ib questions and answers1

7/30/2019 IB Questions and Answers1

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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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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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ADR & GDR

HOW DO WE RAISE FUNDS FROM INTERNATIONAL MARKET?

WHAT IS AN ADR / GDR?

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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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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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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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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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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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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

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