The more trained an employee is, the less are

the chances of committing accidents in job and the more proficient the employee

becomes.

4. Chances of promotion- Employees acquire skills and efficiency during training.

They become more eligible for promotion. They become an asset for the organization.

5. Increased productivity- Training improves efficiency and productivity of

employees. Well trained employees show both quantity and quality performance. There

is less wastage of time, money and resources if employees are properly trained.

IMPORTANCE OF RECRUITMENT IN INTERNATIONAL BUSINESS

1. Attract and encourage more and more candidates to apply in the organization.

2. Create a talent pool of candidates to enable the selection of best candidates for

the organization.

3. Determine present and future requirements of the organization in conjunction

with its personnel planning and job analysis activities.

4. Recruitment is the process which links the employers with the employees.

5. Increase the pool of job candidates at minimum cost.

6. Help increase the success rate of selection process by decreasing number of

visibly under qualified or overqualified job applicants.

7. Help reduce the probability that job applicants once recruited and selected will

leave the organization only after a short period of time.

8. Meet the organizations legal and social obligations regarding the composition of

its workforce.

9. Begin identifying and preparing potential job applicants who will be appropriate

candidates.

10. Increase organization and individual effectiveness of various recruiting

techniques and sources for all types of job applicants

(8) What is the labour market for international companies? What is the importance of

skill & Training?

Ans: LABOUR MARKET-SKILL&TRAINING

Human resource management practices vary from country to country due to the

Variation in culture, government police , labour laws . The core functions of an

International Human Recourse Management are recruitment, selection expatriates,

Performances appraisal, training and development and compensation .Recruitment

Labour follows:

1. INTERNAL SOURCES:

Means the sources with the organizational. Most of the organizational prefer

To depend upon internal sources in order to build good public relations and

Employee as well as past employee morale and development and compensation

Organizational .internal sources are less expensive. There is a good selection of

Performances is in accordance with the organizational requirement and the

Employees become their performances is in accordance with the organizational

Requirement and the employees are the employees are adjusted to the company

Culture

2. EXTERNAL SOURCES/ Market’s:

External sources are those sources where the candidates are available with required

Skill, knowledge, talent and cultural background. There sources are as follows:

I. Professional organization.

II. Data bank maintained by the global companies

III. Public employment agencies like ministry of foreign affairs

IV. Private employment agencies or global placements

V. Casual applicants though internet services

VI. Trade unions

International Labour standard

Today ,the focus labour discrimination and child labour the trade union

have been trying to incorporate social clause in international trade and man labour the

international trade and investment agreement the main idea worker right’s and trade to

include social clause in trade agreement .Multinational are considered as better

channels through which better labour standard can be disseminated. There is several

ways like

1) Home countries may enforces MNCs same requirement in their affiliates

2) There may be adoption of global standards in safety and technology

3) There may be influence of trade unions.

(9) What is relationship marketing? What are its benefits?

Relationship marketing is to build relationship the company and the costumers.

The relation could be public relation or industry relation. Building a good public relation

helps in enhancing its corporate image which further helps to increase its sales.

Industrial relation helps to understand the type of institution, laws and standards in

place with respect to trade unions and their collective bargaining rights, and labour

management relations.

The term international marketing refers to exchange of goods and services across

national boundaries for the satisfaction of human needs and wants. International

marketing is dominated by multinational corporations. They have world-wide contacts.

They conduct business operations more efficiently and economically.

They are in a position to adopt global approach which is necessary in international

marketing. It requires support of marketing research in the form of marketing surveys,

product surveys and product testing as it is highly competitive. International marketing

needs to develop closer economic and cultural relations between countries. This is the

way the available global resources can de utilized fully at the international level.

Benefits of relationship marketing are as follows.

Higher benefit: - competitive advantage is any feature of a business firm that enables it

to earn a higher return on investment, despite counter pressure from competitors.

Synergy and strategic business: - competitive advantage is gained at the corporate level

through synergy and strategic business unit level through market share.

Scope to firms: - large size of the businesses firms can grow further by entering into

new markets of various countries.

Systematic and growing internalization: - the systematic and growing internalization of many companies is essentially a part of the their business policy

Competitive: - the stimulus for internationalization comes from the urge to grow, the need to become competitive, the need to diversify and to gain strategic advantage of internationalization.

Increases entrepreneurial challenges: - the arrival of international business firms in the host country either in partnership with local firms or on its own has increased entrepreneurial challenges.

Increases firms ability: - international firms with superior world-wide experience, knowledge, technology and other relevant resources have a better ability to offer firms goods and services at lower price and higher quality.

Efficient techniques in production: - economies of scale, growth in investment and research and development leads to efficient techniques in production, management and marketing.

(10) WRITE SHORT NOTES ON:-

(a) Business ethics

Business can be defined as a primary economic institution through which people in

modern societies carry on the task of producing and distributing goods and services and

business ethics refers to the application of ethical judgments to business activities.

Business ethics explains that business can generate profits being ethical. But business

ethics till last decade was being contradicted due to expansion of practicing business

ethics. Today more and more importance is being given to the application of ethical

practices in business dealings and the ethical implications of business decisions.

Business ethics is branch of ethics which prescribes standards of how the business is to

be carried out. It deals with morality in business. Business activities need to be

conducted as per certain well-recognized standards. Business Ethics suggest code of

conduct, which businessman should follow while dealing with fellow businessman and

others including customers, employees and local community. It suggest that

businessman should be fair to all social groups and give them satisfaction and welfare.

It tells what is good and what is bad in business. Businessman should support fair

business practices and avoid the practices which are socially undesirable.

Every professional activity has its own ethical standards. Similarly, business has its

ethical standards. Businessman should follows these standards so that business will

expand, get public support and will be useful to consumers and other social groups.

(b) HRM STRATEGY

Ans: The focus of human resource management (HRM) is on managing people within

the employer-employee relationship. It involves the productive use of people in

achieving the organization’s strategic business objectives and the satisfaction of

individual employee needs.

'Strategy defines the direction in which an organization intends to move and establishes

the framework for action through which it intends to get there.' It involves the

productive use of people in achieving the organization’s strategic business objectives

and the satisfaction of individual employee needs is complex enough in a purely

domestic firm, but it is more complex in an international business, where staffing,

management development, performance evaluation, and compensation activities are’

complicated by profound differences between countries in labor markets, culture, legal

systems, economic systems, and the like.” It is not enough that the people recruited fit

the skill requirement, but it is equally important that they fit in to the organizational

culture and the demand of the diverse environments in which the organization functions.

(c) Relationship marketing

Relationship marketing is to build relationship the company and the costumers.

The relation could be public relation or industry relation. Building a good public relation

helps in enhancing its corporate image which further helps to increase its sales.

Industrial relation helps to understand the type of institution, laws and standards in

place with respect to trade unions and their collective bargaining rights, and labour

management relations.

The term international marketing refers to exchange of goods and services across

national boundaries for the satisfaction of human needs and wants. International

marketing is dominated by multinational corporations. They have world-wide contacts.

They conduct business operations more efficiently and economically.

They are in a position to adopt global approach which is necessary in international

marketing. It requires support of marketing research in the form of marketing surveys,

product surveys and product testing as it is highly competitive. International marketing

needs to develop closer economic and cultural relations between countries. This is the

way the available global resources can de utilized fully at the international level.

The importance of personal selling varies from industrial products, to consumer

durables and to consumer products. For industrial products like computers, personal

selling is essential to provide technical information of the product.

Personal selling also plays a vital role in international marketing even for consumer’s

goods as the firms and its products are new to the foreign market.

Many companies appoint the natives as sales personnel for their personal selling

because they are better aware of the countries culture and build the relationship

between customer and company.

(d) Skills & Training

Skills

HRM studies have discovered certain skills which would help the individual and

international organization in dealing with the work individual dimensions includes the

skills and the capabilities that the worker or manager possesses.

These skills include cross-cultural skills these are three sets of individual skills .i.e. self-

efficiency, relational and perception skills. The worker or manager should have self-

confidence, self-esteem and mental hygiene. Reinforcement substation skills involve

replacing activities that bring pleasure and happiness in home culture with similar

activities that exist in the host culture. The common interests are sports, music, art,

dance and social groups.

Relational skills include the worker’s ability, desire and tendency to interact, mix or

involve and develop relationship with host nation’s the skills in this regard are finding

mentors and willingness to communicate. They have to learn language as a means for

familiarizing with the foreign nationals and their culture. These skills reduce the degree

of psychological uncertainties associated with cross-culture experiences.

Training

A good selection process reduces the training effort. The global companies should

have enough training & development efforts. Training is the act of increasing the

knowledge and skill of an employee for doing a particular job. Hence, training and

development assume greater significance in global companies. They are most important

techniques of human resources development.

In case of international business training and development refers to the expatriate not

only towards job and organizational requirements but also towards the job the host

country’s culture, environment and requirements. Therefore cross culture training

enables the employees to learn the cultural norms, values, aptitudes, attitudes, beliefs

behavior practices of the host country. Cross-country training is essential to be efficient.

(e) Religion and culture

Ans. Religion is one of the important social institutions influencing business. Some

religions have spread over large areas in the world. Social environment consists of

religious aspects, language, customs, traditions, beliefs, tastes and preferences, etc.

Religions play significant role in normal and ethical standards in production and

distribution. Most of the religions indicate in providing truthful and honest information.

Religion is a system of shared belief and rituals that is concerned with the realm of the

sacred.

Culture is a complex whole that includes knowledge, beliefs, art, morals, law, customs

and other capabilities acquired by people as member of society. Culture in this sense,

includes system of values, and values are among the building blocks of culture. Thus,

Culture is a system of ideas and these ideas constitute a design for living. Culture

influences the behavior of the consumer though the valid generalizations have not yet

been developed. Culture and custom factors vary widely from country to country. These

factors include dressing habits, eating habits, religious factors, etc. multinational

companies should consider these factors of the host country while operating in that

country.

(f) ENRON CASE STUDY?

The experiences of Enron Corporation, with the $2.8 billion Dabhol project is good

example. In 1992,Enron and Prime Minster Narsimha Rao’s reformist government

quickly signed Memorandum to build Massive power complex at Dabhol, near Ratnagiri

in Maharashtra.

Having no domestic partner, the deal secrecy coupled with the company Effort to keep

the detail confidential the lack of competitive bidding Government load guarantees and

a high rate of return (23percent) all Contributed to a negative public perception. The

company failed of Janata Party. The BJP’s 1995 campaign for state elections called for

A revaluation of the 2015 megawatt Dadhal project-Eron responded by the Bharatiya

the construction believing that, it would became more difficult for a new state

government to reverse the process since the Coalition pledged during the campaign

that they would review the is The Enron case is a combination of corruption and politics.

Politics lending government of the host country economy employment of National

sharing.

chapter 9 international financial markets

TRUE OR FALSE

1. The existence of different currencies poses a fundamental problem in the

international finance.

-True

2. A strong supervisory and regulatory system in the financial market is not

necessary today

-False

3. The growth of mutual funds over the last decade has in fact been dramatic

-True

4. Governments began to regulate domestic financial markets during 1980’s.

-False

5. Euro is a common currency of Asian countries

-False

What is deregulation of financial markets? Why it is necessary?

Deregulation is when government reduces its role and allows industry greater freedom in how it operates. Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces. Deregulation does not mean elimination of laws against fraud, but eliminating or reducing government control of how business is done, thereby moving toward a more free market.

After the 2nd world war, there was a progressive liberalization of trade by the development countries. Successive round of negotiation in the GATT have cut tariffs on trade in manufactures from an average level of 40% in 1947 to about 3% now in 2005 in the industrial countries. With the recent economic liberalization across the world, many developing countries have reduced the tariff rates and non tariff barriers as part of their trade liberalization. India has had one of the highest tariff walls in the world. The govt., following the recommendations of the tax reforms committee (chelliah committee), steadily reduced the peak level of tariff’s from over 300% in 1991 to 25% in 2003, excluding agriculture and dairy products. Further, import duties on capital goods, project imports, basic feed stocks for petrol chemicals, etc. were brought down. Although most tariffs in industrial countries are low, these in several categories of goods remain prohibitively high. Tariffs on many consumers, agricultural and labor intensive products are 10-20 times higher than the overall average tariff. For e.g. US import tariffs on clothes and shoes average 11% and go as high as 48%. Deregulation of financial markets include-

i. Liberalizing the rules and regulation of controls.

ii. Removal of quotas and non tariffs blocs.

iii. Providing freedom to the business and industry.

iv. Providing infrastructure facilities.

v. Removal of bureaucratic hurdles.

vi. Encouraging research and development.

vii. Encouraging the competitiveness based on quality, price, delivery,

customer service, etc.

viii. Providing autonomy to the public sector to compete with the private sector

company.

ix. Providing administrative and governmental support.

x. Developing money and capital markets.

Historically, most developed economies had usually witnessed prominent state

ownership of banks in early stages. However, their withdrawal has been progressive

and often rapid. Indonesia/ Brazil now have only 50% of their banking assets under

state ownership vs. 51% in India, less than 20% in Thailand and nil in Japan and U.S.A.

The second phase of financial sector deregulation (commercial in 1997) has focused on

increased competition as a means to improve the capability of domestic financial

institutions to eventually face international competition. The commitments to WTO have

forced to open slowly, parts of our banking system to foreign entry. And technological

development has moved rapidly. In many ways India is similar to developed

commonwealth nations like Canada, Australia and the U.K. where nationwide banking is

practiced unlike the U.S.; Nationwide banking provides the critical market size,

generates capital for future assets expansion and brings benefits of scale in use of

technology very similar to other major industries which are oligopolistic in nature.

Answer the following in brief:

A. What is an international financial market?

International marketing can be defined as the application of marketing strategies,

planning and activities to external or foreign markets. International marketing is

of consequence to firms which operate in countries and territories other than their

home country, or the country in which they are registered in and have their head

office.

B. What is deregulation financial market?

Deregulation is the removal or simplification of government rules and regulations that

constrain the operation of market forces. Deregulation does not mean elimination

of laws against fraud, but eliminating or reducing government control of how business is

done, thereby moving toward a more free market.

C. What is integration of financial market?

Integration of financial markets is a process of unifying markets and enabling

convergence of risk adjusted returns on the assets of similar maturity across the

markets. The process of integration is facilitated by an unimpeded access of

participants to various market segments.

D. What is cross border alliance?

A Cross-border alliance can be defined as a strategic partnership that is formed

between two or more firms from different countries for the purpose of pursuing mutual

interests through sharing their resources and capabilities.

E. What is euro market?

The market that includes all of the European Union member countries - many of which

use the same currency, the euro. All tariffs between Euromarkets member countries

have been abolished, and import duties from all non-member countries have been fixed

for all of the member countries. The Euromarkets also has one central bank for all of the

member countries, the European Central Bank (ECB).

Q.1 What are emerging markets? Why markets are emerging?

Changes in the enabling environments both industrial and developing countries have

made private capital more responsive to underlying forces that are spurring investment

in development countries of all types of capital flows, FDI has responded most

vigorously. The driving factor for FDI has been sustained improvement in domestic

economic fundamentals. The improvement in domestic economic fundamentals and

creditworthiness began to take hold and new investor base has become more familiar

with emerging market investments, the implements has became the long term rates of

return and opportunities for portfolio risk diversification. Developing countries have seen

almost fourfold increase in FDI Flows in 1995. Their FDI is more in service sector

including provision for infrastructure service opportunities for investment in service

infrastructure have expanded significantly as a result of the stronger economic and

investment deregulation in developing countries. Despite a drastic improvements of

portfolio flows from institution investor to emerging market, information on emerging

market placement by such investor remain fragmentary. In the mid-1980’s, investment

in emerging market was in the form of closed ended funds including country funds,

which bring pioneered flow of private investments in emerging market. Closed ended

funds are well suited to emerging market condition. Since they automatically regulate

redemption risk, which can be large in less liquid markets. As emerging market has

become more establish, more and more open-end emerging market funds have been

setup. emerging market have been allocation of international investment funds and of

global funds. However, mutual funds investment in emerging market have remain highly

skewed towards portfolio equities with debt oriented mutual accounting less than

10percent of mutual fund assets in emerging markets. The financial turmoil which

erupted with the floating of the Thai baht in mid -1997 has since spread to large number

of emerging market economics. Most emerging market economics suffered major

slumps in commodity price in 1998 and faced very unsettled conditions in international

market. Especially after 1998 the riskiness of investing in emerging market increase,

causing creditor, banks and other investor to scale back drastically their financial

exposure.

Q.2 what is SAARC? What its impacts on growth of international trade?

Ans. South Asian Association for Regional Co-operations (SAARC) is an economic

association of South Asian Countries. It was established in the year 19985 for regional

co-operations and for the benefit of members. Seven members, India, Pakistan, Sri-

Lanka, Bangladesh, Nepal, Bhutan and Maldives are the members of this group.

SAARC accounts for over one-fifth of world population but has only 33percent of

World’s area of land. The density of population is very high and major share of world

poor lives in this area. The following were objectives of SAARC:-

(1) To accelerate economic growth and promote welfare of the people in the region and also to promote collective self-reliance.

(2) To promote active collaborations and mutual assistance in economic, social, and cultural fields.

(3) To develop co-operation among the members countries in the area such as agriculture, rural development, telecommunications, postal, transport, technology and sports.

(4) To cooperate for water resource development in the region.

The member of SAARC in 1995 to develop trade among the group. Two rounds of negotiations have been completed for reducing tariff on international trade. The progress of SAARC was limited due to absence of cordial relationship between India and Pakistan. The 12th SAARC was held in Pakistan on 4th and 5th jan,2004 in a cordial atmosphere and proved extremely successful. The impact of SAARC on India trade can be seen below in diagram

Year Exports (US$) Imports (US $)

2001-02 2033 573

2002-03 2731 513

2003-04 4036 641

This table show that India export have been increasing with SAARC countries. However, India import with SAARC countries has been more or less than same in three years. India has been granted the highest number of tariff concession on all lines.

The impact on SAARC on international trade can be explain as follow;-

The SAFTA agreement will create a free trade area in the region by 2015. Additional protocol on terrorism was signed by foreign ministers of member countries during SAARC meeting. It will lead down to various changes in the international trade which can be seen in the following points:-

(1) Duty reduction to rates in the rates in the ranges of 0-5 %to be brought over 10years.

(2) Goods coverage to be negotiated, sensitive lists be maintained,(3) All tariffs, para tariffs measure and direct tariffs measure to be covered.(4) Special needs of least developed countries to be taken into account.(5) Additional measures to be considered ranging up from freezing up intra

SAARC movement of capitals, simplifying business visa procedures. Thus, we can conclude that SAARC has played vital role in improvements in international trade all over the world and form easy to trade policies cross the members of SAARC and also played vital role in improving the relation of Indo-pak relations which help not only India but also Pakistan to grow its economy.1) NAFTA:

NAFTA is a trilateral free trade deal that came into force in January 1994, signed by Democratic President Bill Clinton. The central thrust of the agreement is to eliminate the vast majority of tariffs on products traded among the United States, Mexico, and Canada. The terms of the agreement called for these tariffs to be phased out gradually, and the final aspects of the deal weren't fully implemented until January 1, 2008. The deal swept away export tariffs in several industries: agriculture has been a major focus, but tariffs have also been reduced on items like textiles and automobiles. NAFTA also implemented intellectual-property protections, established dispute-resolution mechanisms, and put into place regional labour and environmental safeguards, though some critics now lobby for stronger measures on this front. The 2008 U.S. presidential elections brought new attention to the debate over the North American Free Trade Agreement, or NAFTA, the free trade bloc uniting Canada, Mexico, and the United States. The Canadian, Mexican, and U.S. governments all broadly support NAFTA, but while campaigning the leading U.S. Democratic presidential candidates, Hillary Rodham Clinton and Barack Obama, said they wanted to renegotiate aspects of the deal. However, as president, Obama has not followed through with his election pledge. In April 2009, U.S. Trade Representative Ronald Kirk confirmed that President Obama has no plans to reopen or renegotiate (NYT) NAFTA. Trade relations have broadened substantially among the three parties to NAFTA since the deal's implementation, and all three have grown economically, Canada at the fastest average rate, Mexico at the slowest. Yet expert opinion varies on NAFTA's direct impact, given the multitude of other economic factors at play and the possibility that trade liberalization might have happened even without a trilateral agreement. Trade relations among Canada, Mexico, and the United States have broadened substantially since NAFTA's implementation, though experts disagree over the extent to which this expansion is a direct result of the deal. According to data from the office of the U.S. Trade Representative (USTR), the United States' chief negotiator in foreign trade and a major booster of NAFTA and other free trade accords, the overall value of intra-North American trade has more than tripled (PDF) since the agreement's inception. The USTR adds that regional business investment in the United States rose 117 percent between 1993 and 2007, as compared to a 45 percent rise in the fourteen years prior. Trade with NAFTA partners now accounts for more than 80 percent of Canadian and Mexican trade, and more than a third of U.S. trade.2) Financial hub: In today's competitive world advanced and big emerging economics are seeking to establish international financial centre this is because.

1. Global financial services have vital economic significance in stimulating economic

activity, employment creation and entrance of government’s incomes through increased

tax revenues solicited by financial transactions and economic growth.

2. Financial institutions serve to provide financial intermediation to all kinds of business

activities. They may facilitate optimum allocation of financial resources.

3. Overall economy health is positively influenced by the strong financial services sector

.Currently, New York and London are the predominant financial centers in the world. In

Asian region, these are Tokyo, Hong Kong, Singapore and even Mumbai are seeking to

play a leading role in catering to the regional needs and aspiring to become

international financial hub. Big and large, a financial hub may be defined as "a place in

which there is a high concentration of banks and other financial institution, and in which

a comprehensive set of financial markets are allowed to exist and develop, so that

financial activities and transactions can be effectuated more efficiently than at any other

locality (Jao, Y.C. 1997).If country is seeking to develop an international financial hub it

has to altreat the business of international financial activities.

4. Singapore vs. Hong Kong as IFH Countries. It follows that on an average the US and

the UK's financial centres are dominant in the world. In Asia, Japan scores better.

Compared to Singapore, Hong Kong score is also exceeding in acquiring the position of

financial hub.

A leading international financial centre or hub should be able to provide intermediation

for the international capital mobility. To capture the idea, the economy's inward

international investment position, exceeding FDI, shows its ability to alternate

international financial activities.

5. Global Financial Crisis:

Global finance sector is highly fragile. History has recorded several financial crises at

global level, time to time.

In this section, some reflections and study notes have been presented to invoke further

discussion on the issue of recent global financial crisis.

3) Emerging markets:

Because the value of the index is not computed as of the close of the U.S. securities

markets due to differences in trading hours between U.S. and foreign markets,

correlation to the index will be measured by comparing the daily change in the fund's

net asset value per share to the performance of one or more U.S. exchange traded

securities or instruments that reflect the values of the securities underlying the Index as

of the close of the U.S. securities markets.

This Short Proshares ETF seeks a return that is -1x the return of an index or other

benchmark (target) for a single day, as measured from one NAV calculation to the next.

Due to the compounding of daily returns, ProShares returns over periods other than one

day will likely differ in amount and possibly direction from the target return for the same

period. These effects may be more pronounced in funds with larger or inverse multiples

and in funds with volatile benchmarks. Investors should monitor their holdings

consistent with their strategies, as frequently as daily. For more on correlation, leverage

and other risks, please read the prospectus.

4) Disintermediation of markets: In economics, disintermediation is the removal

of intermediaries in a supply chain: "cutting out the middleman". Instead of going

through traditional distribution channels, which had some type of intermediate (such as

a distributor, wholesaler, broker, or agent); companies may now deal with every

customer directly, for example via the Internet. One important factor is a drop in the cost

of servicing customers directly.

Disintermediation initiated by consumers is often the result of high market transparency,

in that buyers are aware of supply prices direct from the manufacturer. Buyers bypass

the middlemen (wholesalers and retailers) in order to buy directly from the manufacturer

and thereby pay less. Buyers can alternatively elect to purchase from wholesalers.

Often, a business-to-consumer electronic commerce (B2C) company functions as the

bridge between buyer and manufacturer.

The term was originally applied to the banking industry in about 1967: disintermediation

referred to consumers investing directly in securities (government and private bonds,

and stocks) rather than leaving their money in savings accounts, then later to borrowers

going to the capital markets rather than to banks.(OED, Google News Archive) The

original cause was a US government regulation (Regulation Q which limited the interest

rate paid on interest bearing accounts that were insured by the Federal Deposit

Insurance Corporation.

It was later applied more generally to "cutting out the middleman" in commerce, though

the financial meaning remained predominant. Only in the late 1990s did it become

widely popularized.

Q1. What is integration of financial market?

Ans. Integration of financial markets is a process of unifying markets and enabling convergence of risk-adjusted returns on the assets of similar maturity across the markets. The process of integration is facilitated by an unimpeded access of participants to various market segments.

Financial markets all over the world have witnessed growing integration within as well as across boundaries, spurred by deregulation, globalization and advances in information technology.

Central banks in various parts of the world have made concerted efforts to develop financial markets, especially after the experience of several financial crises in the 1990s.

As may be expected, financial markets tend to be better integrated in developed countries. At the same time, deregulation in emerging market economies (EMEs) has led to removal of restrictions on pricing of various financial assets, which is one of the pre-requisites for market integration.

Capital has become more mobile across national boundaries as nations are increasingly relying on savings of other nations to supplement the domestic savings. Technological developments in electronic payment and communication systems have substantially reduced the arbitrage opportunities across financial centers, thereby aiding the cross border mobility of funds.

Changes in the operating framework of monetary policy, with a shift in emphasis from quantitative controls to price-based instruments such as the short-term policy interest rate, brought about changes in the term structure of interest rates.

This has contributed to the integration of various financial market segments. Harmonization of prudential regulations in line with international best practices, by enabling competitive pricing of products, has also strengthened the market integration process.

Integrated financial markets assume vital importance for several reasons.

1. Integrated markets serve as a conduit for authorities to transmit important price signals.

2. Efficient and integrated financial markets constitute an important vehicle for promoting domestic savings, investment and consequently economic growth.

3. Financial market integration fosters the necessary condition for a country’s financial sector to emerge as an international or a regional financial centre

4. Financial market integration, by enhancing competition and efficiency of intermediaries in their operations and allocation of resources, contributes to financial stability

5. Integrated markets lead to innovations and cost effective intermediation, thereby improving access to financial services for members of the public, institutions and companies alike

6. Integrated financial markets induce market discipline and informational efficiency.

7. Market integration promotes the adoption of modern technology and payment systems to achieve cost effective financial intermediation services.

Q2. What is cross border alliance? Why is it required?

Ans..A Cross-border alliance can be defined as a strategic partnership that is formed between two or more firms from different countries for the purpose of pursuing mutual interests through sharing their resources and capabilities.

Almost all companies surveyed agreed that cross-border alliances would grow in importance to their business. Most cross border alliances are concentrated in relatively few industries--those typified by high entry costs, globalization, scale economies, and rapidly changing technologies--and span all elements of the value chain with particular emphasis on joint development activities.

Given the range and scope of cross border activity and an equivalent range and scope of themes in cross-border alliances it is not surprising to see that the result is a complex patchwork of cross-border alliances, with emphasis on short- and long-term issues. As this occurs, the industry structure and the rational behavior of major players within the industry structure is also undergoing major change.

Cross-border alliances are only one of three options executives can use to achieve corporate goals and objectives in the face of changing market conditions. They are formed when they yield benefits that cannot be achieved in-house or through outright acquisition or merger. They have beers used by managements to:

1. Secure economies of scale in the R&D and manufacturing functions to offset the higher cost and risk of bringing new products to the market without losing the identity or independence of the company in the market place.

2. Reduce the cost and time required to establish major positions in new geographic markets compared with the cost of direct investment or acquisition.

3. Eliminate difficulties in successfully consummating mergers of equals that are complementary and where two managements can agree on a common vision and plan. particularly givers the poor experience of cross-border mergers in the 1980s and 1990s.

4. Participate in some of the more rapidly growing markets where involvement of local partners either required or desirable.

Once in place however cross-border alliances are frequently difficult to manage and have their own costs. Few of them have been used as vehicles to pursue multiple opportunities and even fewer could be considered a complete success on the scale needed to make a fundamental impact on the development of the company. In particular, links with a partner can create inflexibility, coordination difficulties and risk of competitive conflict.

What is disintermediation of Financial Markets? What are its reasons?

Disintermediation is the removal of intermediaries in a supply chain. In other words it means "Cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediary (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet. One important factor is a drop in the cost of servicing customers directly.

It has become more important in financial markets as borrowers have tended to turn away from banks as a source of funds and to the issuance of securities on capital markets. Instead of borrowing from a bank companies have tended to borrow directly from investors by issuing bonds and asset backed securities (ABS). Another example of disintermediation would be where a manufacturer sells directly to its customers rather than via a retailer. The disintermediation of capital markets is particularly important in an investment context.

Disintermediation of Financial Markets

Disintermediation has become increasingly important in financial markets, largely as a result of the increasing use of securities to raise capital from capital markets, rather than from banks.

Banks usually act as financial intermediaries for debt, borrowing from depositors and lending to borrowers. By selling securities such as bonds, instead of borrowing, a borrower can borrow directly from investors, by-passing the banks. The greater use of a wider range of financial instruments such as asset backed securities and convertibles (in addition to the traditional types of security such as bonds and debentures) have encouraged this.

More disintermediation reduces the amount of business available for commercial banks. It also increases the size of capital markets and generates more business for investment

banks (advising on the issue of securities) and, indirectly, for other investment businesses (brokers, fund managers, stock exchanges etc.).

Borrowers can hope to borrow at lower cost as a result of disintermediation. Investors lose the safety of bank deposits but they also should get better rates of return. Investors take on some extra risk which can be controlled through the usual mechanisms of diversification and the selection of appropriate investments. At the same time disintermediation eliminates the banks' interest margin and this benefit is shared by investors, borrowers and investment market intermediaries and advisors.

Reasons for disintermediation

The main reasons for disintermediation of financial market are Deregulation & Technology.

The IT brought significant & dramatic changes through various techniques like Business Process Re-engineering, Enterprise Resource Planning & Supply Chain Management.

New IT modes have a major impact on the coordination of headquarters subsidiary & govt. relations.

Technological advances have reinforced the effect of deregulation & financial innovation in internationalizing markets by increasing efficiency in gathering & disseminating information & in processing transactions.

Due to low cost telecommunication in financial markets, 24 hours trading becomes easy, which brought greater breadth & depth to trading.

Due to improved technology & deregulation Tele-marketing, Internet Banking, E-commerce, E-business, E-business etc. have developed in international business.

The financial markets in industrial countries during 1990’s have become globalize due to self-reinforcing process of competition innovation along with deregulation & technological changes.

What is Euro? Can it become an international currency?

EURO:-It is the component of international financial market which is termed as Eurocurrency market. It is also termed as Eurodollar market.

Euro is the common currency of the European Union.

The emergence of Euro takes place when the communist control governments of Central & Eastern Europe needed dollars to finance their international trade but feared that the US govt. would block their holdings of the dollars in the U.S banks.

The exchange rates per Euro determined at the time of the launch were about

US $ 1.17, British pound 0.70, Yen 133.

1 Euro Is equivalent to 58 INR.

Euro currency can become International Currency,

Because of,

Euro currency market is an international market & beyond national control & has emerged as the most important channel for mobilizing & deploying funds on an international scale.

Eurodollars are financial assets & liabilities denominated in U.S Dollars but traded in Europe. But today, the scope of the market stretches far beyond Europe & the dollar in the sense that the Eurodollar transactions are held also in money market other than European & in currencies other than the U.S Dollar.

Euro market consist of Asian dollar, Rio dollar, Euro-yen market etc. & also as Euro sterling, Euro Swiss francs, Euro French francs etc.

It is a short term market – the deposits in this market range in maturity from one day to several months & interest is paid on all of them. Eurobonds being employed for longer term loans. The Eurobond developed out of the euro currency market to provide longer term loans.

It is a whole sale market in the sense that the size of an individual transaction is usually above $1 million.

Its efficiency & competitiveness are reflected in its growth & expansion thus it is highly competitive & sensible market.

The euro currency brings a single interest rate, eliminate currency risk & give equity & bond markets the necessary scope & liquidity to attract big investors.

Europe ranks alongside the US as the deepest & the most liquid markets.

Euro currency can impart price transparency throughout the Euro land.

The members of euro across the globe are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain.

Thus many of the worlds countries national currency is Euro & it also provides all the requirement of universal currency i.e. Dollar, thus an Euro can be an international currency.

CHAPTER: 10

EXPORT FINANCE AND RISK MANAGEMENT

Q.1) Answer the following question in brief:

1) WHAT IS PRE-SHIPMENT FINANCE?

Pre-shipment finance is defined by the Reserve Bank of India as “Any loan to an

exporter for financing the purchase, processing, manufacturing or packing of goods”. It

is an interim advance provided by the bank for helping the exporter to purchase

process, packing and shipment of goods for exports. It is also known as PACKING

CREDIT. It is provided by any bank or financial institution. The exporters generally

require finance at the per-shipment stage for the following purpose:

1. To purchase raw materials, components, machinery equipment and technology.

2. To pay for transportation and warehouse expenses.

3. For specialized export packing of goods.

4. To pay insurance premium on shipment of goods.

5. To clear the goods after inspection, customer and excise authorities.

6. To pay commission to overseas agents.

7. To pay freight for shipment of goods.

8. To provide additional working capital from time to time.

The feature of packing credit or pre-shipment finance is as follows:

1. Purpose: Pre-shipment finance is granted for the specific purpose such as

procuring of purchasing material, manufacturing, processing the goods and

storing and packing of the goods for exports.

2. Eligibility: Pre-shipment finance is granted only for the exporter who produces a

conferment export order and / or letter of credit received in his own name.

Indirect exporters who export through established Export House or Trading

House and STC are also eligible for pre-shipment finance if they produce letter

form the concerned Export House or Trading House stating that portion of the

export order is allotted in their favor.

3. Form of Finance: Pre-shipment finance can be either in the form of funded or

non-funded advance. Red clause and Green clause letters of credit are the forms

of funded finance and domestic and Bank to Bank Letter of Credit and few

guarantees are terms of non-funded finance.

4. Amount of Finance: Pre-shipment Finance is a need-based finance. Therefore

it depends on the amount of export order and credit rating of the exporter. The

bank usually considers the percentage of exporter’s profit margin depending

upon the nature of order, nature of goods, ability to repay and incentives

available to the exporter.

5. Period of Loan: Pre-shipment finance is available for a period of not exceeding 180 days, however, if the exporter requires extension of time, additional 90 days may be allowed with prior approval from Reserve Bank of India.

6. Rate of Interest: Interest charged on Pre-shipment finance is 10% for a period up to 180 days and 13% for a period up to 270 days. If the loan is not repaid within 360 days, domestic rate if interest plus 2 percent extra is charged from the beginning of the period of loan.

7. Documentary Evidence: Pre-shipment advance is granted against the evidence of irrevocable letter of credit establishment through a reputed bank or against a confirmed export order. These documents are deposited with the bank.

8. Security: The exporter is required to provide personal bond from sureties known to the bank and relevant policy issues by ECGC.

9. Loan Agreement: The exporter has to sign a loan agreement with the bank in order to get pre-shipment finance.

10.Maintenance of Accounts: The banks are required to maintain separate account in respect of each Pre-shipment advance. Running accounts are also permitted in case of certain goods producing in FTZ or EPZ and 100 EOUs.

2) WHAT IS CURRENCY RISK IN EXPORT TRADE?

Risk is an exposure to a peril and from a business point of view; risk is exposure to a

loss. Currency risk is exposure to a loss in cross-border lending, caused by events in a

particular country. These events must be, at least to some extent, under the control of

the government of that country. These events are definitely not under the control of a

private enterprise.

Currency risk applies to assets and not to liabilities. However, there may exist a cross-

border liability risk of branch banking abroad. This liability risk, through very similar to

country risk, is excluded from the definition for the sake of consistency. Among foreign

assets, the country risk includes only foreign loans. The risk of foreign lending is quite

different from the risk of foreign direct investment.

All cross-border lending in a country-whether to the government, a bank, a private

enterprise or an individual is exposed to country risk. Thus, a country risk is broader

concept than sovereign risk, which is the risk of lending to the government of a

sovereign nation. Only events that are under the control of the government, can lead to

the materialization of country risk. A default caused by bankruptcy is country risk if the

bankruptcy is the result of the mismanagement of the economy by the government and

it is commercial risk if it is the result of the mismanagement of the firm.

In case of natural calamities, it cannot be considered as country risk if it is

unforeseeable. But if the past experience shows that there is a tendency to recur

periodically, such as typhoons in Southeast Asia, the government can minimize effects.

Prudent analysts can make allowance for such risk in his assessment of country risk, if

the government can to some extent control at least the impact of an adverse

development, event through it cannot control the event itself, and the possibility of that

event is a country risk.

CLASSIFICATION OF CURRUNCY RISK:

The currency risk arises from the different criteria which are classified as follows:

1. Risk by the side if the balance sheet which is exposed to risk whether assets

of liabilities.

2. In case of assets, risk by the type of asset which is at risk such as loans are

direct investment.

3. Geographical risk like Australian, Brazilian.

4. Risk by the nature of events that may lead to its materialization within each

country such as political, social, economical.

5. Risk by the type of borrower such as government (sovereign risk), private

risk, corporate risk etc.

6. Risk for each type of borrower, by the action taken by the borrower that cause

a loss such as default, repudiation, renegotiation etc.

7. Risk for each of these by degree such as high, low, moderate risk.

Among the various classifications, the type of action taken by the borrower is the most

important, identifying and understanding the host-government’s strategy is an important

aid in forecasting the country risk. If the company established in the foreign territory is

dependent on raw materials, technical skills, machinery, management or other inputs

from abroad, the government will have to think seriously before taking any integration

builds interdependence between the company facility and links with facilities in other

countries.

The protective effect of international integration can be achieved through control of

corporate output, such as markets for the firm’s product. For many years, the

international oils companies operating in the Middle East were relatively immune from

government takeover because of their control over the market for petroleum products.

Nationalization of oils wells was of limited use unless the government also had the

means to dispose of their production profitability. Another form of international

integration on output side can be implemented through the use of international trade

marks and brand names. Increasingly, companies are able to register their international

brands under protective legislation in a wide number of countries. If government

interferes, the company can refuse to allow the government the right to use its brands in

other countries. This may significantly reduce the value of such assets for the use of

government. That is why the Mexican government passed a law in 1976 that required

manufacturing firms to use local trademark in all advertising and packing.

3) WHAT IS AN EXCHANGE RATE?

Exchange rate is the price paid in home currency for a unit of foreign currency. The

transaction in the foreign exchange market takes place at a rate which is called

exchange rate. The exchange rate can be quoted in two ways:

1. One unit of foreign currency to a number of units of domestic currency.

For example 1US $ = Rs. 45.

2. A certain number of units of foreign currency to one unit of domestic

currency.

For example US $ 0.02 = Rs. 1.

Exchange rate in a free market is determined by the demand for and supply of

exchange of a particular currency. The equilibrium exchange rate is the rate at which

demand for foreign exchange and the supply of foreign exchange are equal. The

exchange rate between US dollars and Indian Rupees can be determined by demand

for supply of US dollars in India or by Indians. The price of US $ is fixed in Indian

Rupees. On the other hand the exchange rate between Indian Rupees and US dollars

can also be determined by demand for and supply of Indian Rupees by Americans or in

USA. The price determined in US dollar. The prices are normally same in both the

circumstances.

The demand for foreign exchange is due to import of goods or services, investment in

foreign countries, other payments involved by government , donations etc. The supply

of foreign exchange of a particular country comes from export of goods and services,

inflow of foreign capital, payments made by foreign governments, remittances by NRIs,

donations etc. The excess demand over supply results in the exchange rate higher than

the equilibrium exchange rate and vice versa. Thus, exchange rate is purely determined

by the market conditions of demand for and supply of foreign exchange. The monetary

authorities provide freedom to the market forces to determine exchange rates. Flexible

exchange rates are more prevalent in market and open economies. They are also called

as floating exchange rates. Fixed exchange rate a pegged exchange rate or per value.

The government used to fix the exchange rate and the central bank to operate it by

creating exchange stabilization fund. The central bank of the country purchases the

foreign country currency when the exchange rate falls and sells the foreign exchange

when the exchange rate increases. International monetary fund’s favors fixedexchange

rates. The objective is to stabilize the exchange rates with proper safeguard whenever

necessary.

A new system of exchange rate management was introduced with the introduction of

partial convertibility of rupee from 1992, in India, under this system 40 percent of the

Earnings were convertible in rupees at officially determined exchange rate and the

remaining 60% of the exchange earnings were convertible in rupees at market

determined exchange rate. This system is known as Liberalized Exchange Rate

Management System (LERMS).

4) WHAT IS A LETTER OF CREDIT?

Letter of credit is the safest method of receiving payment from the importer for export

sales. It is important to the exporter because it protects him against failure of the

importer pay. It also helps the exporter making his financial position safe and the bank

which issues the credit ensures that the goods covered by letter of credit would be

permitted to import under the exchange control regulations.

A letter of credit is an authorization issued by the opening (Importer’s) bank to the

negotiator (Exporter’s) bank that if the exporter presents the relevant set of document,

will make the payment. On the basis of the instructions given by the importer, his bank

gives a written undertaking to the bank of the exporter that if the exporter presents

certain shipment documents covering the goods within a fixed period, the bank can

make payment to the exporter. Letter of Credit is a superior method of settlement of

debt for the exporter. If he exports the goods as per as contract and produces evidence

to that effect he would receive payment without default.

PARTIES TO A LETTER OF CREDIT:

The following are the parties to a letter credit.

1. Opener: The importer initiates for opening a letter of credit through his bank.

2. Issuing Bank: Importer’s Bank issues a letter of credit on the basic of instruction

given by the importer.

3. Beneficiary: The beneficiary of the letter of credit is the exporter who is entitled

to receive the payment.

4. Negotiating Bank: The Exporter’s bank to which he presents the letter of credit

for payment is negotiating bank.

5. Advising Bank: The issuing bank’s branch in the exporter’s country is known as

advising bank.

6. Confirming Bank: The bank in exporter’s country which guarantees the credit

on the request of the opening bank.

OPRATION OF THE LETTER OF CREDIT:

The transaction in letter of credit originates when the exporter and the importer

enter into a contract of sale. The contract covers description, the value and quality of

goods, method of payment, date of shipment etc. The importer will request his bank to

open a letter of credit in favor of the exporter. He can get his letter of credit opened by

either by depositing cash in advance or by showing sufficient balance in his current

account in the bank. The importer’s bank will open the letter of credit and forward it

either directly to the negotiating bank or through the importer. In case the exporter

wants confirmation of letter of credit, advising bank is authorized by the issuing bank to

add confirmation. After a shipment of the goods through the customers, the exporter will

present the relevant set of documents to the negotiating bank. The negotiating bank will

scrutinize the documents to ensure that they are as per requirements of the importers. If

the documents are found to be in order, the negotiating bank will make payment to the

exporter. The amount paid by the negotiating bank to the exporter is reimbursed by the

issuing bank against the exchange of document.

TYPES OF LETTER OF CREDIT:

Basically letters of credit are either revocable or irrevocable. There will be the following

types of letters of credit.

1. Revocable: A letter of credit which can be revoked, modified or cancelled by the

opening bank without seeking prior permission of the exporter is called the

revocable letter of credit.

2. Irrevocable: Irrevocable letter of credit cannot be revoked, modified or

cancelled by the importer, unless prior permission is obtained from the exporter.

3. Confirmed: A certain issuing bank may not be known in the country of the

exporter. Under the circumstance, the exporter may ask the issuing bank to get

the letter of credit confirmed by a local bank.

4. Unconfirmed: It is a letter of credit for which confirmation is not added by the

advising bank.

5. With Recourse: This is a conditional letter of credit. The condition is that if the

opening bank does not reimburse the negotiating bank, when the exporter is

already paid, the negotiating bank will request the exporter to refund the

payment with interest.

6. Without Recourse: This letter of credit is without condition. In case of bill is not

honored by the importer and the negotiating bank has already paid to the

exporter, the negotiating bank cannot ask the exporter to refund the amount.

5) WHAT IS BILL OF LANDING?

Bill of lading is a document of title to the goods. It is issued by the shipment company

and serves as a receipt from the shipping company which undertakes to delivers the

goods at agreed destination on payment of freight. Thus, Bill of lading is a receipt for

goods, proof of contract of carriage and document of title to the goods. It is a semi-

negotiable document whose ownership can be transferred by endorsement and

delivery.

(2) State with reasons whether the following statements are True or False:

(a) Indirect exporters are eligible for packing credit.

Ans. The above statement is TRUE.

REASON: -

Packing credit is any loan to an exporter for financing the purchase, processing, manufacturing or packing of goods. Packing credit is granted to indirect exporters who export through established Export houses or Trading houses and STC are also eligible for pre-shipment if they produce letter from the concerned Export House or trading house stating that a portion of export order is allotted in their favour.

Hence, indirect exporters are eligible for packing credit.

(b) The purpose of post-shipment finance advance is to meet seasonal demands needs.Ans. The above statement is FALSE.

REASON : -

Post - shipment finance is when the exporter needs an advance after completing the process of shipment of goods.

Post- shipment finance is used for the following purposes:

To pay ECGC premium. To pay freight and other shipment expenses. To pay Insurance premium on shipment. To participate in the fairs and exhibitions. To pay to overseas agents. To pay to various authorities such as customers, port, inspection etc. To pay regular expenses between the shipment of goods and realization of

export bill.(c) Political risk is a narrower concept than the country risk.

Ans. The above statement is TRUE.

REASON: -

Country risk assessment is a complex, tedious and costly exercise. It refers to the risk of investing in a country, dependent on changes in the business environment that may adversely affect operating profits or the value of assets in a specific country, whereas political risk is a type of risk faced by investors, corporations, and governments. It is a risk that can be understood and managed with reasoned foresight and investment.

(d) The exchange rate fluctuates quite often.Ans. The above statement is TRUE.

REASON: -

Exchange rate in a free market is determined by the demand for and supply of exchange of a particular currency. The equilibrium exchange rate is the rate at which demand for foreign exchange are equal.The demand for foreign exchange is due to import of goods or services, investment in foreign countries, other payments involved by governments, donations etc. The supply of foreign exchange of a particular country comes from

export of goods and services, inflow of foreign capital, payments made by foreign governments, remittances by NRI’s, donations etc.Hence exchange rate often fluctuates by fluctuation in demand and supply of currency.

(e) Documentary bill is the most common method of payment in international trade.Ans. The above statement is TRUE.

REASON: -Documentary bill is the most common method of payment in international trade. The exporter agrees to present the documents to his bank along with bills of exchange. This method has two parts, document against payments acceptance. Under the documents against payment, the exporter ships the goods in the name of the importer but the documents concerned are handed over to the importer through the bank only on receipt of payment of bills of exchange. However, under the documents against acceptance, the documents and bills are handed over to the importer who accepts the bills of exchange.

On due date of the bill, the bank presents the bill and the importer makes the payment

of the bill.

Q.3) What is export finance? Explain the role of Exim bank in export finance.

MEANING OF EXPORT FINANCE:

A range of financing products (loans, guarantees, letters of credit, insurance etc)

in support of a variety of activities which help the firms expand into new export markets.

Export financing describes the activity of governments helping companies by financing

their export activities. They offer low interest rate loans that the company could

otherwise not obtain at a rate lower than market price. Export financing promotes trade

as it provides an opportunity for those organizations that would otherwise not have been

able to participate in trade activities because of financial constraints.

ROLE OF EXIM BANK IN EXPORT FINANCE:

The Exim bank of India is a public sector financial institution established on 1st January, 1982 by an Act of Parliament. The main objective of Exim bank is of financing, facilitating and promoting foreign trade and providing financial assistance to exporters and importers. Following are the roles of exim bank in export finance:

1) Loans to Indian Companies:

Deferred payment exports: Term finance is provided to Indian exporters of eligible goods and services which enables them to offer deferred credit to overseas buyers. Deferred credit can also cover Indian consultant, technology and other services.

Pre-shipment credit: Finance is available from Exim Bank for companies executing export contracts involving cycle time exceeding six months. The facility also enables provision of rupee mobilization expenses for construction/turnkey project exporters.

Term loans for export production: Exim Bank provides loans to enable small and medium enterprises upgrade export production capability. Facilities for deeded exports; Deemed exports are eligible for funded and non- funded facilities from Exim Bank. 

Overseas Investment finance: Indian companies establishing joint ventures overseas are provided finance towards their equity contribution in the joint venture.

Finance for export marketing: This programmed, which is a component of a World Bank loan, helps exporters implement their export market development plans.

2) Loans to Overseas Companies:

Foreign Buyer's Credit: The foreign players are entitled to a sum of financial assistance in order to import goods and services on deferred payments

Lines of Credit: EXIM bank also offers financial assistance to the overseas financial institutions and various government agencies for import of goods and services from India.

Relending Options to Foreign Banks: The foreign banks are entrusted with funding from EXIM bank in order to provide the same to their clients across the globe for importing of goods from India.

3) Loans to Commercial Banks in India:

Export Bills Rediscounting: Commercial Banks in India who are authorized to deal in foreign exchange can rediscount their short term export bills with Exim Banks, for an unexpired usance period of not more than 90 days. 

Refinance of Export Credit: Authorized dealers in foreign exchange can obtain from Exim Bank 100% refinance of de3ferred payment loans extended for export of eligible Indian goods.

4) Advisory Services:

Exim Bank offers advisory services to Indian exporters for facilitating forward linkage for agri exports. Exim Bank provides export information on: 

o Overseas markets/market segments.o Direct marketing of product.o Overseas business opportunities.o Information on export/import regulations, finance, etc.

5) Promotional Activities:

Exim bank helps to plan, finance and promote export oriented units and also encourages export and import by providing technical, administrative and financial assistance. It also finances research, surveys and other overseas study to promote export trade.

6) Guarantees & Bonds:

The guarantee programmed of Exim bank is available in the case of construction contracts such as erection, civil works, etc and turnkey contracts such as advance payment guarantee, performance guarantee, guarantee for retention money and guarantee of borrowings abroad. Exim bank participates with commercial banks as well as ECGC in India in the issue of guarantees.

Q.4) What is packing credit? What are its conditions?

PACKING CREDIT

PACKING CREDIT is any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from the producing country or any other evidence of an order for export from that country having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived.

CONDITIONS FOR GETTING PACKING CREDIT FINANCE:

Following are the requirement for getting packing credit:

1) The bank sanctions packing credit which may be disbursed either against L/C or against an order. Therefore the correct position in this regard must be explained to the bank who avoids any difficulty later.

2) It would, therefore, be necessary to discuss all these matters with the bank at the time of sanctioning of limits. As it may happen that the exporter may receive the L/C at a very late stage in case of exports under L/C and may be required to procure/manufacture the goods much before the L/C is received.

3) All pre-shipment advances are to be liquidated from the proceeds of export bills.4) Application for sanctioning of suitable post-shipment facilities should, therefore,

be simultaneously made.5) Exporters may also require back-to-back L/C or L/C facilities for purchase of raw

materials etc. which are generally sanctioned by banks as a sub-limit of overall packing credit limit.

6) No other service charges are leviable on these advances other than premium payable to ECGC on their guarantees.

7) Sub-suppliers are also eligible for the packing credit advances provided they should submit a letter to the bank.

8) Incorporating details of the goods to be supplied.9) And confirming that they (export houses etc) has not availed of any packing

credit from any other bank/source against the same contract/L/C.10)Packing credit is normally given on adjusted L/C contract-wise.11)In the case of cancellation of the export order, facility of substitution of contract is

also available.12)Except, in certain cases, pre-shipment finance granted to the exporter does not

exceed FOB value of the goods or domestic market value of the goods, whichever is less.

Q.5) What is letter of credit? What is its importance in export finance?

MEANING OF LETTER OF CREDIT:

Letter of credit (L/C) is a binding document that a buyer can request from

his bank in order to guarantee that the payment for goods will be transferred to

the seller. Basically, a letter of credit gives the seller reassurance that he will receive the

payment for the goods. In order for the payment to occur, the seller has to present the

bank with the necessary shipping documents confirming the shipment of goods within a

given time frame. It is often used in international trade to eliminate risks such as

unfamiliarity with the foreign country, customs, or political instability.

IMPORTANCE OF LETTER OF CREDIT IN EXPORT FINANCE:

The letter of credit is important document for both an importer and exporter. The

importance of letter of credit is explained below:

Importance of L/C for an exporter:

1) Dependence on the creditworthiness of a bank instead of importer.

2) If the credit is confirmed by a bank in the exporter’s country, the exporter is

neither subject to commercial not to country risk.

3) If the credit is irrevocable, it cannot be cancelled without the exporter’s consent

and notice of revocation can be rejected by the exporter if received after

shipment.

4) The documents and therefore the goods will not be released until payment or

commitment to payment is made (in terms of L/C).

5) Where credit has been allowed the accepted bill of exchange can be use to

obtain the finances.

Importance of L/C for an importer:

1) The importer can negotiate better terms as the exporter is assured of payment.

2) Importer is assured that no funds will be released unless title documents and

received correct and in order.

3) Protection is provided under UCP for documentary credit.

Q.6) What is financial risk & how to evaluate it in international business?

FOREIGN-EXCHANGE RISK

Major financial risks arise from foreign exchange rate fluctuations. Strategies to protect

against such risks may include the internal movement of funds, as well as the use of

foreign-exchange instruments such as options and forward contracts. The three types of

foreign-exchange risk include translation exposure, transaction exposure and economic

exposure.

Translation Exposure:

Translation exposure reflects the foreign-exchange risk that occurs because a parent

company must translate foreign-currency financial statements into the reporting

currency of the parent, i.e., the value of the exposed asset or liability changes as the

exchange rate changes.

Transaction Exposure:

Transaction exposure reflects the foreign-exchange risk that arises because a firm has

outstanding accounts receivable or payable that are denominated in a foreign currency,

i.e., the receivable or payable changes in value as the relevant exchange rate changes.

Economic Exposure:

Economic or operational exposure reflects the foreign-exchange risk MNEs face in the

pricing of products, the source and cost of inputs and the location of investment, i.e., it

arises from the effects of exchange-rate fluctuations on expected cash flows.

EVALUATION OF FINANCIAL RISK

Risk management involves identifying, analyzing, and taking steps to reduce or

eliminate the exposures to loss faced by an organization or individual. Practice of risk

management utilizes many tools and techniques, including insurance, to manage a wide

variety of risks. Some of which are predictable and under management's control, and

others which are unpredictable and uncontrollable.

Risk management is particularly vital for small businesses, since some common types

of losses—such as theft, fire, flood, legal liability, injury, or disability— can destroy in a

few minutes what may have taken entrepreneur years to such build. Profits, and cause

financial hardship severe enough to cripple or bankrupt a small business. To identify

risks and take the necessary steps to protect the firm against them, small companies

rarely have that luxury. Instead, the responsibility for risk management is likely to fall on

the small business owner. The term risk management is a relatively recent (within the

last 20 years) evolution of the term "insurance management." encompasses a much

broader scope of activities and responsibilities than does insurance management.

A discipline within most large organizations. Risk in finance has no one definition, but

some theorists, notably have defined quite general methods to assess risk as an

expected after the fact such methods have been uniquely successful in limiting interest

rate risk in financial markets. Financial markets are considered to be a proving level of

regret. Ground for general methods of risk assessment. However, difficulties interfere

with other social goods such as disclosure, valuation and transparency. In particular, it

is often difficult to tell if such financial instruments are "hedging" (decreasing

measurable risk by giving up certain to determine if the outcomes of such transactions

will be satisfactory. Seeking describes an individual who has a positive second

derivative of his/her utility function. To) assume all risk in the economy and is hence not

likely to exist. In financial markets one may need to measure credit risk, information

timing and source risk, probability model risk, and legal risk if there are regulatory or

civil actions taken as a result of some "investor's regret".

According to c. Arthur Williams Jr. And Richard m. Heinz in their book risk management and insurance, the risk management process typically includes six steps. These steps are determining the objectives of the organization,

1. Identifying exposures to loss,2. Measuring those same exposures,3. Selecting alternatives,4. Implementing a solution, and5. Monitoring the results.

Q.7) What are import export documents? Legal importance of these documents?

Common Export- Import Documents

These documents are commonly used in exporting but requirements vary by destination

and product. For country-specific requirements, call Trade Info Center at 1-800-USA-

TRADE.

Electronic Export Information (EEI) (formerly Shipper’s Export Declaration SED) You

can get the EEI from the Government Printing Office or commercial outlets and it can be

e-filed using AES Direct. Dual Use Export Controls and Licenses Licensing is required

for "dual use" exports (commercial items which could have military applications), or

exports to embargoed countries.

Defense Trade Export Controls and Licenses for defense export transactions (defense

articles such as munitions), anyone who intends to export such an article must first

obtain approval from the U.S. Department of State Directorate of Defense Trade

Controls (DDTC) prior to the export. The appropriate license form must be submitted to

the DDTC for the purpose of seeking approval. In most cases, in order for a license to

be considered, you must be registered with the DDTC.

Commercial Invoice A bill for goods from seller to buyer. Often used by governments to

determine value of goods when assessing customs duties. Each country may specify

their own form, content, number of copies, language to be used, and other

characteristics (see Sample).

Certificate of Origin the Certificate of Origin is only required by some countries. In many

cases, a statement of origin printed on company letterhead will suffice (download

generic certificate or see Sample with explanation). Special certificates are needed for

countries, with which the US has special trade agreements- such as Mexico, Canada &

Israel (see more info on Free Trade Agreements).

Bill of lading a contract between the owner of the goods and the carrier (as with

domestic shipments). For vessels, there are two types: a straight bill of lading which is

non-negotiable and a negotiable or shipper's order bill of lading. The latter can be

bought, sold, or traded while the goods are in transit. The customer usually needs an

original as proof of ownership to take possession of the goods (see Sample Short Form

Bill of Lading and Sample Liner Bill of Lading).

Insurance Certificate Used to assure the consignee that insurance will cover the loss of

or damage to the cargo during transit (see Sample). These can be obtained from your

freight forwarder.

Export Packing List considerably more detailed and informative than a standard

domestic packing list, it itemizes the material in each individual package and indicates

the type of package, such as a box, crate, drum, or carton. Both commercial stationers

and freight forwarders carry packing list forms.

Import License Import licenses are the importers responsibility. Including a copy with the

rest of your documentation, however, can sometimes help avoid problems with customs

in the destination country.

Consular Invoice Required in some countries, it describes the shipment of goods and

shows information such as the consignor, consignee, and value of the shipment. If

required, copies are available from the destination country's Embassy or Consulate in

the U.S.

Air Way Bills Air shipments require air waybills which can’t be made in negotiable form

(see Sample).

Inspection Certification required by some purchasers and countries to attest to the

specs of the goods shipped. Usually done by a third party, often via independent testing

organizations.

Dock Receipt & Warehouse Receipt Used to transfer accountability when the export

item is moved by the domestic carrier to the port of embarkation and left with the ship

line for export.

Destination Control Statement Appears on the commercial invoice, and ocean/ air

waybill of lading to notify the carrier and all foreign parties that the item can be exported

only to certain destinations.

Shipping Terms-13 INCOTERMS

Define payment of freight, cargo insurance, customs fees and risk transfer from seller to

buyer. E terms favor seller, D terms favor buyer. The Terms shift from sellers favor (E-

terms) to buyers (D-terms) or share risks (F&C Terms).

FOB Factory is a domestic term. The international term is Ex-work- address, city, sate,

USA Some terms are “transport mode” specific Consider risk and all costs associated

with each INCO-term. Duties are usually calculated on FOB or CIF basis –so consider

duties, taxes, port handling fees when calculating costs.

FCA Free carriage to airport

FAS free carriage along-side vessel

FOB free on board vessel

CFR cost & freight

CIF cost & insurance & freight

CPT Air Carriage paid to

CIP Air Carriage & Insurance Paid to

DAF delivered at frontier

DES delivered ex Ship

DEQ delivered Ex-Quay

DDU delivered duties unpaid

DDP delivered duty paid

CIF quotation: Unless demanded by importer, quote CIF to nearest seaport or airport.

The importer can then easily ascertain charges within their own country, such as

unloading charges, customs duty, and internal freight or cartage. That gives importer a

duty-paid, delivered-to-the-warehouse price. Insurance : There can be real danger in

quoting C&F vs. CIF. C&F implies the importer will get insurance on the shipment. But,

if importer fails to properly insure the goods even though they bear the risk of loss once

the goods clear the ship's rails there is risk to the exporter. If a non-insured claim arises,

the exporter might face payment issues due to damaged merchandise even though the

title has passed to importer. Even a letter of credit (L/C) may not protect the exporter

unless a clean bill of lading is obtained to negotiate the L/C. In this case consider

contingency insurance or an FOB sales endorsement on exporter's marine insurance if

the importer's coverage is missing or inadequate. The freight forwarder may be able to

provide this if exporter does not have marine insurance.

Ambiguous words: Ton, FOB, and dollar often lead to misunderstandings and bad cost

calculations. The ton could mean a short ton- 2000 lbs, a metric ton- 2204 lbs, a long

ton-2200 lbs or 4000 lbs of salt. Never use "ton" without qualifying it. FOB requires

specification of what and where such as "FOB ocean vessel at New York City." Finally,

specify country and dollar. A quotation for an importer in Hong Kong such as "500

dollars per order" might be perceived as Hong Kong dollars. However, if the exporter

intends to quote in U.S. dollars, a huge difference in value would result from this

ambiguity.

Export Packing

Exporters should be aware of the demands that international shipping puts on packaged

goods. Exporters should keep four potential problems in mind when designing an export

shipping crate: breakage, moisture, pilferage and excess weight.

Generally, cargo is carried in containers, but may be shipped as break-bulk cargo.

Besides normal handling encountered in domestic transportation, a break-bulk shipment

transported by ocean freight may be loaded aboard vessels in a net or by a sling,

conveyor, or chute that puts an added strain on the package. During the voyage, goods

may be stacked on top of or come into violent contact with other goods. Overseas,

handling facilities may be less sophisticated than in the US and the cargo could be

dragged, pushed, rolled, or dropped during unloading, while moving through customs,

or in transit to the final destination.

Moisture is a constant concern because condensation may develop in the hold of a ship

even if it is equipped with air conditioning and a dehumidifier. Another aspect of this

problem is that cargo may also be unloaded in precipitation, or the foreign port may not

have covered storage facilities. Theft and pilferage are added risks.

Buyers are often familiar with the port systems overseas, so they will often specify

packaging requirements. If not, be sure the goods are prepared using these guidelines:

Pack in strong containers, adequately sealed and filled when possible. To provide

proper bracing in container, regardless of size, make sure weight is evenly distributed.

Goods should be palletized and when possible containerized. Packages and packing

filler should be made of moisture-resistant material. To avoid pilferage, avoid writing

contents or brand names on packages. Other safeguards include using straps, seals,

and shrink wrapping. Observe any product-specific hazardous materials packing

requirements.

Many exporters use containers obtained from carriers or private leasing companies.

These containers vary in size, material, and construction and accommodate most cargo,

but are best suited for standard package sizes and shapes. Also, refrigerated and liquid

bulk containers are usually readily available. Containers are often semi-truck trailers

lifted off wheels, placed on vessel at port of export then placed on new wheels at the

port of import.

Normally, air shipments require less heavy packing than ocean shipments, though they

should still be adequately protected, especially if they are highly pilfer able. In many

instances, standard domestic packing is acceptable, especially if the product is durable

and there is no concern for display packaging. In other instances, high-test (at least 250

pounds per square inch) cardboard or tri-wall construction boxes are more than

adequate.

Finally, because transportation costs are determined by volume and weight, specially

reinforced and lightweight packing materials have been developed for exporting.

Packing goods to minimize volume and weight while reinforcing them may save money,

as well as ensure that the goods are properly packed. It is recommended that a

professional firm be hired to pack the products if the supplier is not equipped to do so.

This service is usually provided at a moderate cost.

Q.8) Explain the role of ECGC in international business.

Export Credit Guarantee Corporation of India

The Export Credit Guarantee Corporation of India Limited (ECGC) is a company wholly

owned by the Government of India based in Mumbai, Maharashtra. [1] It provides export

credit insurance support to Indian exporters and is controlled by the Ministry of

Commerce. Government of India had initially set up Export Risks Insurance Corporation

(ERIC) in July 1957. It was transformed into Export Credit and Guarantee Corporation

Limited (ECGC) in 1964 and to Export Credit Guarantee of India in 1983.

Objective of ECGC

1. ECGC is designed to protect exporters from the consequences of payment risks-both

political and commercial.

2. It helps-exporter to expand their overseas business without fear of loss.

3. It enables exporter to get fimely and liberal bank finance.

4. It provides banks financial guarantees to safeguard their interests.

5. It enables exporter and importer to take calculated risks in business.

Risk covered

Commercial risks covered are insolvency of the buyer/LC opening bank (as applicable);

default by the buyer/LC opening bank to make payment within four months from the due

date; and the buyer s failure to accept the goods, subject to certain conditions/bank s

failure to accept the bill drawn on it under the letter of credit opened by it.

Political risks covered are the imposition of restriction by the Government action which

may block or delay the transfer of payment made by the buyer; war, civil war, revolution

or civil disturbances in the buyer s country; new import restrictions or cancellations of a

valid import license; interruption or diversion of voyage outside India resulting in

payment of additional freight or insurance charges which cannot be recovered from the

buyer; and any other cause of loss occurring outside India, not normally insured by

general insurers and beyond the control of both the exporter and the buyer.

Premium is payable on the projected turnover for each quarter in advance. Important

obligations of the exporter are the declaration of shipments made during the quarter

within 15 days after the end of the quarter and that of payments overdue for a period of

30 days or more from the due date as at the end of the month by the 15th of the

succeeding month.

The exporter should, in consultation with ECGC, take effective steps for recovery of the

debt. All amounts recovered, net of recovery expenses, shall be shared with ECGC in

the same ratio in which the loss was shared.

Risk not covered by ECGC

Commercial disputes including quality disputes raised by the buyer, unless the exporter

obtains a decree from a competent court of law in the buyer's country in his favor.

Causes inherent in the nature of the goods.

Buyer's failure to obtain necessary import or exchange authorization from

authorities in his country.

Insolvency or default of any agent of the exporter or of the collecting bank.

Loss or damage to goods which can be covered by general insurers.

Exchange rate fluctuation.

Failure or negligence on the part of the exporter to fulfill the terms of the export

contract.

Policies issued by ECGCSERVICE POLICY

Where Indian companies conclude contracts with foreign principals for providing them

with technical or professional services, payments due under the contracts are open to

risks similar to those under supply contracts. In order to give a measure of protection to

such exporters of services, ECGC has introduced the Services Policy.

The different types of Services Policy

o Specific Services Contract (Comprehensive Risks) Policy;

o Specific Services Contract (Political Risks) Policy;

o Whole-turnover Services (Comprehensive Risks) Policy; and

o Whole-turnover Services (Political Risks) Policy

Specific Services Policy, as its name indicates, is issued to cover a single specified

contract. It is issued to provide cover for contracts, which are large in value and extend

over a relatively long period. Whole-turnover services policies are appropriate for

exporters who provide services to a set of principles on a repetitive basis and where the

period of each contract is relatively short. Such policies are issued to cover all services

contracts that may be concluded by the exporter over a period of 24 months ahead.

The Corporation would expect that the terms of payment for the services are in line with

customary practices in international trade in these lines. Contracts should normally

provide for an adequate advance payment and the balance should be payable

periodically based on the progress of work. The payments should be backed by

satisfactory security in the form of Letters of Credit or bank guarantees.

Services policies are designed to cover contracts under which only services are to be

rendered. Contracts under which the value of services to be rendered forms only a

small part of a contract involving supply of machinery or equipment will be covered

under an appropriate specific policy for supply contracts.

SMALL EXPORTERS POLICY

The Small Exporter's Policy is basically the Standard Policy, incorporating certain

improvements in terms of cover, in order to encourage small exporters to obtain and

operate the policy. It is issued to exporters whose anticipated export turnover for the

period of one year does not exceed Rs.50 lacs.

STANDARD POLICY

Shipments (Comprehensive Risks) Policy, commonly known as the Standard Policy, is

the one ideally suited to cover risks in respect of goods exported on short-term credit,

i.e. credit not exceeding 180 days. This policy covers both commercial and political risks

from the date of shipment. It is issued to exporters whose anticipated export turnover for

the next 12 months is more than Rs.50 lacs. (The SCR OR STANDARD POLICY

appropriate policy for exporters with an anticipated turnover of Rs.50 lacs or less is the

Small Exporter's Policy, described separately).

The risks covered under the Standard Policy

Under the Standard Policy, ECGC covers, from the date of shipment, the following risks:

a. Commercial Risks

Insolvency of the buyer.

Failure of the buyer to make the payment due within a specified period, normally

four months from the due date.

Buyer's failure to accept the goods, subject to certain conditions.

b. Political Risks

Imposition of restriction by the Government of the buyer's country or any

Government action, which may block or delay the transfer of payment made by the

buyer.

War, civil war, revolution or civil disturbances in the buyer's country. New import

restrictions or cancellation of a valid import license in the buyer's country.

Interruption or diversion of voyage outside India resulting in payment of additional

freight or insurance charges which cannot be recovered from the buyer.

Any other cause of loss occurring outside India not normally insured by general

insurers, and beyond the control of both the exporter and the buyer.

Export (Specific Buyers) Policy

Buyer wise Policies - Short Term (BP-ST) provide cover to Indian exporters against

commercial and political risks involved in export of goods on short-term credit to a

particular buyer. All shipments to the buyer in respect of whom the policy is issued will

have to be covered (with a provision to permit exclusion of shipments under LC). These

policies can be availed of by

Export (Specific Buyers) Policy

(I) Exporters who do not hold SCR Policy and

(ii) By exporters having SCR Policy,

In case all the shipments to the buyer in question have been permitted to be excluded

from the purview of the SCR Policy.

The different types of BP (ST)

Buyer wise (commercial and political risks) Policy - short-term

Buyer wise (political risks) Policy - short-term.

Buyer wise (insolvency & default of L/C opening bank and political risks) Policy -

short-term.

Export Turnover Policy

•Turnover policy is a variation of the standard policy for the benefit of large exporters

who contribute not less than Rs.10 lacs per annum towards premium. Therefore all the

exporters who will pay a premium of Rs. 10 lacs in a year are entitled to avail of it.

The Buyer Turnover Policy V/s Standard Policy

•The turnover policy envisages projection of the export turnover of the exporter for a

year and the initial determination of the premium payable on that basis, subject to

adjustment at the end of the year based on actual

1/2

Buyer Exposure Policies

•Two types of Exposure policies are offered, viz,

–Exposure (Single Buyer) Policy – for covering the risks on a specified buyer and–

Exposure (Multi Buyer) Policy – for covering the risks on all buyers.

Consignment Exports (Stock Holding Agent) Policy

• A consignment Exports (Stock-holding Agent) Policy will be appropriate for each

exporter –stock holding agent combination provided the following criteria are satisfied:

–Merchandise are shipped to an overseas entity in pursuance of an agency agreement–

The overseas agent would be an independent and separate legal entity with no

associate/sister concern relationship with the exporter

Software Project Policy

•It was found that the general services policy does not meet with the exact requirements

of software exporters. It was therefore decided to introduce a new credit insurance

cover to meet the needs on the software exporters, namely, software projects policy,

where the payments will be received in foreign exchange

Construction Works Policy

•Construction Works Policy is designed to provide cover to an Indian contractor who

executes a civil construction job abroad

Features

The contractor keeps raising bills periodically throughout the contract period for the

value of work done between one billing period and another To be eligible for payment,

the bills have to be certified by a consultant or supervisor engaged by the employer for

the purpose

Unlike bills of exchange raised by suppliers of goods, the bills raised by the contractor

do not represent conclusive evidence of debt but are subject to payment in terms of the

contract which may provide, among other things, for penalties or adjustments on various

counts.

Export Finance Guarantee

•This guarantee covers post-shipment advances granted by banks to exporters against

export incentives receivable in the form of cash assistance, duty drawback, etc. The

premium rate for this guarantee is 7paise per Rs.100 per month and the cover is 75

percent

Special Schemes

Transfer Guarantee

•The confirming bank will suffer a loss is the foreign bank fails to reimburse it with the

amount paid to the exporter. The Transfer Guarantee seeks to safeguard banks in India

against losses arising out on such risks Loss due to political risks is covered upto90%

and loss due to commercial risks upto75%.

Overseas Investment Guarantee

• Any investment made by way of equity capital or untied loan for the purpose of setting

up or expansion of overseas projects will be eligible for cover underinvestment

insurance. The investment may be either in cash or in the form of export of Indian

capital goods and services. The cover would be available for the original investment

together with annual dividends or interest receivable

•The cover can be extended for a period o15 years from the date of completion of the

project subject to a maximum of 20 years from the date of commencement on

investment.

Q.9) What is Exim bank? What are its functions?

Export-Import Bank of India

The Export-Import (EXIM) Bank of India is the principal financial institution in India for

coordinating the working of institutions engaged in financing export and import trade. It

is a statutory corporation wholly owned by the Government of India. It was established

on January 1, 1982 for the purpose of financing, facilitating and promoting foreign trade

of India.

Capital:

The authorized capital of the EXIM Bank is Rs. 200 crore and paid up capital is Rs. 100

crore, wholly subscribed by the Central Government. The bank can raise additional

resources through:

(I) Loans/grants from Central Government and Reserve Bank of India;

(ii) Lines of credit from institutions abroad;

(iii) Funds rose from Euro Currency markets;

(iv) Bonds issued in India.

What are the functions of Export-Import Bank of India?

The main functions of the EXIM Bank are as follows:

(I) Financing of exports and imports of goods and services, not only of India but also of

the third world countries;

(ii) Financing of exports and imports of machinery and equipment on lease basis;

(iii) Financing of joint ventures in foreign countries;

(iv) Providing loans to Indian parties to enable them to contribute to the share capital of

joint ventures in foreign countries;

(v) to undertake limited merchant banking functions such as underwriting of stocks,

shares, bonds or debentures of Indian companies engaged in export or import; and

(vi) To provide technical, administrative and financial assistance to parties in connection

with export and import.

The Export-Import Bank of India (Exim Bank) completed 24 years of operations in

March 2006. It was established by an Act of Parliament known as the Export-Import

Bank of India Act 1981 and commenced operations in March 1982. Exim Bank is wholly

owned by the Government of India. Exim Bank was set up for the purpose of financing,

facilitating and promoting foreign trade in India and also to provide financial assistance

to exporters and importers and for functioning as the principal financial institution

for coordinating the working of institutions engaged in financing export and import of

goods and services with a view to promoting the country’s international trade. It has a

high-powered Board of Directors comprising: A Deputy Governor of Reserve Bank of

India, Chairmen of IDBI, ECGC, Representatives of the Ministries of Finance,

Commerce, Industry, External Affairs and Planning, Chairmen of scheduled banks and

professionals from trade and industry. Over the years, Exim Bank has developed 35

lending programmers covering all stages of the export cycle namely Import of

Technology, Export Product Development, Export Production, Export Marketing , Pre-

shipment, Post-shipment, Investment Abroad

Functions:

1) Financing of exports and imports of goods and services, not only of India but also of

third world countries.

2) Financing of exports and imports of machinery and equipment on lease basis.

3) Financing of joint ventures in foreign countries.

4) Providing loans to Indian parties to enable them to contribute to the share capital of

joint ventures in foreign countries.

5)Undertake limited merchant banking functions such as underwriting of stocks, shares,

bonds or debentures of companies engaged in export or import; and

6) Provide technical administrative and financial assistance to parties in connection with

export and import.

(10) Explain the role of EXIM Bank in export promotion?

Ans. The EXIM bank of India is a public sector financial institution established on 1 st

January, 1982 by an Act of Parliament. The main objective of Exim bank is of financing,

facilitating and promoting foreign trade and providing financial assistance to exporters

and importers. Following are the roles of exim bank in export finance:

1. Loans to Indian Companies:

Deferred payment exports: Term finance is provided to Indian exporters of eligible goods and services which enables them to offer deferred credit to overseas buyers. Deferred credit can also cover Indian consultant, technology and other services.

Pre-shipment credit: Finance is available from Exim Bank for companies executing export contracts involving cycle time exceeding six months. The facility also enables provision of rupee mobilization expenses for construction/turnkey project exporters.

Term loans for export production: Exim Bank provides loans to enable small and medium enterprises upgrade export production capability. Facilities for deeded exports; Deemed exports are eligible for funded and non- funded facilities from Exim Bank. 

Overseas Investment finance: Indian companies establishing joint ventures overseas are provided finance towards their equity contribution in the joint venture.

Finance for export marketing: This programmed, which is a component of a World Bank loan, helps exporters implement their export market development plans.

2. Loans to Overseas Companies:

Foreign Buyer's Credit: The foreign players are entitled to a sum of financial assistance in order to import goods and services on deferred payments

Lines of Credit: EXIM bank also offers financial assistance to the overseas financial institutions and various government agencies for import of goods and services from India.

Relending Options to Foreign Banks: The foreign banks are entrusted with funding from EXIM bank in order to provide the same to their clients across the globe for importing of goods from India.

3. Loans to Commercial Banks in India:

Export Bills Rediscounting: Commercial Banks in India who are authorized to deal in foreign exchange can rediscount their short term export bills with Exim Banks, for an unexpired usance period of not more than 90 days. 

Refinance of Export Credit: Authorized dealers in foreign exchange can obtain from Exim Bank 100% refinance of de3ferred payment loans extended for export of eligible Indian goods.

4. Advisory Services:

Exim Bank offers advisory services to Indian exporters for facilitating forward linkage for agri exports. Exim Bank provides export information on: 

a. Overseas markets/market segments.b. Direct marketing of product.c. Overseas business opportunities.d. Information on export/import regulations, finance, etc.

5. Promotional Activities:

Exim bank helps to plan, finance and promote export oriented units and also encourages export and import by providing technical, administrative and financial assistance. It also finances research, surveys and other overseas study to promote export trade.

6. Guarantees & Bonds:

The guarantee programmed of Exim bank is available in the case of construction contracts such as erection, civil works, etc and turnkey contracts such as advance payment guarantee, performance guarantee, guarantee for retention money and guarantee of borrowings abroad. Exim bank participates with commercial banks as well as ECGC in India in the issue of guarantees.

(11) Discuss the different types of facilities provided by commercial banks for exporters?

Ans. Export Finance refers to the credit facilities extended to the exporters at pre-shipment and post-shipment stages. It includes any loan to an exporter for financing the purchase, processing, manufacturing or packing of goods meant for overseas markets.There are two types of facilities provided by commercial banks to exporters are as follows:1. Pre-shipment credit2. Post- shipment credit

Pre-shipment finance:- An exporter may need financial assistance for execution of an export order from the data of receipt of the export order till the date of realization of the export proceeds at any stage. As the name indicates, this facility is extended prior to the shipment of export goods. Pre-shipment finance is provided to the exporters for the purchase of raw materials, processing them and converting them into finished goods for the purpose of export. This acts as working capital finance for the export business.

Types of pre-shipment credit are as under:-

1. Packing credit.2. Advances against receivables from government like duty drawback, etc.3. Pre-shipment credit in foreign currency.

Post-shipment:- Post-shipment credit means any loan or advance granted or any other credit provided by a bank to an exporter of goods from India from the date of shipment of goods to the date of realization of export proceeds and includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the government from time to time. Post-shipment finance is also a working capital finance, which is provided to the exporter against shipping documents. While pre-shipment credit is inventory based finance, post-shipment finance is a receivable finance. Post-shipment credit is to be liquidated by the proceeds of export bills received from aboard in respect of goods exported.

Types of post-shipment credit are:-

1. Export bills purchased/ negotiated/ discounted.2. Advances against bills sent on collection basis.3. Advances against exports on consignment basis.4. Advances against undrawn balances.5. Advances against duty drawback.

Hence these are the types of facilities provided by commercial banks.

Q.12) Discuss different types of letter of credits.

Letters of credit

What is a letter of credit?

A letter of credit - sometime known as 'documentary credit' - is basically a guarantee

from a bank that a particular seller will receive a payment due from a particular buyer.

The bank guarantees that the seller will receive a specified amount of money within a

specified time. In return for guaranteeing the payment, the bank will require that strict

terms are met. It will want to receive certain documents - for example shipping

confirmation - as proof.

Why use a letter of credit?

Letters of credit are most commonly used when a buyer in one country purchases

goods from a seller in another country. The seller may ask the buyer to provide a letter

of credit to guarantee payment for the goods.

The main advantage of using a letter of credit is that it can give security to both the

seller and the buyer.

Types of letter of credit

There are five commonly used types of letter of credit. Each has different features and

some are more secure than others. The most common types are:

irrevocable

revocable

unconfirmed

confirmed

transferable

Other types include:

standby

revolving

back-to-back

Sometimes a letter of credit may combine two types, such as 'confirmed' and

'irrevocable'.

Irrevocable and revocable letters of credit

A revocable letter of credit can be changed or cancelled by the bank that issued it at

any time and for any reason.

An irrevocable letter of credit cannot be changed or cancelled unless everyone involved

agrees. Irrevocable letters of credit provide more security than revocable ones.

Confirmed and unconfirmed letters of credit

When a buyer arranges a letter of credit they usually do so with their own bank, known

as the issuing bank. The seller will usually want a bank in their country to check that the

letter of credit is valid.

For extra security, the seller may require the letter of credit to be 'confirmed' by the bank

that checks it. By confirming the letter of credit, the second bank agrees to guarantee

payment even if the issuing bank fails to make it. So a confirmed letter of credit provides

more security than an unconfirmed one.

Transferable letters of credit

A transferable letter of credit can be passed from one 'beneficiary' (person receiving

payment) to others. They're commonly used when intermediaries are involved in a

transaction.

Standby letters of credit

A standby letter of credit is an assurance from a bank that a buyer is able to pay a

seller. The seller doesn't expect to have to draw on the letter of credit to get paid.

Revolving letters of credit

A single revolving letter of credit can cover several transactions between the same

buyer and seller.

Back-to-back letters of credit

Back-to-back letters of credit may be used when an intermediary is involved but a

transferable letter of credit is unsuitable.

(13) What are different types of risks for the exporters? Suggest your risk management strategy for the exporters?Ans. Risk is an exposure to a peril and from a business point of view; risk is exposure to a loss. Some of the risks in international business are:

Strategic Risk. Operational Risk. Political Risk. Country Risk. Technological Risk. Environmental Risk. Economic Risk. Financial Risk. Terrorism Risk. Currency risk. Foreign Exchange risk Management.

Strategic Risk: The ability of a firm to make a strategic decision in order to respond to the forces that are a source of risk. These forces also impact the competitiveness of a firm. Porter defines them as: threat of new entrants in the industry, threat of substitute goods and services, intensity of competition within the industry, bargaining power of suppliers, and bargaining power of consumers.

Operational Risk: This is caused by the assets and financial capital that aid in the day-to-day business operations. The breakdown of machineries, supply and demand of the resources and products, shortfall of the goods and services, lack of perfect logistic and inventory will lead to inefficiency of production. By controlling costs, unnecessary waste will be reduced, and the process improvement may enhance the lead-time, reduce variance and contribute to efficiency in globalization.

Political Risk: The political actions and instability may make it difficult for companies to operate efficiently in these countries due to negative publicity and impact created by individuals in the top government. A firm cannot effectively operate to its full capacity in order to maximize profit in such an unstable country's political turbulence. A new and hostile government may replace the friendly one, and hence expropriate foreign assets.

Country Risk: The culture or the instability of a country may create risks that may make it difficult for multinational companies to operate safely, effectively, and efficiently. Some of the country risks come from the governments' policies, economic conditions, security factors, and political conditions. Solving one of these problems without all of the problems (aggregate) together will not be enough in mitigating the country risk.

Technological Risk: Lack of security in electronic transactions, the cost of developing new technology, and the fact that these new technology may fail, and when all of these are coupled with the outdated existing technology, the result may create a dangerous effect in doing business in the international arena.

Environmental Risk: Air, water, and environmental pollution may affect the health of the citizens, and lead to public outcry of the citizens. These problems may also lead to damaging the reputation of the companies that do business in that area.

Economic Risk: This comes from the inability of a country to meet its financial obligations. The changing of foreign-investment or/and domestic fiscal or monetary policies. The effect of exchange-rate and interest rate make it difficult to conduct international business.

Financial Risk: This area is affected by the currency exchange rate, government flexibility in allowing the firms to repatriate profits or funds outside the country. The devaluation and inflation will also impact the firm's ability to operate at an efficient capacity and still be stable. Most countries make it difficult for foreign firms to repatriate funds thus forcing these firms to invest its funds at a less optimal level. Sometimes, firms' assets are confiscated and that contributes to financial losses.

Terrorism Risk: These are attacks that may stem from lack of hope; confidence; differences in culture and religious philosophy, and/or merely hate of companies by citizens of host countries. It leads to potential hostile attitudes, sabotage of foreign companies and/or kidnapping of the employers and employees. Such frustrating situations make it difficult to operate in these countries.

Currency Risks: Currency risk is exposure to a loss in cross-border lending, caused by events in a particular country. Currency risk applies to assets and not to liabilities. However, there may exist a cross- border liability risk of branch banking abroad.

Foreign Exchange Risk Management : The foreign exchange is the money in one country for money or credit or goods or services in another country. The importing country pays to the exporting country in return of goods or services either in its domestics currency or the hard currency. This is called as foreign exchange.

Although the benefits in international business exceed the risks, firms should take a risk assessment of each country and to also include intellectual property, red tape and corruption, human resource restrictions, and ownership restrictions in the analysis, in

order to consider all risks involved before venturing into any of the countries. Hence this is the types of risks and the management strategy for the exporters.

Q.14) Different types of Documents used in International business.

Documents used in International business

International business transactions require not only the buyer and seller to reach

agreement on price, quantity, and delivery date, but also buyers and sellers to negotiate

and agree on which currency to use for the transaction, when and how to check credit,

which form of payment to use, and how to arrange for finance.

A. International Business:

A Managerial Perspective, 2nd Edition, Instructor’s Manual Choice of Currency.

B. Exporters typically prefer to be paid in their home currency so that they know exactly

how much they will be receiving from the importer. Importers, however, typically prefer

to pay in their home currency so that they know exactly how much they will be paying

the exporter. The US dollar is the major currency used for settling international

transactions.

C. It is important for firms to check the credit of their customers prior to completing a

business transaction. In situations where the importer is financially healthy, exporters

may choose to extend credit. However, if an importer is financially troubled, an exporter

may demand payment in a way that reduces risk.

D. Firms should aim to build long-term, trusting relationships with customers.

E. There are several methods of payment for international business transactions

including clean payment, open account, documentary collections, documentary letters

of credit, credit cards, and countertrade. Each form involves a different degree of risk

and cost.

F. The safest method of payment from the exporter's perspective is clean payment

(payment in advance). However, this method of payment is very undesirable from the

importer's point of view.

G. The safest method of payment from the importer's perspective is the open account,

where goods are shipped by the exporter and received by the importer prior to payment.

In addition, the importer benefits from this form of payment because it avoids the fees

that may be associated with other forms of payment and requires less paperwork.

H. Open accounts are not desirable for exporters because the exporter must rely on the

importer's reputation to pay promptly, the exporter cannot fall back on financial

intermediaries in the case of a dispute, the lack of documentation may be

disadvantageous if the importer refuses to pay, and cash must be tied up to finance

foreign accounts receivable.

I. Firms may engage in specialized international lending called factoring where firms buy

foreign accounts receivable at a discount from face value. A similar activity is known as

“forfeiting” which is used for trade in very large capital items like commercial aircraft.

Here several companies often join to carry the risk.

Teaching Note:

Students frequently become confused when discussing the process of documentary

collections and documentary letters of credit (see next section). When discussing these

concepts, instructors may wish to develop a chart showing each step of the process so

that students can follow the process

J. A Documentary collection occurs where banks serve as agents to facilitate the

payment process and literally collect payment or ensure acceptance of the documents.

Documentary collections allow exporters to retain control of the goods until payment, or

at least the promise of payment, is received. With documentary collections, the exporter

draws up a document called a bill of exchange in which payment is demanded from the

buyer at a specified time. (A bill of exchange is sometimes called a draft).

K. After the goods have been shipped, the exporter submits the invoice, the packing slip

and the bill of lading, and any other documents, to its local bank. The bill of lading plays

three important roles - it serves as a contract for transportation between the exporter

and the carrier, it is a receipt for the goods; and, it represents legal title to the goods in

question.

L. There are two major forms of bills of exchange. A sight bill of exchange requires

payment, usually within 24 hours, upon the transfer of legal title of the goods from the

exporter to the importer. Sometimes, sight bills of exchange are called sight drafts. A

term bill of exchange extends credit to the importer by requiring payment at some

specified time after the importer receives the goods, such as 30 or 60 days. Sometimes,

term bills of exchange are called term drafts.

M. To obtain title to the goods when a term bill of exchange is used, the importer must

indicate “acceptance” on the bill of exchange by endorsement before the bank will pass

over the bill of lading and associated documents. Therefore, the importer incurs a legal

obligation to pay the bill of exchange when it comes due for payment. An accepted term

bill of exchange is called a trade acceptance and is generally considered a legally

enforceable and negotiable debt instrument. For a fee the importer’s bank may also

accept a term bill of exchange (a process known as validation) in which case the term

bill becomes a bank-accepted bill of exchange.

N. An exporter holding a term bill of exchange can obtain earlier payment be selling the

bill to banks or other commercial lenders at a discount. Some acceptances are sold

without recourse, meaning that the buyer of the acceptance assumes the credit risk, or

with recourse, meaning that the exporter will have to reimburse the buyer of the

acceptance in the case of non-payment by the importer.

O. Documentary collections have several advantages for exporters. First, the fees

involved are reasonable since the bank involved is acting as an agent rather than a risk

taker. Second, a trade acceptance or bank-acceptance is a legally enforceable debt

instrument in most countries. Third, using banks simplifies the collection process.

Fourth, as the collection agent is a local bank, it is likely that the importer does not want

to jeopardize its business reputation with the local lender. Finally, as an accepted bill of

exchange, is more enforceable in courts of law, arranging finance is easier and less

expensive.

Documentary Letters of Credit

Q. A documentary letter of credit is an instrument issued by a bank that contains the

bank’s promise to pay the exporter upon receiving proof that the exporter has fulfilled all

requirements specified in the letter of credit. (Documentary letters of credit are

commonly known as simply letters of credit or documentary credits). Documentary

letters of credit are very popular with exporters as they virtually eliminate any credit risk

associated with the importer. However, the bank charges more as it is accepting risk.

R. An importer usually applies to its local bank for a documentary letter of credit. The

bank assesses the importer’s credit worthiness, examines the proposed transaction,

determines whether it wants collateral, and if everything is in order issues the

documentary letter of credit. Most documentary letters of credit require the exporter to

supply an invoice, appropriate customs documents, a bill of lading, a packing list and

proof of insurance. Depending upon the product involved additional documentation may

be required such as export licenses, certificates of product origin, and inspection

certificates.

CONCLUSION

The importance of risk management in projects can hardly be overstated. Awareness of

risk has increased as we currently live in a less stable economic and political

environment. Making a sound business case for having a strong risk management

program has long been an elusive challenge for many organizations. Remains

unanswered, “How much value should be placed on preventing loss from a disaster that

might never happen?” Consequences of risk management failure can be dire. For many

companies to develop a strong, consistent, enterprise wide risk management

programme, as most prevalent business risks will either remain at current levels or

increase. In pursuing this goal, companies, now more than ever, would do well to begin

by identifying their top drivers, then pinpointing the top threats to those revenue drivers,

and distinguishing between those that are predominantly downside rests and those that

are predominantly variable risks.

Q.15) Write short notes on the following:

1) BUSINESS RISK

International business firms, have fundamental goals of expanding market share, sales

revenue and increase in profits. Expanding markets in overseas countries is one of the

strategies to achieve these fundamental goals. The firms have alternative foreign

market to enter. Therefore, these firms have to analyze and evaluate respective costs,

benefits and risks and select the market. The risk in entering in a new foreign market

includes the following:

1. Exchange rate fluctuations.

2. Operating complexity.

3. Direct financial losses due to misassessment of market potential.

4. Government seizure of property.

Exporting involves less business risk as the company understands the culture, customer

and the market of the host country gradually. The company can enter the host country

on a full scale, if the product is accepted by the host country’s market.

A company should be considering various factors in deciding negotiations. Each

international licensing is unique and has to be decided separately. There are certain

common factor such as specifying the agreement’s boundaries, determined the royalty,

determined rights, privileges and constraints, defining dispute resolution methods and

specifying the duration of the contract.

Business risk is the anticipated loss due to business related factors. The business risk

may arise from the following:

1. Lack of knowledge of the exporter about the market.

2. Inability to adopt the new environment for want of adequate information about

the market.

3. Different trends of marketing situations to be involved, due to entry of new

competitors.

4. Larger involvement of transit time since the distance is usually greater.

5. Price changes due to change in exchange rates, import duties, transportation charges etc.

There is no possibility of shifting business risks on professional risk bearers. However,

the intensity of risk can be reduced by effective forecasting and planning.

No exporter can manage exports without selling on credit on account of growing

competition in the export market. The export credit requires sufficient money to offer

credit and at the same time, it involves credit risk also. The ECGC covers the exporter

against credit risk when the overseas buyer either commits a default or he may go

bankrupt, or a war or a coup in his country which may wreck his fortunes.

There are legal risks arising out of foreign laws. Commercial laws may be different in

different countries. The legal proceedings in other countries are much complicated and

expensive. Therefore, at the time of making the export agreement major risks can be

taken care of by specifying in the contract itself that which law be applicable and who

will be the arbitrator in case of any trade dispute in future.

2) MATE’S RECEIPT

Mate’s Receipt is issued by the mate or master of the vessel. It shows a prima facie

evidence that goods are loaded in the vessel. Mate’s receipt is an acknowledgment of

the goods received on board the ship.

3) ECGC:

Export Credit and Guarantee Corporation (ECGC) was established in India in 1964. It is

a special institution established for the purpose of avoiding high risk situation by

providing adequate cover of insurance to exporters. It plays a dual role in promoting

exports by issuing suitable insurance policies to the exporters against possible risks of

export business and also providing financial guarantees to banks and exporter against

deferred credit terms. It does not provide direct finance to the exporters. It only helps

them in obtaining finance from banks and financial institution by undertaking to share

commercial and political risks with such institutions.

OBJECTIVE OF ECGC:

1. ECGC is designed to protect exporters from the consequences of payment risks-

both political and commercial.

2. It help-exporters to expand their overseas business without fear of loss.

3. It enables exporters to get timely and liberal bank finance.

4. It provides banks financial guarantees to safeguard their interests.

5. It enables exporters and importer to take calculation risks in business.

RISK COVERED BY ECGC

ECGC covers the following types of risks:

1. Commercial Risks: Commercial risks such as insolvency of the importer, his

failure to accept goods when exporter is not at fault and the importer is protracted

from default to pay for the goods accepted by him are covered by ECGC.

2. Political Risks: The political risks covered by ECGC includes the risks due to

war, revolution, civil disturbances in exporter’s country or imposition of new

license restrictions or cancellation of valid import license in the buyer’s buyer’s

country. In addition the following risks are also covered:

a) Imposition of restriction on remittances by the government of importer’s

country or any other government action which may block or delay the

payment to exporter.

b) Additionally handling, transport, insurance charges due to the interruption

or diversion if voyage, which cannot be recovered from the buyer.

c) Any other cause of loss occurring outside India which is not normally

covered by commercial insurance and which is beyond the control of both

the exporter and the importer.

RISKS NOT COVERD BY ECGC:

The following risks are not covered by the ECGC policies.

1. Mistake committed by exporter or his agent.

2. Losses due to dispute about the quality of goods.

3. Causes inherent in the nature of the goods.

4. Buyer’s failure to obtain exchange authorization from the authorities in his

country.

5. Discrepancy in documents.

6. General or Marine insurance risks which would result in loss, theft, pilferage or

demand to goods.

7. Failure or negligence on the part of the exporter to fulfill the terms of the export

contract.

8. Default or insolvency of the exporter’s agent or of the collecting bank.

4) POST-SHIPMENT FINANCE

When the exporter needs an advance after completing the process of shipment of

goods is called as ‘post-shipment finance’. The exporter needs finance at post-shipment

stage for the following purposes:

1. To pay ECGC Premium.

2. To pay Freight and Other Shipment Expanses.

3. To pay Insurance Premium on shipment.

4. To participate in the fairs and exhibitions.

5. To pay to overseas agent.

6. To pay to various authorities such as customer, port, inspection etc.

7. To pay regular expenses between the shipment of goods and realization of

export bill.

FEATURES OF POST-SHIPMENT FINANCE:

1. Purpose: Post Shipment advance is provided for the purpose of meeting the

working capital needs from the date of shipment to the date of realization of

export proceeds. It is short term finance.

2. Eligibility: The post-shipment advance is available to the exporters who have

actually shipped the goods.

3. Form of Advance: The Post-Shipment finance is provided in the form of

discounting the export bill, advance against consignment or advance against

retention money.

4. Amount of Advance: The amount of Post-shipment advance can be extended

up to 100 percent of invoice value of goods exported.

5. Period of Advance: The period of advance is short-term as well as medium and

long term. Short term advance is for the period of 90 days and medium term is up

to 5 years. Long-term advance is for a period exceeding 5 years to 12 years.

6. Rate of Interest: The interest rate on short term advance is at concessional rate.

However, interest on medium and long term advance is as per directives of RBI

issued from time to time.

7. Documents: The post shipment advance is granted against the document such

as Shipping Bill, mate’s Receipt, Export Bill etc.

8. Loan Agreement: The Exporter is required to execute formal loan agreement

with the bank before the amount of loan is actually disbursed.

5) COUNTRY RISK

The need to evaluated country risk is not quite the same in cases of lending and direct

investment. Country risk assessment is a complex, tedious and costly exercise. It was

not always clear that country risk always refers to a financial phenomenon i.e. the

inability to make payment because of the unavailability of hard currency. Business risk

may be similar with commercial or corporate risk in which case it is not country risk or it

may be simply the country risk of unguaranteed loans to private enterprise. Generally,

country risk materializes through the interaction of political and economic developments.

Political and government are particularly significant, to the strategy of multi-national

companied because such companies operate within the jurisdiction of more than one

government, the probability that their plan will be affected by some form of government

initiative is increased. Their international mobility means that they have a certain degree

of choice regarding their political environment. Political environment itself becomes a

variable, part of management’s strategic decision making. The foreign ownership links

of the multinational enterprise place it in special categories in the eyes of host

governments.

Political components like war, riots, disorders, conflicts of economic interest,

regionalism, occupation by foreign power and political polarization, are the many of the

critical factors of country risk analysis of political nature.

6) FOREIGN EXCHANGE RISK MANAGEMENT

The foreign exchange is the money in one country for money or credit of goods or

services in another country. The importing country pays to the exporting country in

return of goods or services either in its domestic currency or the hard currency. This

currency which facilitates exchange. Foreign exchange includes foreign currency,

foreign cheque or foreign drafts. These currencies are bought and sold in foreign

exchange markets. The components of foreign exchange market include the buyer’s the

sellers and the intermediaries. Foreign exchange market is not restricted to any place or

country. It is the market for currencies of various countries anywhere in the globe. In

recent times, foreign exchange is traded through on-line (Internet). The market

intermediaries of foreign exchange include Banks, Brokers, Acceptance Houses and

Central Bank of the country. Certain banks are authorized to deal in exchange, issue

banks drafts, travelers cheque etc. Every business transaction in international business

involves foreign exchange because every country has its own currency.

CHP 11. INTERNATIONAL BUSINESS ENVIRONMENT IN INDIA.

1) ANSWER THE FOLLOWING IN BRIEF: 1. What is Special Economic Zone?

The concept of Special Economic Zone was suggested by the then commerce and industry minister Late Shri Murasoli Maran while introducing third revision to Exim Policy 1997-2002. The SEZs are in addition to EPZs and FPZs operating in India. It is a designated duty free area to be treated as foreign territory for trade operations and duties and tariffs. The units in the SEZ may, manufacture, trade or carry out services. They may be allowed to import capital goods and raw

materials duty free. They can utilize the duty free goods within the approval period of 5years.

2. What is duty drawback?

Under this scheme, the exporters entitled to claim the refund of the customer duty paid on the imported materials or refund of excise duty paid on indigenous material used in the manufactured of the finished goods. However, the conditions is that the export price should be reduced to that extent. Similarly, the drawback is available at a certain percentage of FOB value.

3. What is Negative List of Exports? It is a list of items of exports and imports which cannot be imported or exported freely or are banned for imports and exports. Negative list includes the following three categories of items:(a) Prohibited items: This means items which are banned for export and import

For example, all forms of animals, Exotic birds, Human skeletons, chemicals as notified by DGFT, Red sanders wood and wood products etc.

(b) Restricted items; such items can be imported or exported with the special permission or licence from DGFT. For example, Cattle, Cannel, Chemicals, Fertilizers, deoiled groundnut cakes, fur of domestic animals, hides and skins, fodder including wheat and rice straw.

(c) Canalised items; These are the items which are to be imported/exported through canalising agencies like STC/MMTC etc for example, petroleum products, onions, mica, waste and scrape, niger seeds, minerals oil, gum etc

4. What is FOB (Free on Board) price? Under FOB quotation, the exporter quotes a price which includes cost and all expenses incurred till the good are actually loaded on board the ship. It also includes the exporter’s profit, special packing, marketing etc

5. What is the impact of incentives on export pricing?

2) TRUE OR FALSE: 1) RBI provides export finance to the exporters.Answer: - FalseReason: - RBI does not provide export finance to the exporters but the RBI provides subsidies and other facilities to the exporters and importers. The RBI has made the exim policies liberal in order to encourage exports and imports.

2) Every exporter has to obtain exporter importer code number form DGFT.Answer: - True

3) MMTC is a canalized agency in export business.Answer: - True

4) Recession is a permanent feature of international business.Answer: - False

Reason :-Recession is a temporary feature of international business. Recession can be overcome by the various methods. They are:-

1) Don’t go for any new investments

2) Cut down Un-necessary Expenses

3) Right Time for Investment

Thus it can be said that recession is not permanent.

5) The profit from export business is exempted from income tax in India. Answer: - True

3) WHAT ARE IMPORTS? WHY IMPORTS ARE NECESSARY?

Within the European Union (EU) most goods are in free circulation. Importing goods from the EU is sometimes not termed as 'importing' - this is often referred to simply as a 'movement' of goods, or as an 'acquisition'. The term 'importing' is often used with the implied meaning that the goods have come from outside the EU.

Goods can be moved freely within the EU, although VAT and excise within member states should be taken into consideration. Goods in free circulation in the EU can be moved from country to country with minimal customs control. Unless the goods are subject to excise duty, eg alcohol, or license requirements such as agricultural goods, they generally cross borders without any special taxes and minimal import paperwork. For more information, see our guide on trading in the European Union. You can also see the page VAT on goods from European Union (EU) countries in our guide on imports and purchases from abroad: paying and reclaiming VAT.

Importance of import?

Imports are very significant part for a country. There are many countries in our present economies that largely depend on imports of goods and services. Imports basically mean buying of goods and services. The individual or a country buying the goods is termed as an importer and the seller of these goods and services is termed as an exporter. All the imports should be done in a legitimate way and all such imports help in trade. The goods that are imported by a country are provided to its consumers in the country and are manufactured by the foreign producers. In the receiving country the buying of goods is termed as an import while the seller or the selling country terms it as an export.The international trade comprises of two components known as imports and exports. The import and export both require the involvement of the custom authorities. The imports take place on the basis of a trade agreement and there are certain quotas and tariffs that are also imposed on it. All the imports have an economic value and therefore the exporting country always gets a benefit. All the imports whether in the form of goods or services have an economic value which cannot be neglected. The price of the imported goods is defined on the basis of supply and demand of the good in the market.There are basically two types of imports. One is the imports of consumer and the industrial goods. Second is the import of the immediate goods and services. There are many companies which import the goods and services to supply such goods to the domestic market. The price at which these goods are sold is very cheap and easily affordable. The countries basically import products which are not available in their local or the domestic market.

4) ROLE OF RBI IN EXPORT PROMOTION? There are various functions of the Reserve Bank of India. Besides, other important functions the Reserve Bank of India plays the role of Monetary Authority and Manager of Foreign Exchange. As the Monetary Authority aims to maintain price stability and ensure adequate flow of credit to productive sectors and being the Manager of Foreign Exchange, it seeks to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. In India exports have played a major role in accelerating the economic growth of the country. The initiatives taken by Reserve Bank of India and Government of India have contributed to the impressive increase in our exports. Export Credit is an important factor which helps exporters in executing their export orders efficiently. Export finance is granted in rupees as well as in foreign currency. The RBI has taken some measures to enable timely and hassle free flow of credit to the export sector which includes rationalization and liberalization of export credit interest rates, flexibility in repayment/prepayment of pre-shipment credit, special financial package for large value exporters, export finance for agricultural exports, Gold Card Scheme for exporters etc. The RBI has granted freedom to the Banks to get funds from abroad without any limit for exclusively for the purpose of granting export credit in foreign currency. This has enabled banks to increase their

lending capacity under export credit in foreign currency. The specific of RBI for supporting export-import trade of India are given below:

1. Export bills credit scheme: under this scheme the rbi can grants advances to the scheduled banks against export bills maturing within 180days. However, this scheme has been withdrawn by the bank.

2. Pre-shipment credit: under this scheme RBI provides refinance facility to the scheduled banks that extend pre-shipment credit to bonafide exporters.

3. Export credit interest subsidy scheme: The scheduled commercial banks have to charge interest at specific rate on advances granted to the exporters. This interest rate is reviewed by the rbi from time to time and the ceiling is fixed. Rbi also provide interest subsidy of minimum 1.5 percent per annum to banks which provides export finance to the Indian exporters.

4. Refinance under dbk credit scheme: under this scheme, the exporters can get interest-free advances from the commercial banks upto 90days against shipping bills provisionally certified by the customs authorities towards a refund of customs duty.

5. Liberal refinance facility: the rbi provides refinance to commercial banks and financial institution against their medium and long term finance to the exporters. This refinance facility is provided at concessional rate of interest onj the conditional that the borrowing institutions will not charge interest more than 1.5% over the finance rate.

6. Concessional rate of exchange, interest and discount: the rbi extends concessional rates of exchanges interest, discount, commission and other bank charges for the purpose of export credit. It has introduced a scheme to enable the commercial banks to provide forward exchange cover for medium and long term exports.

5) WHAT ARE SPECIAL ECONOMIC ZONES ? WHAT ARE THEIR ADVANTAGES?

The concept of special economic zone (sezs) was suggested by the then commerce and industry minister late shri murasoli maran while introducing third revision to exim policy 1997-2002. The sezs are in addition to epzs and ftzs operating in India. A scheme for setting up sezs in the country to promote exports was announced by the government in the exim policy announced to 31st march, 2000. The sezs environment for exports and are expected to give a further boost to the country’s exports.

The idea of sezs is borrowed from china where such zones are operating efficiently and are contributing nearly 40 percent of total exports. The government policy is for the creation of sezs in all parts for export promotion. They are expected to provide an

internationally competitive and hassle-free environmental for exports. The state government is expected to participate in export promotion by starting sezs in their states. The scheme is expected to give a future boost to country’s exports. The sezs can be set up in the public, private, joint sector or by state government. The government policy is to provide convenient infrastructure facilities and various incentives to such sezs.Indian sezs will be at par with those of china. There will be exemption to sez units from external commercial borrowings restrictions, freedom to make oversea investment and carry out commodity hedging. Units is sezs will get income tax concessions and direct negotiation permission for export document. Thus, sezs are our best dreams projects.

Future of SEZs:

The distinctive features of special economic zones are as follows:-

1. It is a designated duty free area to be treated as foreign territory for trade operations duties and tariffs.

2. The units in the sezs may manufacture, trade or carry out services. They may be allowed to import capital goods and raw materials duty free.

3. There is no routine examination of export and import cargoby the custom authorities.

4. The units in sezs would be required to export whole of their production. They can sell in domestic markets with full duty and import conditions.

5. The units in sezs may be positive net foreign exchange earners in three years.6. The units have to maintain accounts in proper format of their choice.7. They can utilize the duty free goods within the approval period of 5 years.8. The units are allowed 100 percent foreign direct investment through automatic

route in the manufacturing sector.9. There are no fixed wastage norms.10.They can use external commercial borrowing through automatic route.11. Goods going to the sezs area would be treated as deemed exports.12.The performance of sezs units is to be monitored by a committee consisting of

the development commissioner and the customs.

6). What is the impact of export incentive on production pricing?

Ans: The govt. of India offers various incentives and benefits to Indian exporters in order to create a diversified base for export earnings. These are monetary as well as non-monetary incentives. The following are the monetary incentives or benefits available to the exports:

(1). Duty Drawback: Under this scheme, the exporters are entitled to claim the refund of the customs duty paid on the imported materials and components or refund of excise

duty paid on indigenous material used in manufacture of the finished goods. However, the condition is that the export price should be reduced to that extent. Similarly, the drawback is available at a certain percentage of FOB value.

(2). Exemption from Excise Duty: Finished goods when exported are exempted from payment of excise duty. However, such exemption can be made in two ways:

(a). Export under Rebate, and

(b). Export under Bond.

In case of export under rebate, the exporter has to initially pay the duty which he can claim refund at a later stage. Incase of export under bond goods can be exported without prior payment of duty but an indemnity bond is executed in favour of excise authorities.

(3). Exemption From Sales Tax: Exports are exempted from all kinds of sales at the Central and State levels. However, for the purpose of claiming such exemption the export firm should be registered with the sales tax authorities.

(4). Exemption from Income Tax: Under the section 80HHC of the Income Tax Act, 1961, exporters are given 100 percent exemption from the payment of Income Tax on export profits only. Similarly, units in Free Trade Zones, Export Processing Zones and 100 percent export oriented units (EOU) enjoy a five-year tax holiday.

(5). Marketing Development Assistance (MDA): Government of India has created MDA to have a common fund to help proper implementation of exports promotion measures. Exporters are eligible for marketing assistance in the form of weighted deduction from their taxable income. The Quantum of deduction is half of actual expenditure incurred in advertising abroad, travel abroad, market surveys, opening showrooms etc.

(6). Transport Facilities: Certain rebate is allowed to the exporters in freight charges on transportation of goods meant for export purposes which are as follows:

(a). A rebate of 50 percent in rail freight on number of commodities transported.

(b). Many conference lines of sea transport grant rebate in ocean freight in the form of 10 percent deferred commission.

(c). Air freight subsidy is given against, the export of leather goods, footwear, fresh fruits, flowers and vegetables.

(7). Financial benefits: The exports can take advantage of pre-shipment and post-shipment finance. Finance is made available to the exporters at a concession rate of interest by the Banks.

7). What is export pricing? What factors should be considered while fixing export price?

Ans. Export price is an amount quoted by an Indian Exporter to the overseas buyer. It is normally quoted in foreign currency. However, the price is determined on the basis of various factors, such as cost, competition, demand, alternatives, incentives, tax concessions, delivery schedule and the objectives of exports. The cost includes all possible expenses, direct as well as indirect, incurred an exporter in producing or procuring the product for export. The cost constitutes a major of profit. This technique is known as cost-plus pricing.

Following factors should be considered while fixing export pricing:

(1). Free On Board (FOB): Under FOB quotation, the exporter quotes a price which includes cost an all expenses incurred till the goods are actually loaded on board the ship. It also includes the exporter’s profit, special packing, marketing etc.

(2). Free Alongside Station (FAS): In case the goods are exported through rail transport, the exporter quotes a price which includes cost, and all expenses incurred till the goods are loaded in the train. This includes, packing, local transport, labeling, marking charges and profit margin.

(3). Cost & Freight (C&F): The cost and Freight quotation includes the FOB price plus Freight. The exporter, Has to arrange for transport and pay the necessary freight charges to be included in the C&F price.

(4). Cost, Insurance and Freight (CIF): Cost, Insurance and Freight quotation includes FOB price+Freight+Insurance. Sometimes, the importer wants that the goods should reach at his port without any difficulty. He has also no connection in Exporter’s country to pay the freight and insurance. Therefore, He can insist on CIF price.

8) What are different terms used in export pricing?

Ans.

(1). Free On Board (FOB): Under FOB quotation, the exporter quotes a price which includes cost an all expenses incurred till the goods are actually loaded on board the ship. It also includes the exporter’s profit, special packing, marketing etc.

(2). Free Alongside Station (FAS): In case the goods are exported through rail transport, the exporter quotes a price which includes cost, and all expenses incurred till the goods are loaded in the train. This includes, packing, local transport, labeling, marking charges and profit margin.

(3). Cost & Freight (C&F): The cost and Freight quotation includes the FOB price plus Freight. The exporter, Has to arrange for transport and pay the necessary freight charges to be included in the C&F price.

(4). Cost, Insurance and Freight (CIF): Cost, Insurance and Freight quotation includes FOB price+Freight+Insurance. Sometimes, the importer wants that the goods should reach at his port without any difficulty. He has also no connection in Exporter’s country to pay the freight and insurance. Therefore, He can insist on CIF price.

9) WRITE SHORT NOTES ON:

(I)BREAK EVEN POINT:

A technique for which identifying the point where the total revenue is just sufficient to cover the total cost. The formula for breakeven point is fixed costs/fixed expense over contribution per unit. In economics & business, specifically cost accounting, the break-even point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even". A profit or a loss has not been made, although opportunity costs have been paid, and capital has received the risk-adjusted, expected return.(break even point) Breakeven Point is desired by all firms who wish to make abnormal profit, over and above all costs. It is shown graphically, at the point where the total revenue and total cost curves meet.

Breakeven Analysis is the process of categorizing costs of production between variable and fixed components and deriving the level of output at which the sum of these costs, referred to as total costs per unit become equal to sales revenue. The analysis helps to determine the 'Breakeven Point' from this point of equality of sales revenue with total costs. At the breakeven point, the production activity neither generates a profit nor a loss. Breakeven analysis is used in production management and Management Accounting.

(2) SEZ:

Designated areas in countries that possess special economic regulations that are different from other areas in the same country. Moreover, these regulations tend to contain measures that are conducive to foreign direct investment. Conducting business in a SEZ usually means that a company will receive tax incentives and the opportunity to pay lower tariffs.

While many countries have set up special economic zones, China has been the most successful in using SEZ to attract foreign capital. In fact, China has even declared an entire province (Hainan) to be an SEZ, which is quite distinct, as most SEZs are cities.

(3) DUTY DRAWBACK:

Under this scheme, the exporters are entitled to claim the refund of the customs duty paid on the imported materials and components or refund of excise duty paid on indigenous material used in manufacture of the finished goods. However, the condition is that the export price should be reduced to that extent. Similarly, the drawback is available at a certain percentage of FOB value.

(4) IMPORT SUBSTITUITION:

Government strategy that emphasizes replacement of some agricultural or industrial imports to encourage local production for local consumption, rather than producing for export markets. Import substitutes are meant to generate employment, reduce foreign exchange demand, stimulate innovation, and make the country self-reliant in critical areas such as food, defense, and advanced technology.

The import substitution strategy has certain strong points: Firstly, in developing countries there are always large domestic markets for manufactured goods, so developing an import substitution industry involves a low degree of risk. Secondly, for developing countries, to protect local industries against foreign competition is easier than forcing developed countries to lift trade barriers against manufactured goods from developing countries.

(5) DUMPING:

1. In international trade, this occurs when one country exports a significant amount of goods to another country at prices much lower than in the domestic market.

2. A slang term for selling a stock with little regard for price. In economics, "dumping" is any kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market competition. Dumping can force established domestic producers out of a market and lead to monopolistic positions by the exporting nation. For example, a glut of Chinese garlic exports in the mid 2000s forced many North American producers to switch crops and leave the market. When the price of Chinese garlic soared in 2009, the shuttered North American businesses were unable to quickly re-enter the local market due to barriers to entry.

CHAPTER 12

BALANCE OF PAYMENT

Q.1) Answer the following in brief:-

a) What is Balance of Trade?

Ans. The balance of trade is a narrow term. Its takes into account only the transactions

arising out of the export & import of visible items. It takes into account only merchandise

export & imports. The balance of trade does not take into account the exchange of

invisible items like services of banking, insurance, transport etc.

b) What is a Capital Account?

Ans. An account that tracks the movement of funds for investments and loans into and

out of a country. The capital account makes up part of the balance of payments.

c.)What is Balance of Payment?

Ans. A balance of payment is a double entry system of records of all economic

transactions between the residents of a country & the rest of the world carried out in a

specific period of time.

d.) What is LERMS?

Ans. A new system of exchange rate management was introduced with the introduction

of partial convertibility of rupee. This system was introduced as transitional arrangement

towards unified exchange rate with current account convertibility.

e.) What is convertibility of Rupee?

Ans. The convertibility of rupee on current account is freedom to buy or sell foreign

exchange for the purpose of international transactions.

Q.2) State with reason whether the following statements are True or False

1. All the countries are not given permanent productive resources.

Ans. This statement is true

REASON:- There are difference in the supply of labor and capital as also climatic

condition therefore every country funds it proper to specialize in the production of

certain specific commodities. Hence all the countries are not given permanent

productive resources

2. Balance of trade is a wider term than the balance of payment.

Ans. This statement is false

REASON:-

Balance of trade is narrow term balance of payment is broader concept.

Balance of trade makes only merchandise export and import of visible items

transaction but balance of payments is double entry system to record of all

economies transaction between the residents of a country and the rest of the

world.

Hence balance of payment is wider than balance of trade.

3. External communicational borrowings were not used to finance the current account

deficit during 1980s.

Ans.) This statement is false

REASON:-

External communicational borrowings accounted for more than 25% of the total inflows

into the economy. Hence External communicational borrowings were used to finance

the current account deficit during 1980s.

4. Different exchange rate systems have been used by countries while becoming

integrated with the rest of the world.

Ans.) This statement is true.

REASON:-

Different exchange rate systems have been used by contries while becoming

integrated with the rest of the world. Each system has consequences for the

effectiveness of monetary and fiscal policy.

There are different exchange rates such as pure floating, fixed exchange rate,

flexibly managed exchange rate etc.

There is indication that officially determined exchange rates can be managed

successfully within a consistent macro economic policy framework.

5. Capital account convertibility means capital is converted into reserves.

Ans. This statement is false

REASON:-

Capital accounting convertibility would mean that Indian rupee can be converted

into any other foreign currency at the prevailing market exchange rate.

At the same time, any other available foreign currency can be converted into Indian

rupee

Q.3) what is Balance of Trade? How is it different from Balance of Payments?

Ans The balance of trade forms part of the current account, which includes other

transactions such as income from the international investment position as well as

international aid. If the current account is in surplus, the country's net international asset

position increases correspondingly. Equally, a deficit decreases the net international

asset position.

The trade balance is identical to the difference between a country's output and its

domestic demand (the difference between what goods a country produces and how

many goods it buys from abroad; this does not include money re-spent on foreign stock,

nor does it factor in the concept of importing goods to produce for the domestic market).

Measuring the balance of trade can be problematic because of problems with recording

and collecting data. As an illustration of this problem, when official data for all the

world's countries are added up, exports exceed imports by almost 1%; it appears the

world is running a positive balance of trade with itself. This cannot be true, because all

transactions involve an equal credit or debit in the account of each nation. The

discrepancy is widely believed to be explained by transactions intended to launder

money or evade taxes, smuggling and other visibility problems. However, especially for

developed countries, accuracy is likely.

Difference between BOT and BOP:-

Basis of

DifferenceBalance of Trade (BOT)  Balance of  Payment (BOP)

1. Definition

Balance of trade may be

defined as difference

between export and

import of goods and

services.

Balance of payment is flow of

cash between domestic country

and all other foreign countries. It

includes not only import and

export of goods and services but

also includes financial capital

transfer.

2. Formula BOT = Net Earning on 

Export - Net payment for

importsBOP = BOT + (Net Earning 

on foreign investment - payment

made to foreign investors) + Cash 

Transfer + Capital Account +or -

Balancing Item

or 

BOP = Current Account + Capital

Account  + or - Balancing item

( Errors and omissions)

3. Favorable 

or 

Unfavorable

If export is more than 

import, at that time, BOT

will be favorable. If

import is more than

export, at that time, BOT

will be unfavorable.

Balance of Payment will be 

favorable, if you have surplus in

current account for paying your all 

past loans in your capital account.

Balance of payment will be

unfavorable, if you have current

account deficit and you took more

loan from foreigners. After this,

you have to 

pay high interest on extra loan and

this will make your BOP 

unfavorable.

4. Solution of

Unfavorable 

Problem

To Buy goods and

services 

from domestic country.

To stop taking of loan 

from foreign countries.

5. Factors

Following are main

factors 

which affect BOT

a) cost of production

b) availability of raw

Following are main factors 

which affect BOP

a) Conditions of foreign lenders. 

b) Economic policy of Govt. 

c) all the factors of BOT

materials

c) Exchange rate

d) Prices of goods

manufactured at home

6. Meaning of

Debit and 

Credit

If you see RBI's Overall 

balance of payment

report, it shows debit

and credit of current

account. 

Credit means total

export of different goods

and services and debit

means total import of

goods and services in

current account.

Credit means to receipt and

earning both current and capital

account and debit means total

outflow of cash both current and

capital account and difference

between debit and credit will be

net balance of payment.

Q.4) Explain the theories of balance of trade.

Ans The difference between a country's imports and its exports. Balance of trade is the

largest component of a country's balance of payments. Debit items include imports,

foreign aid, domestic spending abroad and domestic investments abroad. Credit items

include exports, foreign spending in the domestic economy and foreign investments in

the domestic economy. A country has a trade deficit if it imports more than it exports;

the opposite scenario is a trade surplus.

Also referred to as "trade balance" or "international trade balance"

Theories of Balance of Trade/ Payments

There are three' theories for determinants of the balance of trade and

payments viz.

i. Elasticity’s approach

ii. Absorption approach

iii. Monetary approach

I) Economic behavior' involves satisfying unlimited wants

with limited resources. One implication of this fact of budget

constraints is that consumers and business firms will

substitute among goods as prices change to stretch their

budgets as far as possible. For instance, if Italian made

shoes and US made shoes are good substitutes, then the

price of US shoes rises relative to Italian shoes buyers will

substitute the lower priced Italian shoes for the higher priced

U.S. shoes. The crucial concept for determining

consumption patterns is relative price - the price of one

good relative to another.

Relative Prices change as relative demand and supply for individual

good change. Such changes may result from changes in tastes, or

production technology, or government taxes or subsidies, or many

other possible sources. If the changes involve prices of goods at

home changing relative to foreign .goods, then international trade

patterns may be altered. The elasticity approach to the balance of

trade is concerned with how changing relative prices of domestic and

Foreign goods will change the balance of trade. A change in the

exchange rate' will change the domestic currency price of foreign

goods. The quantity of demand changes in response to the relative-

price change which is determined by the elasticity of demand.

Elasticity will determine what happens to total revenue (price times

quantity) following a price change with an elastic demand, quantity

changes by a greater percentage amount than price, and thus total

revenue will move in the opposite direction from the price change.

The Elasticity’s approach: recognizes that the effect of an exchange

rate change on the equilibrium quantity of currency being traded will

depend on the Elasticity’s of the supply and demand curves involved. It is

important to remember that the Elasticity’s approach is a theory of the

balance of trade and can only be a theory of the balance of payments in a

world without capital flows.

II) Absorption approach: Under it emphasis is on domestic

spending on domestic goods changes relative to domestic output. In

other words, the balance of trade is viewed as the difference

between what the economy produces and what it takes or absorbs,

for domestic use. Here, Absorption A is supposed to represent TOTAL

DOMESTIC SPENDING. Thus, if total domestic production Y, exceeds

absorption (the amount of the output consumed at home) then the nation will

export the rest of its output and run a balance of trade surplus. The analysis

of the absorption approach is really broken down into two categories,

depending upon whether the economy is at full employment or has

unemployed resources. If we have full employment, then all resources are

being used so that only way for net exports to increase is to have absorption

fall. On the other hand, with unemployment, Y is not at its maximum possible

value and thus A could remain fixed and Y could increase because of

increases in domestic sales to foreigner, X. The absorption approach is

providing a theory of the balance of trade as did the Elasticity’s approach.

The absorption approach can be viewed as a theory of the balance of

payments only in a world without capital flows.

III) Monetary approach to the balance of payment (MABP): The above two

theories are theories of the balance of trade and have little to say about the

capital account. However, the world today is characterized by well developed

financial markets and large scale international capital flows and in this spirit the

MABP came to popularity in the year 1970's. The basic premise of the MABP is

that any balance of payments disequilibrium is based on a monetary

disequilibrium - that is difference existing between the amount of money people

wish to hold and the amount supplied by the monetary authorities. 'In very

simple terms, if people demand more money than is being supplied by the

Central Bank, then the excess demand fm.:.J11oney would be satisfied by

inflows of money from abroad and vice-versa.

MABP is fine for a world with fixed exchange rates while for floating/flexible

exchange rate, the monetary approach to the exchange rate (MAER) is there,

when exchange rates are fixed between countries, money flows between

countries to adjust disequilibrium. With floating exchange rates, the exchange

rates are allowed to fluctuate with the free market forces of supply and demand

for each currency. We discuss the policy implications of the monetary approach

as follows:

a) Balance of payments disequilibrium is essentially monetary phenomena.

Thus, countries would not run long-term (or structural) deficits of they did

not rely so heavily on inflationary money supply growth to finance

government spending.

b) Balance of payments disequilibrium must transitory. If the exchange rate

remains fixed, eventually the country must run out of reserves by trying to

support a continuing deficit.

c) Balance of payments disequilibria can be handled with domestic monetary

policy rather than with adjustments in the exchange rate.

Q.5) what is BOT and BOP? Explain the importance of BOP. Which are the factors

affecting BOP of a particular country?

The Balance of Trade is the difference between the monetary value

of exports and imports of output in an economy over a certain period. It is the

relationship between a nation's imports and exports.

A positive balance is known as a trade surplus if it consists of exporting more than is

imported; a negative balance is referred to as a trade deficit or, informally, a trade gap.

The balance of trade is sometimes divided into a goods and a services balance.

Balance of payments (Bop) accounts are an accounting record of all monetary

transactions between a country and the rest of the world. These transactions include

payments for the country's exports and imports of goods, services, financial capital,

and financial transfers. The Bop accounts summarize international transactions for a

specific period, usually a year, and are prepared in a single currency, typically the

domestic currency for the country concerned. Sources of funds for a nation, such as

exports or the receipts of loans and investments, are recorded as positive or surplus

items. Uses of funds, such as for imports or to invest in foreign countries, are recorded

as negative or deficit items.

Factors affecting BOP:-

There are conflicting views as to the primary cause of BOP imbalances, with much

attention on the US which currently has by far the biggest deficit. The conventional view

is that current account factors are the primary cause. Apart from that following factors

affect BOP of a country, they can be divided into:-

1. Economic factors:

These include the exchange rate.

The government's fiscal deficit.

Business competitiveness

Private behavior such as the willingness of consumers to go into debt to finance

extra consumption.

An alternative view, is that the primary driver is the capital account

2. Political factors

Certain political factors may also produce a balance of payments disequilibrium.

For instance, a country plagued with political instability may experience large

capital outflows, inadequacy of domestic investment and production, etc. These

factors may, sometimes, cause disequilibrium in the balance of payments.

Further, factors like war, changes in world trade routes, etc., may also produce

balance of payments difficulties.

3. Sociological factors

Certain social factors influence the balance of payments. For

instance, changes in tastes, preferences, fashions, etc. may affect

imports and exports and thereby affect the balance of payments.

6.) Explain the role of IMF in maintaining the international liquidity?

Ans. After the First World War, most of the countries of the world were of the opinion

that monetary cooperation was necessary to get the economic stability at international

level. But the world wide depression in 1930 and the fall of gold standard system in

1931 gave rise to a number of problems in exchange rates, The second world war also

became the reason of cancellation of a trade pact among powerful countries (America,

England and France). Due to the multiple exchange rate practices, difficulties arose in

international trade and it was felt that without monetary cooperation, economic

development was not possible, A well known British Economist, John Maynard Keynes

and the American expert Harry D. White prepared their separate plans for International

Clearing Union and ‘United and Associated Nations Stabilization Fund’ respectively.

The basic features of these plans were fused into a common plan evolved at the United

Nations Monetary and Financial Conference of 44 nations held at Bretton Woods, New

Hampshire in the U.S.A. in July 1944. This conference gave birth to the ‘International

Monetary Fund’ and the International Bank for Reconstruction and Development (World

Bank).

International Liquidity

International liquidity is generally used as a synonym for international reserves. Such

reserves include a country’s official gold stock, holdings of its convertible foreign

currencies, SDRs and its net position in the IMF. It is the aggregate stock of inter-

nationally acceptable assets held by the central bank to settle a deficit in the balance of

payments of a country. In other words international liquidity provides a measure of a

country’s ability to finance its deficit in the balance of payments without resorting to

adjustment measures.

The sources of international liquidity include – owned reserves and borrowed reserves.

Borrowed reserves were constituted by Capital imports in the form of borrowing from

abroad and direct investments by foreign countries. The demand for international

liquidity was increasing more than its supply due to which the problem of international

liquidity arose. The shortage of international liquidity was due to the increasing deficits

in the balance of payments of the majority of countries in the world. Too much

dependence on exports exposed these economies to international fluctuations in the

prices of their products. IMF in 1970 introduced a scheme for the creation and issue of

Special Drawing Rights (SDRs) as unconditional reserve asset to remove all the related

problems of international liquidity. Now SDR is the principal source of international

liquidity to its members.

As one of the main objectives of establishing the IMF was to bring the stability in

exchange rates by stopping the competitive devaluation of currencies of the member

nations, so that they could get foreign exchange easily, to get this objective done IMF

accepted gold as a medium to determining the exchange rate. The currency value of

every country was fixed in gold and American dollar. At that time American dollar was

the most powerful international currency so it ‘was fixed as IMF’s ‘Money of Account’.

The value of one unit of dollar was equal to 0•888671 gm of gold. But due to the regular

fluctuation’s in the value of dollar and irregular supply, IMP gave up dollar and

introduced SDR.

SDR is like a fiat money behind which there is no reserve but it is the medium Of

international payments. It is only the ‘Money of Account’. It is intangible money which is

written only in account and is used as gold in international payments. Therefore, it is

also called ‘Paper Gold’. It is an easy and important source of increasing the

international liquidity.

On July 1974, the value of one unit of SDR was fixed on the basis of a ‘Basket of

Currencies’ of 16 countries. In 1978, the currencies of Denmark and South Africa were

excluded from the basket of currencies and the currencies of Iran and Saudi Arabia

were included. In 1981, the value of SDR was again fixed in five currencies in which

American dollar, British pound, Mark of Germany, Franc of France and Japans yen

were included. At present, the value of currency of every country is fixed in SDR. Mutual

Exchange rates of different currencies can be increased or decreased according to the

demand and supply in the market and thus, the par value system started by IMF has

been ended by the floating rate system.

Q.7) Explain the role of World Bank in providing financial assistance to the less

developed countries?

Ans.The World Bank is an international financial institution that provides loans to

developing countries for capital programs.

The World Bank's official goal is the reduction of poverty. According to the World Bank's

Articles of Agreement (As amended effective 16 February 1989) all of its decisions must

be guided by a commitment to promote foreign investment, international trade and

facilitate capital investment.

The World Bank differs from the World Bank Group, in that the World Bank comprises

only two institutions: the International Bank for Reconstruction and Development (IBRD)

and the International Development Association (IDA), whereas the latter incorporates

these two in addition to three more: International Finance Corporation (IFC), Multilateral

Investment Guarantee Agency (MIGA), and International Centre for Settlement of

Investment Disputes (ICSID).

The World Bank is an international financial institution that provides financial and

technical assistance to developing countries for development programs (e.g.

bridges, roads, schools, etc.) with the stated goal of reducing poverty.

Major institutions created as a result of the Breton Woods Conference in 27 th

December, 1944 Two main countries which shaped the negotiations were United

States and Britain

Provide assistance to developing and transition countries Promote the economic

development of the world's poorer countries Finance the poorest developing

countries whose per capita GNP is less than $865 a year special financial

assistance through the International Development Association (IDA)

Build capacity Infrastructure creation Development of Financial Systems

Combating corruption Research, Consultancy and Training

Investment loans: Support of economic and social development projects

Development policy loans: Quick disbursing finance to support countries

International Bank for Reconstruction and Development (IBRD) :186 member

countries International Development Association (IDA): 168 members countries

Focus on three priority areas: Safety net programs Global recession and the food

Fuel and financial crises For this: $8.3 billion to mitigate the crisis impact in poor

countries, over and above previous commitments to the institution

Trade flows Bolster distressed banking systems Keep infrastructure projects on

track Shift advisory support services Support microfinance institutions

On chocercias is Control Program (OCP) Successfully halted transmission of

river blindness in 11 countries with a collective population of 35 million.

Consultative Group for International Agricultural Research (CGIAR) Created and

promoted crop improvements in developing countries over the last 30 years

through a network of research centers. Global Environment Facility (GEF)

Provides grants to developing countries to fund projects that benefit the global

environment and promote sustainable livelihoods in local communities.

Consultative Group to Assist the Poorest (CGAP) Expands access by the poor in

developing countries to microfinance through a consortium of 28 public and

private development agencies. Financial Sector Reform and Strengthening

Initiative (FIRST) Provides flexible, practical assistance to developing countries

to strengthen their financial systems and adopt international financial standards.

Global Water Partnership (GWP) Supports countries in the sustainable

management of their water resources. Global Alliance for Vaccines and

Immunization (GAVI) Seeks to protect public health worldwide through the

widespread use of vaccines. The Carbon Fund Works to develop viable, flexible

market mechanisms to reduce greenhouse gas emissions under the Kyoto

Protocol. Roll Back Malaria Coordinates the international fight against malaria,

which kills more than 1 million people a year, most of them children in Africa.

Joint United Nations Programmed on HIV/AIDS (UNAIDS) Advocates for global

action on the HIV/AIDS epidemic and works with civil society, the business

community and the private sector. Education for All Focuses attention on

education and strives to ensure an education for every citizen in every society

Focuses on: Fast-track the development Support seven poorest states Total

proposed lending program of US$14 billion, for the next three years Strategy is

aligned with Government of India’s own development priorities

Agriculture Infrastructure: Power Transport Water Urban development Skills

Components Amount (US $ Million) Loan Terms Rail 305 IBRD Loan repayable

over 20 years with 5 year grace period Road 150 IBRD Loan repayable over 20

years with 5 year grace period Resettlement 79 IDA Credit - an interest-free loan

repayable over 35 years with a 10-year grace period Total From World Bank 542

Channeled through the Government of India Govt. of India and Govt.

Maharashtra 403 Total Cost of Project 945

The low cost and stable financing it provides with longer maturity periods

Financing through the International Development Association (IDA) Interest rate:

0.75% p.a. Repayable over a period of 35 years Inclusive of a 10 year grace

period Government estimates investment of $475 billion

WB financed FY08: US$ 2.7 billion World Bank group had 60 active projects in

the country

Q.8) what is balance of trade? Reasons for disequilibrium in balance of payment?

Ans. Definition of 'Balance Of Trade - BOT'

The difference between a country's imports and its exports. Balance of trade is the

largest component of a country's balance of payments. Debit items include imports,

foreign aid, domestic spending abroad and domestic investments abroad. Credit items

include exports, foreign spending in the domestic economy and foreign investments in

the domestic economy. A country has a trade deficit if it imports more than it exports;

the opposite scenario is a trade surplus.

Also referred to as "trade balance" or "international trade balance"

'Balance of Trade - BOT' Meaning

The balance of trade is one of the most misunderstood indicators of the U.S. economy.

For example, many people believe that a trade deficit is a bad thing. However, whether

a trade deficit is bad thing is relative to the business cycle and economy. In a recession,

countries like to export more, creating jobs and demand. In a strong expansion,

countries like to import more, providing price competition, which limits inflation and,

without increasing prices, provides goods beyond the economy's ability to meet supply.

Thus, a trade deficit is not a good thing during a recession but may help during an

expansion.

Causes of Disequilibrium in Balance of Payment ↓

Population Growth

Most countries experience an increase in the population and in some like India and

China the population is not only large but increases at a faster rate. To meet their

needs, imports become essential and the quantity of imports may increase as

Population increases.

Development Programmers

Developing countries which have embarked upon planned development programmes

require importing capital goods, some raw materials which are not available at home

and highly skilled and specialized manpower. Since development is a continuous

process, imports of these items continue for the long time landing these countries in a

balance of payment deficit.

Demonstration Effect

When the people in the less developed countries imitate the consumption pattern of the

people in the developed countries, their import will increase. Their export may remain

constant or decline causing disequilibrium in the balance of payments.

Natural Factors

Natural calamities such as the failure of rains or the coming floods may easily cause

disequilibrium in the balance of payments by adversely affecting agriculture and

industrial production in the country. The exports may decline while the imports may go

up causing a discrepancy in the country's balance of payments.

Cyclical Fluctuations

Business fluctuations introduced by the operations of the trade cycles may also cause

disequilibrium in the country's balance of payments. For example, if there occurs a

business recession in foreign countries, it may easily cause a fall in the exports and

exchange earning of the country concerned, resulting in a disequilibrium in the balance

of payment

Inflation

An increase in income and price level owing to rapid economic development in

developing countries, will increase imports and reduce exports causing a deficit in

balance of payments

Poor Marketing Strategies

The superior marketing of the developed countries have increased their surplus. The

poor marketing facilities of the developing countries have pushed them into huge

deficits.

Flight Of Capital

Due to speculative reasons, countries may lose foreign exchange or gold stocks People

in developing countries may also shift their capital to developed countries to safeguard

against political uncertainties. These capital movements adversely affect the balance of

payments position

Globalization

Due to globalization there has been more liberal and open atmosphere for international

movement of goods, services and capital. Competition has beer increased due to the

globalization of international economic relations. The emerging new global economic

order has brought in certain problems for some countries which have resulted in the

balance of payments disequilibrium

Q.9.)Short Notes:-

a.) The Balance of Trade

The balance of trade is the difference between the monetary value of exports and

imports of output in an economy over a certain period. It is the relationship between a

nation's imports and exports. A positive balance is known as a trade surplus if it consists

of exporting more than is imported; a negative balance is referred to as a trade deficit

or, informally, a trade gap. The balance of trade is sometimes divided into a goods and

a services balance.

The balance of trade forms part of the current account, which includes other

transactions such as income from the international investment position as well as

international aid. If the current account is in surplus, the country's net international asset

position increases correspondingly. Equally, a deficit decreases the net international

asset position.

Factors that can affect the balance of trade include:

The cost of production (land, labor, capital, taxes, incentives, etc.) in the

exporting economy vis-à-vis those in the importing economy;

The cost and availability of raw materials, intermediate goods and other inputs;

Exchange rate movements;

Multilateral, bilateral and unilateral taxes or restrictions on trade;

Non-tariff barriers such as environmental, health or safety standards;

The availability of adequate foreign exchange with which to pay for imports; and

Prices of goods manufactured at home (influenced by the responsiveness of

supply

b.) Balance of payments

Balance of payments (BOP) accounts are an accounting record of all monetary

transactions between a country and the rest of the world. These transactions include

payments for the country's exports and imports of goods, services, financial capital, and

financial transfers. The BOP accounts summarize international transactions for a

specific period, usually a year, and are prepared in a single currency, typically the

domestic currency for the country concerned. Sources of funds for a nation, such as

exports or the receipts of loans and investments, are recorded as positive or surplus

items. Uses of funds, such as for imports or to invest in foreign countries, are recorded

as negative or deficit items.

When all components of the BOP accounts are included they must sum to zero with

no overall surplus or deficit. For example, if a country is importing more than it exports,

its trade balance will be in deficit, but the shortfall will have to be counter-balanced in

other ways – such as by funds earned from its foreign investments, by running down

central bank reserves or by receiving loans from other countries.

While the overall BOP accounts will always balance when all types of payments are

included, imbalances are possible on individual elements of the BOP, such as the

current account, the capital account excluding the central bank's reserve account, or the

sum of the two. Imbalances in the latter sum can result in surplus countries

accumulating wealth, while deficit nations become increasingly indebted. The term

"balance of payments" often refers to this sum: a country's balance of payments is said

to be in surplus (equivalently, the balance of payments is positive) by a certain amount if

sources of funds (such as export goods sold and bonds sold) exceed uses of funds

(such as paying for imported goods and paying for foreign bonds purchased) by that

amount. There is said to be a balance of payments deficit (the balance of payments is

said to be negative) if the former are less than the latter.

Under a fixed exchange rate system, the central bank accommodates those flows by

buying up any net inflow of funds into the country or by providing foreign currency funds

to the foreign exchange market to match any international outflow of funds, thus

preventing the funds flows from affecting the exchange rate between the country's

currency and other currencies. Then the net change per year in the central bank's

foreign exchange reserves is sometimes called the balance of payments surplus or

deficit. Alternatives to a fixed exchange rate system include a managed float where

some changes of exchange rates are allowed, or at the other extreme a purely floating

exchange rate (also known as a purely flexible exchange rate). With a pure float the

central bank does not intervene at all to protect or devalue its currency, allowing the rate

to be set by the market, and the central bank's foreign exchange reserves do not

change.

c.) Deficit financing

Deficit financing, practice in which a government spends more money than it receives

as revenue, the difference being made up by borrowing or minting new funds. Although

budget deficits may occur for numerous reasons, the term usually refers to a conscious

attempt to stimulate the economy by lowering tax rates or increasing government

expenditures. The influence of government deficits upon a national economy may be

very great. It is widely believed that a budget balanced over the span of a business

cycle should replace the old ideal of an annually balanced budget. Some economists

have abandoned the balanced budget concept entirely, considering it inadequate as a

criterion of public policy. Deficit financing, however, may also result from government

inefficiency, reflecting widespread tax evasion or wasteful spending rather than the

operation of a planned countercyclical policy.

Where capital markets are undeveloped, deficit financing may place the government in

debt to foreign creditors. In addition, in many less-developed countries, budget

surpluses may be desirable in themselves as a way of encouraging private saving.

d.) Special Drawing Rights

Special Drawing Rights (SDR) are the monetary unit of the reserve assets of the

International Monetary Fund (IMF). The unit was created in 1969 in support of

the Bretton Woods system of fixed exchange rates to alleviate the shortage of

U.S. dollar and gold reserves in the expansion of international trade.

The SDR unit is defined as a weighted sum of contributions of four major

currencies, re- evaluated and adjusted every five years, and computed daily in

terms of USD.

Special Drawing Rights are not a currency, but they represent potential claims on

the currencies of the IMF members, i.e. the SDR system is backed by the ‘good

faith’ of the member countries. SDRs obtain their reserve asset power from the

commitments of the IMF member states to hold and honor them for payment of

balances. The IMF uses SDRs for its monetary unit of account.

Special Drawing Rights are allocated to member states as a low cost alternative

to debt financing for building reserves. Such allocations provide an unconditional

liquidity for the SDRs.

Special Drawing Rights carry an interest rate that is computed weekly by the

IMF. It is paid or received quarterly by the members for deviations of their SDR

holdings from their SDR allocations.

Special Drawing Rights are denoted with ‘XDR’.

SDRs are used as a unit of account by the IMF and several other international

organizations. A few countries peg their currencies against SDRs, and it is also

used to denominate some private international financial instruments (e.g., the

Warsaw convention, which regulates liability for international carriage of persons,

luggage or goods by air, uses SDRs to value the maximum liability of the carrier).

In the Euro zone, the Euro is displacing the SDR as a basis to set values of

various currencies, including Latvian Laths. This is a result of the ERM II

convergence criteria

SDRs were originally created to replace gold and silver in large international

transactions and provide a cost-free alternative to member states for building

reserves. Under the Bretton Woods system, the reserves of gold and U.S. dollars

proved too limited to support the growth of international trade and exchange.

Thus SDRs are credits that nations with balance of trade surpluses can draw

upon from nations with deficits.

It has also been suggested that having holders of US Dollars convert those

dollars into SDRs would allow diversification away from the dollar without

accelerating the decline of the value of the dollar

e.) The World Bank

Definition of 'The World Bank'

An international organization dedicated to providing financing, advice and research to

developing nations to aid their economic advancement.

Investopedia explains 'The World Bank'

The World Bank was created at the end of World War II as a result of many European

and Asian countries needing financing to fund reconstruction efforts. Created out of the

Bretton Woods agreement of 1944, the Bank was successful in providing financing for

these devastated countries. Today, the Bank functions as an international organization

that attempts to fight poverty by offering developmental assistance to middle and poor-

income countries. By giving loans, and offering advice and training in both the private

and public sectors, the World Bank aims to eliminate poverty by helping people help

themselves.

f.) THE CONVERTIBILITY OF RUPEE

The convertibility of rupee on current account is defined as “the freedom to buy or sell

foreign exchange for the purpose of following international transaction”.

All payments due in connection with foreign trade and other business including

services and normal short - term banking and credit facilities.

Payments due as interest on loans and as net income from other investment.

Payments of moderate amounts of amortization of loan or for depreciation of

direct investment.

Moderate remittances for family living expenses.

Current account convertibility relates to the removal of restrictions on payment relating

to the imports and exports of goods, services and factors of income. The following

steps have been taken by the government of India:

Verification of the exchange rate.

Removal of exchange restrictions on imparts through the abolition of foreign

exchange budgeting in 1993

Announcement of relaxations in payment restrictions in case of a number of

invisible transactions by the reserve bank of India.

The announcement of full convertibility of rupee on current account in august

1994 by accepting the obligation under article VIII of International Monetary Fund

g.) IMF

The IMF, or International Monetary Fund, is an organization of 187 member countries. Their goal is to work with the Fund to stabilize the global economy by cooperating in practices which achieve that aim. Ideally, these countries are willing to forfeit some of their sovereign authority if it is necessary to strengthen the global economy.

In return, the IMF helps its members by:

Surveying global economic conditions. Advising member countries on methods to improve their economy. Providing short-term loans to avoid currency instability.

Since the IMF does lend money, it is often confused with the World Bank. The Bank's purpose is to lend money to developing countries for specific projects that will fight poverty. The IMF, on the other hand, only provides loans if it will help prevent a global economic crisis. Its overall goal is to prevent these crises through guidance to, and cooperation among, its members.

Conclusion

The balance of payment situation started improving since 1992-93. There was a

satisfactory balance of payment position in that period; the reasons are (i) High earnings

from invisibles, (ii) Rise in external commercial borrowings, and (iii) Encouragement to

foreign direct investment.

The positive earnings from invisibles covered a substantial part of trade deficit and

current account deficit reduced significantly. The external commercial borrowings was

extensively used to finance the current account deficit. The net non resident deposits

were positive through out the ten year period. There has been a growing strength in

India's balance of payment position in the post reform period in spite of growing trade

deficit and current account deficit.

SUMS & ABBERVATIONS

Sum no.1

Calculate the FOB price to be quoted to an importer from the following details:-

Ex-factory cost Rs.1,52,000

Packing Cost Rs. 28,000

Expenses up loading Rs. 20,000

Profit expected 21% of FOB Cost

Duty Drawback 10% of FOB Price

Conversion Rate 1$=Rs.45

Solutions:-

(a)Calculation of FOB Price

Ex-factory cost Rs.1,52,000

Add: Expense upto on board of ship

Packing Cost Rs. 28,000

Expenses up loading Rs. 20,000

FOB cost Rs. 2,00,000

Add: Expected profit (21%) Rs. 42,000

FOB Revenue Rs 2,42,000

However, FB revenue= FOB Price+ duty drawback

Let FOB price be X

x+ 0.10x = Rs. 2,42,000

11x= Rs. 2,42,000

X= Rs. 2,42,000

1.1

X= Rs. 2,20,000

FOB Price = Rs. 2,20,000

FOB Price in dollars = Rs. 2,20,000 =$ 4888.88

45

Sum no.2

ABC limited has been selling exclusively in Indian markets. Its has received an export order enquiry for 200 units. The cost data is as follows:-

Materials Rs. 30/unit

Labour Rs. 17/unit

Overheads Rs. 10/unit

The selling price in the domestic market is Rs. 77. Export order will require packing and transport of Rs.3/unit. However, the company will be entitled to duty drawback of 10%.

Solution:-

(a) Calculation of FOB Price Materials Rs. 30/unitLabour Rs. 17/unit Overheads Rs. 10/unitTotal Rs. 57/unit

Add: Packing & Transport Rs. 03/unit

FOB Cost Rs. 60/unit

Add Profit Rs. 17

FOB Revenue Rs. 77

Minimum FOB Price to be quoted = x+ 0.1x= Rs.77

= 1.1x = 77

x= 77 = Rs.70

1.1

Price in U.S $ = 70 = $1.56.

45

(b) If the profit/unit should remain the same, then the FOB revenue should be Rs.60 + 20= Rs. 80.

Profit in domestic market

=sales – cost

=Rs.77 – Rs.57

=Rs. 20.

Sum no.3

Raj Traders, Pune is currently operating at 80% capacity, the profit and loss a/c shows the following:-

(Rs. in Lakhs) (Rs. in Lakhs)

Sales

Less:- cost of sale Direct Materials Direct Wages Variable overheads Fixed overheads

Profit

200 80 40260

640

580

60

The managing director has been discussing an offer from middle east on quantity which will be required 20% capacity of the factory. However, the export price is 10% less than current price in the local market. You asked to advise whether the order should be accepted or not?

Solutions:-

Comparative statements of profitable (Rs. In Lakhs)

80% 100%SalesLess: Variable Cost

Materials Wages Var. overheads

ContributionLess: Fixed Cost Profit

200 80 40

640

320

320260 60

250100 50

784

400

384 260 124

Sum no.4

A factory manufacturing sewing machine has the capacity to produce 500 machines per annum. The marginal cost of each machine is 200 and each machinery is sold for 250. Fixed overheads are 12,000. The demand from domestic market is for 200 machines and remaining machine can be exported at a price of 240, each of them with additional cost of 12 each for packing and transport. Calculate break even point state whether it should be exporter or not?

Solution:-

Calculation of break even point

Break Even Point is a point of sale at which there is no profit or no loss

BEP = Fixed Cost

Contribution per unit

Contribution Per Unit = Sales – Variable Cost

= 250 – 200 = Rs.50

BEP = Rs. 12,000

50 = 240 machines.

Since the local demand is for 200 machine, which is below BEP level, it is necessary to enter in the export market.

(2) Calculation of profit

Domestic Rs.

Export Rs.

Total Rs.

Sales (200x250) (300x240)

Less Cost Variable (200x250) Fixed Export Total

50,000

40,000

72,000

60,000

1,22,000

1,00,000 12,000 3,6001,15,000

Profit 6,500

The total profit of the firm is Rs.6,500 if it export the surplus machines if it does not export machines it will operate below BEP level and hence it occurs loss.

Sum no.5

Calculate the minimum Free on Board Price for an exporter from the following data:

Ex-factory Rs. 150,000

Packing Cost Rs. 3000

Transportations Rs. 2000

Profit 10% 0f FOB cost

Duty Draw back 5% of FOB Price

Conversion Rate $1 = Rs.45

Solution:

Rs.Ex-factory Packing Cost Transportations

1,50,000 3,000 2,000

FOB COSTProfit @10% of FOB Cost

1,55,000 15,000

FOB Revenue 1,70,500

Export price will be reduced proportionately due to the duty drawback. The duty drawback is applicable only by FOB Price

Let FOB Price be = x

FOB Price + Duty Draw back = FOB Revenue

X + 5 X = 170,000

100

1.05X = 170,000

X = 107,000

1.05

X = 162,380.

Sum no.6

From the following data calculate the minimum FOB Price in Euro:-

Cost of Materials Rs. 1,05,000

Cost of Labour Rs. 45,000

Local Transportation Rs. 6000

Special Packing Rs. 4000

Profit Rs. 27,000

Duty Drawback 10% on FOB Price

Conversion Rate 1 Euro = Rs. 50

Solution:

Rs.

Cost of Materials Cost of Labour Local Transport Special Packing FOB Price Profit FOB Revenue

1,05,00045,000 6,0004,0001,60,000 27,0001,87,000

Export price will be reduced proportionally due to incentives i.e. duty draw back. The duty drawback is applicable only on FOB Price.

Let the FOB Price be X

FOB Price + Duty Draw back = FOB Revenue

X + 10 X = 187,000

100

1.1x = 187000

X = 170,000

FOB Price in Euros = 170,000

50

= 3,400.00

Sum no.7

X Ltd is an exporter and wants to export goods. The detail of goods given below:-

Ex-Factory Cost Rs. 60,000

Packing Cost Rs. 25,000

Transportation Rs. 15,000

Profit desired 10%

Calculate the minimum FOB Price to be quoted to an importer if

(a) No incentives are available and (b) incentive of duty drawback of 10% available. Conversion rate is $1 = Rs. 45

Solution

(a) Calculation of FOB Price without incentives

Rs.Ex-Factory Cost Packing Cost Transportation FOB CostProfit @10% of FOB CostFOB Revenue

1,60,000 25,000 15,000 2,00,000 20,000 2,20,000

As there as no incentives available

FOB Price in Rupees = Rs. 220,000

FOB Price in Dollars = 220,000 = $ 4,888.88

45

(B) calculation of FOB Price with incentives

Ex-Factory Cost Packing Cost Transportation FOB CostProfit @10% of FOB CostFOB Revenue

1,60,000 25,000 15,000 2,00,000 20,000 2,20,000

Export price will be reduced proportionately due to the incentives i.e. duty draw back. The duty draw back is applicable only for FOB Price

Let the FOB Price be = x

FOB Price + Duty Drawback = FOB Revenue

X + 10 X = 220,000

100

1.1X =220,000

X =200,000

FOB Price in Dollars = 200,000 = $ 4,444.44

45

Sum no : 8

From the following data calculate the minimum FOB Price in Euro

Material Cost Rs. 40,000

Labour Cost Rs. 30,000

Local Transport Rs. 10,000

Other Expenses Rs. 15,000

Profit Contribution Rs. 15,000

Duty drawback 10% of FOB price

Conversion rate € 1=Rs.50

Solution:

Export price will be reduced proportionately due to the incentives i.e. duty drawback. The duty drawback is applicable only on FOB Price.

Let the FOB Price be = X

FOB Price + Duty drawback = FOB Revenue

∴ X+ 10100 X = 1,10,000

Rs.

Material cost

Lobour cost

Local transport

Other Expenses

∴FOB Cost

Profit contribution

∴FOB Revenue

40,000

30,000

10,000

15,000

95,000

15,000

1,10,000

∴ 1.1X = 1,10,000

∴ X = 1,100001.1

∴ X = 1,00,000

∴ Fob Price (in rupees) = Rs. 1,00,000

∴ Fob Price (in Euros) = 1,0000050

∴ Fob Price (in Euros) = € 2,000.00

Sum no: 9

Calculate the minimum FOB price to be quoted to an importer from the following:

Ex-factory Cost Rs. 3,04,000

Packing Cost Rs. 56,000

Local Transport Rs. 40,000

Profit expected 10% of FOB Cost

Duty drawback 10% of FOB Price

Conversion rate £1 = Rs. 80

SOLUTION:

Calculation of FOB Price

Rs.

Ex-factory Cost

Packing Cost

Local Transport

∴ FOB Cost

Expected profit (10%)

∴ FOB Revenue

3,04,000

56,000

40,000

400,000

40,000

4,40,000

Let the minimum FOB Price be X

∴ X+10% of X = Rs. 440,000

∴ 1.1 X = Rs. 440,000

∴ X = 4,00,000

∴ Minimize FOB Price = Rs. 4,00,000

∴ =400 ,00080

∴ = £ 5000

Sum no :10

From the following data calculate the minimum FOB price in Euro:

Cost of Materials Rs. 9,00,000

Cost of Labour Rs. 4,80,000

Local transport Rs. 80,000

Special Packing Rs. 40,000

Profit contribution Rs. 3,70,000

Duty drawback 10% of FOB Price

Conversion rate 1 Euro = Rs. 50.

SOLUTION:

Calculation of minimum FOB Price

Let minimum FOB Price be Rs. X

∴ X+10% of X = Rs. 18,70,000

∴ 1.1 X = Rs. 18,70,000

∴ X = 1870 ,000

.1

∴ Minimize FOB Price = Rs. 17,00,000

∴ Euro =17,00,00050

∴ = Euro 34,000

Rs.

Cost of Materials

Cost of Labour

Local transport

Special Packing

∴FOB Cost

Profit contribution

∴FOB Revenue

900,000

480,000

80,000

40,000

15,00,000

3,70,000

18,70,000

Sum no: 11

Calculate the CIF price in USD from the following data:

Cost of Materials Rs. 3,00,000

Cost of wages and packing Rs. 50,000

Local transportation and Insurance

up to port of shipment Rs. 20,000

Marine freight and Insurance Rs. 25,000

Duty drawback 10% of FOB Cost

Conversion rate 1 USD = RS. 39.50

SOLUTION :

(a) Calculation of minimum FOB Price

Rs.

Material cost

Lobour cost

Local transport

Other Expenses

∴FOB Cost

Profit contribution

∴FOB Revenue

40,000

30,000

10,000

15,000

95,000

15,000

1,10,000

Let minimum FOB Price be Rs. X

∴ X+10% of X = Rs. 4,25,500

∴ 1.1 X = Rs. 4,25,500

∴ X = 4 ,25 ,5001 .1

∴ = Rs.3,86,818

∴ CIF = FOB+ Freight + Insurance

∴ = Rs.3,86,818 + 25,000

∴ = Rs. 4,11,818

∴ CIF($) =4,11,81839.5

∴ = $ 10,425.77

Note: (1) The duty drawback is available to the exporters at a certain percentage of FOB price. The condition is to reduces the export price to that extent. Hence the duty drawback reduces the export. (2) Profit is assumed at 15% of the FOB cost.

Sum no: 12

Calculate the CIF price in USD from the following data:

Cost of Raw Materials Rs. 2,00,000

Cost of wages and packing Rs. 50,000

Local transportation and Insurance

up to port of shipment Rs. 10,000

Marine freight and Insurance Rs. 25,000

Duty drawback 10% of FOB Cost

Conversion rate 1 USD = RS. 39.50

SOLUTION:

(a) Calculation of minimum FOB

Price

Rs.

Cost of Materials

Cost of wages and packing

Local transportation

∴FOB Cost

Profit(15%assumed)

∴FOB Revenue

2,00,000

50,000

10,000

2,60,000

39,000

2,99,000

Let minimum FOB Price be Rs. X

∴ X+15% of X = Rs. 2,99,000

∴ 1.1 X = Rs. 2,99,000

∴ X = 2 ,99 ,0001 .1

∴ = Rs.2,71,818

∴ CIF = FOB+ Freight + Insurance

∴ = Rs.2,71,818 + 25,000

∴ = Rs. 2,96,818

∴ CIF($) =2,96,81839.5

∴ = $ 7,514.38

Note: (1) The duty drawback is available to the exporters at a certain percentage of FOB price. Thus the duty drawback reduces the export price to that extent. (2) Profit is assumed at 15% of the FOB cost.

Sum no:13

Calculate the minimum FOB price for an export order from the following data:

Cost of Raw Materials Rs.4,00,000

Cost of wages Rs. 1,00,000

Cost overheads Rs. 50,000

Local transport Rs. 20,000

Freight and Insurance Rs. 30,000

Duty drawback 10% of FOB Price

Profit 10% of FOB cost

Conversion rate 1 $ = Rs. 50.

SOLUTION:

Calculation of minimum FOB Price

(i) FOB Cost: 5,70,000

Profit 57,000

(ii) FOB Revenue: 6,27,000

Let the minimum FOB price be Rs. X

∴ X+10% of X = Rs. 6,27,000

∴ 1.1 X = Rs.6,27,000

∴ X = 6 ,27 ,0001 .1

(iii) Minimum FOB Price = Rs. 5,70,000

(iv) Minimum FOB Price in $ = 5 ,70 ,00050

= 11,400

Rs.

Cost of Raw Materials

Cost of wages

Cost of Overheads

Local transport

4,00,000

1,00,000

50,000

20,000

5,70,000

Note: Freight and Insurance is not a part of FOB price.

Sum no.14

From the following data calculate the minimum FOB Price in US Dollars:

Cost of materials 1, 50,000

Cost of Labour 80,000

Local of Transportation 12,000

Packing charges 8,000

Profit contribution 20% of FOB cost

Duty drawback 5% of FOB Price

Conversion rate = 1$ = Rs.45

Solution:

Cost of materials 1, 50,000

Cost of Labour 80,000

Local of Transportation 12,000

Packing charges 8,000

FOB Cost 2, 50,000

(-) Profit 50,000

FOB Revenue 2, 00,000

Let the minimum FOB price be x

FOB Price +Duty Drawback =FOB Revenue

Therefore, x + 5% of x = 2, 00,000

1.05x = 2, 00,000

x = 2, 00,000

1.05

= Rs 190476.19

Therefore, FOB price (in Rs) = Rs 190476.19

FOB price (in $ ) = 190476

45

= $ 4232.80

Sum no.15

Calculate the minimum FOB Price to be quoted to an importer from the following:

Ex-factory cost 1, 52,000

Packing Cost 28,000

Expenses upto loading 20,000

Profit expected 21% of FOB Cost

Duty drawback 10% of FOB Price

Conversion rate £1=Rs.85

Solution:

Ex-factory cost 1, 52,000

Packing Cost 28,000

Expenses upto loading 20,000

FOB Cost 2, 00,000

Profit 42,000

FOB Revenue 1, 58,000

Let minimum FOB price be x

FOB Price +Duty Drawback =FOB Revenue

Therefore, x + 10% of x = 1, 58, 000

1.1x = 1, 58, 000

x = 143636.36

MAY 2006

Calculate the minimum free on board (fob) price for an exporter from the following data:

Ex factory cost Rs.1, 50,000

Packing cost Rs. 3000

Transportation Rs. 2000

Profit 10% of FOB cost

Duty drawback 5% of FOB price

Conversion Rate 1$ = Rs.45

ANS:

Ex-factory cost 150000Add: packing expenses 3000 Transportation 2000 5000

155000Add: Expected profit 10% 15500FOB revenue 170500

FOB revenue = FOB price + duty drawback

170500 = x + 0.05

x = 162380.95

$ = Rs.45

162380.95 / 45 = $3608.47

MAY 2007

Calculate the minimum FOB price to be quoted to an importer from the following:

Ex factory cost Rs.304000

Packing cost Rs.56000

Local transport Rs.40000

Profit expected 10% of FOB cost

Duty drawback 10% of FOB price

Conversion rate £ 1 = Rs.80

ANS:

Ex factory cost 304000Add: packing expenses 56000

Local transport expenses 40000 96000400000

Add: expected profit 10% 40000FOB revenue 440000

FOB revenue = FOB price +duty drawback

440000 = x + 0.10

X = 400000

FOB PRICE = 400000

£ 1 = Rs.80

400000 ÷ 80 = 5000

£5000

MAY 2008

Calculate the CIF price in USD from the following data:

Cost of materials 300000

Cost of wages and packing 50000

Local transportation and insurance 20000

Marine freight and insurance 25000

Duty drawback 10% of FOB cost

Conversion rate 1 USD = Rs.39.50

ANS:

Cost of materials 300000Add: wages and packing 50000

Transportation 20000 70000370000

ProfitFOB revenue 370000

FOB revenue = FOB price + duty drawback

370000 = x + 0.10x

X = 336363.63

CIF = FOB + freight + insurance

= 336363.63 + 25000

=361363.63

CIF = 361363.63

CHF $ = 9148.45

MAY 2010

Biz limited is an exporter and wants to export goods. The detail of goods is given below:

Ex factory cost 160000

Packing cost 25000

Transportation 15000

Profit desired 10%

Conversion rate $1=Rs.45

Calculate minimum FOB price to be quoted to an importer in Rupees and Dollars.

ANS:

Ex factory cost 160000Add: packing cost 25000 transportation 15000 40000

200000Add: profit 10% 20000FOB revenue 220000

FOB revenue = FOB price + duty drawback

220000 = x

FOB price = 220000

$1 = Rs.45

$4888.89

Abbreviations

ASEAN Associations Of South East Asian Nations (May 10)

BIT Bilateral Investment TreatiesBOP Balance of Payment BOT Balance of TradeCAC Capital Account Convertibility (May

09,10)CCFF Compensatory and Contingency

Financing FacilityCEPT Common Effective Preferential

Tanks CIF Cost, Insurance and Freight

CIS Commonwealth of Independent States

CPI Corruption Perception IndexDEPB Duty Entitlement Pass Book

Scheme (May 08)

DFA Draft Final ActDGFT Director General of Foreign Trade

(May 09)ECGC Export Credit and Guarantee

Corporation (Nov 07)ECB European Central Bank (May 09)ECU European Currency UnitEEC European Economic CommunityEFTA European Free Trade AreaEOU Export Oriented UnitEPZ Export Processing Zone

ESAF Enhanced Structural Adjustment Facility

ESOPs Employee Stock OptionsEU European Union

FAS Free Alongside StationFDI Foreign Direct Investment

FEDAI Foreign Exchange Dealers Associations of India (May 10)

FEMA Foreign Exchange Management Act (Nov 07)

FERA Foreign Exchange Regulation ActFIPB Foreign Investment Promotion

BoardFMCG Fast Moving Consumer GoodsFOB Free On Board (May 09)FTA Free Trade AreaFTZ Free Trade Zone

GATT General Agreement on Tariffs and Trade

GDP Gross Domestic Production (Nov 07)

GNP Gross National Production

HIPC Heavily Indebted Poor CountriesHRM Human Resources ManagementICC International Chamber of Commerce

ICFTU International Confederation of Free Trade Union

IMF International Monetary FundITA Information Technology AgreementLDC Less Developed Countries

LIBOR London Inter-Bank Offered RateMAI Multilateral Agreements On

Investment MFI Multilateral Framework on

InvestmentsMITI Ministry of International Trade and

InvestmentMMTC Metals and Minerals Trading

Corporation (Nov 07)MNC Multinational CorporationMNE Multinational Enterprises

MPBF Maximum Permissible Bank FinanceMRTP Monopolies and Restrictive Trade

PracticesNAFTA North American Free Trade

Associations (May 08)NASDAQ National Associations of Security

Dealers Automated Quoted SystemNGO Non Government OrganizationNRI Non-Residents IndiansOCB Overseas Commercial Borrowings

(May 10)OECD Organization of Economic

Cooperation and Development PSCFC Post Shipment Credit Denominated

in Foreign CurrencyPTA Preferential Trading AgreementsQRs Quantitative RestrictionsRIF Regional Integration Framework

SAARC South Asian Association For Regional Corporation (May 09)

SAFTA South Asian Free Trade AreaSDR Special Drawings Rights (Nov 07)SEZ Special Economic ZonesSME Small and Medium EnterprisesSTC State Trading Corporations

SWIFT Society For World Wide Inter-Bank Funds (May 08)

SWOT Strength, Weakness, Opportunity and Threats

TMMA Trade and Merchandise Marks ActTNC Transactional Corporations

TRIMS Trade Related Investments Measures (May 10)

TRIPS Trade Related Intellectual Property Rights

UCP Uniforms Customs PracticeUCPDC Uniforms Customs Practice For

Documentary Credit (May 08)UNCTAD United Nations Conference on Trade

and Development (May 08)USA United States of America

USSR Union of Soviet Socialist RepublicWFTU World Confederation of Trade UnionWIR World Investment ReportWTO World Trade Organization