Assignment of International Business Management

Question-1-The world economy is globalizing at an accelerating pace. Discuss this statement and lists the benefits of globalization.Answer-Globalization: Globalization is a process where businesses are dealt in markets around the world, apart from the local and national markets. According to business terminologies, globalization defined as, “the worldwide trend of businesses expanding beyond their domestic boundaries’. It is advantageous for the economy of the countries because it promotes prosperity in the countries that embrace globalization.

Globalization describes the process by which regional economies, societies, and cultures have become integrated through a global network of political ideas through communication, transportation, and trade. The term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence. However, globalization is usually recognized as being driven by a combination of economic, technological, socio cultural, political, and biological factors. The term can also refer to the transnational circulation of ideas, languages, or popular culture through acculturation. An aspect of the world which has gone through the process can be said to be globalized.

Benefits of Globalization - Some of the benefits of globalization are as follows:

• Commerce as a percentage of gross world product has increased in 1986 from 15% to nearly 27% in recent years. 

• The stock of foreign direct investment resources has increased rapidly as a percentage of gross world products in the past twenty years. 

• For the purpose of commerce and pleasure, more and more people are crossing national borders. Globally, on average nations in 1950 witnessed just one overseas visitor for every 100 citizens. By the mid-1980s it increased to six and ever since the number has doubled to 12. 

• Worldwide telephone traffic has tripled since 1991. The number of mobile subscribers has elevated from almost zero to 1.8 billion indicating around 30% of the world population. Internet users will quickly touch 1 billion.

• Promotes foreign trade and liberalization of economies.

• Increases the living standards of people in several developing countries through the capital investments in developing countries by developed countries.

• Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies to be competitive by keeping the cost low with increased productivity.

• Promotes better education and jobs.

• Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices and culture.

• Provides better quality of products, customer services and standardized delivery model across countries.

• Give better access to finance for corporate and sovereign borrowers.

• Increase business travel, which in turn leads to flourishing travel and hospitality industry across the world.

• Increase sales as the availability of cutting edge technologies and production techniques decrease the cost of production.

• Provide several platforms for international dispute resolutions in business, which facilitates international trade.

Question-2- Compare the Adam Smith and David Ricardo theories of international trade with examples.Answer-

Comparative Advantage Theory-

The theory of comparative advantage is an economic theory about the potential gains from trade for individuals, firms, or nations that arise from differences in their factor endowments or technological progress. In an economic model, an agent has a comparative advantage over another in producing a particular good if he can produce that good at a lower relative opportunity or autarky price, i.e. at a lower relative marginal cost prior to trade. The closely related law or principle of comparative advantage holds that under free trade, an agent will produce more of and consume less of a good for which he has a comparative advantage.

David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries engage in international even when one country's workers are more efficient at producing every single good than workers in other countries. He demonstrated that if two countries capable of producing two commodities engage in the free market, then each country will increase its overall consumption by exporting the good for which it has a comparative advantage while importing the other good, provided that there exist differences in labor productivity between both countries. Widely regarded as one of the most powerful yet counter-intuitive insights in economics, Ricardo's theory implies that comparative advantage rather than absolute advantage is responsible for much of international trade.

Absolute Advantage Theory-

The main concept of absolute advantage is generally attributed to Smith for his 1776 publication An Inquiry into the Nature and Causes of the Wealth of Nations in which he countered mercantilist ideas. Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nation’s import and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage.[1] Smith also stated that the wealth of nations depends upon the goods and services available to their citizens, rather than their gold

reserves. While there are possible gains from trade with absolute advantage, the gains may not be mutually beneficial. Comparative advantage focuses on the range of possible mutually beneficial exchanges.

In economics, the principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more number of a good product or service than competitors, using the same amount of resources. Adam first described the principle of absolute advantage in the context of international, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productiveness, it is possible for a party to have no absolute advantage in anything;[1] in that case, according to the theory of absolute advantage, no trade will occur with the other party. It can be contrasted with the concept of comparative advantage which refers to the ability to produce specific goods at a lower opportunity cost.

Question-3-Regional integration is helping the countries in growing their trade. Discuss this statement. Describe in brief the various types of regional integrations.

Answer-

Regional integration is a process in which neighboring states enter into an agreement in order to upgrade cooperation through common institutions and rules. The objectives of the agreement could range from economic to political to environmental, although it has typically taken the form of apolitical economy initiative where commercial interests are the focus for achieving broader socio-political and security objectives, as defined by national governments. Regional integration has been organized either via supranational institutional structures or through intergovernmental decision-making, or a combination of both.

Past efforts at regional integration have often focused on removing barriers to free trade in the region, increasing the free movement of people, lab our, goods, and capital across national borders, reducing the possibility of regional armed conflict (for example, through Confidence and Security-Building Measures), and adopting cohesive regional stances on policy issues, such as the environment, climate change and migration.

Different types of regional integration are:  

1. Preferential trading agreement-  

Preferential trading agreement is a trade pact between countries. It is the weakest type of economic integration and aims to reduce taxes on few products to the countries who sign the pact. The tariffs are not abolished completely but are lower than the tariffs charged to countries not party to the agreement.

2. Free trade area-

Free Trade Area (FTA) is a type of trade bloc and can be considered as the second stage of economic integration. It comprises of all countries that are willing to or agree to reduce preferences, tariffs and quotas

on services and goods traded between them. Countries choose this kind of economic integration if their economical structures are similar. If countries compete among themselves, they are likely to choose customs union

3. Custom union- 

Custom Union is an agreement among two or more countries having already entered into a free trade agreement to further align their external tariff to help remove trade barriers. Custom union agreement among negotiating countries may encompass to reduce or eliminate customs duty on mutual trade. Under customs union agreement, countries generally impose a common external -tariff (CTF) on imports from non-member countries. Such common external tariff helps the member countries to reap the benefits of trade expansion, trade creation and trade diversification.

4. Common market- 

Common market is a group formed by countries within a geographical area to promote duty free trade and free movement of lab our and capital among its members. Common markets levy common external tariff on imports from non-member countries. 

A single market is a type of trade bloc, comprising a free trade area with common policies on product regulation, and freedom of movement of goods, capital, labor and services, which are known as the four factors of production.

A common market is the first step towards a single market. It may be initially limited to a FTA with moderate free movement of capital and services, but it is not capable of removing the other trade barriers.

5. Economic union- 

Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of a common market with a customs union. The countries that are part of an economic union have common policies on the freedom of movement of four factors of production, common product regulations and a common external trade policy. 

The purpose of an economic union is to promote closer cultural and political ties while increasing the economic efficiency between the member countries.

6. Political union- 

A political union is a type of country, which consists of smaller countries/nations. Here, the individual nations

share a common government and the union is acknowledged internationally as a single political entity. A political union can also be termed as a legislative union or state union.

Question-4-Write a short note on-

a) GATS (General agreement on trade in services)

b) ILO (International Lab our Organization)

Answer-

a) General agreement on trade in services-

The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization (WTO) that entered into force in January 1995 as a result of the Uruguay Round negotiations. The treaty was created to extend the multilateral trading system to service sector, in the same way the General Agreement on Tariffs and Trade (GATT) provides such a system for merchandise trade.

All members of the WTO are signatories to the GATS. The basic WTO principle of most favored nation (MFN) applies to GATS as well. However, upon accession, Members may introduce temporary exemptions to this rule.

While the overall goal of GATS is to remove barriers to trade, members are free to choose which sectors are to be progressively "liberalized", i.e. marketwise and privatized which mode of supply would apply to a particular sector, and to what extent liberalization will occur over a given period of time. Members' commitments are governed by a "ratchet effect", meaning that commitments are one-way and are not to be wound back once entered into. The reason for this rule is to create a stable trading climate.

b) International lab our Organization-

The International Lab our Organization (ILO) is a United Nations agency dealing with lab our issues, particularly international lab our standards, social protection, and work opportunities for all 185 of the 193 UN member states are members of the ILO.

In 1969, the organization received the Nobel Peace Prize for improving peace among classes, pursuing justice for workers, and providing technical assistance to other developing nations.

The ILO registers complaints against entities that are violating international rules; however, it does not impose sanctions on governments.

The ILO aims to ensure that it serves the needs of working women and men by bringing together governments, employers and workers to set lab our standards develop policies and devise programmes.

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Question-5-What is the difference between domestic and international accounting and how will you measure this difference.

Answer-Different countries whether domestic or international have different accounting standards. A common belief is that these differences reduce the quality and importance of accounting information. Accounting standards determine the financial reporting quality and provide separately verified information about an organization’s financial performance to investors and creditors.

Though theseences in accounting methods, domestic businesses are not affected.The accounting system of a domestic organization must meet the specialized and regulatory standards of his home country but an MNC and its subsidiaries must meet differing accounting and auditing standards of all the countries in which it operates. This needs to a need for comparability between businesses in the group. In order to successfully manage and organize their operations, local manager require accounting information which should be prepared according to the local accounting concepts and denomination in the local currency. Yet for financial controllers to measure the foreign subsidiary performance and worth the subsidiary accounts must be translated into organizations home currency. This translation is done using accounting concepts and measures, which are detailed by the organization. Investors worldwide look for the highest possible returns on their capital in order to interpret the trackrecord, though they use a currency and the accounting system of their own. The organization also has to pay taxes to the countries where it does business, based on the accounting statements prepared in these countries,

Question-6- Discuss the various payment terms in international trade. Which is safest method and why.

Answer-

The mode of payments-

1-Cash-in-Advance-

With cash-in-advance payment terms, the exporter can avoid credit risk because payment is received before the ownership of the goods is transferred. Wire transfers and credit cards are the most commonly used cash-in-advance options available to exporters. However, requiring payment in advance is the least attractive option for the buyer, because it creates cash-flow problems. Foreign buyers are also concerned that the goods may not be sent if payment is made in advance. Thus, exporters who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms.

2-Letters of Credit-

Letters of credit (LCs) are one of the most secure instruments available to international traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the LC have been met, as verified through the presentation of all required documents. The buyer pays his or her bank to render this service. An LC is useful when reliable credit information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the creditworthiness

of the buyer’s foreign bank. An LC also protects the buyer because no payment obligation arises until the goods have been shipped or delivered as promised.

3-Documentary Collections-

A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter’s bank), which sends documents to a collecting bank (importer’s bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. D/Cs involve using a draft that requires the importer to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The draft gives instructions that specify the documents enquired for the transfer of title to the goods. Although banks do act as facilitators for their clients, D/Cs offers no verification process and limited recourse in the event of non-payment. Drafts are generally less expensive than LCs.

4-Open Account-

An open account transaction is a sale where the goods are shipped and delivered before payment is due, which is usually in 30 to 90 days. Obviously, this option is the most advantageous option to the importer in terms of cash flow and cost, but it is consequently the highest risk option for an exporter. Because of intense competition in export markets, foreign buyers often press exporters for open account terms since the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may lose a sale to their competitors. However, the exporter can offer competitive open account terms while substantially mitigating the risk of non-payment by using of one or more of the appropriate trade finance techniques, such as export credit insurance.