Ib Paper Solve

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INTERNATIONAL BUSINESS

Q.1) what is International Business? State & explain the forces that are helping

internationalization of business. Can it be said that international business has not only

encouraged global growth and prosperity but has also resulted in creation of international

financial instability. Explain with examples?

ANS: International Business:

International business is a term used to collectively describe all commercial transactions

(private and governmental, sales, investments, logistics,and transportation) that take place between two

or more regions, countries and nations beyond their political boundary. Usually, private companies

undertake such transactions for profit; governments undertake them for profit and for political reasons.

It refers to all those business activities which involves cross border transactions of goods, services,

resources between two or more nations. Transaction of economic resources include capital, skills,

people etc. for international production of physical goods and services such as finance, banking,

insurance, construction etc. International Business is the study of business and management across

international borders. It encompasses aspects such as globalisation and the impacts of the global

environment on organisations, trade and trade policy, foreign direct investment, strategies of

international firms, strategic alliances and exporting, and international management, including cross-

cultural and international human resource management.

It has become essential for business managers, policy makers and researchers involved in the global

environment to understand international business. In the 21st century, goods, services and knowledge

flow across country borders much more easily than in the past. For business, the implications of these

flows and the increased mobility of human resources are profound. Long-term survival of businesses,

and indeed entire economies, depend on how well these forces are understood and leveraged.

Forces helping internationalization of business:

1. Expansion of Technology. Air travel, the internet, e-mail, e-commerce, direct dial internationalphone calls, fax, and other technologies have brought down the cost and increased the efficiency

of doing business internationally.
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2. Liberalization of Cross-Border Movements. The World Trade Organization (WTO, discussed inChapter 6) and other international trade agreements have reduced barriers to the movement of

goods and services across national boundaries.

3. Development of Supporting Services. International banking, international document delivery,and other services have tremendously simplified the conduct of international business.

4. Increase in Global Competition. It is becoming increasingly important that firms haveinternational operations in order to be able to shift production across countries and take

advantage of new production location and marketing opportunities to stay ahead of other

international competitors.

5. Exports are goods and services produced in one country and then sent to another country.Imports are goods and services produced in one country and then brought in by another country.

Information about exports and imports helps us to explain the impact of international businesson the economy.

6. Foreign direct investment (FDI) is equity funds invested in other nations. Industrialized countrieshave invested large amounts of money in other industrialized nations and smaller amounts in

less developed countries (LDCs), such as those in Eastern Europe, or in newly industrialized

countries (NICs), such as Hong Kong, South Korea, and Singapore. Most of the worlds FDI is in

the US, the European Union (EU), and Japan. As nations have become more affluent, they have

pursued FDI in geographic areas that have economic growth potential. The Japanese, for

example, have been investing heavily in the EU in recent years.

7. Over 50 per cent of world trade and over 80 per cent of foreign direct investment is conductedby three regional economic hubs: the US, the EU and Japan. Collectively, these areas are referred

to as the triad. The triad is a group of three major trading and investment blocs in the

international arena.

Q.2) critically examine Purchasing Power Parity Theory.

Purchasing power parity (PPP) is a theory which states that exchange rates between currencies

are in equilibrium when their purchasing power is the same in each of the two countries. This means

that the exchange rate between two countries should equal the ratio of the two countries' price level of

a fixed basket of goods and services. When a country's domestic price level is increasing (i.e., a country

experiences inflation), that country's exchange rate must depreciated in order to return to PPP.

The purchasing power parity (PPP) theory measures the purchasing power of one currency against another

after taking into account their exchange rate. Taking into account their exchange rate simply means that you


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measure the strength of purchasing power on $1 with that of Rs 50 and not with Rs 1 (assuming the exchange rate is

$ 1 = Rs 50) .

Developed by Gustav Cassel in 1918, the theory states that, in ideally efficient markets, identical goods

should have only one price.

Simply put, what this means is that a bundle of goods should ideally cost the same in Canada and

the United States. However, if it doesnt happen then we say that purchasing power parity does not exist

between the two currencies.

Lets look at an example

Suppose that one U.S. Dollar (USD) is currently selling for fifty Indian Rupees(INR)In the United

States, wooden cricket bats sell for $40 while in India, they sell for 750 Rupees. Since 1 USD = 50 INR, the

bat which costs $40 USD in U.S costs only 15 USD if we buy it in India. Clearly there is an advantage of

buying the bat in India, so consumers would be happier to buy the bat in India.

If consumers decide to do this, we should expect to see three things happen:

1. American consumers demand for Indian Rupees would increase which will cause the Indian Rupee

to become more expensive.

2. The demand for cricket bats sold in the United States would decrease and hence its prices would tend

to decrease.

3. The increase in demand for cricket bats in India would make them more expensive.

4. Thus the prices in the US and India would start moving towards an equilibrium.

So what happens now?

In an ideal scenario, prices in both countries would become equal at some price point.

The increased demand for INR, for instance may lead an increase in its value such that 1 U SD =

40 INR.

Secondly, due to decrease in demand for the bats in the US, its price drops to USD 30.

Thirdly, the increase in demand for the bats in India takes its price up to INR 1200.At these levels you can see that there is Purchase Price Parity between both the currencies.

This also means that whether you buy the bat in US or in India, it is one and the same thing for the

consumer.


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This is because a consumer can spend $30 in the United States for a cricket bat, or he can take

his $30, exchange it for 1200 Rupees (since 1 USD = 40 INR) and buy a cricket bat in India

and be no better off.

So, Purchasing-power parity theory tells us that price differentials between countries are not

sustainable in the long run as market forces will equalize prices between countries and change exchange

rates in doing so.

You might think that my example of consumers crossing the border to buy cricket bats is unrealistic as

the expense of the longer trip would wipe out any savings you get from buying the bat for a lower price.

However it is not unrealistic to imagine an individual or company buying hundreds or thousands of the

bats in India, then shipping them to the United States for sale.

It is also not unrealistic to imagine a large retail store purchasing bats from the lower cost manufacturer

in India instead of the higher cost manufacturer in India.

In the long run, having different prices in the United States and India is not sustainable because an

individual or company will be able to gain an arbitrage profit by buying the good cheaply in one market

and selling it for a higher price in the other market

Q.3) Define 'International Business'. Explain fundamental difference b/w domestic business operation

and international business operation using business characteristics

INTERNATIONAL BUSINESS

International business is a term used to collectively describe all commercial transactions (private and

governmental, sales, investments, logistics, and transportation) that take place between two or more

regions, countries and nations beyond their political boundary. Usually, private companies undertake

such transactions for profit; governments undertake them for profit and for political reasons. It refers to

all those business activities which involves cross border transactions of goods, services, resources

between two or more nations. Transaction of economic resources include capital, skills, people etc. for

international production of physical goods and services such as finance, banking, insurance, construction

etc.

International business deals with business activities (both production and services) that crosses the

national boundaries. This activity includes movement of goods, services capital or personnel, transfer of


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technology, etc .

Functionally, by business we mean those human activities, which involve production or purchase of

goods and services with the object of selling them at a profit. Todays world is an era of Global Village or

specialization. A particular country is not self-dependent for producing goods and services. One country

depends on another for goods and services as well as one area of a particular country depends on

another area for meeting demand. This interdependence creates international Business.

CHARACTERISTICS OF BUSINESS

What makes a business great? This is one of the key questions to ask when looking to invest your dollars

in the common stock of a publicly traded company. Obviously, the goal of any business is to create

capital where there was none before; i.e., generate profits. However, just because a company is

profitable today does not necessarily mean it will be profitable tomorrow. Good investments are made

in companies that can sustain profitability over a period of time, and are not prone to swift and painful

loss of business.

Here are 5 primary factors to look for when evaluating a potential investment in terms of determining

whether or not it is a great business:

1. Recurring SalesOne way to guard against a sudden loss of business is to employ a recurring revenue business model.

There are numerous examples of this: consumable products (food, beverages, toiletries, etc.),

subscription media, open-ended prescription drugs, business services such as outsourcing payroll,

consumer services like cable TV and broadband internet, and so on. All of these businesses generate

recurring revenues from customers on an annual or monthly basis, and so are not necessarily reliant on

their product being the "hot" item at the moment.

Conversely, there are lots of businesses that must constantly compete to win business, and after

winning it, they rarely see more sales to the same customer. One Magic Formula example of this is LCA-

Vision (LCAV), which provides laser eye correction surgery. It's pretty unlikely that most customers will

need (or want) to have their vision corrected twice!
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2. Scalability at Low CostGrowth is an important factor to consider, but the cost of growing is very important to the ultimate

outcome. Truly great businesses can increase revenues without spending a whole lot to do so. Take, for

example, eBay (EBAY). Here is a company that does nearly all of it's business on the internet, and

basically just connects buyers and sellers together. Once the servers, databases, and software were in

place, eBay could accommodate ever larger numbers of customers without spending much of anything!

This is scalability at low cost.

Compare this to the airlines, a notoriously bad business. For the airlines to grow revenues, they have to

add routes. Adding routes requires massive capital spending for new planes, airport terminal space,

regulatory rights, and so forth. Growing revenues is a very expensive proposition - airlines cannot scale

without spending a lot of money to do so. Clearly eBay's way is a lot better!

3. High Return on Invested CapitalThink about what your goal is when you invest in a stock, or a mutual fund, or a piece of real estate. You

are looking for high returns on your investment, right? The same applies to businesses. Simply put,

businesses invest capital to earn a return. A business that can earn a higher return on the capital it

invests is a better business. Most Magic Formula companies earn returns of 30% or higher on invested

capital.

This point is core to the Magic Formula screen. The mantra of the Magic Formula Investing strategy is

"good companies at cheap prices". The "good companies" part is measured by return on invested

capital. The airlines vs. eBay example apply here as well. For every server eBay buys, they can earn a

substantial return on that investment. For every plane the airlines purchase, there is less upside because

of maintenance costs and the limited time and space available at any given time. Which brings us to our

next point...?

4. High Cash Flow Margins after MaintenanceCash flow is what it's all about... this is the capital that a business can re-invest to earn those return on

capital figures, or pay back to the shareholders in the form a dividend or repurchase of shares. Good

companies can convert a high percentage of their sales into free cash flow - cash left after maintenance


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costs to keep the business going. Magic Diligence usually looks for free cash flow margins to be over 5%,

although this figure depends on the type of business.

Let's pick on the airlines again here. Maintaining airplanes is an expensive proposition. Planes have to

work flawlessly, which requires a lot of spending for parts, labor, tools, and so on, and in every location

the planes fly to or from. All of this eats up the cash earned from ticket sales, and leaves little left for the

business to re-invest or pay back. eBay's maintenance costs are much less obtrusive. Maintaining

computer equipment and software is considerably cheaper. Therefore eBay will have more cash left

over to invest (unfortunately, the company has often chosen to use that cash to make insanely

expensive purchases of other businesses).

5. Durable, Structural Competitive AdvantagesAll of these attributes of a good business are worthless unless they are attributes that can be sustained

over a long period of time. Otherwise they can disappear and we're left owning a not-so-good business.

How International business is different from domestic business:

Many a people are involved in business but some of them dont know the actual meaning of business.

Because they are supposed to run their fathers or uncles business with due care, it does not matter

whether they are familiar with this term or not. Their knowledge may be ample for domestic business

but in case of an international business they must be acquainted of some differences. When business

transactions are carried out among parties within a countrys borders is called domestic business. And

when the business transactions occur between parties from more than one countries or cross border

activities is termed as International business. The business transactions comprise of buying materials in

one country and transport them off to another country for dealing out, shipping finished products from

one country to another for retail sales, installing a new plant in a foreign country to take advantage of

lower labour costs, or borrowing money from a bank in one country for the funding of operations in

another. These business transactions are not associated with only one type of party it may involve

transactions between private business owners, governmental agencies, individual companies, and

groups of companies. International business can differ from domestic business for a number of other

reasons including the following:


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The first difference involves the dissimilarity in currencies. Countries involved in business may use

different currencies; it may force at least one party to switch its currency into another. In other words,

one of the parties would have to follow the prevailing market currency exchange rate to make its

business transactions viable.

Next you may face the difference in legal systems of countries; it may compel one or more parties to

adjust their practices to comply with local law. Occasionally, the consent of the legal systems may act as

a barrier and be irreconcilable, creating complications for international managers.

Difference in cultures is also considered as dissimilarity in domestic and international business. The

cultures of the countries may vary according to the use of trading product and it may force each party to

adjust its behavior to meet the expectation of the others. For example the difference in the use of pork

and wine face different attitudes in western and Muslim cultures.

Last is the difference in availability of resources by country. One country may be rich in natural

resources but poor in skilled labour, while another may enjoy a productive, well-trained work force but

lack natural resources. Thus, the way products are produce and the types of products that are produced

vary among countries. Currently, this is the major difference noticed in the business between developed

and third world countries.

Before going to start an International business, people must be well-informed about cultures, legal,

political and social differences among countries. They must choose the countries in which to sell their

goods and from which to buy inputs with assurance and hoping that a good business is waiting ahead for

them.

Q.4) International business is more complex and different from domestic business. Explain the difference by

using ten functional parameters

Today, business is acknowledged to be international and there is a general expectation that this will

continue for the foreseeable future. International business may be defined simply as business

transactions that take place across national borders. This broad definition includes the very small firm

that exports (or imports) a small quantity to only one country, as well as the very large global firm with

integrated operations and strategic alliances around the world. Within this broad array, distinctions are


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often made among different types of international firms, and these distinctions are helpful in

understanding a firm's strategy, organization, and functional decisions (for example, its financial,

administrative, marketing, human resource, or operations decisions). One distinction that can be helpful

is the distinction between multi-domestic operations, with independent subsidiaries which act

essentially as domestic firms, and global operations, with integrated subsidiaries which are closely

related and interconnected. These may be thought of as the two ends of a continuum, with many

possibilities in between. Firms are unlikely to be at one end of the continuum, though, as they often

combining aspects of multi-domestic operations with aspects of global operations.

International business grew over the last half of the twentieth century partly because of liberalization of

both trade and investment, and partly because doing business internationally had become easier. In

terms of liberalization, the General Agreement on Tariffs and Trade (GATT) negotiation rounds resulted

in trade liberalization, and this was continued with the formation of the World Trade Organization

(WTO) in 1995. At the same time, worldwide capital movements were liberalized by most governments,

particularly with the advent of electronic funds transfers. In addition, the introduction of a new

European monetary unit, the euro, into circulation in January 2002 has impacted international business

economically. The euro is the currency of the European Union, membership in March 2005 of 25

countries, and the euro replaced each country's previous currency. As of early 2005, the United States

dollar continues to struggle against the euro and the impacts are being felt across industries worldwide.

In terms of ease of doing business internationally, two major forces are important:

(i) Technological developments which make global communication and transportation relatively quick

and convenient; and

(ii) The disappearance of a substantial part of the communist world, opening many of the world's

economies to private business.

Conducting and managing international business operations is more complex than undertaking domestic

business. Because of variations in political, social, cultural and economic environments across countries,

business firms find it difficult to extend their domestic business strategy to foreign markets. To be

successful in the overseas markets, they need to adapt their product, pricing, promotion and distribution

strategies and overall business plans to suit the specific requirements of the target foreign markets Key


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aspects in respect of which domestic and international businesses differ from each other are discussed

below.

Mobility of factors of production: The degree of mobility of factors like labor and capital is generally less

between countries than within a country. While these factors of movement can move freely within the

country, there exist various restrictions to their movement across nations. Apart from legal restrictions,

even the variations in socio-cultural environments, geographic influences and economic conditions come

in a big way in their movement across countries.

Differences in business systems and practices: Countries differ from one another in terms of their socio-

economic development, availability, cost and efficiency of economic infrastructure and market support

services, and business customs and practices due to their socio-economic milieu and historical

coincidences. All such differences make it necessary for firms interested in entering into international

markets to adapt their production, finance, human resource and marketing plans as per the conditions

prevailing in the international markets.

Political system and risks: Political factors such as the type of government, political party system,

political ideology, political risks, etc., have a profound impact on business operations. Since a business

person is familiar with the political environment of his/her country, he/she can well understand it and

predict its impact on business operations. But this is not the case with international business. Political

environment differs from one country to another. One needs to make special efforts to understand the

differing political environments and their business implications. A major problem with a foreign

countrys political environment is a tendency among nations to favor products and services originating in

their own countries to those coming from other countries. While this is not a problem for business firms

operating domestically, it quite often becomes a severe problem for the firms interested in exporting

their goods and services to other nations or setting up their plants in the overseas markets.

Business regulations and policies: Coupled with its socioeconomic environment and political philosophy,

each country evolves its own set of business laws and regulations. Though these laws, regulations and

economic policies are more or less uniformly applicable within a country, they differ widely among

nations. Tariff and taxation policies, import quota system, subsidies and other controls adopted by a

nation are not the same as in other countries and often discriminate against foreign products, services

and capital.


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Q.5) State the objectives of International Business. Give an overview of various methods of doing Int. Bus. With

suitable practical examples

METHODS OF INTERNATIONAL EXPANSION

1: EXPORTING

2: FDI

3: LICENSING.

4: FRANCHISING.

5: MERGERS & ACQUISITIONS / CROSS BORDER ACQUISITIONS.

6: MANAGEMENT CONTACTS.

Exporting

Usually the business first experience with global business. Exporting is the selling of products in overseas domestic markets. Usually a low cost, low risk way of penetrating into global markets. Sole traders and SMEs commonly use intermediaries to export their goods, in a process known

as indirect exporting.

Government departments such as the DFAT and Austrade provide information to small businessabout exporting to other countries.

FDI Foreign Direct Investment

Method of international expansion, by controlling interest in property, assets or companiesoverseas.

Involves a higher level of commitment money, equipment and personnel transfers do occur. Usually requires large amounts of capital, therefore the players are usually multinational or

transnational corporations.

Originates from a variety of business arrangements, including:(A) Wholly owned subsidiarys


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(i) A business that is entirely owned and controlled by the parent company.

(ii) Achieved with by establishing a new business, or buying an existing business

(B) Joint Ventures

(i) Part ownership of another business with other business and partners.

(ii) Each share contributions such as personnel, equipment, capital etc.

(C) Strategic Alliances

(i) Arrangements between two or more businesses with a common busies objective.

(ii) Partys are willing to cooperate, but dont wish to form a separate business.

(iii) Examples The Star Alliance encompassing many airlines from around the globe.

Reallocation of Production

This is where the production of the business is reallocated to one of many potential locations thatexist worldwide.

There are many reasons why companys engage in this practice including:(A) Reducing labour Costs

(i) Taking advantage of lower labour costs in other countries.

(B) Get around trade barriers

(i) In order to penetrate into domestic markets, to avoid the barriers incurred when

Importing, a business may set up production in that particular country (producing Behind enemy lines).

(C) Be Closer to Customers

(i) This results in cheaper, more time efficient means of getting gods and services to the Customer.

Management Contracts

Management contracts are agreements where one business provides managerial assistance,


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technical expertise or specialized services to another organization.

The business providing the service usually gets a flat fee or percentage of sales.

This form of expansion opens up new markets which the business providing assistance can operate

within, whilst providing capital inlay.

Licensing and Franchising

Licensing is an arrangement where a business seeks the right to use intellectual property to another

business.

This intellectual property includes such things as technology, work methods, patents, designs,

copyrights etc.

This form of expansion minimizes expenditure and risk. The licensor learns information about this new

market without investing a lot of time and effort.

Disadvantages include loss of control, including quality standards and geographic distribution.

Franchising is an arrangement where one business supplies another with intellectual property and

ongoing support.

Gives the franchisor more control over the sale of its products. There are strict guidelines which must

be followed; else a loss of the franchising license will occur.

Advantages include low cost and low risks in entering new markets, maintenance of product service

and consistency, access to cultural knowledge from managers, and arranged favorable deals with

suppliers.

OBJECTIVES OF INTERNATIONAL BUSINESS

Increasing sales and finding new markets

By expanding operations to an international scale means that business can increase their total Sales.

The product may also differ in its life cycle in other countries. It is quite possible that a mature product

in Australia is only an emerging product in another oversees country. Business can take advantage of

this.


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Acquiring New Resources

Other markets in the global economy may have extra resources that the business needs to expand.

These same resources may also be less productive or more expensive than that of the domestic

Operations of the business.

Diversification

Business may engage in expanding its operations in order to diversify its suppliers and markets.

This avoids volatile swings in market prices and sales in any one market, allowing other markets to

support these occurrences.

If a business has a range of suppliers from different countries, then the business is less likely to

Come under threat from supply shortages or price increases.

Minimizing Competitive Risk

The operation of a business in many countries means that it is less likely that a competitor will

Have a crucial impact on the businessoperations in one particular market.

Gaining Economies of Scale

Where a business endures cost savings by increasing the scale or size of its operations.

Through international expansion, business obtain a better economies of scale by selling worldwide or

establishing production opportunities in low cost labour localities.

Through this increase in the size of the market, the price per unit of output falls, allowing for a

Reduction in price or an increase in profits.

Cushioning the Economic Cycle

If a business has operations in a variety of economies, it may lessen the impact or cushion the Nature

of the economic cycle.


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The economic cycle is the stages an economy experiences over an amount of time; moving from a

booming economy where sales and employment is high to a recession or boom where there are lower

sales and increased unemployment.

Although the economies of the world are becoming more integrated, this cycle still varies from

economy to economy and thus can be used as an advantage to multinational or transnational business.

Regulatory Differences

Some countries of the word have more lenient stances towards regulations involving environmental

emissions and award rates for workers.

Business may use this to their advantage, and set up operations where it will cost them less to

Operate due to the nature of government regulations in a particular country.

Minimizing Tax

Taxes in various countries around the world differ.

Therefore business may take advantage of countries with lower taxation rates, saving on the costs of

production.

These types of countries are known as tax havens countries having little or no corporate income taxes.

Three types of tax havens include:

(a) Tax Paradises

(i) No corporate taxation

(b) Tax shelters

(i) No tax at all or very little tax occurs.

(c) Financial Centres


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Q.6) Discuss the economic, cultural, social, political and technological envt of int. bus. as it prevails today. Draw

lessons for Indian companies wishing to go global

Political

The most important political factor to consider is the stability of the foreign government, viewed in the

context of how long the enterprise wants to be doing business in the country. If the foreign country

holds regular elections, the business must look at the likely date of the next election and the possible

changes that would result if there were a change of government. Also, if a sudden emergency or coup

could give rise to change of government this could radically change the business environment, and if this

is possible the company may need to be more cautious in its approach to doing business in that country.

Where no change of government is imminent, and the system is judged to be stable, the business must

consider the future policy of the government and how it will affect the business and its products in thatcountry. For example, incentives and reliefs currently given to foreign enterprises could be phased out,

or a more nationalistic policy could be pursued that would favour domestic companies over foreign

competitors.

The enterprise must consider the available forms of doing business in the foreign country, and whether

a branch or a company would be the better business vehicle. In the legal area the enterprise must

examine intellectual property laws and regulations, and the extent to which they are enforced. This is

especially important where the products to be sold contain high technology and patented components

or procedures. Another important legal area to examine in the foreign country is the employment law,

which will be especially important if the enterprise is to set up manufacturing operations or to retain a

number of selling outlets in the country.

Laws relating to the environment and to health and safety should also be examined, as they may affect

the way the product is to be marketed and sold in the country. Modifications may need to be made to

the product to make it suitable for sale under the laws of the country.

Economic

The business must look at the size of the economy and the growth rate in the foreign country. Other

significant numbers to look at are the inflation rate and the interest rate in the country, and likely future

developments with these figures. This will affect patterns of consumer spending, and will impact sales to

a greater or lesser extent depending on the type of products and target market. Government economic


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policy and its management of the economy can be examined to glean information about the likely future

policy trends.

The enterprise must examine the industry in which it is operating and the size and number of players in

that industry in the foreign country. In particular, the nature and number of competitors in the industry

is important it will make a difference if there is one major player and a number of smaller players, or a

number of equal-sized enterprises competing in the industry. The marketing strategy of the other

players in the industry should be examined. Possible future suppliers and distributors should be

identified. The marketing strategy could be affected by the nature of the distributors and the type of

sales outlet used.

The business must look at import duties on its products and at any restrictions on imports such as

quotas, or any safety or public interest requirements that might prevent some products bei ng

imported into the country. High tariffs are likely to affect the price at which the business can sell its

product in the foreign country, and it will also need to examine the position with regard to indirect taxes

such as a sales tax or VAT that might affect selling prices within the country. Direct taxes are also an

important factor to consider, and the enterprise must look round for any possibility for reducing taxes

such as operating in a special enterprise zone that might offer tax and duty reliefs in addition to the

provision of modern infrastructure.

Social

An analysis of the social composition and attitudes in the foreign country must take into account the size

of the population and the age distribution, which will affect the likely demand for the products. A

country where the majority of people are under the age of thirty will have different tastes and demands

to a country where the population is ageing and quite a large proportion are of retirement age. The

enterprise should also take into account the income distribution and its relation to the age distribution.

The combination will affect marketing efforts and target markets within the country.

Another demographic feature worth taking into account is the proportion of urban dwellers in relation

to those living in the countryside, and how the proportions are likely to change in the future. The

marketing and sales of the enterprises products could also be affected by lifestyle factors such as the

attitude to health and fitness or the job expectations especially among younger people.


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Finally, social customs and languages are likely to have a significant effect on the marketing effort and

how it is approached. To overcome language problems, local sales and marketing staff will need to be

put in place and any social taboos must be taken into account in advertising strategies. There are also

many examples of mistakes in naming products for a foreign market. Where a strong brand is attached

to a certain name, it is desirable to use it in the new market, but it is necessary to check the meaning of

the product name in the foreign languages used by the target market.

Technological

The situation with regard to technological development in the foreign country is important to the

marketing effort. Where internet use is high, this can be an effective marketing tool. Other types of

media should also be examined, such as television viewing, number of listeners to radio stations in

addition to less high technology media such as newspaper circulation.

The telecommunications infrastructure in place, including actual and potential use of broadband, should

be taken into account when planning the marketing effort. The extent of use of technology in other

areas such as the banking system is also important.

Conclusion

The PEST analysis is not in itself a solution to the problems posed by marketing a product in a foreign

country, but it is a way of directing planning towards important features of the new country and target

market. The results of the PEST analysis will always be subjective and should only be treated as an

approximate guide, to be refined as more information and experience is gained in the new market.

LESSONS FOR INDIAN COMPANIES WISHING TO GO GLOBAL

1. Whenever you are involved in international negotiations or global meetings keep in mind thatyou might be working with the same person for the next 10 20 years.

2. Negotiations should be open and straightforward. Hidden agendas will eventually be discoveredand make the next meeting very difficult.

3. Negotiations should involve creating value for both parties.4. Meetings are important moments where trust is being built and confirmed. Be honest and clear

about your desires.


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5. Never agree to something you cannot deliver or perform.6. Listen, understand and evaluate what your partner is requesting. What are they saying, and

what does it mean.

7. Be certain of what you are negotiating and agreeing to. If not 100% sure, stop and requestclarification.

8. Prepare for the meeting several weeks before it happens. Refresh and add information weekly.When you reach the meeting, you will be in control of the information and feel comfortable

during the talks.

9. At the end of the meeting, write down the most important points or agreements, with namesand dates, and have it signed by those present. This little tip will save lots of time and trouble for

everyone involved.

10.Any agreement must have 100% follow-through. If for any reason problems arise in the follow-through, immediately contact and communicate the situation to your partner.

Q.7) how global organizations emerge to enjoy global leaderships their business? Give relevant current

illustrations from global organizations

Requirements to be a global leader:

I. Leadership

An Inspirational Global Leader

Experience shows that if a global leader is a visionary person with an entrepreneurial, out-of-the-box

thinking spirit who acts as a role model in reaching out to the various opportunities international

expansion offers, his or her organization is fueled with the right level of energy to grow beyond its

home-country borders. Strong global leaders come across as inspiring to people in the local markets;they are strong advocates for the core business of their organizations, understand the needs of

international audiences, attract local people to following the organizational goals, and know how to

support these people in their countries. With the way they work, strong leaders enrich local economies

and people.


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Culturally Flexible Hinge Managers

Because of their mediating role, one would like to call the managers whom one primarily liaise within

the individual countries hinge managers. How well do one hinge managers understands vision, mission,

and way of operating? And how can they link that understanding with the way other employees,

volunteers, and markets operate in the local country?

As one may have found out in their experience, people in other countries may have different values and

perceptions, communicate in different ways, and may need to be managed in different ways. Global

leaders, as well as the hinge managers, need to have a very good understanding of the similarities and

differences in conducting international business. Global leaders need to provide their hinge managers

with information resources that would help them in their country. The hinge managers need to be good

at carrying the feedback of their teams and markets to international headquarters. Also, it is worthwhile

for everybody to fine-tune their cross-cultural communications skills by learning more about cultural

value dimensions that researchers have identified in the past century, to understand different behaviors

across cultures.

One of the cultural dimensions researchers have identified is uncertainty avoidance. It is fascinating to

learn how countries where people dont like too much uncertainty prefer to be managed safely and

securely, meaning a high level of social security and quality of work life. Learning these value dimensions

will help you understand the tax system, the insurance practices, and the number of holidays when

managing people in these countries.

II. Company Culture

The Global Company Culture

Can you think of organizations that went through tremendous crises, but came out of the crises perhaps

in even better ways? Lets define a strong global organizational culture as a culture that holds the

organization together and conveys trust not only in good times, but also challenging times.

In light of this, according to the observations, many exemplary organizations practice the following:


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(a) Address a global need: The vision and mission statements embrace a global need and are articulated

with messages on different platforms.

(b) Communicate, communicate, communicate: The organization utilizes a wide variety of internal

communication channels such as websites, intranets, print, experience exchange meetings, and so forth

to facilitate information exchange and emphasize corporate values.

(c) Assume ownership: Corporate identity and branding are applied to all of these communication

channels. Be aware of cross-cultural management styles. In some countries, the hinge managers give

guidance on the level of access to information other staff and volunteers receive.

(d) Translate to reach out: Depending on its size, the organization adapts official language(s) and has its

important corporate announcements and documents published in all of these languages.

(e) Facilitate internal communication: An intranet site acts as an online resource for local operations

and provides such information as project status and/or more functional information, such as helpful

hints for event management, travel policy, holidays, country phone number codes, time differences, and

foreign exchange rates.

(f) Capitalize on full international potential: Employees and volunteers at local sites are true business

partners to global operations and contribute to drafting international strategic plans. They are the eyes

and ears for strategic alliances, membership feedback, government environment, and investment ideas.

They also are triggers for potential change and for keeping a large organization relevant to its audiences.

(g) Train to reach goals and transform: The organization utilizes the training function as a strategic and

dynamic function within the organization.

(h) Emphasize a sense of pride: The organization proudly talks about its organizational culture to attract

like-minded people.

(i) Identify international career paths: Good employees always look for professional development and

challenge. Hence, the successful organization promotes international career paths.

(j) Capitalize on the potential of an international board: A successful organization capitalizes on the

view and resources of international board members.


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(k) Recognize ethics: The problem of ethics can vary from country to country. An international code of

ethics may guide leadership and management in the board members decisions and also add to the long-

term international credibility of the organization. Also, recognizing ethical practices will attract peoples

attention to this important subject, and foster an ethical business environment.

(l) Training as a Strategic Function: When engaged strategically, training can fulfill two important

functions: Help the company achieve its organizational goals faster, and help build the company culture.

When designing your training activities, take the following into consideration:

Run competency-based training: Identify competencies that will help your staff and volunteersachieve goals and train accordingly.

Engage the culture factor: The competency that helps achieve goals in one country may not beappropriate to achieve goals in another country. Localization of training is important for the end result.

Get local leadership ownership. Your hinge managers will talk training terminology in theiroperational meetings if they are convinced about its usefulness, and this will help your organization

internalize the training.

Integrate messages on organizational goals into your training. This will again make the trainingrelevant and help the organization internalize it for success.

III. Customer Service:

Internalize and highlight vision and mission statements: Well-written vision and mission statements

that are communicated on the global website, the country website, and through other means help local

audiences get a clear message about what the nonprofit organization does. This clarity nurtures a trust

environment.

Clarify your terminology: In some countries, it may be worthwhile to attend events that talk about the

nonprofit industry, and there may be a need to explain the nonprofit terminology to individuals. Not all

countries are familiar with this type of organization, and some even use a terminology that is perceived


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with suspicion by the public. Offering respectable certification programs also will help strengthen your

credibility.

Build your credibility: A foreign organization is a guest organization in a country. Delivering the

promised service and having a can-do approach and a sense of urgency are extremely important to

maintain credibility and establish good relationships.

Share your passion: If the communication material coming from the international headquarters reflects

the passion of the leaders and tells about international experience, the global organization will come

across as inspirational. Your website should reflect your global identity. The local organization then

assumes the responsibility to be a point of immediate resource for members. Your country organization

is your customer. As your organization grows internationally, your customers will become your local

staff and volunteers, in which case they will really appreciate if you offer them platforms for experience

exchange and opportunities for cross-cultural collaboration.

Speak to off-shore English: Foreign people tend to speak written English rather than conversational

English at times. Some authors call this English off-shore English. The employees and volunteers of the

global organization should be aware of off-shore English and speak, present, and promote for the ears,

eyes, and feelings of off-shore English speakers. Keep in mind that there have been cases where

businesses have decided to partner with other non-native English-speaking companies merely because

of parallels in communication.

Incorporate the culture factor into your strategy: As there are different symbols, values, and beliefs

that shape the perception of people in other countries, your market analysis, segmentation, and

branding strategy require the consideration of cultural factors. Based on social and economical factors,

you also need to give consideration to the most appropriate communication channels that will bring out

the word on your organization. Strong leadership, company culture, and culturally sensitive customer

service may not be the first thoughts that come to your mind when your organization starts establishing

international presence. At that time, things are just too exciting. Yet, once the time comes to support

these international operations, your company culture, leadership, and customer service style are going

to add the greatness to your organization that will inspire a lot of people around the world.

EXAMPLES: WAL MART, APPLE, P&G, NESTLE, MICROSOFT


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SHORT NOTES WITH EXAMPLES

Q.8) what are TRIPS?

Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)

The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), negotiated during

the Uruguay Round, introduced intellectual property rules for the first time into the multilateral trading

system. The Agreement, while recognizing that intellectual property rights (IPRs) are private rights,

establishes minimum standards of protection that each government has to give to the intellectual

property right in each of the WTO Member countries. The Member countries are; however, free to

provide higher standards of intellectual property rights protection.

The Agreement is based on and supplements, with additional obligations, the Paris, Berne, Rome and

Washington conventions in their respective fields. Thus, the Agreement does not constitute a fully

independent convention, but rather an integrative instrument which provides "Convention-plus"

protection for IPRs.

The TRIPS Agreement is, by its coverage, the most comprehensive international instrument on IPRs,

dealing with all types of IPRs, with the sole exception of breeders' rights. IPRs covered under the TRIPS

agreement are:

The TRIPS agreements is based on the basic principles of the other WTO Agreements, like non-

discrimination clauses - National Treatment and Most Favored Nation Treatment, and are intended to

promote "technological innovation" and "transfer and dissemination" Of technology. It also recognizes

the special needs of the least-developed country Members in respect of providing maximum flexibility in

the domestic implementation of laws and regulations.

Part V of the TRIPS Agreement provides an institutionalized, multilateral means for the prevention of

disputes relating to IPRs and settlement thereof. It is aimed at preventing unilateral actions.

Q.9) Doing business with expanded Europe

India is an important trade partner for the EU and a growing global economic power. It combines a

sizable and growing market of more than 1 billion people with a growth rate of between 8 and 10 % -

one of the fastest growing economies in the world. Although it is far from the closed market that it was

twenty years ago, India still also maintains substantial tariff and non-tariff barriers that hinder trade with


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the EU. The EU and India hope to increase their trade in both goods and services through the Free Trade

Agreement (FTA) negotiations that they launched in 2007.

India's integration with the global economy

In particular since the early 1990s, India has embarked on a process of economic reform and progressive

integration with the global economy that aims to put it on a path of rapid and sustained growth. Per

capita incomes more than doubled during the period 1990-2005. In parallel, EU-India trade has grown

impressively and doubled from 28.6billion in 2003 to over 55billion in 2007. EU investment to India

has more than tripled since 2003 from 759million to 2.4billion in 2006 and trade in commercial

services has more than doubled from 5.2billion in 2002 to 12.2bill ion in 2006. However, India's trade

regime and regulatory environment still remain comparatively restrictive and in 2008 the World Bank

ranked India 120 (out of 178 economies) in terms of the 'ease of doing business'. In addition to tariffbarriers to imports, India also imposes a number of non-tariff barriers in the form of quantitative

restrictions, import licensing, mandatory testing and certification for a large number of products, as well

as complicated and lengthy customs procedures.

Overall cooperation framework with India

In 2004 India became one of the EU's "strategic partners". Since 2005, the EU-India Joint Action Plan,

revised in 2008, aims at realising the full potential of this partnership in key areas of interest to India and

the EU.

The EU and India have in place an institutional framework, cascading down from the annual EU-India

Summit, to a senior-official level Joint Committee, to the Sub-Commission on Trade and to working

groups on technical issues such as technical barriers to trade (TBT), sanitary and phytosanitary measures

(SPS), agricultural policy or industrial policy.

The EU-India FTA

With its combination of rapid growth and relatively high market protection India was an obvious partner

for one of the new generation of EU FTAslaunched as part of the Global Europe strategy in 2006.

The parameters for an ambitious FTA were set out in the report of the EU-India in October 2006, which

was tasked with assessing the viability of an FTA between the EU and India. Other studies have

reinforced the economic potential of an FTA between the EU and India.
http://ec.europa.eu/trade/creating-opportunities/trade-topics/european-competitiveness/global-europe/http://trade.ec.europa.eu/doclib/html/134682.htmhttp://trade.ec.europa.eu/doclib/html/134682.htmhttp://ec.europa.eu/trade/creating-opportunities/trade-topics/european-competitiveness/global-europe/


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Negotiations for such FTA were launched in June 2007 and, so far, nine negotiating rounds have been

held. The tenth round is foreseen from 6-8 March in Delhi. This year's EU-India Summit will take place on

10 December in Brussels.

EU technical and financial trade assistance to India

To assist India in continuing its efforts to better integrate into the world economy with a view to further

enhancing bilateral trade and investment ties, the EU is providing trade related technical assistance to

India. 13.4million were allocated through the Trade and Investment Development Programme (TIDP)

funded from the Country Strategy Paper (CSP) 2002-2006. At present, the follow-up programme to

the TIDP is being designed and will be funded by the Country Strategy Paper 2007-2013.

Q.10) Salient Features of any 2 RTAs

There has been a rapid growth in the number of regional trade agreements (RTAs) in recent years.

Regional Trade Agreements (RTAs) have become a very prominent feature of the Multilateral Trading

System (MTS). Some of the important RTA is APEC, the European Union, NAFTA, ASEAN, CEFTA,

MERCOSUR and the Andean Community.

NAFTAThe North American Free Trade Agreement or NAFTA is an agreement signed by the governments

ofCanada, Mexico, and the United States, creating a trilateral trade bloc in North America. The

agreement came into force on January 1, 1994.

Features of NAFTA

NAFTA Tariff Elimination

Under the North American Free Trade Agreement (NAFTA), tariffs on virtually all originating goods

traded between Canada and Mexico were eliminated in 2008, with the exception of Canadian

agricultural goods in the dairy, poultry, egg and sugar sectors (which are exempt from tariff elimination).

Tariffs on qualifying goods traded between Canada and the United States became duty free on January

1, 1998, in accordance with the Canada-United States Free Trade Agreement, which was carried forward

under NAFTA for goods traded between Canada and the United States.
http://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Trade_blochttp://en.wikipedia.org/wiki/Trade_blochttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Canada


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National Treatment

NAFTA provides for national treatment of the goods and services of the three partner nations and the

prohibition of trade-distorting performance requirements. Canada, the U.S. and Mexico must treat each

others goods, services, and investors as they treat their own. Once goods, services or investments from

one country enter the other, they cannot be discriminated against on the basis of origin.

Significantly, NAFTA coverage also extends to investments made by any company incorporated in a

NAFTA country, regardless of its country of origin. Because of this, foreign investors can locate in Canada

with the assurance that they will have secure access to markets in the U.S. and Mexico. Moreover,

NAFTA also has provisions for accession by other countries.

Other implications of NAFTAs national treatment provisions include increased access to U.S. and

Mexican government procurement opportunities for Canadian-based companies, and improved cross-

border movement of business people and professionals among the signatory countries.

Secure Market Access

NAFTA ensures secure access for Canadian-based exporters to both the U.S. and Mexico. Clearer North

American content rules reduce the risk of unilateral interpretations by customs officials. In cases where

North American content is an issue, exporters or producers can choose between two formulas and

select the one which is most beneficial.

Improved Dispute Settlement

NAFTA provides clear rules for dealing with the settlement of disputes. If disputes arise between

companies and NAFTA governments, to which acceptable solutions cannot be negotiated, they may be

settled through international arbitration. The dispute settlement process is transparent and enforceable,

so the interests of exporters and business investors can be effectively defended.

Improved Intellectual Property Rights Protection

NAFTA includes comprehensive protection of intellectual property including patents, trademarks,

copyrights and trade secrets. Enhanced protection for holders of intellectual property encourages the

development and commercialization of innovative goods and services in the NAFTA nations.


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Q.11) Foreign risk

Foreign exchange risk management

Foreign exchange risk management is designed to preserve the value of currency inflows, investments

and loans, while enabling international businesses to compete abroad. Although it is impossible to

eliminate all risks, negative exchange outcomes can be anticipated and managed effectively by

individuals and corporate entities. Businesses do so by becoming familiar with the typical foreignexchange risks, demanding hard currency, diversifying properly and employing hedging strategies.

1. Currency RisksForeign exchange risk is generally associated with adverse currency movements that negatively affect

purchasing or pricing power. Merchants that accept and hold foreign currency lose purchasing power

when the value of that foreign currency falls against their home currency. Meanwhile, businesses that

offer goods and services overseas are unfavorably affected by increasing domestic currency values that

raise the prices for exports.

2. Political Risks - Politics influences foreign exchange risks.All international operators are challenged by political risks, which impede the flow of global business.

Exchange rates for domestic currency have a bilateral cause and effect relationship with the home

government. First, political unrest and instability will cause currency values from that particular nation

to fall. Second, the nation's citizenry will pressure leadership to action if they feel that foreign exchange

and trade are not being coordinated effectively. The upheaval may result in trade wars, excessive taxes

on international commerce or the outright seizure of foreign assets.

3. Hard Currency - The U.S. dollar is hard currency.Businesses and private citizens attempt to minimize foreign exchange risk by demanding that all

transactions are settled in hard currency. Hard currency is associated with the industrialized, group ofseven (G7) nations. The G7 is made up of the United States, Canada, United Kingdom, France, Germany,

Italy and Japan. The currencies employed are the U.S. dollar, Canadian dollar, British pound, Euro and

Yen. Hard currency values are relatively stable as they are associated with strong economies and

political regimes that protect individual rights.

4. DiversificationAll currencies fluctuate in value over time. Diversification allows people and businesses to neutralize the

risks of holding currency that deteriorates in value, by carrying competing currency that is gaining in

value. Doing business within several different countries, converting profits into separate foreign

currency reserves and/or coordinating cash flow with basic hedging strategies are ways to achievediversification.

5. Hedging Strategies - Currency futures contracts trade at the Chicago Board of Trade.Hedging strategies related to foreign exchange are executed to smooth currency fluctuations by

anticipating and locking in exchange rates. Financial managers hedge against currency risks with futures

contracts and currency swaps.


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Currency futures are contracts entered into by traders that set a fixed foreign exchange rate between

currencies into the future. Currency swaps allow separate parties to switch the principal and interest

payments upon debt that is denominated in one currency for that of another. Lenders use currency

swaps to ensure that loans do not lose value. Borrowers use currency swaps to hedge against the risk of

loans becoming more expensive to pay off in foreign currency.

Of course, hedging strategies carry the opportunity cost risk of losing out on currency movements that

are actually favorable.

The risk that an investor will have to close out a long or short position in a foreign currency at a loss due

to an adverse movement in exchange rates. Also known as "currency risk" or "exchange-rate risk.

Managing foreign exchange (or forex) risk is essential to successful investment in the forex market.

Foreign exchange exposure or risk can be classified into three types: transaction, economic and

translation exposure.

Q.12) PPP [purchasing POWER PARITY THEORY & ROLE IN INT BUZQ.13) NAFTA

The North American Free Trade Agreement (NAFTA) was signed by Canada, Mexico, and the United

States in December 1992, and came into effect on January 1st, 1994. The NAFTA is precedent-setting in

that it establishes a free trade area among developed and developing countries.

The agreement seeks to promote free trade in goods and services and increase investment not only by

eliminating tariff protection and reducing non-tariff barriers, but also by introducing GATT plus trade and

investment-related disciplines. The NAFTA builds on the bilateral Canada-U.S. Free Trade Agreement

(CUSFTA) which came into effect on January, 1989. Major advances in the NAFTA over the CUSFTAinclude the substantially expanded coverage of government procurement (to services and construction),

intellectual property and investor's rights (introducing binding investor-state arbitration), as well as

more stringent rules of origin.

Two side agreements signed in 1993 address cooperation on labor (NAALC) and the environment. These

side agreements will allow the imposition of fines and trade sanctions to enforce national standards

under certain circumstances.

Major trade components of the NAFTA include:

General:

(a) Tariffs and Quotas: All U.S., Canadian, and Mexican tariffs and quotas will be phased out over15 years;

(b) Rules of Origin: Goods made with materials or labor from outside North America qualify forNAFTA treatment only if they undergo "substantial transformation" within a member country;


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Sector-Specific:

(a) Autos: Tariffs will be eliminated after eight years for autos only if a certain percentage ofcosts are comprised of North American materials or labor. The requirement that U.S. auto

manufacturers produce in Mexico in order to sell there will be lifted after 10 years;

(b) Textiles and Apparels: Strict rules will eliminate tariffs only for goods made from NorthAmerican-spun yarn or from fabric made from North American fibers. Quotas can be reimposed

temporarily if imports cause "serious damage" to domestic industry;

(c) Agriculture: About half of the existing tariffs and quotas will be eliminated immediately;however those for politically sensitive crops, such as U.S. corn sold to Mexico or Mexican

peanuts, sugar and orange juice sold to the U.S., will be gradually phased out over the maximum

period of 15 years.

Institutions

Various institutions will facilitate the implementation of the agreement. The Free Trade Commission,

composed of cabinet-level representatives of each member country, will meet at least once a year to

oversee the performance and evolution of NAFTA. In particular, it will supervise dispute resolution andthe work of the nearly 40 committees and working groups set up under the NAFTA. At the Commission's

first ministerial meeting in January of 1994, it was agreed that an International Coordinating Secretariat

be established in Mexico City, with a U.S. Executive Director. This decision has yet to be implemented

Q.14) ASEAN

ESTABLISHMENT

The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by

the five original Member Countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand.

Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July 1995, Lao PDR and Myanmar on 23 July

1997, and Cambodia on 30 April 1999.

The ASEAN region has a population of about 500 million, a total area of 4.5 million square kilometers, a

combined gross domestic product of almost US$ 700 billion, and a total trade of about US$ 850 billion.

OBJECTIVES

The ASEAN Declaration states that the aims and purposes of the Association are: (1) to accelerate

economic growth, social progress and cultural development in the region and (2) to promote regional

peace and stability through abiding respect for justice and the rule of law in the relationship among

countries in the region and adherence to the principles of the United Nations Charter.

The ASEAN Vision 2020, adopted by the ASEAN Leaders on the 30th Anniversary of ASEAN, agreed on a

shared vision of ASEAN as a concert of Southeast Asian nations, outward looking, living in peace, stability

and prosperity, bonded together in partnership in dynamic development and in a community of caring


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societies.

In 2003, the ASEAN Leaders resolved that an ASEAN Community shall be established comprising three

pillars, namely, ASEAN Security Community, ASEAN Economic Community and ASEAN Socio-Cultural

Community.

FUNDAMENTAL PRINCIPLES

ASEAN Member Countries have adopted the following fundamental principles in their relations with one

another, as contained in the Treaty of Amity and Cooperation in Southeast Asia (TAC):

mutual respect for the independence, sovereignty, equality, territorial integrity, and nationalidentity of all nations;

the right of every State to lead its national existence free from external interference, subversionor coercion;

non-interference in the internal affairs of one another; settlement of differences or disputes by peaceful manner; renunciation of the threat or use of force; and effective cooperation among themselves

Q.15 w.r.t International trade Explain?

Strategic AdvantageComparative Advantage is also defined as STRATEGIC ADVANTAGE

Comparative advantage exists when a country has a margin of superiorityin the production of a good or

service i.e. where the opportunity cost of production is lower.

The basic theory of comparative advantage was developed by David Ricardo

Ricardo's theory of comparative advantage was further developed by Heckscher, Ohlin and Samuelson

who argued that countries have different factor endowments of labour, land and capital inputs.

Countries will specialise in and export those products which use intensively the factors of production

which they are most endowed.


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If each country specialisesin those goods and services where they have an advantage, then total output

and economic welfare can be increased (under certain assumptions). This is true even if one nation has

an absolute advantageover another country.

Worked example of comparative advantage

Consider the data in the following table:

Pre-Specialisation CD Players Personal Computers

UK 2,000 500

Japan 4,000 2,000

Total Output 6,000 2,500

To identify which country should specialise in a particular product we need to analyse the internal

opportunity costfor each country. For example, were the UK to shift more resources into higher output

of personal computers, the opportunity cost of each extra PC is four CD players. For Japan the same

decision has an opportunity cost of two CD players. Therefore, Japan has a comparative advantage in

PCs.

Were Japan to reallocate resources to CD players, the opportunity cost of one extra CD player is 1/2 of a

PC. For the UK the opportunity cost is 1/4 of the PC. Thus the UK has the comparative advantage in CD

players.

Specialisation and potential gains from trade

After Specialisation CD Players Personal Computers

UK 4,000 0

Japan 2.400 2,800



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Output of both products has increased - representing a gain in economic welfare. Total output of CD

players has increased by 2000 units and total output of personal computers has expanded by 500 units.

Allocating the gains from trade

For mutually beneficial trade to take place, the two nations have to agree an acceptable rate of

exchange of one product for another. To work this out, consider the internal opportunity cost ratios for

each country.

Without trade, the UK has to give up four CD players for each PC produced.

A terms of trade(or rate of exchange) of 3 CD players for each PC produced would be an improvement

for the UK In the case of Japan (specialising in producing personal computers) for each

After trade (3 CD's for 1 PC) CD Players Personal Computers

UK 2,200 600

Japan 4,200 2,200


Compare with the original production matrix

Pre-Specialisation CD Players Personal Computers

UK 2,000 500

Japan 4,000 2,000


After trade has taken place, total output of goods available to consumers in both countries has grown.

UK's consumption of CD players has increased by 200 and they have an extra 100 PCs. For Japan, they

have an extra 200 CD players and 200 PCs.


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Assumptions underlying the concept of comparative advantage

Perfect occupational mobility of factors of production - resources used in one industry can be switched

into another without any loss of efficiency

Constant returns to scale (i.e. doubling the inputs in each country leads to a doubling of total output)

No externalities arising from production and/or consumption

Transportation costs are ignored

If businesses exploit increasing returns to scale (i.e. economies of scale) when they specialise, the

potential gains from trade are much greater. The idea that specialisation should lead to increasing

returns is associated with economists such as Paul Romer and Paul Ormerod

What determines comparative advantage?

Comparative advantage is a dynamic concept. It can and does change over time. Some businesses find

they have enjoyed a comparative advantage in one product for several years only to face increasing

competition as rival producers from other countries enter their markets.

For a country, the following factors are important in determining the relative costs of production:

The quantity and quality of factors of production available (e.g. the size and efficiency of the available

labour force and the productivity of the existing stock of capital inputs). If an economy can improve the

quality of its labour force and increase the stock of capital available it can expand the productive

potential in industries in which it has an advantage. Movements in the exchange rate. An appreciation of

the exchange rate can cause exports from a country to increase in price. This makes them less

competitive in international markets.

Long-term rates of inflation compared to other countries. For example if average inflation in Country X is

4% whilst in Country B it is 8% over a number of years, the goods and services produced by Country X

will become relatively more expensiveover time. This worsens their competitiveness and causes a switchin comparative advantage. Import controls such as tariffs and quotas that can be used to create an

artificial comparative advantage for a country's domestic producers- although most countries agree to

abide by international trade agreements. Non-price competitiveness of producers (e.g. product design,

reliability, quality of after-sales support)


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Q.16 TARIFF & NON TARIFF ways of International Trade Control

INSTRUMENTS OF TRADE CONTROLGovernments use many rationales and seek a range of outcomes when they try to influence the

international trade process. The choice of instrument(s) is crucial because each type of control may

incite different responses from both domestic and foreign groups. While some instruments directly limit

the amount that can be traded, others indirectly affect the amount traded by directly influencing prices,

i.e., while tariff barriers directly affect prices and subsequently the quantity demanded, nontariff

barriers may directly affect price and/or quantity.

TariffsA tariff (also called a duty) is a tax levied on (internationally) traded products. Exports tariffs are levied

by the country of origin on exported products; a transit tariff is levied by a country through which goods

pass en route to their final destination; import tariffs are levied by the country of destination on

imported products. A tariff increases the delivered price of a product, and, at the higher price, the

quantity demanded will be less.

A specific duty is a tariff that is assessed on a per unit basis; an ad valorem tariff is assessed as a

percentage of the value of an item. If both a specific duty and an ad valorem tariff are assessed on the

same product, it is known as a compound duty. A tariff controversy concerns the treatment of

manufactured exports to industrialized nations. While raw materials frequently enter industrial

countries tariff-free, when an ad valorem tariff is applied to manufacture goods, it is generally applied to

the total value of the product. Critics argue that the effective tariff on the manufactured portion, i.e.,

the value-added portion, is higher than the published tariff.

Nontariff Barriers:a) Direct Price Influences

Nontariff barriers (NTBs) represent administrative regulations, policies, and procedures, i.e., quantitative

and qualitative barriers that directly or indirectly impede international trade.

Subsidies. Subsidies consist of direct or indirect financial assistance from governments to their domestic

firms to help them overcome market imperfections and thus make them more competitive in the


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marketplace. From the standpoint of market efficiency, subsidies are more justifiable than tariffs

because they seek to overcome, rather than create, market imperfections. However, many international

frictions result from disagreements about the definition of a subsidy.

Aid and Loans. Governments may give aid and loans to other countries but require that the recipient

spend the funds in the donor country; this is known as tied aid or tied loans. In this way some donor

products that might otherwise be noncompetitive may find limited international markets.

Customs Valuation. Because of the temptation to declare a low invoice price in order to pay a lower ad

valorem tariff, it is sometimes difficult to determine the true value of traded products. First, customs

officials should use the declared invoice price. If there is none, or if the authenticity of the value is in

doubt, then customs agents may assess the shipment on the basis of the value of identical (preferable)

or similar (acceptable) goods arriving at about the same time. Further, because countries often impose

different import barriers on products sourced from different countries, customs officials must also

determine a products true origin.

Other Direct Price Influences. Other means that countries may use to affect prices include establishing

special fees for consular and customs clearance and documentation, requirements that customs

deposits be made in advance of shipment, and minimum price levels at which products can be sold after

they receive customs clearance.

b) Quantity ControlsGovernments use a variety of nontariff barriers to directly affect the quantity of imports and exports.

When the quantity of imports is limited, the resulting shift in the supply curve means that the

equilibrium price will then be higher.

Quotas. A quota represents a numerical limit on the quantity of a product that may be imported orexported in a given period of time. (Because of the increase in the equilibrium price, quotas may

increase per unit revenues for firms that participate in the market.) Voluntary export restraints (VERs)

are negotiated limitations of exports from one country to another and, as in the case of a quota, may

result in higher prices to customers. An embargo represents an outright ban on imports from or exports

to a particular country. (A commodity cartelseeks higher, more stable prices for its goods by assigning

production quotas to individual countries and thus limiting overall output.)


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Buy Local Legislation. Buy local legislation represents laws that are intended to favour the purchase ofdomestically sourced products over imported products, particularly with respect to government

procurement. Local content requirements, i.e., costs incurred within the local country (usually

measured as a percentage of total costs), fall within this category.

Standards and Labels. The professed purpose of standards is to protect the safety or health of thedomestic population. However, countries may also devise classification, labelling, and testing standards

that facilitate the sale of domestic products but obstruct the sale of foreign-sourced products.

Specific Permission Requirements. An import (and export) license requires that firms secure permissionfrom government authorities before conducting trade transactions. Such procedures directly restrict

trade when permission is denied and indirectly restrict trade because of the cost, time, and uncertainty

involved in the process. A foreign exchange control requires an importer of a given product to apply to a

government agency to secure the foreign currency to pay for the product.

Administrative Delays. Intentional administrative delays create uncertainty and increase the cost ofcarrying inventory. However, competitive pressures can motivate countries to improve inefficient

administrative systems.

Reciprocal Requirements. Governments may require that foreign suppliers accept products in lieu ofmoney. Barter, i.e., the direct exchange of products between two parties, and offsets, i.e., the

agreement by a foreign firm to purchase products with a specified percentage of the proceeds from an

original sale within the importing country, both represent forms of countertrade.

Restrictions on Services. Countries restrict trade in services such as transportation, insurance,advertising, consulting, and banking for reasons of essentiality, the maintenance of standards, and

employment.

Essentiality. Countries consider certain services industries to be essential because they serve strategicpurposes or provide social assistance to citizens. Private companies of any sort may be prohibited, and

in other cases, price controls may be imposed by the government; government-owned operations are

often subsidized. Essential services can include the transportation, postal, banking, utilities, security,

and communications sectors.


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Standards. Governments may limit foreign entry into particular service professions in order to assurethat practitioners are qualified. Licensing standards vary by country and extend to a wide variety of

occupations. Prerequisites for taking certification examinations may be lengthy.

Immigration. Government regulations often require that an organization, whether domestic or foreign,demonstrate that the skills needed for a particular job are not available locally before hiring a foreigner

CASE STUDY QUESTIONs

Q1) What overall mission Co. Is trying to achieve huge expansion across widest geography while

global slow down? Explain giving examples.

Strengthen presence in traditional and niche market &Establish regional alliances for marketing

The company has a strategy in place for the next stage of its expansion. Tata has been able to exchange

expert

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