1 a economic

7/30/2019 1 a Economic

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International trade and investment have increased

dramatically in recent years. Major multinational

corporations (MNCs) have holdings throughout the

world, from North America to Europe, to Asia, to thePacific Rim, to South America to Africa. Most of

these holdings are a result of FDI, Foreign Direct

Investment, including partnerships with local Some

countries require this, for example, China, Thailand,India(?)


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In addition, there is considerable indirect foreign

investment such as shares in foreign companies (for

investment not for control), investment in bond

markets, futures exchanges, etc. but in terms ofinternational management we are concerned with

FDI not other forms of foreign investment.


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Small firms also are often finding that they must seekout international markets to survive in the future.There is definitely a trend toward theinternationalization of almost all business.

We now see many international agreements andarrangements for international business. The mostdeveloped of these is the EU, European Union,which, of course, is much wider than just being aninternational trading association with their owncurrency, the Euro.(Athough not all EU members arein the European Monetary Union) and also aEuropean political association with the European

Parliament and the European Central Bank.


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We know, of course, that the E U, & particularly

those EU countries which are in the European

Monetary Union , have been having significant

problems of sovereign debt (banking debt). Other major trading groups are NAFTA, the North

American Free Trade Association, incorporating the

USA, Canada, and Mexico.


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There are also trading groups or blocs in many other

regions including in Asia, Africa & South America.

In Southeast Asia we have ASEAN, which was

originally developed for regional security but assecurity has improved it has turned its interest

toward economic & trade matters. In 2015, ASEAN

will enter the ASEAN Economic Community (AEC)

which will mean a Common Market with a commonboundary for trade and investment in this region.


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We also have seen the growth of bilateral free trade

agreements often between two individual countries

but sometimes between a country and a regional

trading group. Many countries now have these types of

agreements. India, for example, has such agreements

with neighboring countries but also with MEDCOSUR

which is the trading group of many South Americancountries.


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Todays political and economic environments presenta myriad of challenges for MNCs. The continuingtransition of China which is now the top exportingcountry in the world with a huge trade surplus withthe rest of the world, the change from a politicalsystem of communism in Russia & Eastern Europeand the movement towards free market economics,the political problems in the Middle East, including

the wars in Iraq and Afghanistan & significantproblems with , Egypt, Syria & Iran, and continuingpolitical unrest in many African countries.


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The economic problems which started with the sub-

prime crisis in the USA ,and other problems

associated with derivatives, which spread to other

countries, the problems of government bail-outs ofbanks, finance companies and some major industries

in the USA & elsewhere, the problem that still faces

many European countries of sovereign or banking

debt. These problems have raised levels inunemployment in many countries to the highest

levels seen since the Great Depression of the 1930s.


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Let us now look at India. The 11th largest economy in

the world after USA, China, Germany, and Japan.

As we know it has the second largest population in

the world after China, with 1.33 billion people (Chinahas about 100 million more) but by 2020-2025, it is

estimated that India will pass China because it has a

higher birthrate.

Its per capita income is US$1,469 or $3700 ppp. This

is around 140th out of 191 counties.


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China has per capita income of US$5.400, ppp of

$8,300 (about 85thout of 191 countries)

PPP is Purchasing Power Parity. It is an economic

technique used to determine the relative value ofcurrencies, estimating the amount of adjustment

needed on the exchange rate between currencies in

order for the exchange to be equivalent to each

currencys purchasing power.


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The per capita income in the USA is approximately

$48,000 (2011,IMF). It is 6th in terms of per capita

GDP but the first 5 are small countries, e.g.,

Singapore, etc. The economic growth rate in India in 2011 was 6.5%

and this is expected to be maintained in 2011/12

(the growth rate in China was over 9 % and for

2011/12 is expected to be approximately 7.5-8percent).


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The main areas of employment and proportions of

GDP in India are:

Agriculture , 53% employment, 15.7% of GDP (and

with a steadily declining proportion of GDP). Textiles, 2nd largest area of employment, 20 % of

GDP.

Services, quickest growing area, approximately 23%of workforce & over 50 % of GDP.

Retail, approximately 14 % of GDP.


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India is the 11th largest economy in the world (USA is

first, China, second).

Indian exports in 2011 were almost US$300 billion

and imports were US $450 billion. Chinas exports were almost US$1900 billion and

imports, US $ 1664 billion.

Main Exports were in petroleum products, textiles,chemicals, machinery, gold & gems.


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Main export locations were approximately 12 % to

both UAE & USA, & 9% to China.

Main imports were petroleum (India imports

approximately 70 % of its petroleum requirements),machinery, chemicals, minerals.

Main import locations were China, 12%, UAE, 7%,

Saudi Arabia, 6%, USA,6%, Australia, 4.5%.

India has a an FDI stock of US$ 36.5 billion.


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In terms of problems, the greatest problem in India is

seen to be corruption.

Transparency International, an independent body,

each year produces a corruption index. Countries are rated on an index with 10 being the

maximum (best) score and 1, being the worst.


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The countries with the highest or best scores,

between 9 &10, were the Scandinavian countries &

Singapore, those between 8 & 9, were the

Netherlands, Canada, Switzerland and Australia, USAwas between 7 & 8.

China was 3.6 (75th out of 182 countries) & India

3.1(95th ).

Scores under 5 are regarded as countries with

significant corruption.


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Another problem attributed to India is absenteeism

from work. Studies have found very high

absenteeism from places of work in India.

A further problem which was recently evidenced bysubstantial electricity blackouts in much of India may

be of electricity supply & generation which may

affect Indias GDP growth rate & FDI into India if it

continues to be a problem.


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Before we leave this economic section, I want to

briefly mention two other concepts.

One is Gross National Happiness (GNH) which was

first introduced into Bhutan by the King of Bhutan in1972. It is seen as an indicator of the well-being of

the people & as consistent with Buddist principles,

however, it is extremely difficult to measure with any

real idea of accuracy.


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The other is the Sufficiency Economy, introduced by

the King of Thailand, Bhumiopol Adulyadej.

The Sufficiency Economy is not a theory about how

the economy of a country works but rather as aguide to making decisions that will produce

outcomes that are sustainable , moderate, and

broad-based . This also follows Buddist principles of

the middle way or path.


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The concept is admirable but it is also difficult tomeasure, however, Thailand has is attempting tointroduce this concept into its national economy.

Now back to International Management.

The current legal and regulatory environmentpresents a myriad of challenges for MNCs.

Each country is unique and so MNCs have to deal

with a bureaucracy, complexity of laws, procedures,rules and regulations whenever they plan to enter acountry in which they do not currently operating.


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This does not only apply at the entry point but these

factors are changing rapidly and constantly in many

countries and so the MNC must keep abreast of any

changes that may occur. Different political leadersand/or parties may have significantly different

approaches to FDI and international companies

operating within their borders.


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Laws may also change or new laws introduced which

may affect or impact on the way they operate in

other countries. A good example of this is the

Foreign Corrupt Practices Act, 1997, introduced inthe USA, which prohibits American companies from

engaging in certain practices abroad which are

considered as corrupt by the U.S. government.

The EU has also now introduced similar rules .


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I have already mentioned various major political and

economic changes which may or will affect the

international operations of MNCs. Obviously

international managers must monitor such changesvery closely which may mean substantial strategy

changes become necessary . In the worst scenario a

government may nationalize various sectors of

private sector industry, with or withoutcompensation to the original owners.


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When Fidel Castro achieved political power in Cuba

,in 1960, he nationalized all foreign companies

operating in that country, without compensation.

More recently, Hugo Chevez, in 1999, nationalized allforeign banks operating in Venezuela, although the

question of compensation has not been finalized.


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In some cases, MNCs may decide themselves to

withdraw from operating in a particular country , for

various reasons.

For example, the Coca Cola company withdrew,wisely or unwisely, from the Indian market in 1997,

only to return later.


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Developing countries are garnering a larger share of world

trade, and developed countries are finding that they need to

rely on these developing countries as a source of imports as

well as export markets.

The technological environment is changing rapidly & this willcontinue. International finance has developed quickly in terms

of money transfers and exchange rate dealings (with the junk

bonds and the later sub-prime crisis & deriviatives this has not

always been to good effect and international authorities arenow moving to try to exercise control of a largely unregulated

international financial sector!)


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In other technological areas, such as

telecommunications, MNCs are moving toward a

more high-tech knowledge-based economy. But this

whole area is increasingly competitive and the pastor present success of MNCs does not necessarily

ensure future success in this highly and increasingly

competitive environment.


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In The Economic Times of India, on 29 November, 2012, there

was an article headed Global Perils for India Inc, with the by-line,

Indian businesses aspiring to go global need the art of dealing

with geopolitical and geoeconomic challenges. The article went on to say, Early this week when the

spokesperson of Indias Ministry of External Affairs issued a

statement disapproving the Maldives government decision to

terminate an agreement with the GMR Group for the upgradation

and management of the Male airport, a new milestone wascrossed in the evolution of Indian diplomacy.


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This is not the first time when domestic politics in

host countries has hurt Indian business. A couple of

years ago, Indias Durbur group faced a politically

motivated campaign against its products by anti-Indian elements in Nepal.

The article went on to describe similar situations and

described these types of problems in more detail and

that Indian needs to learn the art of dealing withsuch issues.

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