International Business Question Bank

1. Describe Raymond Vernon’s Product Life Cycle theory of international trade and explain why an innovator and exporter has to turn importer at later stage of PLC.

In 1966, Raymond Vernon published a model that described internationalisation patterns of organisations. He looked at how U.S. companies developed into multinational corporations (MNCs) at a time when these firms dominated global trade, and per capita income in the U.S. was, by far, the highest of all the developed countries.The IPLC international trade cycle consists of three stages:

1. NEW PRODUCTThe IPLC begins when a company in a developed country wants to exploit a technological breakthrough by launching a new, innovative product on its home market. Such a market is more likely to start in a developed nation because more high-income consumers are able to buy and are willing to experiment with new, expensive products (low price elasticity). Furthermore, easier access to capital markets exists to fund new product development. Production is also more likely to start locally in order to minimize risk and uncertainty: “a location in which communication between the markets and the executives directly concerned with the new product is swift and easy, and in which a wide variety of potential types of input that might be needed by the production units are easily come by”.

Export to other industrial countries may occur at the end of this stage that allows the innovator to increase revenue and to increase the downward descent of the product’s experience curve. Other advanced nations have consumers with similar desires and incomes making exporting the easiest first step in an internationalisation effort. Competition comes from a few local or domestic players that produce their own unique product variations.

2. MATURING PRODUCTExports to markets in advanced countries further increase through time making it economically possible and sometimes politically necessary to start local production. The product’s design and production process becomes increasingly stable. Foreign direct investments (FDI) in production plants drive down unit cost because labour cost and transportation cost decrease. Offshore production facilities are meant to serve local markets that substitute exports from the organisation’s home market. Production still requires high-skilled, high paid employees. Competition from local firms jump start in these non-domestic advanced markets. Export orders will begin to come from countries with lower incomes.

3. STANDARDISED PRODUCTDuring this phase, the principal markets becomes saturated. The innovator's original comparative advantage based on functional benefits has eroded. The firm begins to focus on the reduction of process cost rather than the addition of new product features. As a result, the product and its production process become increasingly standardised. This enables further economies of scale and increases the mobility of manufacturing operations. Labour can start to be replaced by capital. “If economies of scale are being fully exploited, the principal difference between any two locations is likely to be labour costs”. To counter price competition and trade barriers or simply to meet local demand, production facilities will relocate to countries with lower incomes. As previously in advanced nations, local competitors will get access to first hand information and can start to copy and sell the product.

The demand of the original product in the domestic country dwindles from the arrival of new technologies, and other established markets will have become increasingly price-sensitive. Whatever market is left becomes shared between competitors who are predominately foreign. A MNC will internally maximize “offshore” production to low-wage countries since it can move capital and technology around, but not labour. As a result, the domestic market will have to import relatively capital intensive products from low income countries. The machines that operate these plants often remain in the country where the technology was first invented.

2. Define Globalisation and describe the stages in the evolution of Global companies. Explain with examples, the driving and restraining forces of globalization.

3. State the characteristic features of Transnational Economy, as explained by Peter Drucker.

GlobalisationThe IMF defines globalisation as “the growing economic interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology.”

Globalisation of World Economy The world economy has been emerging as global or transnational economy. A global or transnational economy is one which transcends the national borders unhindered by artificial restrictions like Government restrictions on trade and factor movements.

The Transnational economy is different from the international economy. The international economy is characterised by the existence of different national economies the economic relations between them being regulated by the national governments. The transnational economy is a border less world economy characterised by free flow of trade and factors of production across national borders.

According to Drucker, the transnational economy is characterised by, inter alia the following features:

1. The transnational economy is shaped mainly by money flows rather than by trade in goods and services. These money flows have their own dynamics. The monetary and fiscal policies of sovereign governments increasingly react to events in the international money and capital markets rather than actively shape them.

2. In the transnational economy management has emerged as the decisive factor of production and the traditional factors of production, land and labour, have increasingly become secondary. Money and capital markets too have been increasingly becoming transnational and universally obtainable.

3. In the transnational economy the goal is market maximisation and not profit maximisation.

4. Trade, which increasingly follows investment, is becoming a function of investment.

5. The decision making power is shifting from the national state to the region. (e.g., European Union, NAFTA, etc.)

6. There is a genuine – and almost autonomous – world economy of money, credit and investment flows. It is organised by information which no longer knows national boundaries.

7. Finally, there is a growing pervasiveness of the transnational corporations which see the entire world as a single market for production and marketing of goods and services.

4. Describe various market entry strategies in International Business with examples.

Rs. 15 Notes: Q1.In addition to that from Sir’s ppt:• Globalization, Liberalization and Privatization facilitates economic progress through various business related strategies known as FOREIGN MARKET ENTRY STRATEGIES. They may be :

1. Licensing

2. Franchising

3. Contract Manufacturing

4. Management Contract

5. Assembly Operations

6. Fully Owned Manufacturing Facilities

7. Joint Ventures

8. Counter Trade

9. Mergers and Acquisitions

10. Strategic Alliance

11. Third Country Location

LICENSING: (Add Notes rs ka answer)• Involves Minimal Commitment of Resources

• Under International Licensing a firm in one country ( the licensor ) permits a firm in another country ( the licensee ) to use its INTELLECTUAL PROPERTY – such as patents, trade marks, copy rights, technology, technical know-how, marketing skill or some other specific skill.

• THE MONETARY BENEFIT : Licensor gets Royalty or Fees which the Licensee Pays. However this is regulated by Government in various countries.

FRANCHISING (Add 15 rs Notes ka answer)• Involves minimum commitment of resources.

• Franchising – A form of licensing in which a parent company ( the franchiser ) grants another independent entity (the franchisee) the right to do business in a prescribed manner.

• This right can take the form of selling the franchisor’s products, using its name, production, and marketing techniques, or general business approach.

CONTRACT MANUFACTURING• A company doing International Business contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibility of marketing the product or / and materials management (i.e) NON FUNDING ( sourcing approvals ), TQM - quality approvals, inspections, process related techniques, defining the machineries and equipments required, etc.

ADVANTAGES- No resource commitment for setting up production facilities

- Free from risk of investing in foreign countries

- Idle production capacity in a foreign country can be utilised immediatley.

- Cost of product becomes lower when manufactured through contract manufacturing system.

- Exiting becomes easy if success is not achieved.

NOTE: This may not be possible in the case of High Tech Products and Cases where technical secrets are involved.

MANAGEMENT CONTRACTING• The firm providing management know how may not have any equity stake in the enterprise being managed.

• The supplier brings together a package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership.

Tata Tea in Sri Lanka – Managing no of plantations due to their expertiseTURNKEY CONTRACTS• Common in IB related to supply, erection and commissioning of plants, as in the case of oil refineries, steel plants, cement, fertilizer plants, railway projects, construction projects, etc.

• A turnkey operation is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyer’s personnel, who will be trained by the seller.

• However a Turnkey Contractor may subcontract different phases/parts of the project.

Fully Owned Manufacturing Facilities• Companies with long term and substantial interest in the foreign market normally establish fully owned manufacturing facilities there.

• For example – Coke in India, Pepsi in India entered India initially by supplying the secret ingredients to the bottling plants. Later they bought over the bottling plants.

• Benefits – Population and Market in India and SAARC Countries, Raw Materials like Sugar, Water, Labor, etc. at lower costs and accessibility.

• Higher Profits and Margins with Repatriation Benefits.

• LPG Process facilitating the economic and strategic IB decision through FDI process.

Mahindra and Mahindra in USA – Tractor DivisionASSEMBLY OPERATIONS• Economies of Scale of production

• Labor Intensive Production activities

• Parts and Components

• Cost advantage in developing countries/ LDC’s as the Import Duties are also lower on the parts and components as compared to finished products

• Benefit of opposite countries domestic market and advantage of export benefits also.

• Favorable attitude from a Government for creating employment opportunities and earning foreign exchange through investments and exports.

JOINT VENTURES• A Common IB Strategy through -

1. Sharing of ownership and management in an enterprise.

2. Licensing/ Franchising agreements.

3. Contract Manufacturing.

4. Management Contracts.

(example ) Pepsi’s Indian Joint Venture involved Voltas and Punjab Agro Industries Corporation- TOYOTA with Kirloskars.

- Maruti Suzuki ( Government – PSU )

- Tata Tea with TETLEY for overseas markets

NOTE- Many foreign companies entered the communist, socialist and other developing countries by JOINT VENTURINGCOUNTER TRADE• PEPSICO entered USSR by employing this strategy – Receive Rubles payment for exports ( sell concentrates ) and buy vodka, wine, etc and pay in Rubles.

• India and USSR since many years – Import of Defence related items and export of various items in Rupee Terms.

• A form of International Trade in which certain export and import transactions are directly linked with each other and in which import of goods are paid for by export of goods, instead of money payments.

MERGERS AND ACQUISITIONS• ( M & A’S) are very important market entry strategy and growth strategy.

• Mittal – Arcelor or Tata – Corus, etc.

• Vijay Mallya’s UB Group acquired a small British Co – Wiltshire Brewery. The attraction of Wiltshire for UB was that the former offered a ready made chain of 300 Pubs through out Britain which could be used for the Marketing of UB’s Brands of Beer like Kingfisher, Kalyani, etc. The UB Group has also gone in for such acquisitions in USA and S. Africa

STRATEGIC ALLIANCE• WIDE SCOPE

• IMPORTANT FOR TECHNOLOGY ACQUISITION AND OVERSEAS MARKETING.

• GOOD OPPORTURINTIES FOR INDIAN FIRMS TO ENTER IB.

EXAMPLE – Airlines, Hotels, Hospitals, Tourism Industry, Banking and Insurance Industry, Film Industry etcTHIRD COUNTRY LOCATION• Example – India and Pakistan

• It has been the practice earlier to Import or Export through / Via Arab Countries since the relationship has been bad between both the Countries.

• Israel and Arab Countries

• OR In the past India before going in for LPG could not export directly to many countries – ADVANCED AND DEVELOPED ( except by Foreign MNC’s in India ) and Indian Business Houses used to route the Products through Third Countries with those countries packaging and labeling.

TOYOTAS GLOBALISATION STRATEGIES• Toyota is a car company that challenges itself in a way that makes the world shudder, Toyota announces it is shooting for 15% of the global market and 50% cost cuts, and everyone goes ‘Ooof!’ It is like getting hit in the solar plexus.”

• If people started living at the South Pole, we would want to open a dealership there.”

• Reaching No 2 slot was a major achievement for toyota, which had begun as a spinning and weaving company during 1918. Ford was reportedly plagued by high labour costs, quality-control problems, lack of new designs and innovations, and a weak economy during the early 21st century, which made it vulnerable to competition.

• Toyota aided by its new product offerings and strong financial muscle had successfully used this scenario to surpass Ford and affect a dramatic increase in its sales figures

• In January 2004, leading global automobile co and Japan’s number one automaker, Toyota Motor Corporation (Toyota), replaced Ford Motors ( Ford), as the world’s second largest automobile manufacturer

• Ford had been in that spot for over seven decades

MARKET ENTRY STRATEGIES OF STARBUCKS• Starbucks is one of the leading international food retailing chains with US $ 4.1 bn revenues for the fiscal year 2002-2003

• It has 7225 outlets the world over

• With saturation in the North American markets, starbucks started expanding internationally. It decided to enter the Asia Pacific rim markets first

• Growing consumerism in the Asia Pacific countries and eagerness among the younger generation to imitate western lifestyles made these countries attractive markets for starbucks

• Starbucks decided to enter the international markets using a three-pronged strategy-joint ventures, licensing and wholly owned subsidiaries. Prior to entering a foreign market, starbucks focused on studying the market conditions for its products in the country. It then decided on the local partner for its business

• Initially, starbucks test marketed with a few stores that were opened in trendy places and the company’s experienced managers from Seattle handled the operations

• After successful test marketing, local baristas(brew masters) were given training for 13 weeks in Seattle. Starbucks did not compromise on its basic principles. It ensued similar coffee beverage line-ups and ‘No Smoking’ rules in all its stores across globe

5. Define ‘Multinational Corporation’ (MNC). Explain the merits and demerits of Multinational Corporations. Critically examine the role of MNC’s in the international economy.

- According to International Labor Organisation, MNC as a corporation that has its management headquarters in one country, known as the home country, and operates in several other countries, known as host countries.

- Organization doing business in more than one country- MNC are corporations that engage in various activities like exporting, importing , manufacturing etc in different countries- MNCs have worldwide involvement and a global perspective in their management and decision making- Few characteristics of MNCs:o Invest considerable proportion of their assets internationallyoConsider opportunities throughout the world though they do business only in a few countriesoMNCs operate in more than 1 country but operate like the domestic company of the country concerned

Merits and Demerits

The merits and demerits of the MNCs can best be understood in context of the advantages and the disadvantages to the home country and the host country

Merits:

o 1) In context of the host country:

- In the investment level, employment level and income level of the host country consequent upon the operation of the MNC there - Growth in the ancillary and the service industry of the host country leads to industrial and economic development - Host country(HC) gets latest technology from other countries due to MNCs - HC gets latest and sophisticated management techniques from the managerial practices of MNCs - MNC enhance competition in the host country - HC can make use of the R&D outcomes of the MNC - HC can reduce the imports and increase the exports due to the goods produced by MNC in that HCo o 2) In context of the Home country - MNC create the opportunity for marketing the products produced in the home country throughout the world - In the long run , contributes for favorable BoP of the home country - MNC creates employment opportunities for country people, both at home and abroad

Demerits:

1) In context of host country:- MNC may kill the domestic industry by monopolizing the host country’s market- MNC may adopt ethnocentric approach in staffing, thus causing unemployment in the host country- May use the natural resources of the host country indiscriminately and cause fast depletion of resources- Payments of Dividend and Royalty: A large sum of money flows to the foreign countries in terms of payments towards profits, dividends and royalty- Distortion of Economic Structure: Suppress domestic entrepreneurship, cause extension of oligopolistic practices, exploitation of customers etc- Political Interference: MNCs are believed to influence the decision making process of the host country’s governments through their financial and other resources strengths. MNC may suddenly withdraw their capital from the HC thus destablizing the HC.

2) In context of home country:- transfer capital from home country to the various host countries causing serious BoP situations- may not create employment opportunities to the people of home country if it adopts a geocentric or polycentric approach- MNCs may neglect the home country’s industrial and economic development as it invests in more profitable host countries- may bring culture from foreign countries which is detrimental to the interest of the home country

Criticism of the role of MNCs in international economy:

MNCs have become a very powerful driving force in the world’s economy as can be seen from the merits of the MNC in both home and host countries. However criticisms are that multinational corporations have, in recent times, leveraged their economic power to position themselves as primary agents of the kind of `economic development' that inevitably results in gross social and political inequities, environmental disasters and loss of cultural diversity. (Expand on this)

6. Explain the forces influencing competition in an international business?

International business is a term used to collectively describe all commercial transactions (private and governmental, sales, investments, logistics, and transportation) that take place between two or more regions, countries and nations beyond their political boundary . International business provides major advantage in price, marketing, innovation, and many other factors to the companies involved in international business.

The various competitive forces are as follows:1. Number and comparative capabilities of competitors2. Competitive differences by country3. Local taxesThe other factors influencing competition in international business are as follows: - Technology is expanding, especially in transportation and communications.- Governments are removing international business restrictions.- Institutions provide services to ease the conduct of international business.- Consumers know about and want foreign goods and services.- Political relationships have improved among some major economic powers. - Countries cooperate more on transnational issues.- Cross-national cooperation and agreements.- Increased socioeconomic welfare sought by various countries. This has led to opening up of their economies, thus further leading to an increase in International Business and the competition therein.- General increase in the standards of living - Reduced risks – Nowadays governments have turned favorable towards the MNCs.

(these are just the bullet points. Fill gas inside)

7. A firm which plans to go international has to make a series of strategic decisions. Elaborate with examples.

Ans: Strategic decisions to be taken:-1) Country selection: From Sir’s ppt, “Country Selection and Evaluation”, slides 1 to 72) Assess costs, benefits and risks:-

Costs: Direct and opportunity costsBenefits: a. High sales and profitsb. Lower acquisition and manufacturing costsc. Competitive advantaged. Access to new technologye. Access to cheap labourf. Opportunity to achieve synergyRisks:a. Exchange rate fluctuationsb. Operating complexityc. Direct financial losses due to misassessment of market potentiald. Government seizure of property

8. Explain why the need to export is crucial and describe the institutional framework to promote exports in India.

Part 1: Answer in Rs. 15/- Xerox: Q5 -> Ricardian model -> Point no. 10 (Gains from trade)Part 2: Institutional framework to promote exports in India: To be done from Sir’s ppt, “Government Influence on Trade”, slides 4 to 8, in combination with hand-written notes

9. What role Business Ethics and CSR play in globalization? How will it help Organisations in sustainable Business?

Dacunha has covered it. It’s in d PPT n Vrushali’s notes

10. Why is FDI important for host and home country? Discuss the FDI environment in India in last 20 years. Also suggest how to increase inward FDI.

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:

oIt 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.

oFDI 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.

oFDI allows companies to avoid foreign government pressure for local production.

oIt allows making the move from domestic export sales to a locally based national sales office.

oCapability to increase total production capacity.

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 company’s 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:

oAssessment of internal resources

oCompetitiveness

oMarket Analysis

oMarket expectations

Importance:

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. 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 to accomplish 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 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 increase the amount of capital in

the host country. Even with skill levels and technology constant, this will either raise labor 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

destination of 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.

Types:

1) Outward FDI: An outward-bound FDI is backed by the government against all types of

associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms

2) Inward FDI: Here, investment of foreign capital occurs in local resources.

3) Vertical FDI: It takes place when a multinational corporation owns some shares of a foreign

enterprise, which supplies input for it or uses the output produced by the MNC.

4) Horizontal FDI: It happens when a multinational company carries out a similar business

operation in different nations.

FDI Trend, Sector Specific Measures in India :

Foreign Direct Investment equity inflow in India increased to US $ 27.31 billion in the financial year 2008-09 from US $ 5.5 billion in fiscal 2005-06. Further, the FDI equity inflows in 2007-08 were US $ 24.58 billion and increased to US $ 27.31 billion in 2008-09, despite the economic slowdown, showing a growth of 11 percent over the previous financial year. No target has been fixed for the current financial year. However, for the first two months of the current fiscal FDI in The Indian government has put in place a liberal and investor-friendly policy on FDI under which FDI up to 100% is permitted on the automatic route in most sectors/ activities, including infrastructure and Research and Development (R&D). The UNCTAD World Investment Reports (WIR) 2007 & 2008, in their analysis of the global trends and sustained growth of Foreign Direct Investment (FDI) inflows, have reported India as the second most attractive location for FDI for 2007- 2009. India has retained the second place in A. T. Kearney’s 2007 Foreign Direct Investment Confidence Index, a position it has held since 2005. Government has also announced a slew of measures to accelerate the demand in the economy which would enable

India to continue as an attractive investment destination. Under the liberalized economic environment, investment decisions of investors are based on the macro-economic policy framework, investment climate in the state, investment policies of the transnational corporations and other commercial considerations.flows reportedly stood at US $ 4.434 billion. Various assessments/ studies have shown that India continues to be one of the most attractive destinations for investments worldwide in the period 2009-2011.

11. Discuss the contemporary theories of International trade with suitable examples. How can the Porter’s Diamond model of competitive advantage be used to assess competitive advantage for India for Agro based products?

Ans.

International trade is the exchange of capital, goods, and services across international borders or territories.[1] In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries.

Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders.

International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to

border delays and costs associated with country differences such as language, the legal system or culture.

Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production.

Instead of importing a factor of production, a country can import goods that make intensive use of that factor of production and thus embody it. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor, the United States imports goods that were produced with Chinese labor. One report in 2010 suggested that international trade was increased when a country hosted a network of immigrants, but the trade effect was weakened when the immigrants became assimilated into their new country.[2]

International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.

Contemporary Theories not getting exactly on net but this PPT may help:

http://www.slideshare.net/shanmugapriya/international-trade-theories-presentation

Good Article on Porter Dimond Model but not allowed to copy: http://www.quickmba.com/strategy/global/diamond/

Porter's diamond model suggests that there are inherent reasons why some nations, and industries within nations, are more competitive than others on a global scale. The argument is that the national home base of an organization provides organizations with specific factors, which will potentially create competitive advantages on a global scale.

Porter's model includes 4 determinants of national advantage, which are shortly described below:

FactorConditionsFactor conditions include those factors that can be exploited by companies in a given nation. Factor conditions can be seen as advantageous factors found within a country that are subsequently build upon by companies to more advanced factors of competition. Factors not normally seen as advantageous, such as workforce shortage, can also be seen as a factor potentially strengthening competitiveness, because this factor may heighten companies' focus on automation and zero defects.

Some examples of factor conditions:

Highly skilled workforce Linguistic abilities of workforce Rich amount of raw materials Workforce shortage

Demand conditions If the local market for a product is larger and more demanding at home than in foreign markets, local firms potentially put more emphasis on improvements than foreign companies. This will potentially increase the global competitiveness of local exporting companies. A more demanding home market can thus be seen as a driver of growth, innovation and quality improvements. For instance, Japanese consumers have historically been more demanding of electrical and electronic equipment than western consumers. This has partly founded the success of Japanese manufacturers within this sector.

Related and Supporting Industries When local supporting industries and suppliers are competitive, home country companies will potentially get more cost efficient and receive more innovative parts and products. This will potentially lead to greater competitiveness for national firms. For instance, the Italian shoe industry benefits from a highly competent pool of related businesses and industries, which has strengthened the competitiveness of the Italian shoe industry world-wide.

Firm Strategy, Structure, and Rivalry The structure and management systems of firms in different countries can potentially affect competitiveness. German firms are oftentimes very hierarchical, which has resulted in advantages within industries such as engineering. In comparison, Danish firms are oftentimes more flat and organic, which leads to advantages within industries such as biochemistry and design. Likewise, if rivalry in the domestic market is very fierce, companies may build up capabilities that can act as competitive advantages on a global scale. Home markets with less rivalry may therefore be counterproductive, and act as a barrier in the generating of global competitive advantages such as innovation and development.

By using Porter's diamond, business leaders may analyze which competitive factors may reside in their company's home country, and which of these factors may be exploited to gain global competitive advantages. Business leaders can also use the Porter's diamond model during a phase of internationalization, in which leaders may use the model to analyze whether or not the home market factors support the process of internationalization, and whether or not the conditions found in the home country are able to create competitive advantages on a global scale.

Finally, business leaders may use this model to asses in which counties to invest, and to assess which countries are most likely to be able to sustain growth and development.

12. “WTO aims at removing non tariff barriers and reducing tariff barriers.” If so, critically evaluate achievements and problem areas which WTO has to encounter in order to succeed in the above objective.

Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but are not in the usual form of a tariff. Some common examples of NTB's are anti-dumping measures andcountervailing duties, which, although they are called "non-tariff" barriers, have the effect of tariffs once they are enacted.Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use. Some non-tariff trade barriers are expressly permitted in very limited circumstances, when they are deemed necessary to protect health, safety, or sanitation, or to protect depletable natural resources. In other forms, they are criticized as a means to evade free traderules such as those of the World Trade Organization (WTO), the European Union (EU), or North American Free Trade Agreement (NAFTA) that restrict the use of tariffs.Some of non-tariff barriers are not directly related to foreign economic regulations, but nevertheless they have a significant impact on foreign-economic activity and foreign trade between countries.Trade between countries is referred to trade in goods, services and factors of production. Non-tariff barriers to trade include import quotas, special licenses, unreasonable standards for the quality of goods, bureaucratic delays at customs, export restrictions, limiting the activities of state trading, export subsidies, countervailing duties, technical barriers to trade, sanitary and phyto-sanitary measures, rules of origin, etc. Sometimes in this list they include macroeconomic measures affecting trade.Types of Non-Tariff BarriersThere are several different variants of division of non-tariff barriers. Some scholars divide between internal taxes, administrative barriers, health and sanitary regulations and government procurement policies. Others divide non-tariff barriers into more categories such as specific limitations on trade, customs and administrative entry procedures, standards, government participation in trade, charges on import, and other categories. We choose traditional classification of non-tariff barriers, according to which they are divided into 3 principal categories.The first category includes methods to directly import restrictions for protection of certain sectors of national industries: licensing and allocation of import quotas, antidumping and countervailing duties, import deposits, so-called voluntary export restraints, countervailing duties, the system of minimum import prices, etc. Under second category follow methods that are not directly aimed at restricting foreign trade and more related to the administrative bureaucracy, whose actions, however, restrict trade, for example: customs procedures, technical standards and norms, sanitary and veterinary standards, requirements for labeling and packaging, bottling, etc. The third category consists of methods that are not directly aimed at restricting the import or promoting the export, but the effects of which often lead to this result.The non-tariff barriers can include wide variety of restrictions to trade. Here are some example of the “popular” NTBs.LicensesThe most common instruments of direct regulation of imports (and sometimes export) are licenses and quotas. Almost all industrialized countries apply these non-tariff methods. The license system requires that a state (through specially authorized office) issues permits for foreign trade transactions of import and export commodities included in the lists of licensed merchandises. Product licensing can take many forms and procedures. The main types of licenses are general license that permits unrestricted importation or exportation of goods included in the lists for a certain period of time; and one-time license for a certain product importer (exporter) to import (or export). One-time license indicates a quantity of goods, its cost, its country of origin (or destination), and in some cases also customs point through which import (or export) of goods should be carried out. The use of licensing systems as an instrument for foreign trade regulation is based on a number of international level standards agreements. In particular, these agreements include some provisions of the General Agreement on Tariffs and Trade and the Agreement on Import Licensing Procedures, concluded under the GATT (GATT).Quotas

Licensing of foreign trade is closely related to quantitative restrictions – quotas - on imports and exports of certain goods. A quota is a limitation in value or in physical terms, imposed on import and export of certain goods for a certain period of time. This category includes global quotas in respect to specific countries, seasonal quotas, and so-called "voluntary" export restraints. Quantitative controls on foreign trade transactions carried out through one-time license.Quantitative restriction on imports and exports is a direct administrative form of government regulation of foreign trade. Licenses and quotas limit the independence of enterprises with a regard to entering foreign markets, narrowing the range of countries, which may be entered into transaction for certain commodities, regulate the number and range of goods permitted for import and export. However, the system of licensing and quota imports and exports, establishing firm control over foreign trade in certain goods, in many cases turns out to be more flexible and effective than economic instruments of foreign trade regulation. This can be explained by the fact, that licensing and quota systems are an important instrument of trade regulation of the vast majority of the world.Agreement on a "voluntary" export restraintIn the past decade, a widespread practice of concluding agreements on the "voluntary" export restrictions and the establishment of import minimum prices imposed by leading Western nations upon weaker in economical or political sense exporters. The specifics of these types of restrictions is the establishment of unconventional techniques when the trade barriers of importing country, are introduced at the border of the exporting and not importing country. Thus, the agreement on "voluntary" export restraints is imposed on the exporter under the threat of sanctions to limit the export of certain goods in the importing country. Similarly, the establishment of minimum import prices should be strictly observed by the exporting firms in contracts with the importers of the country that has set such prices. In the case of reduction of export prices below the minimum level, the importing country imposes anti-dumping duty which could lead to withdrawal from the market. “Voluntary" export agreements affect trade in textiles, footwear, dairy products, consumer electronics, cars, machine tools, etc.Problems arise when the quotas are distributed between countries, because it is necessary to ensure that products from one country are not diverted in violation of quotas set out in second country. Import quotas are not necessarily designed to protect domestic producers. For example, Japan, maintains quotas on many agricultural products it does not produce. Quotas on imports is a leverage when negotiating the sales of Japanese exports, as well as avoiding excessive dependence on any other country in respect of necessary food, supplies of which may decrease in case of bad weather or political conditions.Export quotas can be set in order to provide domestic consumers with sufficient stocks of goods at low prices, to prevent the depletion of natural resources, as well as to increase export prices by restricting supply to foreign markets. Such restrictions (through agreements on various types of goods) allow producing countries to use quotas for such commodities as coffee and oil; as the result, prices for these products increased in importing countries.

EmbargoEmbargo is a specific type of quotas prohibiting the trade. As well as quotas, embargoes may be imposed on imports or exports of particular goods, regardless of destination, in respect of certain goods supplied to specific countries, or in respect of all goods shipped to certain countries. Although the embargo is usually introduced for political purposes, the consequences, in essence, could be economic.StandardsStandards take a special place among non-tariff barriers. Countries usually impose standards on classification, labeling and testing of products in order to be able to sell domestic products, but also to

block sales of products of foreign manufacture. These standards are sometimes entered under the pretext of protecting the safety and health of local populations.Administrative and bureaucratic delays at the entranceAmong the methods of non-tariff regulation should be mentioned administrative and bureaucratic delays at the entrance which increase uncertainty and the cost of maintaining inventory.Import depositsAnother example of foreign trade regulations is import deposits. Import deposits is a form of deposit, which the importer must pay the bank for a definite period of time (non-interest bearing deposit) in an amount equal to all or part of the cost of imported goods.At the national level, administrative regulation of capital movements is carried out mainly within a framework of bilateral agreements, which include a clear definition of the legal regime, the procedure for the admission of investments and investors. It is determined by mode (fair and equitable, national, most-favored-nation), order of nationalization and compensation, transfer profits and capital repatriation and dispute resolution.Foreign exchange restrictions and foreign exchange controlsForeign exchange restrictions and foreign exchange controls occupy a special place among the non-tariff regulatory instruments of foreign economic activity. Foreign exchange restrictions constitute the regulation of transactions of residents and nonresidents with currency and other currency values. Also an important part of the mechanism of control of foreign economic activity is the establishment of the national currency against foreign currencies.The transition from tariffs to non-tariff barriersOne of the reasons why industrialized countries have moved from tariffs to NTBs is the fact that developed countries have sources of income other than tariffs. Historically, in the formation of nation-states, governments had to get funding. They received it through the introduction of tariffs. This explains the fact that most developing countries still rely on tariffs as a way to finance their spending. Developed countries can afford not to depend on tariffs, at the same time developing NTBs as a possible way of international trade regulation. The second reason for the transition to NTBs is that these tariffs can be used to support weak industries or compensation of industries, which have been affected negatively by the reduction of tariffs. The third reason for the popularity of NTBs is the ability of interest groups to influence the process in the absence of opportunities to obtain government support for the tariffs.

Non-tariff barriers todayWith the exception of export subsidies and quotas, NTBs are most similar to the tariffs. Tariffs for goods production were reduced during the eight rounds of negotiations in the WTO and the General Agreement on Tariffs and Trade (GATT). After lowering of tariffs, the principle of protectionism demanded the introduction of new NTBs such as technical barriers to trade (TBT). According to statements made at United Nations Conference on Trade and Development (UNCTAD, 2005), the use of NTBs, based on the amount and control of price levels has decreased significantly from 45% in 1994 to 15% in 2004, while use of other NTBs increased from 55% in 1994 to 85% in 2004.Increasing consumer demand for safe and environment friendly products also have had their impact on increasing popularity of TBT. Many NTBs are governed by WTO agreements, which originated in the Uruguay Round (the TBT Agreement, SPS Measures Agreement, the Agreement on Textiles and Clothing), as well as GATT articles. NTBs in the field of services have become as important as in the field of usual trade.Most of the NTB can be defined as protectionist measures, unless they are related to difficulties in the market, such as externalities and information asymmetries information asymmetries between consumers and producers of goods. An example of this is safety standards and labeling requirements.The need to protect sensitive to import industries, as well as a wide range of trade restrictions, available to the governments of industrialized countries, forcing them to resort to use the NTB, and putting

serious obstacles to international trade and world economic growth. Thus, NTBs can be referred as a “new” of protection which has replaced tariffs as an “old” form of protection.

13. State general agreements incorporated in WTO and discuss their impact on Indian industry and trade with special focus on sectors.

Please refer to Attached PDF

14. Discuss any two of the international issues:-

A. Intellectual property rights

IPR are legal rights granted by governments to encourage innovation and creative output by ensuring that creators reap the benefits of their inventions or works and they may take the form of patents, trade secrets, copyrights, trademarks, or geographical indicationsThe importance of intellectual property in India is well established at all levels- statutory, administrative and judicial. India ratified the agreement establishing the World Trade Organisation (WTO). This Agreement, inter-alia, contains an Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) which came into force from 1st January 1995. It lays down minimum standards for protection and enforcement of intellectual property rights in member countries which are required to promote effective and adequate protection of intellectual property rights with a view to reducing distortions and impediments to international trade. The obligations under the TRIPS Agreement relate to provision of minimum standard of protection within the member countries legal systems and practices. The Agreement provides for norms and standards in respect of following areas of intellectual property: Copyrights and related rights Trade Marks Geographical Indications Industrial Designs Lay out Designs of Integrated Circuits Protection of Undisclosed Information (Trade Secrets) Patents Plant varieties Copyrights India’s copyright law, laid down in the Indian Copyright Act, 1957 as amended by Copyright (Amendment) Act, 1999, fully reflects the Berne Convention on Copyrights, to which India is a party. Additionally, India is party to the Geneva Convention for the Protection of rights of Producers of Phonograms and to the Universal Copyright Convention. India is also an active member of the World Intellectual Property Organisation (WIPO), Geneva and UNESCO. Trade MarksTrade marks have been defined as any sign, or any combination of signs capable of distinguishing the goods or services of one undertaking from those of other undertakings. Such distinguishing marks constitute protectable subject matter under the provisions of the TRIPS Agreement. The Agreement provides that initial registration and each renewal of registration shall be for a term of not less than 7

years and the registration shall be renewable indefinitely. Compulsory licensing of trade marks is not permitted.The Trade and Merchandise Marks Act,1958An Act to provide for the registration and better protection of Trade Marks and for the prevention of the use of fraudulent marks on merchandise.Industrial DesignsIndustrial designs refer to creative activity which result in the ornamental or formal appearance of a product and design right refers to a novel or original design that is accorded to the proprietor of a validly registered design. Industrial designs are an element of intellectual property. Under the TRIPS Agreement, minimum standards of protection of industrial designs have been provided for. As a developing country, India has already amended its national legislation to provide for these minimal standards.A new designs law repealing and replacing the Designs Act, 1911 has been passed by Parliament in the Budget Session, 2000. This Act has been brought into force from 11.5.2001.PatentsThe basic obligation in the area of patents is that, invention in all branches of technology whether products or processes shall be patentable if they meet the three tests of being new involving an inventive step and being capable of industrial application. In addition to the general security exemption which applied to the entire TRIPS Agreement, specific exclusions are permissible from the scope of patentability of inventions, the prevention of whose commercial exploitation is necessary to protect public order or morality, human, animal, plant life or health or to avoid serious prejudice to the environment.The TRIPS Agreement provides for a minimum term of protection of 20 years counted from the date of filing.The global system of intellectual property rights (IPRs) has undergone profound change. Most important is the introduction of the multilateral agreement on trade-related intellectual property rights, or TRIPs, within the World Trade Organization (WTO). Under the terms of TRIPs current and future WTO members must adopt and enforce strong and non-discriminatory minimum standards of protection for intellectual property. While considerable controversy persists over international means of protecting key information technologies, including databases and electronic information transfer, there is an evident commitment to achieving strong protection in these areas.******************************************************************************

B. Current trends and application of purchase power parity theory.Purchasing power parity (PPP) theory states that the nominal exchange rate between two currencies should be equal to the ratio of aggregate price levels between the two countries, so that a unit of currency of one country will have the same purchasing power in a foreign country.The idea that purchasing power parity may hold because of international goods arbitrage is related to the so-called Law of One Price, which holds that the price of an internationally traded good should be the same anywhere in the world once that price is expressed in a common currency, since people could make a riskless profit by shipping the goods from locations where the price is low to locations where the price is high (for example, by arbitraging). If the same goods enter each country’s market basket used to construct the aggregate price level— and with the same weight—then the Law of One Price implies that a PPP exchange rate should hold between the countries concerned.Absolute purchasing power parity holds when the purchasing power of a unit of currency is exactly equal in the domestic economy and in a foreign economy, once it is converted into foreign currency at the market exchange rate. However, it is often difficult to determine whether literally the same basket of goods is available in two different countries. Thus, it is common to test relative PPP, which holds that the percentage change in the exchange rate over a given period just offsets the difference in inflation rates

in the countries concerned over the same period. If absolute PPP holds, then relative PPP must also hold; however, if relative PPP holds, then absolute PPP does not necessarily hold, since it is possible that common changes in nominal exchange rates are happening at different levels of purchasing power for the two currencies (perhaps because of transactions costs, for example).The importance of PPP theorem could be gauged by its wide applications in formulating the policy decisions. It is applied, interalia, in choosing the right initial exchange rate for a newly independent country; forecasting medium and long-term Real Exchange Rate; and adjusting for price differentials in international comparisons of income. The PPP condition not only helps in understanding the nature of nominal and real shocks in the exchange rate models but also help policy makers and researchers to compute RER misalignment. A proper assessment of the deviation of the real exchange rate from its equilibrium path can go a long way in enabling policy makers to design an exchange rate policy which can achieve the long-term sustainability of the balance of payments (Joshi, 2007). A common method of determining the extent of misalignment of the exchange rate is based on the principle of PPP theory for open economies, which assumes that exchange rates adjust to offset the changes in relative prices.A number of studies have weighed in favour of real exchange rate tending toward purchasing power parity in the very long run. However, the speed of convergence to PPP is very slow. While few economists take PPP seriously as a short-term proposition, most instinctively believe in some variant of purchasing power parity as an anchor for long-term real exchange rates ******************************************************************************

C. G 20 and impact on India’s foreign trade. (Could not find a convincing answer for 2nd part)What is the G-20The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 to bring together systemically important industrialized and developing economies to discuss key issues in the global economy.MandateThe G-20 is the premier forum for our international economic development that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe.MembershipThe G-20 is made up of the finance ministers and central bank governors of 19 countries and the European Union:Argentina, Australia, Brazil, Canada, China, European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, United Kingdom, United States of AmericaMore specifically, India’s priorities at the G20 have focused on a limited number of issues. These include the reform of international financial institutions, increased funding for developing countries by recapitalizing the IMF and International Development Banks, as well as financing the infrastructures of developing countries.Besides these contributions, much of India’s interventions have followed the G20’s traditional priorities, with an emphasis on recovery measures, financial regulations, and global imbalances. India currently co-chairs with Canada the working group on the last subject.Ironically, policy makers acknowledge that the main macroeconomic issues debated at the G20 are of limited concern to India. The issue of global imbalances, whose working group India chairs, is considered as being of no immediate relevance to the country. The same feeling holds for financial regulations, as

India’s financial system is small and strongly regulated. Policy makers acknowledge that India’s main areas of interest are related to the G20’s development agenda.******************************************************************************

D. Most Favoured Nation (MFN) status – Advantages and DisadvantagesThe term most favored nation (MFN) refers to a status that is bestowed by one country to another to indicate that that particular country will enjoy specific benefits in trading. Typically, this takes the form of lower import taxes, called tariffs, and higher quotas set on imported goods. This means the county that is bestowed most favored nation status is equal to any other country receiving the status. It is usually given when one country wants to increase trade with another country.The members of the World Trade Organization (WTO) agree to accord MFN status to each other. Exceptions allow for preferential treatment of developing countries, regional free trade areas and customs unions.Together with the principle of national treatment, MFN is one of the cornerstones of WTO trade law.The main purposes of granting most favored nation status are for diplomatic reasons or to improve trade between two countries. There are many advantages to doing this, not the least of which can be improved relations with a country. Other advantages include ease of calculating fees, and the same tariffs and import limits are charged to any nation with most favored nation status, so there is no need to have a different rate of calculation. It also equalizes the market for small countries that might not be able to achieve or negotiate better trade agreements on their own, as well as keeps any potential disagreements between different countries from causing them to retaliate with higher tariffs.Despite its advantages, most favored nation status has its challenges and potential drawbacks. One drawback is that developing nations may not be able to keep up with exports. It has been suggested that developing countries be given preferential treatment according to GATT, but it has been difficult to regulate. Other potential conflicts have been in the arena of prior disputes or disagreements, such as war, that have caused two nations to have superseding reasons not to do trade. Also, MFN restrains domestic special interests from obtaining protectionist measures.Other issues deal with regional trading. Some configurations, such as the European Union, have much freer trade amongst themselves then between member countries and other nations. A similar situation has resulted as the rest of the North American Free Trade Agreement (NAFTA) in the Americas. These issues are typically considered exceptions, but may lead to a different form of trade in the future. The United States, for instance, has already renamed most favored nation status to permanent normal trade relations, simply because most nations already had the status and the term seemed outdated.******************************************************************************

E. Product Life Cycle theory in International Business.Raymond Vernon initially proposed the product life-cycle theory in the mid-1960s. Vernon's theory was based on the observation that for most of the 20th century a very large proportion of the world's new products had been developed by U.S. firms and sold first in the U.S. market (e.g. mass-produced automobiles, televisions, instant cameras, photocopiers, personal computers, and semiconductor chips). To explain this, Vernon argued that the wealth and size of the U.S market gave U.S. firms a strong incentive to develop new consumer products. In addition, the high cost of U.S. labor gave U.S. firms an incentive to develop cost-saving process innovations. -Just because a new product is developed by a U.S. firm and first sold in the U.S. market, it does not follow that the product must be produced in the United States. lt could be produced abroad at some low-cost location and then exported back into the United States. However, Vernon argued that most new products were initially products were initially produced- in America. Apparently, the pioneering firms believed it was better to keep production facilities close the market and to the firm's center of decision making, given the uncertainty and risks inherent in

introducing new products. Also, the demand for most new products tends to be based on nonprice factors.Consequently, firms can charge relatively high prices for new products, which obviate the need to look for low cost production sites in other countries. Vernon went on to argue that early in the life cycle of a typical new product, demand is starting to grow rapidly in the United States, demand in other advance countries is limited to high income groups. The limited initial demand in other advanced countries does not make it worthwhile for firms in those countries to start producing the new product, but it does necessitate some exports from the United States to those countries. Overtime, demand for the new product starts to grow in other advanced countries (e.g., Great Britain, France, Germany, and Japan). As it does, it becomes worthwhile for foreign producers to begin producing for their home markets. ln addition, U.S.firms might set up production facilities in those advanced countries where demand is growing. Consequently, production within other advanced countries begins to limit the potential for exports from the United States. As the market in the United States and other advanced nations matures, the product becomes more standardized, and price becomes the main competitive weapon. As this occurs, cost considerations start to play a greater role in the competitive process. Producers based in advanced countries where labor costs are lower than in the United States (e.g., ltaly, Spain) might now be able to export to the United States. lf cost pressures become intense, the process might, not stop there. The cycle by which the United States lost its advantage to other advanced countries might be repeated once more, as developing countries (e.g., Thailand) begin to acquire a production advantage over advanced countries. Thus, the locus of global production initially switches from the United States to other advanced nations and then from those nations to developing countries.The consequence of these trends for the pattern of world trade is that is over time the United States switches, from being an exporter of the Product to an importer of product as production becomes concentrated in lower-cost foreign locations.The product life cycle theory focused on the U.S since most innovations came from that market. This was an applicable theory at that time since the U.S dominated the world trade. Today, the U.S is no longer the only innovator of products in the world. Today companies design new products and modify them much quicker than before. Companies are forced to introduce the products in many different markets at the same time to gain cost benefits before its sales declines. The theory does not explain trade patterns of today.

15. Any indigenous organization has potential to become global organization in today’s business environment. Explain sequential steps which are prerequisites to emerge as global corporation with practical illustrations.

Answer:a) Why do companies go global (elaborate on each of these points – probably 3-4 sentences)a. To increase profits and fight market saturationb. Reduce costc. Expansion / global ambitionsd. Follow rival firms into international marketse. Extend product lifecycle

b) Process / stages of going global: (EPRG framework to be followed by a domestic company)

• Stage 1: Domestic Company: Domestic in focus with all activity concentrated in the home market. Whilst many organizations can survive like this, solely domestically oriented organizations may face stagnating growth in the long term. E.g.: Hero Cycles, Atlas Cycles develop their products based on requirements of local requirements.

• Stage 2: Home focus but with exports (ethnocentric). Company believes only in home values but creates an export division. The ethnocentric orientation means company personnel see only similarities in market and assumes the product and practices that succeed in the home country will due to their demonstrated superiority be successful anywhere. Ethnocentric companies that do conduct business outside the home country can be described as international companies. They adhere to the notion that the products that succeed in the home country are superior and therefore can be sold everywhere without adaptation. E.g.: Marico (makers of Parachute hair oil) follow this strategy in Bangladesh, where 50% of their international business comes from Bangladesh.

• Stage 3: Stage two organizations which realize that they must adapt their product portfolio to overseas operations. The focus switches to multinational (polycentric) and adaptation becomes paramount. The polycentric orientation is the opposite of ethnocentrism. The term polycentric describes management belief that each country in which a company does business is unique. This assumption lays the groundwork for each subsidiary to develop its own unique business and marketing strategies in order to succeed. The term multinational company is often used to describe such a company. E.g.: Ford Motors, Toyota, all develop locally adapted models of their vehicles, to suit each country’s consumer-specific needs.

• Stage 4: In a company with a regiocentric orientation management views regions as unique and seeks to develop an integrated regional strategy. For eg: a US company that focuses on the countries included

Domestic Company

Geocentric Company

Regiocentric Company

Polycentric Company

Ethnocentric Company

Domestic Company

Global Company (one which makes the same product offering, without any modifications, throughout the world

MNC (manages production or delivers services in more than one country)

International Company (typically company following route of JVs, M&A/Franchising)

in the NAFTA is a regiocentric orientation. Similarly an Indian company that focuses its attention on the SAARC region is regiocentric. Goodyear International (tyres) operates on a regiocentric basis, with its regional units being divided as Asia-Pacific, Europe, North America, Latin America, etc.

• Stage 5: A company with a geocentric orientation views the entire world as a potential market and strives to develop integrated worlds market strategies. A company whose management has a regiocentric or geocentric orientation is known as a global or a transnational company. This involves recognizing that market differences and that it is possible to develop a global strategy based on similarities to obtain scale economies but also recognize and responds to cost effective differences. Its strategies are a combination of extension, adaption and creation. For E.g.: Mc Donalds, Pizza Hut, Companies in banking sector, all offer a similar ambience, products (including adapted products) and service levels.

c) Type of global companies (as explained above):

---------------end of answer--------------------

Some external links (have a look-through later on)

google book on International Marketing

global consulting for Indian companies

16. Discuss the economic, cultural, social, political and technological environment of international business as it prevails today. Draw lessons for Indian companies wishing to go global.

Answer: (Answer contains normal pointers for a PEST (legal not considered) analysis where-in for expansion of the answer any gas can be added. Some examples and learnings for Indian Companies have also been provided as and when required. You can add your own examples)POLITICAL1. Types of government system : democratic, communist or military

2. Political parties and their ideologies and policies

3. Nature of constitution of country

4. Political process like electing the government, elections and their funding procedure, etc.

5. Government policies and general attitude towards foreign trade, labour laws, outsourcing, etc.

Example related to India : Ban on multinationals during 1977 by Janata Government regime as compared to the welcome treatment to multinationals since liberalization process was started during 1991.ECONOMIC1. Per capita income of the country, National income and its distribution, rate of savings, growth of GNP, etc.

2. Level of economic development of country.

3. Structure of economy such as capitalistic, socialistic or mixed economy

4. Economic policies – industrial, monetary and fiscal

5. Economic planning such as 5 year plans, annual budgets, etc.

EXAMPLES : (a) Economic factors have significant impact on the demand for products and services offered by the companies

(b) Besides, economic conditions such as severe recession may drastically affect the performance of companies.

(c) The negative effects of poor general economic conditions influence not only the demand for products but also major strategic decisions.

SITUATIONS BASED ON ECONOMIC ENVIRONMENTS 1. For example, public issue/ rights issue for the shares of the company may be required to be postponed due to depressed stock markets conditions

2. An increase in prime lending rates may cause a planned borrowing to become too expensive

3. While assessing economic factors, managements must not only consider those that affect demand for the product but also those which affect company’s long-term ability to satisfy that demand. For example, increase in cost of company’s capital resulting from change in general economic conditions can have effect on plan to construct a new plant, thereby limiting the company’s ability to satisfy future demand.

4. Similarly, increase in financial costs may necessitate cut in R & D expenditure, which can have long lasting impact

SOCIAL / CULTURAL ENVIRONMENT1. Social / Cultural environment consists of factors like beliefs, values, attitudes, opinions, lifestyles of the customers, who buy the products of companies.

2. These factors evolve from their cultural, ecological, demographic, religious, educational and ethnic conditions.

3. The acceptance or liking for a product may vary from one culture to another.

4. In order to be successful in different countries, multinational companies modify their products according to the culture of the country

5. Various other factors which should be taken into accounts are like of colors and beliefs in different cultures and languages spoken by them

6. The companies should keep track of social changes occurring in the society alongwith demographic data for the country. These can be as follows :

(a) Demographic factors : Population, breakup into rural and urban areas, density, distribution, agewise composition, education, literacy rate, family income, etc.

(b) Social factors : Social customs, beliefs, rituals and practices, lifestyles, etc.

(c) Family structures : Number of joint and nuclear families, number of persons in household, role of women in family, etc.

(d) Social concerns : Awareness about environment, pollution, corruption, role of mass media, consumer and employee interest in quality of life issues, etc.

TECHNOLOGICAL ENVIRONMENTTechnological environment means technological advancements/ innovations related to the materials and machines used in production of goods and services that have an impact on the business of company/ organization.FACTORS TO BE CONSIDERED1. Sources of technology : own /outside : If the sources of technology are outside sources then various aspects to be studied are, cost of technology, method of technology transfer, time frame for full technology transfer, etc.

2. Stages of technology development and rate of obsolescence.

3. Impact on human beings and environmental effects

- The technological advancements affect not only manufacturing or service process but also related functions like finance (how to raise) and staffing (recruiting new persons to work with the latest technology machines and their training).

- Some technological innovations create new industries and also affect existing industries. For example : Xerox machines affected carbon paper business, transistor manufacturing hurt vaccum tube industry.

- The technological innovations may suddenly shorten life of present manufacturing facility, may create new products and markets. Hence the companies working in high technology area must try to understand both the present state of technological advancements affecting their products and services and of probable future innovations.

- This science of attempting to predict advancements and estimate their probable impact on company/ organization’s operations is known as technological forecasting.

LEARNINGS FOR INDIAN COMPANIESPolitical: example of USA Govt. showing strong negativity towards Indian outsourcing firms (Indian IT companies). Rising tensions and political instability in MENA (Middle East and North Africa) region.

Economical: continuing instability in Europe (our favourite topic!) and how any business may find it difficult to sustain in Europe (rising labour costs, etc.). Plus point for a company like Ajanta Quartz – cheap manufacturing and low labour costs in China, hence the company has shifted entire business to China. Social/Cultural: Indian FMCG companies targeting MENA region – cultural shift (not the same as Indian consumers). Technological: Power of technology – well exploited outside India (online retailing, internet related businesses), than in India (relatively lower internet penetration). Use of technology (telecommunications, portable media devices like tablets) has spawned niche companies in animation and application software development for movies and other gaming and communication devices.

17. Which are the key environmental factors relevant to International Business? Explain each factor with examples.

Environmental factors for international business comprise the external relations a firm will face in going global. Environmental analysis is defined as "the process by which strategists monitor the economic, governmental, legal, market, competitive, supplier, technological, geographical and social settings to determine opportunities and threats to the firm.

Definition of Business Environment: “The aggregate of all conditions, events and influences that surround and affect business” (David Keith).Thus the international business environment comprises of both a micro and a macro environment. The former consists of actors in the immediate environment that affects the performance of the firm, such as suppliers, competitors, marketing intermediaries, customers etc. The macro environment consists of larger societal forces that affect the actors in the company's micro environment, such as demographic, economic, natural, legal, technical, political and cultural forces.

The Economic Environment

This element comprises the nature of the economic system and institutions of a particular country or region. It also takes into account the nature of human and natural resources within the target market. A firm will function very differently in a libertarian environment than within a highly statist one. Here, the activities and functions of local economic elites are also very important. Critical factors for analyzing economic environment are:1. Interest rates.2. The level of inflation Employment level per capita.3. Long-term prospects for the economy Gross Domestic Product (GDP) per capita, and so on.

The Political Environment

Closely tied to the economic environment is the political one, itself also dealing with the nature of systems and institutions. Many variables to consider here are the stability of the political system, the existence of local or international conflict, the role of state enterprises and the nature of the bureaucracy. The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. You must consider issues such as:

1. How stable is the political environment?

2. Will government policy influence laws that regulate or tax your business?3. What is the government’s position on marketing ethics?4. What is the government’s policy on the economy?5. Does the government have a view on culture and religion?6. Is the government involved in trading agreements such as EU, NAFTA, ASEAN, or others?

The Legal Environment

The existence of bureaucratic systems and cultures is central in making the decision to invest globally. The nature of corruption, local values and assumptions that are built into national ideologies are major variables in this field. A great concern is the extent to which there is a culture of law or a culture of personal patronage, where negotiations are done on a personal rather than a legal basis. The impact of international lending agencies such as the International Monetary Fund or the World Bank is also important in creating a legal culture that a business will have to take seriously.

Social Structure

Experts such as Robert Brown and Alan Gutterman hold that social structure comprises the basic values of a people and transcends the institutions mentioned above. Issues such as the relation between the individual and the collective, religion, family life and even time concepts and gender roles are all significant in terms of dealing with a new population. Being sensitive to these might be the difference between success and failure. Questions to considered for socio-cultural environmental analysis are: 1. What is the dominant religion?2. What are attitudes to foreign products and services?3. Does language impact upon the diffusion of products onto markets?4. How much time do consumers have for leisure?5. What are the roles of men and women within society?6. How long are the population living? Are the older generations wealthy?7. Does the population have a strong/weak opinion on green issues?

18. Logistics in International Business

Ans: Try to avoid this question as much as you can, as it includes everything from export shipments, documentations, inland transport, inventory managament and so on……. Still, the PgNos 6-10 and Pg 23 onwards might be usefulhttp://books.google.com/books?id=NG2TjfQF6zEC&pg=PA149&source=gbs_selected_pages&cad=3#v=onepage&q&f=falseApart from that, for a general gassy answer, PFB When a firm becomes heavily involved in international business, logistics is seen as a critical part of the

strategic planning process. An effective international logistics strategy not only offers significant cost

savings but also can help firms penetrate new foreign markets. Indeed, international logistics is

recognized as an integral part of the marketing mix that furthers the global marketing process.

With the assistance of an efficiently managed international logistics function, firms can gain economies

of scale from increased production, obtain technological advantages from other countries, and expand

their markets.

As logistics activities become a substantial part of a firm's international operations, the role played by

international logistics managers also increases in importance.

The complexity of the international business environment, including different business customs,

inadequate transportation infrastructure, restrictive regulatory frameworks, and different levels of

logistics services, presents barriers that make operations in foreign countries far more complicated and

less controllable than in domestic markets. In many cases, existing or emerging barriers result in longer

order cycle times, higher logistics costs, and greater customer dissatisfaction.

Thus, the additional logistics costs required to support operations can be so great that, if not handled

properly, they may offset any potential cost savings from using inexpensive labor and other resources in

foreign countries. Under these circumstances, logistics barriers obviously make it difficult for firms to

gain a competitive advantage from their international operations. To establish an efficient logistics

system to support international operations, a firm should be able to ascertain when and where logistics

barriers may disrupt materials flows in the distribution channel. The identification of barriers is

important in designing an effectively international operations network. A better understanding of those

barriers enables a firm to take actions to reduce or avoid them so that it can improve its competitive

position in international markets.

19. Mergers & Acquisitions