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INTERNATIONAL BUSINES
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INTERNATIONAL BUSINESS
VARIOUS ORGANISATIONAL STRUCTURES IN IB
ORGANIZATION ARCHITECTURE AND PROFITABILITY
Totality of a firms organization, including structure, control
systems, incentives, processes, culture and people.
Superior organization profitability requires three conditions:
An organizations architecture must be internally consistent.
Strategy and architecture must be consistent.
Strategy, architecture and competitive environments must be
consistent.
ORGANIZATIONAL ARCHITECTURE
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Organizational structure
Location of decision making responsibilities within the structure
(vertical differentiation)
Formal division of the organization into subunits e.g. product
divisions (horizontal differentiation)
Establishment of integrating mechanisms including cross-functional
teams and or pan-regional committees
Control systems
Metrics used to measure performance of subunits and judge
managerial performance
Incentives
Devices used to reward appropriate employee behaviour
Closely tied to performance metrics
Processes
Manner in which decisions are made and work is performed
Organizational culture
Values and norms shared among employees of an organization
Strategy used to manage human resources
People (Employees)
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Strategy used to recruit, compensate, and retain individuals with
necessary skills, values and orientation
PURPOSE OF ORGANIZATIONAL STRUCTURE
To exercise control
To establish division of labour
To facilitate communications
To facilitate coordination & integration
To establish accountability
To delegate responsibility
To establish lines of authority and chain of command
To establish rules and regulations
VERTICAL DIFFERENTIATION
Concerned with where decisions are made.
Two Approaches
Centralization
Decentralization
CENTRALIZATION
Facilitates coordination.
Ensure decisions consistent with organizations objectives.
Top-level managers have means to bring about organizational
change.
Avoids duplication of activities.
DECENTRALIZATION
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Overburdened top management.
Motivational research favours decentralization.
Permits greater flexibility.
Can result in better decisions.
Can increase control.
STRATEGY AND ORGANIZATION STRUCTURE
Major strategic decisions are centralized at the firms headquarters while
operating decisions are decentralized
GLOBAL STRATEGY
Aim to realize location and experience economies
Centralization of some operating decisions
Multi-domestic firms: aim for local responsiveness
Decentralizing operating decisions to foreign subsidiaries
INTERNATIONAL FIRMS
Maintain centralized control over their core competency and decentralize
other decision to foreign subsidiaries.
TRANSNATIONAL FIRMS
Aim to realize location and experience curve economies
Centralized control over global production centers
Need to be locally responsive
COMPANYS INTERNATIONAL DIVISION STRUCTURE
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INTERNATIONAL BUSINESS
Adopted in early stages of international business operations
Coordinate all IB activities
Develop international expertise & skills
Develop a global/international mindset
Champion of foreign business
DISADVANTAGES OF INTERNATIONAL DIVISION
Dependent on domestic product divisions for R&D, engg., etc.
Conflict over pricing and transfer pricing
Power struggles in firm: intl Vs. domestic
Cannot handle too many products
Not appropriate if foreign sales over 25%
Heads of foreign subsidiaries relegated to second-tier position
WORLDWIDE AREA STRUCTURE
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Favoured by firms with low degree of diversification
Area is usually a country
Facilitates local responsiveness
Favoured by firms with low degree of diversification & domestic
structure based on function
World is divided into autonomous geographic areas
Operational authority decentralized
Facilitates local responsiveness
Fragmentation of organization can occur Consistent with multi domestic strategy
A WORLDWIDE AREA STRUCTURE
PRODUCT DIVISION
Adopted by firms that is reasonably diversified
Original domestic firm structure based on product division
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INTERNATIONAL BUSINESS
ADR & GDR
HOW DO WE RAISE FUNDS FROM INTERNATIONAL MARKET?
WHAT IS AN ADR / GDR?
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INTERNATIONAL BUSINESS
There are some very good proxies that can be used by Non Resident
Indians (NRIs) and non-Indians for making investments in India.
ADR stands forAmerican Depository Receipt. Similarly, GDR
stands for Global Depository Receipt.
Every publicly traded company issues shares and these shares
are listed and traded on various stock exchanges. Thus,
companies in India issue shares which are traded on Indian stock
exchanges like BSE (The Stock Exchange, Mumbai), NSE (National
Stock Exchange), etc.
These shares are sometimes also listed and traded on foreignstock exchanges like NYSE (New York Stock Exchange) or NASDAQ
(National Association of Securities Dealers Automated Quotation).
But to list on a foreign stock exchange, the company has to
comply with the policies of those stock exchanges. Many times,
the policies of these exchanges in US or Europe are much more
stringent than the policies of the exchanges in India. This deters
these companies from listing on foreign stock exchanges directly.
But many companies get listed on these stock exchanges
indirectly- using ADRs and GDRs.
The company deposits a large number of its shares with a bank
located in the country where it wants to list indirectly.
The bank issues receipts against these shares, each receipt having
a fixed number of shares as an underlying (Usually 2 or 4).
These receipts are then sold to the people of this foreign country
(and anyone who are allowed to buy shares in that country).
These receipts are listed on the stock exchanges. They behave
exactly like regular stocks- their prices fluctuate depending on
their demand and supply, and depending on the fundamentals of
the underlying company.
These receipts, which are traded like ordinary stocks, are called
Depository Receipts.
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Each receipt amounts to a claim on the predefined number of
shares of that company.
The issuing bank acts as a depository for these shares- that is, it
stores the shares on behalf of the receipt holders.
WHAT IS THE DIFFERNCE BETWEEN ADR AND GDR?
Both ADR and GDR are depository receipts, and represents a claim
on the underlying shares. The only difference is the location where
they are traded.
If the depository receipt is traded in the United States of America
(USA), it is called an American Depository Receipt (ADR).
If the depository receipt is traded in a country other than USA, it is
called a Global Depository Receipt (GDR).
Since ADRs and GDRs are traded like any other stock, NRIs and
foreigners can buy these using their regular equity trading
accounts.
INDIAN COMPANIES HAVING ADRs & GDRs
Company ADR GDR
Bajaj Auto No Yes
Dr. Reddys Yes Yes
HDFC Bank Yes Yes
Hindalco No Yes
ICICI Bank Yes Yes
Infosys Technologies Yes Yes
ITC No Yes
L&T No Yes
MTNL Yes Yes
Patni Computers Yes No
Ranbaxy Laboratories No Yes
FUTURE OF ADRs AND GDRs
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If you look across the spectrum of companies in Central Europe
(CE), GDR programmes are becoming less popular because overall
institutions are investing directly.
For a newly listed CE company, a GDR programme still makes
sense: the costs are marginal, there are no extra efforts in terms of
compliance and its a good way to get exposure.
Im not sure if having an ADR programme is really beneficial given
the amount of paperwork and additional lawyers time needed to
comply with the Sarbanes Oxley Act.
There is good empirical evidence to show that, on average, there is
a 10 to 15 per cent increase in stock price when a foreign company
lists an American depositary receipt.
The reason is that it has become a new company by agreeing
voluntarily to play by a different set of rules.
Terminating an ADR programme sends the reverse signal. It says to
investors: We, as management, no longer want to be subjected to
this additional layer of regulation and scrutiny.
There have been a lot of good names delisting over the past few
months since the rule change that allowed companies to exit if their
ADR trading fell below five per cent.
The US brokerage system, besides the large institutional system, is
still dollar based. Investors dont want multiple brokerage accounts,
which is why an ADR offers such value because its a US dollarsecurity.
With an ADR, you dont face custody costs, tax issues or get your
dividends in another currency.
ADR programmes can either be in Pink Sheets, which means the
issuer has no relationship with us or they can apply for and go
through the process of joining International OTCQX.
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INTERNATIONAL BUSINESS
RBI RULES FOR ADRs & GDRs
Indian companies are allowed to raise equity capital in the
international market through the issue of GDR & ADRs.
An applicant company seeking Government's approval in this regard
should have a consistent track record for good performance
(financial or otherwise) for a minimum period of 3 years.
This condition can be relaxed for infrastructure projects such as
power generation, telecommunication, petroleum exploration and
refining, ports, airports and roads.
There is no restriction on the number of GDRs/ADRs/FCCBs to be
floated by a company or a group of companies in a financial year.
There is no such restriction because a company engaged in the
manufacture of items covered under Automatic Route is likely to
exceed the percentage limits under Automatic Route, whose direct
foreign investment after a proposed GDRs/ADRs/FCCBs is likely to
exceed 50 % / 51 % / 74 %.
There are no end-use restrictions on GDRs/ADRs issue proceeds,
except for an express ban on investment in real estate and stock
markets.
ADR & GDR NORMS FURTHER RELAXED
Indian bidders allowed raising funds through ADRs, GDRs and
external commercial borrowings (ECBs) for acquiring shares of PSEs
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Indian custodian for issue of ADRs/GDRs by the overseas depository
to the extent of the ADRs/GDRs that have been converted into
underlying shares.
FOR EXAMPLE
Cipla to raise funds from international market
Cipla on Fridiay said it would raise Rs. 1,500 crore from the international
market by issuing non-convertible debentures, foreign currency
convertible bonds, American Depository Receipts and Global Depository
Receipts, Cipla said in a filing to the Bombay Stock Exchange.
INTERNATIONAL LOGISTICS AND ITS IMPORTANCE IN IB
INTERNATIONAL LOGISTICS
An important dimension of the supply chain is logistics, also
sometimes called materials management.
According to the Council of Logistics Management, USA, logistics
management is the process of planning, implementing and
controlling the efficient, cost effective flow and storage of raw
materials, in process inventory, finished goods, and related
information from point of origin to point of consumption for the
purpose of conforming to customer requirements.
The difference between supply chain management and materials
management is on degree. Materials management, or logistics,
focuses much more on the transport and storage of materials and
final goods, whereas supply chain management extends beyond
that to include the management of supplier and customer relations.
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COMPONENTS OF LOGISTICS
Logistics encompasses the total movement concept, covering the
entire range of operations concerned with the movement of
materials and products to, through, and out of the firm to the
consumer.
It includes a variety of activities such as inventory management,
warehousing and storage, transportation, materials handling, order
processing, distribution, communications, packaging, salvage and
scrap disposal, returned goods handling, customer service etc.
Some of the major components of logistics are the following:
FIXED FACILITIES LOCATION
The major consideration is the location of fixed facilities like
production and warehousing in such a way as to maximize the total
efficiency of the logistics system.
Factors like future potential of the markets, future plans of the
company, competitive factors, political stability, etc. are also
important considerations.
INVENTORY MANAGEMENT
The main objective of inventory management is to minimize the cost
of the inventory while ensuring smooth supplies.
Developments in inventory management by the customers order
processing and in the total logistics system have made inventory
management both challenging and efficient.
ORDER PROCESSING
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The efficiency of order processing by the client as well as the
company have important implications for inventory levels and other
aspects of the logistics. Rapid order processing shortens the order
cycle and allows for lower safety stocks on the part of the client.
Exporters from developing countries like India face the challenge of
coping up with such situations.
Material Handling and Transportation:
Material handling and transportation are also an important part of
the logistics management. The technologies in use in material
handling and transportation affect the efficiency of logistics.
IMPORTANCE OF INTERNATIONAL LOGISTICS IN IB
1. Firms have begun to explore how the logistics function can provide
certain strategic advantages: more efficient distribution networks,
improved quality, reduced total cycle time, better post sale service,
and efficient response to customer needs.
2. When a firm becomes heavily involved in international business,
logistics is seen as a critical part of the strategic planning process.
3. An effective international logistics strategy not only offers
significant cost savings but also can help firms penetrate new
foreign markets.
4. Indeed, international logistics is recognized as an integral part of the
marketing mix that furthers the global marketing process.
5. With the assistance of an efficiently managed international logisticsfunction, firms can gain economies of scale from increased
production, obtain technological advantages from other countries,
and expand their markets.
6. As logistics activities become a substantial part of a firm's
international operations, the role played by international logistics
managers also increases in importance.
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7. In order to obtain a competitive advantage through such operations,
a comprehensive and complex logistics system (including
infrastructure and control systems) must be established. Various
barriers in international markets, however, tend to offset a firm'sefforts to establish an efficient logistics system.
8. These often lead to higher total logistics costs and decreased
flexibility, all of which adversely affects the competitive position of
the firm.
VARIOUS ENTRY METHODS FOR INTERNATIONAL
BUSINESS
EXPORT
Exporting is the most traditional way of entering into International
Business. Export can be done in two ways:
1. Direct Export Products are sold directly to buyers in target marketseither through local sales representatives or distributors. Sales
representatives promote their companys products and do not take title
to the merchandise. Distributors take ownership of the goods (and the
accompanying risk) and usually on-sell through wholesalers and
retailers to end-users.
Advantages of Direct Exports
o Give a higher return on your investment than selling through an
agent or distributor
o Allows the exporting company to set lower prices and be more
competitive
o Gives the company a close contact with its customers
Disadvantages of Direct Exports
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o The company may not have the services of a foreign intermediary,
so it may need more time to become familiar with the market
o The customers or clients may take longer to get to know the
company and its products, and such familiarity is often important
when doing business internationally
2. Indirect Export - Products are sold through intermediaries such as
agents and trading companies. Agents may represent one or more
indirect exporters in return for commission on sales.
FOREIGN DIRECT INVESTMENT
FDI are investments made to acquire a lasting interest by a resident entity
in one economy in an enterprise resident in another economy. FDI has
come to play a major role in the internationalization of business. This has
happened due to changes in technologies, improved trade and investment
policies of governments, regulatory environment in terms of liberalization
and easing of restrictions on foreign investments and acquisitions, and
deregulation and privatization of many industries.
Advantages:
o It can provide a firm with new markets and marketing channels,
cheaper production facilities, access to new technologies, capital
process, products, organizational technologies and management skills.
o FDI can provide a strong impetus to economic development of the host
country. This is all the more true when large MNCs enter developing
nations through FDI.
o FDI allows companies to avoid foreign government pressure for local
production.
o It allows making the move from domestic export sales to a locally
based national sales office.
o Capability to increase total production capacity.
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INTERNATIONAL BUSINESS
Depending on the industry sector and type of business, a foreign direct
investment may be an attractive and viable option. With rapid
globalization of many industries and vertical integration rapidly taking
place on a global level, at a minimum a firm needs to keep abreast of
global trends in their industry. From a competitive standpoint, it is
important to be aware of whether a companys competitors are expanding
into a foreign market and how they are doing that. Often, it becomes
imperative to follow the expansion of key clients overseas if an active
business relationship is to be maintained.
New market access is also another major reason to invest in a foreign
country. At some stage, export of product or service reaches a critical
mass of amount and cost where foreign production or location begins to
be more cost effective. Any decision on investing is thus a combination of
a number of key factors including:
o Assessment of internal resources
o Competitiveness
o Market Analysis
o Market expectations
LICENSING
Licensing is a legal agreement between the owner of intellectual property
such as a copyright, patent or trademark and someone who wants to use
that IP. The licensee pays rent to the licensor for the use of an
idea/product/process that is otherwise protected by IP law. Like a lease on
a building, the license is for a specific period of time. The licensee uses
that idea/product/process to sell products or services and earns money.
Advantages:
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o Licensing appeals to prospective global players because it does not
require large capital investment not detailed involvement with foreign
customers. By generating royalty income, licensing provides an
opportunity to exploit research and development already conducted.
After initial costs, the licensor can reap benefits until the end of license
contract period.
o It reduces the risk of expropriation because the licensee is a local
company that can provide leverage against government action.
o Helps avoid host country regulations that are more prevalent in equity
ventures.
o Provides a way of testing foreign markets without significant resources.
o Can be used as a pre-emption major in new market before the entry of
competition.
Limitations:
o Limited form of market entry which does not guarantee a basis for
expansion.
o Licensor may create more competition in exchange of royalty.
FRANCHISING
Franchising involves granting of rights by a parent company to another
(franchisee) to do business in a prescribed manner. This right can take the
form of selling the franchisers products, using its name, production and
marketing techniques or using its general business approach.
It allows provides a network of interdependent business relationships that
allows a number of people to share:
o Brand identification
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o Normally, foreign partner has an option to sell its stake in the venture
to another entity.
Limitations:
o Limited control over business approach for foreign entity.
o Profits have to be shared.
e.g. Danone-Brittania, Hero Honda, Maruti Suzuki
WHOLLY OWNED SUBSIDIARIES
In a wholly owned subsidiary, the company owns 100% of the equity.
Establishing a wholly owned subsidiary in a foreign market can be done in
2 ways:
1. Set up of new operation
2. Acquisition of established firm.
WOS allows a foreign firm complete control and freedom to execute its
business strategy in the foreign country. This freedom is accompanied bya greater risk due to lack of knowledge of the market. Acquisition of an
established company can reduce this risk to an extent.
INFLUENCE OF PEST FACTORS ON INTERNATIONAL
BUSINESS
OR
RISK ANALYSIS IN INTERNATIONAL BUSINESS
Any business is affected by its external environment. The major
macroeconomic factors in the external environment that affect the
business are political, environmental, social and technological.
A. POLITICAL ENVIRONMENT
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INTERNATIONAL BUSINESS
The political environment of a country greatly influences the business
operating in those countries or business trading with those countries. The
success and growth of international business depends on the stable,
collaborative, conducive and secure political system in the country.
The following factors affect the political environment in a country.
1. Tax Policy :
The tax policy of a country affects the profitability of the business
there. The Corporate Taxation laws affect the profitability directly.
The direct taxation laws also affect the business because it
influences consumer spending. The structure of indirect taxation ina country like its excise duty structure, customs and sales tax
greatly affects the input costs of a business.
For e.g. Countries like UAE have very low direct taxation levels
inducing great spending and hence trading and marketing based
business are successful. But due to very high indirect taxation levels
the manufacturing business is not very successful.
2. Government support :
One of the most important political factors is the Government
support to international businesses. Business can be successful only
if the local government provides support in terms of infrastructure,
license clearing if required, transparent policy and quick dispute
resolution mechanism. Also the nature of the political system i.e.
democracy, communism etc. in the country influences the
Government support.
For e.g. the RBI has provided single window clearance for FDI and
hence has greatly increased the FDI levels in our country.
3. Labour Laws :
The labour laws in a country affect the viability of a business in that
country. The pension laws also play a critical role especially in cross
border acquisitions. Many businesses had to be withdrawn or closed
because of the labour unrest in the country.
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For e.g.: Withdrawal of Premier Automobiles due to union strikes
in our country. The problems faced by doctors and nurses in UK due
to the restrictive laws in that country.
4. Environmental policy :
The countries environmental policy (under the Kyoto Protocol or
otherwise) affects many business like chemicals, refineries and
heavy engineering.
5. Tariffs and duty structure :
The level of duties and tariffs that are imposed by the country
influence its imports and exports greatly. Some countries follow a
protectionist policy to the domestic industry by raising import
barriers for e.g. India in the pre liberalization era, Russia.
6. Political stability and political milieu :
Political stability greatly affects the longevity of the businesses in a
country. Political risk assessment should be done to determine the
country risk on the basis of following parameters:
a. Confiscation: The nationalization of businesses without
compensation. For e.g. India during the nationalist wave during
Indira Gandhis tenure.
b. Nationalization : Resource nationalization is a major risk for
businesses involving local resources like oil, minerals etc. For e.g.
the resource nationalization in Columbia.
c. Instability risk : The possibility of military takeovers or huge
government changes. For e.g. the coups in Thailand or in Fiji has
affected the profits of businesses there by as much as 60% due
to work stoppage and property destruction.
d. Domestication : The global company relinquishing control in
favour of domestic investors. For e.g. Barclays bank in South
Africa
B. ECONOMIC FACTORS
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INTERNATIONAL BUSINESS
The economic factors in a country greatly influence the business in that
country. The following factors are important in the macroeconomic
environment.
1. Economic system :
The economic system in a country i.e. capitalism/ communism/
mixed economy (India) is important for deciding the nature of the
businesses. The nature of the system decides the allocation of
resources. Due to globalization there is a gradual shift toward
market forces to allocate resources even in the communist countries
like China.
2. Interest rates :
The interest rates in the country affect the cost of capital (if raised
locally) and the operational costs. Interest rates also determine the
confidence of the Government in the economy and consumer
spending.
3. Exchange rates :
The exchange rates affect international trade and capital inflows in
the country.
4. Income levels and spending pattern :
Though it is more of a demographic parameter has is very
important bearing on the sell side of all international businesses. For
e.g. In a country like India, with rising a sparer population there is a
market opportunity for products like IPod (considered luxury items
till now)
C. SOCIAL FACTORS
Businesses are driven by people both as human capital and as consumers.
It is necessary for an international businessman to understand the social
and cultural aspects of the country they operate in. The following are the
important social factors.
1. Age distribution :
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INTERNATIONAL BUSINESS
1. Classical Country-Based Theories
1.1. Mercantilism (pre-16th century)
This theory takes an us-versus-them view of trade; other countrys
gain is our countrys loss.
Neo-mercantilism views persist today.
A nations wealth depends on accumulated treasure.
Theory says you should have a trade surplus.
Maximize exports through subsidies.
Minimize imports through tariffs and quotas.
Flaw: Zero-sum game.
Mercantilism- Zero-Sum Game
In 1752, David Hume pointed out that:
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TABLE A
Shoes Shirts
India 100 75
Japan 80 100
Total 180 175
What will happen when each country specializes and spends all its
working hours making one product? It will make twice as much of that
product and none of the other, as shown in Table B.
TABLE B
Shoes Shirts
India 200 0
Japan 0 200
Total 200 200
The world now has both more shoes and more shirts. India can trade 100
units of shoes for 100 units of shirts, and both countries will benefit.
In this example, India could make more shoes than Japan with the same
resources. It has an absolute advantage at shoemaking. Japan, on the
other hand, had an absolute advantage at shirt making.
Assumptions:
Perfect competition and no transportation costs in a world of two
countries and two products
One unit of input (combination of land, labor, and capital)
Each nation has two input units it can use to produce either rice or
automobiles
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shoes is lower; vice-versa for China. Hence, India has a comparative
advantage in shoemaking and China has a comparative advantage in shirt
making.
Table D shows what happens when each country specializes in the
product in which it has a comparative advantage.
TABLE D
Shoes Shirts
India 200 0
China 0 150
Total 200 150
By specializing in this way, the India and China have increased the
production of shoes by twenty units over what they produced before, from
180 to 200. But the world has lost five units of shirts, going from 155 to
150.
Production in the India could be adjusted to make up the difference. For
example, if the India gave up 10 units of shoes, it could produce 8 units of
shirts. Table E shows the results of such a tradeoff.
TABLE E
Shoes Shirts
India 190 8
China 0 150
Total 190 158
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In this way, the total production of both goods could be increased.
For India, the opportunity cost of choosing to produce 80 units of shirts
was the 100 units of shoes that could have been produced with the same
resources. In the like manner, China's opportunity cost of producing 80
units of shoes was 75 units of shirts.
In the terms of trade each reduce each country's opportunity cost of
acquiring the good traded for, trade will take place. In this example,
China will not accept fewer than 80 units of shoes for 75 units of shirts
and the India will not pay more than 100 units of shoes for 80 units of
shirts. Both countries must benefit for trade to occur.
The real world is much more complex than this two-country, two-product
mode. Trade involves many different countries and products. And it is not
always clear where a country's comparative advantage lies.
Summary
Country should specialize in the production of those goods in which
it is relatively more productive, even if it has absolute advantage in
all goods it produces.
This extends free trade argument.
Efficiency of resource utilization leads to more productivity.
1.3. Free Trade refined
1.3.1. Factor-proportions (Heckscher-Ohlin, 1919)
Eli Heckscher and Bertil Ohlin developed the theory of relative
factor endowments, now often referred to as the Heckscher-Ohlin
theory. The theory states that the pattern of international trade
depends on differences in factor endowments not on differences in
productivity.
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Relative endowments of the factors of production (land, labour, and
capital) determine a country's comparative advantage.
Countries have comparative advantage in those goods for which the
required factors of production are relatively abundant. This is
because the prices of goods are ultimately determined by the prices
of their inputs.
Goods that require inputs that are locally abundant will be cheaper
to produce than those goods that require inputs that are locally
scarce.
For example, a country where capital and land are abundant but labour is
scarce will have comparative advantage in goods that require lots of
capital and land, but little labour - grains, for example.
Since capital and land are abundant, their prices will be low. Those low
prices will ensure that the price of the grain that they are used to produce
will also be low - and thus attractive for both local consumption and
export.
Labour intensive goods on the other hand will be very expensive to
produce since labor is scarce and its price is high. Therefore, the country
is better off importing those goods.
Summary
Factor endowments vary among countries
Products differ according to the types of factors that they need as
inputs
A country has a comparative advantage in producing products that
intensively use factors of production (resources) it has in abundance
Assumptions
A given technology was universally available.
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Relative factor endowments are different in each country
Tastes and preferences are identical in both countries
A given product was either labor- or capital-intensive
The theory ignored transportation costs.
1.3.2. Product Life Cycle (Ray Vernon, 1966)
As products mature, both location of sales and optimal production
changes
Affects the direction and flow of imports and exports
Globalization and integration of the economy makes this theory less
valid
Classic Theory Limitations:
All the classical theories are based on the following assumptions that no
longer hold true
Simple world (two countries, two products)
No transportation costs
No price differences in resources
Resources immobile across countries
Constant returns to scale
Each country has a fixed stock of resources & no efficiency gains in
resource use from trade
Full employment
2. Modern Trade Theory
In industries with high fixed costs:
Specialization increases output, and the ability to enhance
economies of scale increases
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Learning effects are high.
These are cost savings that come from learning by doing
New Trade Theory-Applications
Typically, requires industries with high, fixed costs
o World demand will support few competitors
o Competitors may emerge because of First-mover advantage
Economies of scale may preclude new entrants
o Role of the government becomes significant
Some argue that it generates government intervention and strategic
trade policy
Theory of National Competitive Advantage
The theory attempts to analyze the reasons for a nations success in
a particular industry
Porter studied 100 industries in 10 nations
- Postulated determinants of competitive advantage of a nation
were based on four major attributes
Factor endowments
Demand conditions
Related and supporting industries
Firm strategy, structure and rivalry
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Factor endowments: A nations position in factors of production such as
skilled labor or infrastructure necessary to compete in a given industry
Basic factor endowments
Advanced factor endowments
Basic Factor Endowments
Basic factors: Factors present in a country
- Natural resources
- Climate
- Geographic location
- Demographics
While basic factors can provide an initial advantage they must
be supported by advanced factors to maintain success
Advanced Factor Endowments
Advanced factors: The result of investment by people,
companies, and government are more likely to lead to
competitive advantage
If a country has no basic factors, it must invest in advanced
factors
- Communications
- Skilled labor
- Research
- Technology
- Education
Porters Theory-Predictions
Porters theory should predict the pattern of international trade that
we observe in the real world.
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another country and in turn gives the benefit under international
trade.
Appropriateness of this Theory for Developing Countries:
According to this theory, the factors of production of developing
countries are fully utilized.
The unemployed labour of the developing countries is profitably
employed when the vent for surplus is exported.
3.3. Mills theory of reciprocal demand
Comparative cost advantage theories do not explain the ratios at
which commodities are exchanged for one another. J.S. Mill
introduced the concept of reciprocal demand to explain the
determinations of the equilibrium terms of trade.
Reciprocal demand indicates a countrys demand for one
commodity in terms of the other commodity; it is prepared to give
up in exchange. It determines the terms of trade and relative share
of each country.
Equilibrium:
Quality of a product exported by country A = Quality of another product
exported by country B
Assumptions:
Existence of two countries
Trade in only two goods both the goods are produced under the
law of constant returns
Absence of transportation Costs.
Existence of perfect competition
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Existence of full employment
TEN REASONS WHY FDI HAPPENS
1. Foreign Direct Investments (FDI) as defined in the BOP Manual, are
investments made to acquire a lasting interest by a resident entity in
one economy in an enterprise resident in another economy. The
purpose of the investor is to have a significant influence, an effective
voice in the management of the enterprise. The definition of the
Organization for Economic Cooperation and Development (OECD)
which considers as direct investment enterprise an incorporated or
unincorporated enterprise in which a direct investor who is resident in
another economy owns ten percent or more of the ordinary shares or
voting power (for incorporated enterprise) or the equivalent (for an
unincorporated enterprise).
2. It provides a firm with new markets and marketing channels, cheaper
production facilities, access to new technology, products, skills and
financing. For a host country or the foreign firm which receives the
investment, it can provide a source of new technologies, capital,
processes, products, organizational technologies and management
skills, and as such can provide a strong impetus to economic
development.
3. FDI inflows are considered as channels of entrepreneurship,
technology, management skills, and of resources that are scarce in
developing countries. Hence, they could help their host countries in
their industrialization.
4. For small and medium sized companies, FDI represents an opportunity
to become more actively involved in international business activities.
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In the past 15 years, the classic definition of FDI as noted above has
changed considerably, over 2/3 of direct foreign investment is still
made in the form of fixtures, machinery, equipment and buildings.
5. FDI is viewed as a basis for going global. FDI allows companies toaccomplish following tasks:
Avoiding foreign government pressure for local production
Circumventing trade barriers, hidden and otherwise
Making the move from domestic export sales to a locally-based
national sales office
Capability to increase total production capacity.
Opportunities for co-production, joint ventures with local partners,
joint marketing arrangements, licensing, etc
6. Foreign direct investment is viewed as a way of increasing the
efficiency with which the world's scarce resources are used. A recent
and specific example is the perceived role of FDI in efforts to stimulate
economic growth in many of the world's poorest countries. Partly this is
because of the expected continued decline in the role of development
assistance (on which these countries have traditionally relied heavily),
and the resulting search for alternative sources of foreign capital.
7. FDI enables the firm owns assets to be profitably exploited on a
comparatively large scale, including intellectual property (such as
technology and brand names), organizational and managerial skills,
and marketing networks. And it is more profitable for the production
utilizing these assets to take place in different countries than to
produce in and export from the home country exclusively.
8. FDI may result in a greater diffusion of know-how than other ways of
serving the market. While imports of high-technology products, as well
as the purchase or licensing of foreign technology, are important
channels for the international diffusion of technology, FDI provides
more scope for spillovers. For example, the technology and
productivity of local firms may improve as foreign firms enter the
market and demonstrate new technologies, and new modes of
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organization and distribution, provide technical assistance to their local
suppliers and customers, and train workers and managers who may
later be employed by local firms.
9. FDI increases employment in host country. Inflows of FDI also increasethe amount of capital in the host country. Even with skill levels and
technology constant, this will either raise labour productivity and
wages, allow more people to be employed at the same level of wages,
or result in some combination of the two.
10. Proponents of foreign investment point out that the exchange of
investment flows benefits both the home country (the country from
which the investment originates) and the host country (the destinationof the investment). Opponents of FDI note that multinational
conglomerates are able to wield great power over smaller and weaker
economies and can drive out much local competition. The truth might
lie somewhere in between but they surely become reasons for
companies to invest in foreign markets.
WTO ROUNDS WRT INDIA
The WTO came into being on January 1, 1995, and is the successor to the
General Agreement on Tariffs and Trade (GATT), which was created in
1948. India was one of the 76 countries that signed the accession to the
WTO and is one of the founder members of the WTO.
TRADE IMPLICATIONS OF SIGNING THE WTO FOR INDIA
The implications of signing the WTO agreement for Indian trade have been
mixed. India has benefited in the areas of garment exports, agricultural
products exports and in market access to foreign markets in automobiles
and electronics. India has a disadvantage mainly in areas of TRIPs, drug
prices, patents in agriculture, TIS ( trade in services ) and TRIMS
especially in biomedical areas, AoA export subsidies etc.
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BENEFITS
1. Garment exports :
The Multi Fiber Arrangement (MFA) that required Indian garment
exporters to have quotas for exporting to developed countries was
phased out in 2005. The readymade garment exports from India has
reached Rs 800 crores in 2007 and expected to reach Rs 1000 crores in
2008. This is thrice the exports in 2004-05.
2. Market access :
As a signatory to the WTO India automatically gets the MFN ( most
favored nation ) status. This gives India access to markets in Europe
and US in sectors like automobiles and engineering. India also benefits
from the clauses related to trade without discrimination and benefit
from capital good exports.
3. Anti Dumping measures :
India suffered frompersistent dumping by Romanian and Russian steel
majors in the areas of steel casings, pipes affecting Indian domestic
industry greatly. Also India suffered from dumping by Chinese steel
industry. The anti dumping provisions and countervailing duties lend
security to Indias domestic industries.
4. The Agreement on Agriculture :
The AOA stipulates that the developed countries will reduce tariffs on
agriculture imports (up to 35%) thus helping Indias agriculture
exports. It also promises reduction of domestic subsidies in the
developed countries helping exports from India.
5. Competitive advantage: India has competitive advantage in the areas
of merchandise trade. India can utilize its competitive advantage in
processing, beverages, gems and jeweller compared to the traditional
centers in Europe like Amsterdam or Manchester etc increasing its
trade with both the Euro region and the US.
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DISADVANTAGES
1. TRIPS :
The Indian Patent Act is not compatible with the TRIPS agreement
under the WTO. The Indian Patent Act allows only process patents in
areas of foods, chemicals and medicines. Under the TRIPS the IPA will
have to modify to allow product patents also. Also products developed
outside India can claim international patents applicable to India. This
will hurt our agriculture foods. E.g. the Alphanso mango and the
Basmati strand controversy.
2. Drug prices :
The granting of the product patents in India will hurt the Indian generic
drugs industry and benefit the foreign pharma companies that own the
formulation patents. This will lead to increase in drug prices in India.
(This resulted in regulatory intervention in the recent budget in life
saving drugs) e.g. The Pfizer controversy
3. Genetics :
Indian seed and genetic research organizations are Government
funded and will not be able to compete with the MNCs like Montessanto
etc that have economies of scale. This will increase seed prices for
Indian farmers and also lend our genetic resources to the MNCs
4. Services :
The opening up of the banking sector in 2009 will affect Indian banks
due to the foreign banks with huge balance sheets.
5. TRIMS :
The Trade Related Investment Measures resulted in problems in trade
in investment issues like transit charges, formalities etc. together
called as Singapore issues. Indian companies would have to lose in the
differential charges that are applied. These issues were dropped in the
Chachun ministerial conferences.
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6. Anti dumping:
The anti dumping rules were imposed on Indian linen in EU. Similarly
Indian textiles faced anti dumping regulations in US. There is nomechanism to resolve anti dumping duties issues.
INDIAS STAND IN THE DOHA ROUND AND THE FOLLOWING
MINISTERIAL CONFERENCES
1. Doha round:
The Doha Development Round commenced at Doha, Qatar in
November 2001 and is still continuing. Its objective is to lower trade
barriers around the world, permitting free trade between countries of
varying prosperity. As of 2008, talks have stalled over a divide between
the developed nations led by the European Union, the United States
and Japan and the major developing countries (represented by the G20
developing nations), led and represented mainly by India, Brazil, China
and South Africa.
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Singapore issues: The issues related to the trade facilitation and
differential charges in investment vehicles affected Indian investment and
venture companies. This affected the Indian services.
Agricultural subsidies: The EU, US and Japan support domestic
agriculture by subsides. This was opposed by countries like India and
Brazil.
2. Cancun conference 2003 :
The objective of this conference was to forge the agreement discussed in
Doha.
Issues: Market access to foreign markets. This agreement on market
access for the developing countries in capital and industrial goods
increased strength of G20 countries.
India benefited greatly in the capital goods export.
The Singapore issues were resolved that resulted in removing the undue
advantage for countries like US and Japan in investment arena. This also
benefited the Indian financial sector internationally.
3. Geneva 2004: In Geneva conference the developed nations reduced
subsidiaries on manufactured goods. This resulted in Indian small
manufacturers like steel forging, casting to export largely and benefit
from the construction boom in US.
4. Paris 2005: France reduced subsidies on farm products. However US
and Japan did not relent. Hong Kong 2006 and Potsdam 2007 talks
failed in resolving the farm subsidies. So the recent rounds are in a
stalemate situation from Indias point of view.
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DISCUSS NAFTA/ EU/ ASEAN/ SAARC/ MERCUSOR
MERCOSUR
Mercosur is a regional trade agreement among Argentina, Brazil
,Paraguay & Uruguay founded in 1991 by the Treaty of Asuncin, which
was later amended and updated by the 1994 Treaty of Ouro Preto. Its
purpose is to promote free trade and the fluid movement of goods,
people, and currency. Bolivia, Chile, Colombia, Ecuador and Peru currently
have associate member status. Venezuela signed a membershipagreement on 17 June 2006, but before becoming a full member its entry
has to be ratified by the Paraguayan and the Brazilian parliaments.
The bloc comprises a population of more than 263 million people, and the
combined Gross Domestic Product of the full-member nations is in excess
of US$2.78 trillion a year (Purchasing power parity, PPP) according to
International Monetary Fund (IMF) numbers, making Mercosur the fifth
largest economy in the World.
OBJECTIVES OF MERCOSUR
Free transit of production goods, services and factors between the
member states with inter alia, the elimination of customs rights and
lifting of nontariff restrictions on the transit of goods or any other
measures with similar effects;
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Fixing of a common external tariff (TEC) and adopting of a common
trade policy with regard to non member states or groups of states, and
the coordination of positions in regional and international commercial
and economic meetings;
Coordination of macroeconomic and sectorial policies of member states
relating to foreign trade, agriculture, industry, taxes, monetary system,
exchange and capital, services, customs, transport and
communications, and any others they may agree on, in order to ensure
free competition between member states; and
The commitment by the member states to make the necessary
adjustments to their laws in pertinent areas to allow for the
strengthening of the integration process. The Asuncion Treaty is based
on the doctrine of the reciprocal rights and obligations of the member
states.
MERCOSUR initially targeted free-trade zones, then customs unification
and, finally, a common market, where in addition to customs unification
the free movement of manpower and capital across the member nations'
international frontiers is possible, and depends on equal rights and duties
being granted to all signatory countries. During the transition period, as a
result of the chronological differences in actual implementation of trade
liberalization by the member states, the rights and obligations of each
party will initially be equivalent but not necessarily equal. In addition to
the reciprocity doctrine, the Asuncion Treaty also contains provisions
regarding the most-favored nation concept, according to which the
member nations undertake to automatically extend--after actual
formation of the common market--to the other Treaty signatories any
advantage, favor, entitlement, immunity or privilege granted to a product
originating from or intended for countries that are not party to ALADI.
SAARC
The South Asian Association for Regional Cooperation (SAARC) is an
economic and political organization of eight countries in Southern Asia. It
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was established on December 8, 1985 by India, Pakistan, Bangladesh, Sri
Lanka, Nepal, Maldives and Bhutan. In April 2007, at the Association's
14th summit, Afghanistan became its eighth member.Sheelkant Sharma is
the current secretary & Mahinda Rajapaksa is the current chairman ofSAARC which is headquartered at Kathmandu.
OBJECTIVES OF SAARC
To promote the welfare of the peoples of South Asia and to improve
their quality of life;
To accelerate economic growth, social progress and cultural
development in the region and to provide all individuals theopportunity to live in dignity and to realize their full potential;
To promote and strengthen collective self-reliance among the
countries of South Asia;
To contribute to mutual trust, understanding and appreciation of
one another's problems;
To promote active collaboration and mutual assistance in the
economic, social, cultural, technical and scientific fields; To strengthen cooperation with other developing countries;
To strengthen cooperation among themselves in international
forums on matters of common interest; and
To cooperate with international and regional organizations with
similar aims and purposes.
FREE TRADE AGREEMENT
Over the years, the SAARC members have expressed their unwillingness
on signing a free trade agreement. Though India has several trade pacts
with Maldives, Nepal, Bhutan and Sri Lanka, similar trade agreements with
Pakistan and Bangladesh have been stalled due to political and economic
concerns on both sides. India has been constructing a barrier across its
borders with Bangladesh and Pakistan. In 1993, SAARC countries signedan agreement to gradually lower tariffs within the region, in Dhaka. Eleven
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years later, at the 12th SAARC Summit at Islamabad, SAARC countries
devised the South Asia Free Trade Agreement which created a framework
for the establishment of a free trade area covering 1.4 billion people. This
agreement went into force on January 1, 2006. Under this agreement,SAARC members will bring their duties down to 20 per cent by 2007.
The last summit (15th) was held in Colombo where four major agreements
- the SAARC development fund, the establishment of a SAARC standard
organization, the SAARC convention on mutual legal assistance in criminal
matters, and the protocol on Afghanistan's admission to the South Asia
Free Trade Agreement (SAFTA) were adopted with emphasis on region-
wide food security.
NAFTA
The North American Free Trade Agreement (NAFTA) is a trilateral trade
bloc in North America created by the governments of the United States,
Canada, and Mexico. In terms of combined purchasing power parity GDP
of its members, as of 2007 the trade bloc is the largest in the world and
second largest by nominal GDP comparison. It also is one of the most
powerful, wide-reaching treaties in the world.
The North American Free Trade Agreement (NAFTA) has two supplements,
the North American Agreement on Environmental Cooperation (NAAEC)
and the North American Agreement on Labor Cooperation (NAALC).
Implementation of the North American Free Trade Agreement (NAFTA)
began on January 1, 1994. This agreement will remove most barriers to
trade and investment among the United States, Canada, and Mexico.
Under the NAFTA, all non-tariff barriers to agricultural trade between the
United States and Mexico were eliminated. In addition, many tariffs were
eliminated immediately, with others being phased out over periods of 5 to
15 years. This allowed for an orderly adjustment to free trade with
Mexico, with full implementation beginning January 1, 2008.
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The agricultural provisions of the U.S.-Canada Free Trade Agreement, in
effect since 1989, were incorporated into the NAFTA. Under these
provisions, all tariffs affecting agricultural trade between the United States
and Canada, with a few exceptions for items covered by tariff-rate quotas,were removed by January 1, 1998.
Mexico and Canada reached a separate bilateral NAFTA agreement on
market access for agricultural products. The Mexican-Canadian agreement
eliminated most tariffs either immediately or over 5, 10, or 15 years.
U.S. trade with Mexico and Canada has grown more rapidly than total U.S.
trade since 1994. The automotive, textile, and apparel industries haveexperienced the most significant changes in trade flows, which may also
have affected employment levels in these industries. The five major U.S.
industries that have high volumes of trade with Mexico and Canada are
automotive industry, chemicals and allied products, computer equipment,
textiles and apparel, and microelectronics.
The effects of NAFTA, both positive and negative, have been quantified by
several economists. Some argue that NAFTA has been positive for Mexico,
which has seen its poverty rates fall and real income rise (in the form of
lower prices, especially food), even after accounting for the 19941995
economic crisis. Others argue that NAFTA has been beneficial to business
owners and elites in all three countries, but has had negative impacts on
farmers in Mexico who saw food prices fall based on cheap imports from
U.S. agribusiness, and negative impacts on U.S. workers in manufacturing
and assembly industries who lost jobs. Critics also argue that NAFTA has
contributed to the rising levels of inequality in both the U.S. and Mexico.
EU
The European Union (EU) is a political and economic union of 27 member
states, located primarily in Europe. The EU generates an estimated 30%
share of the world's nominal gross domestic product (US$16.8 trillion in
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2007). Thus EU presents an enormous export and investor market that is
both mature and sophisticated.
The EU has developed a single market through a standardised system of
laws which apply in all member states, guaranteeing the freedom of
movement of people, goods, services and capital. It maintains a common
trade policy. Fifteen member states have adopted a common currency,
the euro.
OBJECTIVES OF THE EU
Its principal goal is to promote and expand cooperation among members
states in economics, trade, social issues, foreign policies, security,
defense, and judicial matters. Another major goal of the EU is to
implement the Economic and Monetary Union, which introduced a single
currency, the Euro for the EU members.
The single market refers to the creation of a fully integrated market within
the EU, which allows for free movement of goods, services and factors of
production. The EU, in conjunction with Member States, has a number ofpolicies designed to assist the functioning of the market. Some of the
policies are given below:
Competition Policy: The main competition lied in energy and transport
sector. The union designed this strategy to prevent price fixing, collusion
(secret agreement), and abuse of monopoly.
Free movement of goods: A custom union covering all trade in goods
was established and a common customs tariff was adopted with respect to
countries outside the union.
Services: Any member nation has a right to provide services in other
Member States.
Capital: There are no restrictions on the movement of capital and on
payments with the EU and between member states and third countries.
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TRADE BETWEEN THE EUROPEAN UNION AND INDIA
India was one of the first Asian nations to accord recognition to the
European Community in 1962. The EU is Indias largest trading partner
and biggest source of FDI. It is a major contributor of developmental aid
and an important source of technology. Over the years, EU India trade
has grown from 4.4 bn to 28.4 bn US$.
Top items of trade between India and EU
Indias exports to EU % Indias Imports from EU %
Textile and clothing 35 Gemstones and jewellery 31
Leather and leather products 25 Power generating equipment 28
Gemstones and jewellery 12 Chemical products 15
Agriculture products 10 Office machinery 10
Chemical products 9 Transport equipment 6
India is EUs 17th largest supplier and 20th largest destination for
exports.
Tariff and non-tariffs have been reduced, but compared to International
standards they are still high.
Under the Bilateral trade between India and EU, it accounts for 26% of
Indias exports and 25% of its imports.
The European Union (EU) and India agreed on September 29,2008 at
the EU-India summit in Marseille, France's largest commercial port, to
expand their cooperation in the fields of nuclear energy and
environmental protection and deepen their strategic partnership.
Trade between India and the 27-nation EU has more than doubled from
25.6 billion euros ($36.7 billion) in 2000 to 55.6 billion euros last year,
with further expansion to be seen.
ASEAN
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The Association of Southeast Asian Nations or ASEAN was established on 8
August 1967 in Bangkok by the five original Member Countries, namely,
Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei
Darussalam joined on 8 January 1984, Vietnam on 28 July 1995, Laos andMyanmar on 23 July 1997, and Cambodia on 30 April 1999.
OBJECTIVES
The ASEAN Declaration states that the aims and purposes of the
Association are:
(i) To accelerate the economic growth, social progress and cultural
development in the region through joint endeavors.
(ii) To promote regional peace and stability through abiding respect for
justice and the rule of law in the relationship among countries in the
region and adherence to the principles of the United Nations
Charter.
(iii) To maintain close cooperation with the existing international and
regional organizations with similar aims.
WORKING OF ASEAN
The member countries of ASEAN have Preferential Trading Arrangements
(PTA), which reduces tariffs on products traded among member countries.
In 1992, ASEAN developed a Common Effective Preferential Tariffs (CEPT)
plan to reduce tariffs systematically for manufactured and processed
products.
The members have also established a series of co-operative efforts to
encourage joint participation in industrial, agricultural and technical
development projects and to increase foreign investments in their
economies. These efforts include an ASEAN finance corporation, the
ASEAN Industrial Joint Ventures Programme (AJIV) etc. ASEAN nations
have introduced some programmes for greater diversification in their
economies.
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INDIA AND ASEAN
India is interested in maintaining close economic relations with the
members of ASEAN, as these countries are closer to India. The ASEAN
countries are offering co-operation to India in the field of trade,
investment, science and technology and training of personnel. Also,
Indias trade with ASEAN countries is satisfactory in recent years.
EFFECT OF CURRENT ECONOMIC MELTDOWN ON INTERNATIONAL
BUSINESS
1. Slower global growth: Global growth stood at 5 percent in 2007, butthe IMF expects world growth to slow to 3 percent in 2009 - 0.9
percentage points lower than forecasted in July 2008.
2. Economic contraction in some countries: In G7 countries except
for the United States and Canada, GDP growth was slower in Q2 of
2008 compared to Q1. Three major European economies (Italy, France
and Germany) experienced negative GDP growth in Q2, and forecasts
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are for a continued decline in Q3. The IMF forecasts around 0 percent
growth for advanced economies in 2009.
3. Depth of slowdown: It is observed that economic slowdowns,
preceded by financial stress tend to be more severe. Althoughemployment has contracted in several countries in recent months, it
has not been as severe as that during 1990-91.
4. Financing challenges for governments: State and local
governments may be faced with financial crisis. Even administrative
costs may be difficult to come by. The governments would be hard
pressed for funds for guarantees and development work. For e.g. In the
case of Iceland the banking sector has assets of around 300% of GDP,something no government could ever guarantee, at least not on a
short-term basis.
5. Rising unemployment: According to IMF, unemployment in the
advanced economies will rise from 5.7 percent in 2008 to 6.5 percent
in 2009.
6. Large employment losses in sectors: Some sectors like
construction, real estate services will experience disproportionateemployment declines. In addition there will be significant job losses in
the financial sector.
7. Reduced world trade volume: According to the IMF, the world trade
will grow only at the rate of 1.9% as against the earlier estimate of
4.1% for 2009. A drop in exports, as well as capital inflow, may trigger
a falloff in investments.
8. Rising income insecurity and disproportionate impact on low-income groups: As stock markets around the world have eroded
trillions of dollars in wealth and rolled back some of the investment
gains of the past 5 years, the investment and retirement savings of
many individuals have lost significant value. There is a risk that low-
income countries and lower-income groups within countries will bear
the brunt of challenges, as the most poor are the most defenseless,
says World Bank President Robert Zoellick.
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9. Return to Tariff and Non-Tariff Barriers: Developed economies in
order to ward off unemployment and financial crisis may erect barriers
to free trade. This might start a local business environment. For e.g.
President-elect Barrack Obama has already announced his intention toreduce outsourcing from US by 30%.
10. Surplus Production Capacities: In line with demand destruction,
many branded products may face surplus capacities. For e.g. Car, Steel
& Aircrafts manufacturers are already staring at excess capacity.
11. Increase in Government Controls: In order to bail out sinking
Corporates the governments, would buy out or control the operations
of large companies. For e.g. AIG and Citibank12. Impact on India:
a. BPO Operations: India is likely to face a severe crunch on the IT and
ITes services, rendered by Indian BPO Companies.
b. Increase in Trade Deficit: Already in the last quarter, Indias trade
deficit has grown where exports are not meeting the set targets
while imports continue to grow.
c. Falling Currency: as the demand for dollars increases the Indianrupee is likely to weaken. The rupee has already depreciated to Rs.
50 a dollar.
d. Pressure on Services Sector: As the demand for services is
destroyed, these sunshine industries such as BPOs, Airlines, and
Telecommunication etc. will face salary and employment cutbacks.
DISCUSS SWAPS, OPTIONS, FUTURES
SWAPS
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a) A swap is a derivative in which two counterparties agree to exchange
one stream of cash flows against another stream. These streams are
called the legs of the swap.
b) The cash flows are calculated over a notional principal amount, whichis usually not exchanged between counterparties. Consequently, swaps
can be used to create unfunded exposures to an underlying asset,
since counterparties can earn the profit or loss from movements in
price without having to post the notional amount in cash or collateral.
c) Swaps can be used to hedge certain risks such as interest rate risk, or
to speculate on changes in the underlying prices.
d) Most swaps are traded over-the-counter (OTC), "tailor-made" for thecounterparties. Some types of swaps are also exchanged on futures
markets such as the Chicago Mercantile Exchange Holdings Inc., the
largest U.S. futures market, the Chicago Board Options Exchange and
Frankfurt-based Eurex AG.
e) The five generic types of swaps, in order of their quantitative
importance, are: interest rate swaps, currency swaps, credit swaps,
commodity swaps and equity swaps.
FUTURES
a) A futures contract is a standardized contract, traded on a futures
exchange, to buy or sell a standardized quantity of a specified
commodity of standardized quality at a certain date in the future, at a
price determined by the instantaneous equilibrium between the forcesof supply and demand among competing buy and sell orders on the
exchange at the time of the purchase or sale of the contract.
b) The future date is called the delivery date or final settlement date.
The official price of the futures contract at the end of a day's trading
session on the exchange is called the settlement price for that day of
business on the exchange.
c) A futures contract gives the holder the obligation to make or take
delivery under the terms of the contract,
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d) Both parties of a "futures contract" must fulfill the contract on the
settlement date. The seller delivers the underlying asset to the buyer,
or, if it is a cash-settled futures contract, then cash is transferred from
the futures trader who sustained a loss to the one who made a profit.To exit the commitment prior to the settlement date, the holder of a
futures position has to offset his/her position by either selling a long
position or buying back (covering) a short position, effectively closing
out the futures position and its contract obligations.
e) Futures contracts, or simply futures, are exchange traded derivatives.
The exchange's clearinghouse acts as counterparty on all contracts,
sets margin requirements, and crucially also provides a mechanism forsettlement.
OPTIONS
a) An option is a contract written by a seller that conveys to the buyer
the right but not the obligation to buy (in the case of a call option)
or to sell (in the case of aputoption) a particular asset, such as a piece
of property, or shares of stock or some other underlying security, such
as, among others, a futures contract. In return for granting the option,
the seller collects a payment (thepremium) from the buyer.
b) For example, buying a call option provides the right to buy a specified
quantity of a security at a set strike price at some time on or before
expiration, while buying a put option provides the right to sell. Upon
the option holder's choice to exercise the option, the party who sold, or
wrote, the option must fulfill the terms of the contract.
c) The theoretical value of an option can be evaluated according to
several models. These models, which are developed by quantitative
analysts, attempt to predict how the value of the option will change in
response to changing conditions. Hence, the risks associated with
granting, owning, or trading options may be quantified and managed
with a greater degree of precision, perhaps, than with some other
investments.
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d) Exchange-traded options form an important class of options which
have standardized contract features and trade on public exchanges,
facilitating trading among independent parties. Over-the-counter
options are traded between private parties, often well-capitalizedinstitutions that have negotiated separate trading and clearing
arrangements with each other.
e) Another important class of options, particularly in the U.S., are
employee stock options, which are awarded by a company to their
employees as a form of incentive compensation
f) Other types of options exist in many financial contracts, for example
real estate options are often used to assemble large parcels of land,and prepayment options are usually included in mortgage loans.
INTERNATIONAL HUMAN RESOURCE MANAGEMENT
International human resource management (HRM) involves
ascertaining the corporate strategy of the company and assessing
the corresponding human resource needs; determining the
recruitment, staffing and organizational strategy; recruiting,
inducting, training and developing and motivating the personnel;
putting in place the performance appraisal and compensation plans
and industrial relations strategy and the effective management of
all these.
The strategic role ofHRM is complex enough in a purely domestic
firm, but it is more complex in an international business, where
staffing, management development, performance evaluation, and
compensation activities are complicated by profound differences
between countries in labour markets, culture, legal systems,
economic systems, and the like.
It is not enough that the people recruited fit the skill requirement,
but it is equally important that they fit in to the organizational
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culture and the demand of the diverse environments in which the
organization functions.
FACTORS AFFECTING INTERNATIONAL HRM
The following are some of the important factors, which make international
HRM complex and challenging:
DIFFERENCES IN LABOUR MARKET CHARACTERISTICS
The skill levels, the demand and supply conditions and the
behaviour characteristics of labour vary widely between countries.
While some countries experience human resource shortage in
certain sectors, many countries have abundance.
In the past, developing countries were regarded, generally, as pools
of unskilled labour. Today, however, many developing countrieshave abundance of skilled and scientific manpower as well as
unskilled and semiskilled labour.
This changing trend is incasing significant shift of location of
business activities. Hard disk drive manufacturers are reported to be
shifting their production base from Singapore to cheaper locations
like Malaysia, Thailand and China.
While in the past unskilled and semiskilled labour intensive activities
tended to be located in the developing countries, today
sophisticated activities also find favour with developing countries.
The changing quality attributes of human resources in the
developing countries and wage differentials are causing a location
shift in business activities, resulting in new trends in the global
supply chain management.
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India is reported to be emerging as a global R&D hub. India and
several other developing countries are large sources of IT personnel.
In short, the labour changing labour market characteristics have
been causing global restructuring of business processes and
industries. And this causes a great challenge for strategic HRM.
CULTURAL DIFFERENCES
Cultural differences cause a great challenge to HRM.
The behavioural attitude of workers, the social environment, values,
beliefs, outlooks etc., are important factors, which affect industrial
relations, loyalty, productivity etc.
There are also significant differences in aspects related to labour
mobility. Cultural factors are very relevant in inter personal
behaviour also.
In some countries it is common to address the boss Mr. so and so
but in countries like India addressing the boss by name would not be
welcome.
In countries like India people attach great value to designations and
hierarchical levels. This makes delivering and organisational
restructuring difficult.
DIFFERENCES IN REGULATORY ENVIRONMENT
A firm operating in different countries is confronted with different
environments with respect to government policies and regulations
regarding labour.
The attitude of employers and employees towards employment of
people show great variations is different nations. In some countries
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hire and fire is the common thing whereas in a number of countries
the ideal norm has been lifetime employment.
In countries like India workers generally felt that while they, have
the right to change organisations, as they preferred, they had a
right to lifetime employment in the organisation they were
employed with.
In such situations it is very difficult to get rid of inefficient or surplus
manpower. The situation, however, is changing in many countries,
including India.
DIFFERENCE IN CONDITIONS OF EMPLOYMENT
Besides the tenancy of employment, there are several conditions of
employment the differences of which cause significant challenge to
international HRM.
The system of rewards, promotion, incentives and motivation,
system of labour welfare and social security etc., vary significantly
between countries.
CASE STUDY: ORGANIZATIONAL CHANGE AT UNILEVER
Unilever is a very old multinational with worldwide operations in the
detergent and food industries. For decades, Unilever managed its
worldwide detergents activities in an arm's-length manner. A subsidiary was
set up in each major national market and allowed to operate largely
autonomously, with each subsidiary carrying out the full range of value cre-
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ation activities, including manufacturing, marketing, and R&D. The
company had 17 autonomous national operations in Europe alone by the
mid-1980s.
In the 1990s, Unilever began to transform its worldwide detergents
activities from a loose confederation into a tightly managed business with
a global strategy. The shift was prompted by Unilever's realization that its
traditional way of doing business was no longer effective in an arena where
it had become essential to realize substantial cost economies, to innovate,
and to respond quickly to changing market trends.
The point was driven home in the 1980s when the company's archrival,Procter & Gamble, repeatedly stole the lead in bringing new products to
market. Within Unilever, "persuading" the 17 European operations to adopt
new products could take four to five years. In addition, Unilever was
handicapped by a high-cost structure from the duplication of manufacturing
facilities from country to country and by the company's inability to enjoy
the same kind of scale economies as P&G. Unilever's high costs ruled out its
use of competitive pricing.
To change this situation, Unilever established product divisions to coordi-
nate regional operations. The 17 European companies now report
directly to Lever Europe. Implicit in this new approach is a bargain:
The 17 companies are relinquishing autonomy in their traditional markets
in exchange for opportunities to help develop and execute a unified pan-
European strategy. As a consequence of these changes, manufacturing is
now being rationalized, with detergent production for the European
market concentrated in a few key locations. The number of European
plants manufacturing soap has been cut from 10 to 2, and some new
products will be manufactured at only one site. Product sizing and packaging
are being harmonized to cut purchasing costs and to pave the way for
unified pan-European" advertising. By taking these steps, Unilever
estimates it may save as much as $400 million a year in its European
operations.
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Lever Europe is attempting to speed its development of new products and
to synchronize the launch of new products throughout Europe. Its efforts
seem to be paying off: A dishwasher detergent introduced in Germany in the
early 1990s was available across Europe a year latera distinctimprovement.
But history still imposes constraints. Procter & Gamble's leading laundry
detergent carries the same brand name across Europe, but Unilever sells its
product under a variety of names. The company has no plans to change this.
Having spent 100 years building these