VIVEKANANDA EDUCATION SOCIETY INSTITUTE OF

MANAGEMENT STUDIES AND RESEARCH

INTERNATIONAL BUSINESS

SUBMITTED TO: PROF. VIJU NAVARE

GROUP NO: 7

SUBMITTED BY:

NILESH AHUJA 62

NITIN GALANI 66

NITESH NAGDEV 77

PAWAN RAHEJA 97

SANJAY RAWLANI 101

PAYAL VANVARI 119

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Q.1) what is International Business? State & explain the forces that are helping

internationalization of business. Can it be said that international business has not only

encouraged global growth and prosperity but has also resulted in creation of international

financial instability. Explain with examples?

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. Usually,

private companies undertake such transactions for profit; governments undertake them for

profit and for political reasons. It refers to all those business activities which involves cross

border transactions of goods, services, resources between two or more nations. Transaction of

economic resources include capital, skills, people etc. for international production of physical

goods and services such as finance, banking, insurance, construction etc.

International Business is the study of business and management across international borders. It

encompasses aspects such as globalisation and the impacts of the global environment on

organisations, trade and trade policy, foreign direct investment, strategies of international

firms, strategic alliances and exporting, and international management, including cross-cultural

and international human resource management.

It has become essential for business managers, policy makers and researchers involved in the

global environment to understand international business. In the 21st century, goods, services

and knowledge flow across country borders much more easily than in the past. For business,

the implications of these flows and the increased mobility of human resources are profound.

Long-term survival of businesses, and indeed entire economies, depend on how well these

forces are understood and leveraged.

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Forces helping internationalization of business:

1. Expansion of Technology. Air travel, the internet, e-mail, e-commerce, direct dial international phone calls, fax, and other technologies have brought down the cost and increased the efficiency of doing business internationally.

2. Liberalization of Cross-Border Movements. The World Trade Organization (WTO, discussed in Chapter 6) and other international trade agreements have reduced barriers to the movement of goods and services across national boundaries.

3. Development of Supporting Services. International banking, international document delivery, and other services have tremendously simplified the conduct of international business.

4. Increase in Global Competition. It is becoming increasingly important that firms have international operations in order to be able to shift production across countries and take advantage of new production location and marketing opportunities to stay ahead of other international competitors.

5. Exports are goods and services produced in one country and then sent to another country. Imports are goods and services produced in one country and then brought in by another country. Information about exports and imports helps us to explain the impact of international business on the economy.

6. Foreign direct investment (FDI) is equity funds invested in other nations. Industrialized countries have invested large amounts of money in other industrialized nations and smaller amounts in less developed countries (LDCs), such as those in Eastern Europe, or in newly industrialized countries (NICs), such as Hong Kong, South Korea, and Singapore. Most of the world’s FDI is in the US, the European Union (EU), and Japan. As nations have become more affluent, they have pursued FDI in geographic areas that have economic growth potential. The Japanese, for example, have been investing heavily in the EU in recent years.

7. Over 50 per cent of world trade and over 80 per cent of foreign direct investment is conducted by three regional economic hubs: the US, the EU and Japan. Collectively, these areas are referred to as the “triad”. The triad is a group of three major trading and investment blocs in the international arena.

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Q.2) critically examine Purchasing Power Parity Theory.

Purchasing power parity (PPP) is a theory which states that exchange rates between currencies

are in equilibrium when their purchasing power is the same in each of the two countries. This

means that the exchange rate between two countries should equal the ratio of the two

countries' price level of a fixed basket of goods and services. When a country's domestic price

level is increasing (i.e., a country experiences inflation), that country's exchange rate must

depreciated in order to return to PPP

The purchasing power parity (PPP) theory measures the purchasing power of one currency against

another after taking into account their exchange rate. �Taking into account their exchange rate simply

means that you measure the strength of purchasing power on $1 with that of Rs 50 and not with Rs 1

(assuming the exchange rate is $ 1 = Rs 50) �

Developed by Gustav Cassel in 1918, the theory states that, in ideally efficient markets, identical goods

should have only one price.

Simply put, what this means is that a bundle of goods should ideally cost the same in Canada

and the United States. However, if it doesn’t happen then we say that purchasing power parity

does not exist between the two currencies.

Let’s look at an example

Suppose that one U.S. Dollar (USD) is currently selling for fifty Indian Rupees(INR) �In the United

States, wooden cricket bats sell for $40 while in India, they sell for 750 Rupees. Since 1 USD =

50 INR, the bat which costs $40 USD in U.S costs only 15 USD if we buy it in India. Clearly there

is an advantage of buying the bat in India, so consumers would be happier to buy the bat in

India.

If consumers decide to do this, we should expect to see three things happen:

1. American consumers demand for Indian Rupees would increase which will cause the Indian

Rupee to become more expensive.

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2. The demand for cricket bats sold in the United States would decrease and hence its prices

would tend to decrease.

3. The increase in demand for cricket bats in India would make them more expensive.

4. Thus the prices in the US and India would start moving towards an equilibrium.

So what happens now……?

In an ideal scenario, prices in both countries would become equal at some price point.

�The increased demand for INR, for instance may lead an increase in its value such that 1 USD =

40 INR.

Secondly, due to decrease in demand for the bats in the US, its price drops to USD 30.

Thirdly, the increase in demand for the bats in India takes its price up to INR 1200.

�At these levels you can see that there is Purchase Price Parity between both the currencies.

� This also means that whether you buy the bat in US or in India, it is one and the same thing for the

consumer.

This is because a consumer can spend $30 in the United States for a cricket bat, or he can take

his $30, exchange it for 1200 Rupees (since 1 USD = 40 INR) and buy a cricket bat in India

and be no better off.

So,

Purchasing-power parity theory tells us that price differentials between countries are not

sustainable in the long run as market forces will equalize prices between countries and change

exchange rates in doing so.

� you might think that my example of consumers crossing the border to buy cricket bats is

unrealistic as the expense of the longer trip would wipe out any savings you get from buying

the bat for a lower price.

�However it is not unrealistic to imagine an individual or company buying hundreds or thousands

of the bats in India, then shipping them to the United States for sale.

It is also not unrealistic to imagine a large retail store purchasing bats from the lower cost

manufacturer in India instead of the higher cost manufacturer in India.

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�In the long run, having different prices in the United States and India is not sustainable because

an individual or company will be able to gain an arbitrage profit by buying the good cheaply in

one market and selling it for a higher price in the other market

Q.3) Define 'International Business'. Explain fundamental difference b/w domestic business operation

and international business operation using business characteristics

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. Usually,

private companies undertake such transactions for profit; governments undertake them for

profit and for political reasons. It refers to all those business activities which involves cross

border transactions of goods, services, resources between two or more nations. Transaction of

economic resources include capital, skills, people etc. for international production of physical

goods and services such as finance, banking, insurance, construction etc.

International business deals with business activities (both production and services) that crosses

the national boundaries. This activity includes movement of goods, services capital or

personnel, transfer of technology, etc .

Functionally, by business we mean those human activities, which involve production or

purchase of goods and services with the object of selling them at a profit. Today’s world is an

era of Global Village or specialization. A particular country is not self-dependent for producing

goods and services. One country depends on another for goods and services as well as one area

of a particular country depends on another area for meeting demand. This interdependence

creates international Business.

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CHARACTERISTICS OF BUSINESS

What makes a business great? This is one of the key questions to ask when looking to invest

your dollars in the common stock of a publicly traded company. Obviously, the goal of any

business is to create capital where there was none before; i.e., generate profits. However, just

because a company is profitable today does not necessarily mean it will be profitable

tomorrow. Good investments are made in companies that can sustain profitability over a period

of time, and are not prone to swift and painful loss of business.

Here are 5 primary factors to look for when evaluating a potential investment in terms of

determining whether or not it is a great business:

1. Recurring Sales

One way to guard against a sudden loss of business is to employ a recurring revenue business

model. There are numerous examples of this: consumable products (food, beverages, toiletries,

etc.), subscription media, open-ended prescription drugs, business services such as outsourcing

payroll, consumer services like cable TV and broadband internet, and so on. All of these

businesses generate recurring revenues from customers on an annual or monthly basis, and so

are not necessarily reliant on their product being the "hot" item at the moment.

Conversely, there are lots of businesses that must constantly compete to win business, and

after winning it, they rarely see more sales to the same customer. One Magic Formula example

of this is LCA-Vision (LCAV), which provides laser eye correction surgery. It's pretty unlikely that

most customers will need (or want) to have their vision corrected twice!

2. Scalability at Low Cost

Growth is an important factor to consider, but the cost of growing is very important to the

ultimate outcome. Truly great businesses can increase revenues without spending a whole lot

to do so. Take, for example, eBay (EBAY). Here is a company that does nearly all of it's business

on the internet, and basically just connects buyers and sellers together. Once the servers,

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databases, and software were in place, eBay could accommodate ever larger numbers of

customers without spending much of anything! This is scalability at low cost.

Compare this to the airlines, a notoriously bad business. For the airlines to grow revenues, they

have to add routes. Adding routes requires massive capital spending for new planes, airport

terminal space, regulatory rights, and so forth. Growing revenues is a very expensive

proposition - airlines cannot scale without spending a lot of money to do so. Clearly eBay's way

is a lot better!

3. High Return on Invested Capital

Think about what your goal is when you invest in a stock, or a mutual fund, or a piece of real

estate. You are looking for high returns on your investment, right? The same applies to

businesses. Simply put, businesses invest capital to earn a return. A business that can earn a

higher return on the capital it invests is a better business. Most Magic Formula companies earn

returns of 30% or higher on invested capital.

This point is core to the Magic Formula screen. The mantra of the Magic Formula Investing

strategy is "good companies at cheap prices". The "good companies" part is measured by return

on invested capital. The airlines vs. eBay example apply here as well. For every server eBay

buys, they can earn a substantial return on that investment. For every plane the airlines

purchase, there is less upside because of maintenance costs and the limited time and space

available at any given time. Which brings us to our next point...?

4. High Cash Flow Margins after Maintenance

Cash flow is what it's all about... this is the capital that a business can re-invest to earn those

return on capital figures, or pay back to the shareholders in the form a dividend or repurchase

of shares. Good companies can convert a high percentage of their sales into free cash flow -

cash left after maintenance costs to keep the business going. MagicDiligence usually looks for

free cash flow margins to be over 5%, although this figure depends on the type of business.

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Let's pick on the airlines again here. Maintaining airplanes is an expensive proposition.

Planes have to work flawlessly, which requires a lot of spending for parts, labor, tools, and so

on, and in every location the planes fly to or from. All of this eats up the cash earned from ticket

sales, and leaves little left for the business to re-invest or pay back. eBay's maintenance costs

are much less obtrusive. Maintaining computer equipment and software is considerably

cheaper. Therefore eBay will have more cash left over to invest (unfortunately, the company

has often chosen to use that cash to make insanely expensive purchases of other businesses).

5. Durable, Structural Competitive Advantages

All of these attributes of a good business are worthless unless they are attributes that can be

sustained over a long period of time. Otherwise they can disappear and we're left owning a not-

so-good business.

How International business is different from domestic business:

Many a people are involved in business but some of them don’t know the actual meaning of

business. Because they are supposed to run their father’s or uncle’s business with due care, it

does not matter whether they are familiar with this term or not. Their knowledge may be ample

for domestic business but in case of an international business they must be acquainted of some

differences. When business transactions are carried out among parties within a country’s

borders is called domestic business. And when the business transactions occur between parties

from more than one countries or cross border activities is termed as International business.

The business transactions comprise of buying materials in one country and transport them off

to another country for dealing out, shipping finished products from one country to another for

retail sales, installing a new plant in a foreign country to take advantage of lower labour costs,

or borrowing money from a bank in one country for the funding of operations in another. These

business transactions are not associated with only one type of party it may involve transactions

between private business owners, governmental agencies, individual companies, and groups of

companies.

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International business can differ from domestic business for a number of other reasons

including the following:

The first difference involves the dissimilarity in currencies. Countries involved in business may

use different currencies; it may force at least one party to switch its currency into another. In

other words, one of the parties would have to follow the prevailing market currency exchange

rate to make its business transactions viable.

Next you may face the difference in legal systems of countries; it may compel one or more

parties to adjust their practices to comply with local law. Occasionally, the consent of the legal

systems may act as a barrier and be irreconcilable, creating complications for international

managers.

Difference in cultures is also considered as dissimilarity in domestic and international business.

The cultures of the countries may vary according to the use of trading product and it may force

each party to adjust its behavior to meet the expectation of the others. For example the

difference in the use of pork and wine face different attitudes in western and Muslim cultures.

Last is the difference in availability of resources by country. One country may be rich in natural

resources but poor in skilled labour, while another may enjoy a productive, well-trained work

force but lack natural resources. Thus, the way products are produce and the types of products

that are produced vary among countries. Currently, this is the major difference noticed in the

business between developed and third world countries.

Before going to start an International business, people must be well-informed about cultures,

legal, political and social differences among countries. They must choose the countries in which

to sell their goods and from which to buy inputs with assurance and hoping that a good

business is waiting ahead for them.

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Q.4) International business is more complex and different from domestic business. Explain the

difference by using ten functional parameters

Today, business is acknowledged to be international and there is a general expectation that this

will continue for the foreseeable future. International business may be defined simply as

business transactions that take place across national borders. This broad definition includes the

very small firm that exports (or imports) a small quantity to only one country, as well as the

very large global firm with integrated operations and strategic alliances around the world.

Within this broad array, distinctions are often made among different types of international

firms, and these distinctions are helpful in understanding a firm's strategy, organization, and

functional decisions (for example, its financial, administrative, marketing, human resource, or

operations decisions). One distinction that can be helpful is the distinction between multi-

domestic operations, with independent subsidiaries which act essentially as domestic firms, and

global operations, with integrated subsidiaries which are closely related and interconnected.

These may be thought of as the two ends of a continuum, with many possibilities in between.

Firms are unlikely to be at one end of the continuum, though, as they often combine aspects of

multi-domestic operations with aspects of global operations.

International business grew over the last half of the twentieth century partly because of

liberalization of both trade and investment, and partly because doing business internationally

had become easier. In terms of liberalization, the General Agreement on Tariffs and Trade

(GATT) negotiation rounds resulted in trade liberalization, and this was continued with the

formation of the World Trade Organization (WTO) in 1995. At the same time, worldwide capital

movements were liberalized by most governments, particularly with the advent of electronic

funds transfers. In addition, the introduction of a new European monetary unit, the euro, into

circulation in January 2002 has impacted international business economically. The euro is the

currency of the European Union, membership in March 2005 of 25 countries, and the euro

replaced each country's previous currency. As of early 2005, the United States dollar continues

to struggle against the euro and the impacts are being felt across industries worldwide.

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In terms of ease of doing business internationally, two major forces are important:

(i) Technological developments which make global communication and transportation relatively

quick and convenient; and

(ii) The disappearance of a substantial part of the communist world, opening many of the

world's economies to private business.

Conducting and managing international business operations is more complex than undertaking

domestic business. Because of variations in political, social, cultural and economic

environments across countries, business firms find it difficult to extend their domestic business

strategy to foreign markets. To be successful in the overseas markets, they need to adapt their

product, pricing, promotion and distribution strategies and overall business plans to suit the

specific requirements of the target foreign markets Key aspects in respect of which domestic

and international businesses differ from each other are discussed below.

Mobility of factors of production: The degree of mobility of factors like labor and capital is

generally less between countries than within a country. While these factors of movement can

move freely within the country, there exist various restrictions to their movement across

nations. Apart from legal restrictions, even the variations in socio-cultural environments,

geographic influences and economic conditions come in a big way in their movement across

countries.

Differences in business systems and practices: Countries differ from one another in terms of

their socio-economic development, availability, cost and efficiency of economic infrastructure

and market support services, and business customs and practices due to their socio-economic

milieu and historical coincidences. All such differences make it necessary for firms interested in

entering into international markets to adapt their production, finance, human resource and

marketing plans as per the conditions prevailing in the international markets.

Political system and risks: Political factors such as the type of government, political party

system, political ideology, political risks, etc., have a profound impact on business operations.

Since a business person is familiar with the political environment of his/her country, he/she can

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well understand it and predict its impact on business operations. But this is not the case with

international business. Political environment differs from one country to another. One needs to

make special efforts to understand the differing political environments and their business

implications. A major problem with a foreign country’s political environment is a tendency

among nations to favor products and services originating in their own countries to those

coming from other countries. While this is not a problem for business firms operating

domestically, it quite often becomes a severe problem for the firms interested in exporting

their goods and services to other nations or setting up their plants in the overseas markets.

Business regulations and policies: Coupled with its socioeconomic environment and political

philosophy, each country evolves its own set of business laws and regulations. Though these

laws, regulations and economic policies are more or less uniformly applicable within a country,

they differ widely among nations. Tariff and taxation policies, import quota system, subsidies

and other controls adopted by a nation are not the same as in other countries and often

discriminate against foreign products, services and capital.

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Q.5) State the objectives of International Business. Give an overview of various methods of doing Int.

Bus. With suitable practical examples

METHODS OF INTERNATIONAL EXPANSION

1: EXPORTING

2: FDI

3: LICENSING.

4: FRANCHISING.

5: MERGERS & ACQUISITIONS / CROSS BORDER ACQUISITIONS.

6: MANAGEMENT CONTACTS.

 

Exporting

Usually the business first experience with global business.

Exporting is the selling of products in overseas domestic markets.

Usually a low cost, low risk way of penetrating into global markets.

· Sole traders and SME“s commonly use intermediaries to export their goods, in a process

known as indirect exporting.

Government departments such as the DFAT and Austrade provide information to small

business about exporting to other countries.

FDI’ Foreign Direct Investment

Method of international expansion, by controlling interest in property, assets or companies

overseas.

Involves a higher level of commitment’ money, equipment and personnel transfers do

occur.

Usually requires large amounts of capital, therefore the players are usually multinational or

transnational corporations.

Originates from a variety of business arrangements, including:

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(A) Wholly owned subsidiary’s

(i) A business that is entirely owned and controlled by the parent company.

(ii) Achieved with by establishing a new business, or buying an existing business

(B) Joint Ventures

(i) Part ownership of another business with other business and partners.

(ii) Each share contributions such as personnel, equipment, capital etc.

(C) Strategic Alliances

(i) Arrangements between two or more businesses with a common busies objective.

(ii) Party’s are willing to cooperate, but don’t wish to form a separate business.

(iii) Examples’ The ”Star Alliance’ encompassing many airlines from around the globe.

Reallocation of Production

This is where the production of the business is reallocated to one of many potential locations

that exist worldwide.

There are many reasons why company’s engage in this practice including:

(A) Reducing labour Costs

(i) Taking advantage of lower labour costs in other countries.

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(B) Get around trade barriers

(i) In order to penetrate into domestic markets, to avoid the barriers incurred when

Importing, a business may set up production in that particular country (”producing

Behind enemy lines).

(C) Be Closer to Customers

(i) This results in cheaper, more time efficient means of getting gods and services to the

Customer.

Management Contracts

· Management contracts are agreements where one business provides managerial assistance,

technical expertise or specialized services to another organization.

· The business providing the service usually gets a flat fee or percentage of sales.

· This form of expansion opens up new markets which the business providing assistance can

operate within, whilst providing capital inlay.

Licensing and Franchising

· Licensing is an arrangement where a business seels the right to use intellectual property to

another business.

· This intellectual property includes such things as technology, work methods, patents, designs,

copyrights etc.

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· This form of expansion minimizes expenditure and risk. The licensor learns information about

this new market without investing a lot of time and effort.

· Disadvantages include loss of control, including quality standards and geographic distribution.

· Franchising is an arrangement where one business supplies another with intellectual property

and ongoing support.

· Gives the franchisor more control over the sale of its products. There are strict guidelines

which must be followed, else a loss of the franchising licence will occur.

· Advantages include low cost and low risks in entering new markets, maintenance of product

service and consistency, access to cultural knowledge from managers, and arranged favourable

deals with suppliers.

OBJECTIVES OF INTERNATIONAL BUSINESS

Increasing sales and finding new markets

· By expanding operations to an international scale means that business can increase their total

Sales.

· The product may also differ in its life cycle in other countries. It is quite possible that a mature

product in Australia is only an emerging product in another oversees country. Business can

take advantage of this.

Acquiring New Resources

· Other markets in the global economy may have extra resources that the business needs to

expand.

· These same resources may also be less productive or more expensive than that of the

domestic Operations of the business.

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Diversification

· Business may engage in expanding its operations in order to diversify its suppliers and

markets.

· This avoids volatile swings in market prices and sales in any one market, allowing other

markets to support these occurrences.

· If a business has a range of suppliers from different countries, then the business is less likely to

Come under threat from supply shortages or price increases.

Minimizing Competitive Risk

· The operation of a business in many countries means that it is less likely that a competitor will

have a crucial impact on the business“ operations in one particular market.

Gaining Economies of Scale

· Where a business endures cost savings by increasing the scale or size of its operations.

· Through international expansion, business obtain a better economies of scale by selling

worldwide or establishing production opportunities in low cost labour localities.

· Through this increase in the size of the market, the price per unit of output falls, allowing for a

Reduction in price or an increase in profits.

Cushioning the Economic Cycle

· If a business has operations in a variety of economies, it may lessen the impact or cushion the

Nature of the economic cycle.

· The economic cycle is the stages an economy experiences over an amount of time; moving

from a booming economy where sales and employment is high to a recession or boom where

there are lower sales and increased unemployment.

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· Although the economies of the world are becoming more integrated, this cycle still varies from

economy to economy and thus can be used as an advantage to multinational or transnational

business.

Regulatory Differences

· Some countries of the word have more lenient stances towards regulations involving

environmental emissions and award rates for workers.

· Business may use this to their advantage, and set up operations where it will cost them less to

operate due to the nature of government regulations in a particular country.

Minimising Tax

· Taxes in various countries around the world differ.

· Therefore business may take advantage of countries with lower taxation rates, saving on the

costs of production.

· These types of countries are known as tax havens countries having little or no corporate

income taxes. Three types of tax havens include:

(a) Tax Paradises

(i) No corporate taxation

(b) Tax shelters

(i) No tax at all or very little tax occurs.

(c) Financial Centres

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Q.6) Discuss the economic, cultural, social, political and technological envt of int. bus. as it prevails

today. Draw lessons for Indian companies wishing to go global

Political

The most important political factor to consider is the stability of the foreign government,

viewed in the context of how long the enterprise wants to be doing business in the country. If

the foreign country holds regular elections, the business must look at the likely date of the next

election and the possible changes that would result if there were a change of government. Also,

if a sudden emergency or coup could give rise to change of government this could radically

change the business environment, and if this is possible the company may need to be more

cautious in its approach to doing business in that country.

Where no change of government is imminent, and the system is judged to be stable, the

business must consider the future policy of the government and how it will affect the business

and its products in that country. For example, incentives and reliefs currently given to foreign

enterprises could be phased out, or a more nationalistic policy could be pursued that would

favour domestic companies over foreign competitors.

The enterprise must consider the available forms of doing business in the foreign country, and

whether a branch or a company would be the better business vehicle. In the legal area the

enterprise must examine intellectual property laws and regulations, and the extent to which

they are enforced. This is especially important where the products to be sold contain high

technology and patented components or procedures. Another important legal area to examine

in the foreign country is the employment law, which will be especially important if the

enterprise is to set up manufacturing operations or to retain a number of selling outlets in the

country.

Laws relating to the environment and to health and safety should also be examined, as they

may affect the way the product is to be marketed and sold in the country. Modifications may

need to be made to the product to make it suitable for sale under the laws of the country.

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Economic

The business must look at the size of the economy and the growth rate in the foreign country.

Other significant numbers to look at are the inflation rate and the interest rate in the country,

and likely future developments with these figures. This will affect patterns of consumer

spending, and will impact sales to a greater or lesser extent depending on the type of products

and target market. Government economic policy and its management of the economy can be

examined to glean information about the likely future policy trends.

The enterprise must examine the industry in which it is operating and the size and number of

players in that industry in the foreign country. In particular, the nature and number of

competitors in the industry is important – it will make a difference if there is one major player

and a number of smaller players, or a number of equal-sized enterprises competing in the

industry. The marketing strategy of the other players in the industry should be examined.

Possible future suppliers and distributors should be identified. The marketing strategy could be

affected by the nature of the distributors and the type of sales outlet used.

The business must look at import duties on its products and at any restrictions on imports such

as quotas, or any safety or “public interest” requirements that might prevent some products

being imported into the country. High tariffs are likely to affect the price at which the business

can sell its product in the foreign country, and it will also need to examine the position with

regard to indirect taxes such as a sales tax or VAT that might affect selling prices within the

country. Direct taxes are also an important factor to consider, and the enterprise must look

round for any possibility for reducing taxes such as operating in a special enterprise zone that

might offer tax and duty reliefs in addition to the provision of modern infrastructure.

Social

An analysis of the social composition and attitudes in the foreign country must take into

account the size of the population and the age distribution, which will affect the likely demand

for the products. A country where the majority of people are under the age of thirty will have

different tastes and demands to a country where the population is ageing and quite a large

proportion are of retirement age. The enterprise should also take into account the income

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distribution and its relation to the age distribution. The combination will affect marketing

efforts and target markets within the country.

Another demographic feature worth taking into account is the proportion of urban dwellers in

relation to those living in the countryside, and how the proportions are likely to change in the

future. The marketing and sales of the enterprise’s products could also be affected by lifestyle

factors such as the attitude to health and fitness or the job expectations especially among

younger people.

Finally, social customs and languages are likely to have a significant effect on the marketing

effort and how it is approached. To overcome language problems, local sales and marketing

staff will need to be put in place and any social taboos must be taken into account in advertising

strategies. There are also many examples of mistakes in naming products for a foreign market.

Where a strong brand is attached to a certain name, it is desirable to use it in the new market,

but it is necessary to check the meaning of the product name in the foreign languages used by

the target market.

Technological

The situation with regard to technological development in the foreign country is important to

the marketing effort. Where internet use is high, this can be an effective marketing tool. Other

types of media should also be examined, such as television viewing, number of listeners to

radio stations in addition to less high technology media such as newspaper circulation.

The telecommunications infrastructure in place, including actual and potential use of

broadband, should be taken into account when planning the marketing effort. The extent of use

of technology in other areas such as the banking system is also important.

Conclusion

The PEST analysis is not in itself a solution to the problems posed by marketing a product in a

foreign country, but it is a way of directing planning towards important features of the new

country and target market. The results of the PEST analysis will always be subjective and should

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only be treated as an approximate guide, to be refined as more information and experience is

gained in the new market.

LESSONS FOR INDIAN COMPANIES WISHING TO GO GLOBAL

Whenever you are involved in international negotiations or global meetings keep in mind that

you might be working with the same person for the next 10 – 20 years.

Negotiations should be open and straightforward. Hidden agendas will eventually be

discovered and make the next meeting very difficult.

Negotiations should involve creating value for both parties.

Meetings are important moments where trust is being built and confirmed. Be honest and

clear about your desires.

Never agree to something you cannot deliver or perform.

Listen, understand and evaluate what your partner is requesting. What are they saying, and

what does it mean.

Be certain of what you are negotiating and agreeing to. If not 100% sure, stop and request

clarification.

Prepare for the meeting several weeks before it happens. Refresh and add information

weekly. When you reach the meeting, you will be in control of the information and feel

comfortable during the talks.

At the end of the meeting, write down the most important points or agreements, with names

and dates, and have it signed by those present. This little tip will save lots of time and trouble

for everyone involved.

Any agreement must have 100% follow-through. If for any reason problems arise in the follow-

through, immediately contact and communicate the situation to your partner.

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Q.7) how global organizations emerge to enjoy global leaderships their business? Give relevant current

illustrations from global organizations

Requirements to be a global leader:

I. Leadership

An Inspirational Global Leader

Experience shows that if a global leader is a visionary person with an entrepreneurial, out-of-

the-box thinking spirit who acts as a role model in reaching out to the various opportunities

international expansion offers, his or her organization is fueled with the right level of energy to

grow beyond its home-country borders. Strong global leaders come across as inspiring to

people in the local markets; they are strong advocates for the core business of their

organizations, understand the needs of international audiences, attract local people to

following the organizational goals, and know how to support these people in their countries.

With the way they work, strong leaders enrich local economies and people.

Culturally Flexible Hinge Managers

Because of their mediating role, one would like to call the managers whom one primarily liaise

within the individual countries hinge managers. How well do one hinge managers understands

vision, mission, and way of operating? And how can they link that understanding with the way

other employees, volunteers, and markets operate in the local country?

As one may have found out in their experience, people in other countries may have different

values and perceptions, communicate in different ways, and may need to be managed in

different ways. Global leaders, as well as the hinge managers, need to have a very good

understanding of the similarities and differences in conducting international business. Global

leaders need to provide their hinge managers with information resources that would help them

in their country. The hinge managers need to be good at carrying the feedback of their teams

and markets to international headquarters. Also, it is worthwhile for everybody to fine-tune

their cross-cultural communications skills by learning more about cultural value dimensions

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that researchers have identified in the past century, to understand different behaviors across

cultures.

One of the cultural dimensions researchers have identified is uncertainty avoidance. It is

fascinating to learn how countries where people don’t like too much uncertainty prefer to be

managed safely and securely, meaning a high level of social security and quality of work life.

Learning these value dimensions will help you understand the tax system, the insurance

practices, and the number of holidays when managing people in these countries.

II. Company Culture

The Global Company Culture

Can you think of organizations that went through tremendous crises, but came out of the crises

perhaps in even better ways? Lets define a strong global organizational culture as a culture that

holds the organization together and conveys trust not only in good times, but also challenging

times.

In light of this, according to the observations, many exemplary organizations practice the

following:

(a) Address a global need: The vision and mission statements embrace a global need and are

articulated with messages on different platforms.

(b) Communicate, communicate, communicate: The organization utilizes a wide variety of

internal communication channels such as websites, intranets, print, experience exchange

meetings, and so forth to facilitate information exchange and emphasize corporate values.

(c) Assume ownership: Corporate identity and branding are applied to all of these

communication channels. Be aware of cross-cultural management styles. In some countries, the

hinge managers give guidance on the level of access to information other staff and volunteers

receive.

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(d) Translate to reach out: Depending on its size, the organization adapts official language(s)

and has its important corporate announcements and documents published in all of these

languages.

(e) Facilitate internal communication: An intranet site acts as an online resource for local

operations and provides such information as project status and/or more functional information,

such as helpful hints for event management, travel policy, holidays, country phone number

codes, time differences, and foreign exchange rates.

(f) Capitalize on full international potential: Employees and volunteers at local sites are true

business partners to global operations and contribute to drafting international strategic plans.

They are the eyes and ears for strategic alliances, membership feedback, government

environment, and investment ideas. They also are triggers for potential change and for keeping

a large organization relevant to its audiences.

(g) Train to reach goals and transform: The organization utilizes the training function as a

strategic and dynamic function within the organization.

(h) Emphasize a sense of pride: The organization proudly talks about its organizational culture

to attract like-minded people.

(i) Identify international career paths: Good employees always look for professional

development and challenge. Hence, the successful organization promotes international career

paths.

(j) Capitalize on the potential of an international board: A successful organization capitalizes

on the view and resources of international board members.

(k) Recognize ethics: The problem of ethics can vary from country to country. An international

code of ethics may guide leadership and management in the board members’ decisions and

also add to the long-term international credibility of the organization. Also, recognizing ethical

practices will attract people’s attention to this important subject, and foster an ethical business

environment.

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(l) Training as a Strategic Function: When engaged strategically, training can fulfill two

important functions: Help the company achieve its organizational goals faster, and help build

the company culture. When designing your training activities, take the following into

consideration:

Run competency-based training: Identify competencies that will help your staff and

volunteers achieve goals and train accordingly.

Engage the culture factor: The competency that helps achieve goals in one country may not

be appropriate to achieve goals in another country. Localization of training is important for the

end result.

Get local leadership ownership. Your hinge managers will talk training terminology in their

operational meetings if they are convinced about its usefulness, and this will help your

organization internalize the training.

Integrate messages on organizational goals into your training. This will again make the

training relevant and help the organization internalize it for success.

III. Customer Service:

Internalize and highlight vision and mission statements: Well-written vision and mission

statements that are communicated on the global website, the country website, and through

other means help local audiences get a clear message about what the nonprofit organization

does. This clarity nurtures a trust environment.

Clarify your terminology: In some countries, it may be worthwhile to attend events that talk

about the nonprofit industry, and there may be a need to explain the nonprofit terminology to

27

individuals. Not all countries are familiar with this type of organization, and some even use a

terminology that is perceived with suspicion by the public. Offering respectable certification

programs also will help strengthen your credibility.

Build your credibility: A foreign organization is a guest organization in a country. Delivering the

promised service and having a “can-do” approach and a sense of urgency are extremely

important to maintain credibility and establish good relationships.

Share your passion: If the communication material coming from the international headquarters

reflects the passion of the leaders and tells about international experience, the global

organization will come across as inspirational. Your website should reflect your global identity.

The local organization then assumes the responsibility to be a point of immediate resource for

members. Your country organization is your customer. As your organization grows

internationally, your customers will become your local staff and volunteers, in which case they

will really appreciate if you offer them platforms for experience exchange and opportunities for

cross-cultural collaboration.

Speak to off-shore English: Foreign people tend to speak written English rather than

conversational English at times. Some authors call this English off-shore English. The employees

and volunteers of the global organization should be aware of off-shore English and speak,

present, and promote for the ears, eyes, and feelings of off-shore English speakers. Keep in

mind that there have been cases where businesses have decided to partner with other non-

native English-speaking companies merely because of parallels in communication.

Incorporate the culture factor into your strategy: As there are different symbols, values, and

beliefs that shape the perception of people in other countries, your market analysis,

segmentation, and branding strategy require the consideration of cultural factors. Based on

social and economical factors, you also need to give consideration to the most appropriate

communication channels that will bring out the word on your organization. Strong leadership,

company culture, and culturally sensitive customer service may not be the first thoughts that

come to your mind when your organization starts establishing international presence. At that

time, things are just too exciting. Yet, once the time comes to support these international

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operations, your company culture, leadership, and customer service style are going to add the

greatness to your organization that will inspire a lot of people around the world.

EXAMPLES:

1. WAL MART

2. APPLE

3. P&G

4. NESTLE

5. MICROSOFT

SHORT NOTES WITH EXAMPLES

Q.8) what are TRIPS?

Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)

The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS),

negotiated during the Uruguay Round, introduced intellectual property rules for the first time

into the multilateral trading system. The Agreement, while recognizing that intellectual

property rights (IPRs) are private rights, establishes minimum standards of protection that each

government has to give to the intellectual property right in each of the WTO Member countries.

The Member countries are; however, free to provide higher standards of intellectual property

rights protection.

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The Agreement is based on and supplements, with additional obligations, the Paris, Berne,

Rome and Washington conventions in their respective fields. Thus, the Agreement does not

constitute a fully independent convention, but rather an integrative instrument which provides

"Convention-plus" protection for IPRs.

The TRIPS Agreement is, by its coverage, the most comprehensive international instrument on

IPRs, dealing with all types of IPRs, with the sole exception of breeders' rights. IPRs covered

under the TRIPS agreement are:

The TRIPS agreements is based on the basic principles of the other WTO Agreements, like non-

discrimination clauses - National Treatment and Most Favored Nation Treatment, and are

intended to promote "technological innovation" and "transfer and dissemination"

Of technology. It also recognizes the special needs of the least-developed country Members in

respect of providing maximum flexibility in the domestic implementation of laws and

regulations.

Part V of the TRIPS Agreement provides an institutionalized, multilateral means for the

prevention of disputes relating to IPRs and settlement thereof. It is aimed at preventing

unilateral actions.

Q.9) Doing business with expanded Europe

India is an important trade partner for the EU and a growing global economic power. It

combines a sizable and growing market of more than 1 billion people with a growth rate of

between 8 and 10 % - one of the fastest growing economies in the world. Although it is far from

the closed market that it was twenty years ago, India still also maintains substantial tariff and

non-tariff barriers that hinder trade with the EU. The EU and India hope to increase their trade

in both goods and services through the Free Trade Agreement (FTA) negotiations that they

launched in 2007.

India's integration with the global economy

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In particular since the early 1990s, India has embarked on a process of economic reform and

progressive integration with the global economy that aims to put it on a path of rapid and

sustained growth. Per capita incomes more than doubled during the period 1990-2005. In

parallel, EU-India trade has grown impressively and doubled from €28.6billion in 2003 to over

€55billion in 2007. EU investment to India has more than tripled since 2003 from €759million to

€2.4billion in 2006 and trade in commercial services has more than doubled from €5.2billion in

2002 to €12.2billion in 2006. However, India's trade regime and regulatory environment still

remain comparatively restrictive and in 2008 the World Bank ranked India 120 (out of 178

economies) in terms of the 'ease of doing business'. In addition to tariff barriers to imports,

India also imposes a number of non-tariff barriers in the form of quantitative restrictions,

import licensing, mandatory testing and certification for a large number of products, as well as

complicated and lengthy customs procedures.

Overall cooperation framework with India

In 2004 India became one of the EU's "strategic partners". Since 2005, the EU-India Joint Action

Plan, revised in 2008, aims at realising the full potential of this partnership in key areas of

interest to India and the EU.

The EU and India have in place an institutional framework, cascading down from the annual EU-

India Summit, to a senior-official level Joint Committee, to the Sub-Commission on Trade and to

working groups on technical issues such as technical barriers to trade (TBT), sanitary and

phytosanitary measures (SPS), agricultural policy or industrial policy.

The EU-India FTA

With its combination of rapid growth and relatively high market protection India was an

obvious partner for one of the new generation of EU FTAslaunched as part of the Global

Europe strategy in 2006.

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The parameters for an ambitious FTA were set out in the report of the EU-India in October

2006, which was tasked with assessing the viability of an FTA between the EU and India. Other

studies have reinforced the economic potential of an FTA between the EU and India.

Negotiations for such FTA were launched in June 2007 and, so far, nine negotiating rounds have

been held. The tenth round is foreseen from 6-8 March in Delhi. This year's EU-India Summit

will take place on 10 December in Brussels.

EU technical and financial trade assistance to India

To assist India in continuing its efforts to better integrate into the world economy with a view to

further enhancing bilateral trade and investment ties, the EU is providing trade related

technical assistance to India. €13.4million were allocated through the Trade and Investment

Development Programme (TIDP) funded from the Country Strategy Paper (CSP) 2002-2006. At

present, the follow-up programme to the TIDP is being designed and will be funded by the

Country Strategy Paper 2007-2013.

Q.10) Salient Features of any 2 RTAs

There has been a rapid growth in the number of regional trade agreements (RTAs) in recent

years. Regional Trade Agreements (RTAs) have become a very prominent feature of the

Multilateral Trading System (MTS). Some of the important RTA is APEC, the European Union,

NAFTA, ASEAN, CEFTA, MERCOSUR and the Andean Community.

NAFTA

The North American Free Trade Agreement or NAFTA is an agreement signed by the

governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North

America. The agreement came into force on January 1, 1994.

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Features of NAFTA

NAFTA Tariff Elimination

Under the North American Free Trade Agreement (NAFTA), tariffs on virtually all originating

goods traded between Canada and Mexico were eliminated in 2008, with the exception of

Canadian agricultural goods in the dairy, poultry, egg and sugar sectors (which are exempt from

tariff elimination).

Tariffs on qualifying goods traded between Canada and the United States became duty free on

January 1, 1998, in accordance with the Canada-United States Free Trade Agreement, which

was carried forward under NAFTA for goods traded between Canada and the United States.

National Treatment

NAFTA provides for national treatment of the goods and services of the three partner nations

and the prohibition of trade-distorting performance requirements. Canada, the U.S. and Mexico

must treat each other’s goods, services, and investors as they treat their own. Once goods,

services or investments from one country enter the other, they cannot be discriminated against

on the basis of origin.

Significantly, NAFTA coverage also extends to investments made by any company incorporated

in a NAFTA country, regardless of its country of origin. Because of this, foreign investors can

locate in Canada with the assurance that they will have secure access to markets in the U.S. and

Mexico. Moreover, NAFTA also has provisions for accession by other countries.

Other implications of NAFTA’s national treatment provisions include increased access to U.S.

and Mexican government procurement opportunities for Canadian-based companies, and

improved cross-border movement of business people and professionals among the signatory

countries.

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Secure Market Access

NAFTA ensures secure access for Canadian-based exporters to both the U.S. and Mexico.

Clearer North American content rules reduce the risk of unilateral interpretations by customs

officials. In cases where North American content is an issue, exporters or producers can choose

between two formulas and select the one which is most beneficial.

Improved Dispute Settlement

NAFTA provides clear rules for dealing with the settlement of disputes. If disputes arise

between companies and NAFTA governments, to which acceptable solutions cannot be

negotiated, they may be settled through international arbitration. The dispute settlement

process is transparent and enforceable, so the interests of exporters and business investors can

be effectively defended.

Improved Intellectual Property Rights Protection

NAFTA includes comprehensive protection of intellectual property including patents,

trademarks, copyrights and trade secrets. Enhanced protection for holders of intellectual

property encourages the development and commercialization of innovative goods and services

in the NAFTA nations.

Q.11) Foreign risk

Foreign exchange risk management

Foreign exchange risk management is designed to preserve the value of currency inflows, investments and loans, while enabling international businesses to compete abroad. Although it is impossible to eliminate all risks, negative exchange outcomes can be anticipated and managed effectively by individuals and corporate entities. Businesses do so by becoming familiar with the typical foreign exchange risks, demanding hard currency, diversifying properly and employing hedging strategies.

1. Currency Risks

o Foreign exchange risk is generally associated with adverse currency movements that negatively affect purchasing or pricing power. Merchants that accept and hold foreign currency lose purchasing power when the value of that foreign currency falls against their home currency.

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Meanwhile, businesses that offer goods and services overseas are unfavorably affected by increasing domestic currency values that raise the prices for exports.

Political Riskso Politics influences foreign exchange risks.

All international operators are challenged by political risks, which impede the flow of global business. Exchange rates for domestic currency have a bilateral cause and effect relationship with the home government. First, political unrest and instability will cause currency values from that particular nation to fall. Second, the nation's citizenry will pressure leadership to action if they feel that foreign exchange and trade are not being coordinated effectively.

The upheaval may result in trade wars, excessive taxes on international commerce or the outright seizure of foreign assets.

Hard Currencyo The U.S. dollar is hard currency.

Businesses and private citizens attempt to minimize foreign exchange risk by demanding that all transactions are settled in hard currency. Hard currency is associated with the industrialized, group of seven (G7) nations. The G7 is made up of the United States, Canada, United Kingdom, France, Germany, Italy and Japan. The currencies employed are the U.S. dollar, Canadian dollar, British pound, Euro and Yen.

Hard currency values are relatively stable as they are associated with strong economies and political regimes that protect individual rights.

Diversification

o All currencies fluctuate in value over time. Diversification allows people and businesses to neutralize the risks of holding currency that deteriorates in value, by carrying competing currency that is gaining in value. Doing business within several different countries, converting profits into separate foreign currency reserves and/or coordinating cash flow with basic hedging strategies are ways to achieve diversification.

Hedging Strategieso Currency futures contracts trade at the Chicago Board of Trade.

Hedging strategies related to foreign exchange are executed to smooth currency fluctuations by anticipating and locking in exchange rates. Financial managers hedge against currency risks with futures contracts and currency swaps.

Currency futures are contracts entered into by traders that set a fixed foreign exchange rate between currencies into the future. Currency swaps allow separate parties to switch the principal and interest payments upon debt that is denominated in one currency for that of another. Lenders use currency swaps to ensure that loans do not lose value. Borrowers use

35

currency swaps to hedge against the risk of loans becoming more expensive to pay off in foreign currency.

Of course, hedging strategies carry the opportunity cost risk of losing out on currency movements that are actually favorable.

The risk that an investor will have to close out a long or short position in a foreign currency at a

loss due to an adverse movement in exchange rates. Also known as "currency risk" or

"exchange-rate risk”. Managing foreign exchange (or forex) risk is essential to successful

investment in the forex market. Foreign exchange exposure or risk can be classified into three

types: transaction, economic and translation exposure.

Q.12) PPP [purchasing POWER PARITY THEORY & ROLE IN INT BUZ

Purchasing power parity (PPP) is a theory which states that exchange rates between currencies

are in equilibrium when their purchasing power is the same in each of the two countries. This

means that the exchange rate between two countries should equal the ratio of the two

countries' price level of a fixed basket of goods and services. When a country's domestic price

level is increasing (i.e., a country experiences inflation), that country's exchange rate must

depreciated in order to return to PPP

Q.13) NAFTA

The North American Free Trade Agreement (NAFTA) was signed by Canada, Mexico, and the United States in December 1992, and came into effect on January 1st, 1994. The NAFTA is precedent-setting in that it establishes a free trade area among developed and developing countries.

The agreement seeks to promote free trade in goods and services and increase investment not only by eliminating tariff protection and reducing non-tariff barriers, but also by introducing GATT plus trade and investment-related disciplines. The NAFTA builds on the bilateral Canada-U.S. Free Trade Agreement (CUSFTA) which came into effect on January, 1989. Major advances in the NAFTA over the CUSFTA include the substantially expanded coverage of government

36

procurement (to services and construction), intellectual property and investor's rights (introducing binding investor-state arbitration), as well as more stringent rules of origin.

Two side agreements signed in 1993 address cooperation on labor (NAALC) and the environment. These side agreements will allow the imposition of fines and trade sanctions to enforce national standards under certain circumstances.

Major trade components of the NAFTA include:

General:

(a) Tariffs and Quotas: All U.S., Canadian, and Mexican tariffs and quotas will be phased out over 15 years;

(b) Rules of Origin: Goods made with materials or labor from outside North America qualify for NAFTA treatment only if they undergo "substantial transformation" within a member country;

Sector-Specific:

(a) Autos: Tariffs will be eliminated after eight years for autos only if a certain percentage of costs are comprised of North American materials or labor. The requirement that U.S. auto manufacturers produce in Mexico in order to sell there will be lifted after 10 years;

(b) Textiles and Apparels: Strict rules will eliminate tariffs only for goods made from North American-spun yarn or from fabric made from North American fibers. Quotas can be reimposed temporarily if imports cause "serious damage" to domestic industry;

(c) Agriculture: About half of the existing tariffs and quotas will be eliminated immediately; however those for politically sensitive crops, such as U.S. corn sold to Mexico or Mexican peanuts, sugar and orange juice sold to the U.S., will be gradually phased out over the maximum period of 15 years.

Institutions

Various institutions will facilitate the implementation of the agreement. The Free Trade Commission, composed of cabinet-level representatives of each member country, will meet at least once a year to oversee the performance and evolution of NAFTA. In particular, it will supervise dispute resolution and the work of the nearly 40 committees and working groups set up under the NAFTA. At the Commission's first ministerial meeting in January of 1994, it was agreed that an International Coordinating Secretariat be established in Mexico City, with a U.S. Executive Director. This decision has yet to be implemented

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Q.14) ASEAN

ESTABLISHMENT

The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in

Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines,

Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July

1995, Lao PDR and Myanmar on 23 July 1997, and Cambodia on 30 April 1999.

The ASEAN region has a population of about 500 million, a total area of 4.5 million square

kilometers, a combined gross domestic product of almost US$ 700 billion, and a total trade of

about US$ 850 billion.

OBJECTIVES

The ASEAN Declaration states that the aims and purposes of the Association are: (1) to

accelerate economic growth, social progress and cultural development in the region and (2) to

promote regional peace and stability through abiding respect for justice and the rule of law in

the relationship among countries in the region and adherence to the principles of the United

Nations Charter.

The ASEAN Vision 2020, adopted by the ASEAN Leaders on the 30th Anniversary of ASEAN,

agreed on a shared vision of ASEAN as a concert of Southeast Asian nations, outward looking,

living in peace, stability and prosperity, bonded together in partnership in dynamic

development and in a community of caring societies.

In 2003, the ASEAN Leaders resolved that an ASEAN Community shall be established comprising

three pillars, namely, ASEAN Security Community, ASEAN Economic Community and ASEAN

Socio-Cultural Community.

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FUNDAMENTAL PRINCIPLES

ASEAN Member Countries have adopted the following fundamental principles in their relations

with one another, as contained in the Treaty of Amity and Cooperation in Southeast Asia (TAC):

mutual respect for the independence, sovereignty, equality, territorial integrity, and

national identity of all nations;

the right of every State to lead its national existence free from external interference,

subversion or coercion;

non-interference in the internal affairs of one another;

settlement of differences or disputes by peaceful manner;

renunciation of the threat or use of force; and

effective cooperation among themselves

Q.15 w.r.t “International trade” Explain?

Strategic Advantage

Comparative Advantage is also defined as STRATEGIC ADVANTAGE

Comparative advantage exists when a country has a margin of superiority in the production of a

good or service i.e. where the opportunity cost of production is lower.

The basic theory of comparative advantage was developed by David Ricardo

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Ricardo's theory of comparative advantage was further developed by Heckscher, Ohlin and

Samuelson who argued that countries have different factor endowments of labour, land and

capital inputs. Countries will specialise in and export those products which use intensively the

factors of production which they are most endowed.

If each country specialises in those goods and services where they have an advantage, then

total output and economic welfare can be increased (under certain assumptions). This is true

even if one nation has an absolute advantage over another country.

Worked example of comparative advantage

Consider the data in the following table:

Pre-Specialisation CD Players Personal Computers

UK 2,000 500

Japan 4,000 2,000

Total Output 6,000 2,500

To identify which country should specialise in a particular product we need to analyse the

internal opportunity cost for each country. For example, were the UK to shift more resources

into higher output of personal computers, the opportunity cost of each extra PC is four CD

players. For Japan the same decision has an opportunity cost of two CD players. Therefore,

Japan has a comparative advantage in PCs.

Were Japan to reallocate resources to CD players, the opportunity cost of one extra CD player is

1/2 of a PC. For the UK the opportunity cost is 1/4 of the PC. Thus the UK has the comparative

advantage in CD players.

Specialisation and potential gains from trade

After SpecialisationCD Players Personal Computers

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UK 4,000 0

Japan 2.400 2,800

Total Output 6,400 2,800

Output of both products has increased - representing a gain in economic welfare. Total output

of CD players has increased by 2000 units and total output of personal computers has expanded

by 500 units.

Allocating the gains from trade

For mutually beneficial trade to take place, the two nations have to agree an acceptable rate of

exchange of one product for another. To work this out, consider the internal opportunity cost

ratios for each country.

Without trade, the UK has to give up four CD players for each PC produced.

A terms of trade (or rate of exchange) of 3 CD players for each PC produced would be an

improvement for the UK In the case of Japan (specialising in producing personal computers) for

each

After trade (3 CD's for 1

PC)CD Players Personal Computers

UK 2,200 600

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Japan 4,200 2,200

Total Output 6,400 2,800

Compare with the original production matrix

Pre-Specialisation CD Players Personal Computers

UK 2,000 500

Japan 4,000 2,000

Total Output 6,000 2,500

After trade has taken place, total output of goods available to consumers in both countries has

grown. UK's consumption of CD players has increased by 200 and they have an extra 100 PCs.

For Japan, they have an extra 200 CD players and 200 PCs.

Assumptions underlying the concept of comparative advantage

Perfect occupational mobility of factors of production - resources used in one industry can be

switched into another without any loss of efficiency

Constant returns to scale (i.e. doubling the inputs in each country leads to a doubling of total

output)

No externalities arising from production and/or consumption

Transportation costs are ignored

If businesses exploit increasing returns to scale (i.e. economies of scale) when they specialise,

the potential gains from trade are much greater. The idea that specialisation should lead to

increasing returns is associated with economists such as Paul Romer and Paul Ormerod

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What determines comparative advantage?

Comparative advantage is a dynamic concept. It can and does change over time. Some

businesses find they have enjoyed a comparative advantage in one product for several years

only to face increasing competition as rival producers from other countries enter their markets.

For a country, the following factors are important in determining the relative costs of

production:

The quantity and quality of factors of production available (e.g. the size and efficiency of the

available labour force and the productivity of the existing stock of capital inputs). If an economy

can improve the quality of its labour force and increase the stock of capital available it can

expand the productive potential in industries in which it has an advantage.

Movements in the exchange rate. An appreciation of the exchange rate can cause exports from

a country to increase in price. This makes them less competitive in international markets.

Long-term rates of inflation compared to other countries. For example if average inflation in

Country X is 4% whilst in Country B it is 8% over a number of years, the goods and services

produced by Country X will become relatively more expensive over time. This worsens their

competitiveness and causes a switch in comparative advantage.

Import controls such as tariffs and quotas that can be used to create an artificial comparative

advantage for a country's domestic producers- although most countries agree to abide by

international trade agreements.

Non-price competitiveness of producers (e.g. product design, reliability, quality of after-sales

support)

Q.16 TARIFF & NON TARIFF ways of International Trade Control

INSTRUMENTS OF TRADE CONTROL

Governments use many rationales and seek a range of outcomes when they try to influence the

international trade process. The choice of instrument(s) is crucial because each type of control

43

may incite different responses from both domestic and foreign groups. While some

instruments directly limit the amount that can be traded, others indirectly affect the amount

traded by directly influencing prices, i.e., while tariff barriers directly affect prices and

subsequently the quantity demanded, nontariff barriers may directly affect price and/or

quantity.

Tariffs

A tariff (also called a duty) is a tax levied on (internationally) traded products. Exports tariffs

are levied by the country of origin on exported products; a transit tariff is levied by a country

through which goods pass en route to their final destination; import tariffs are levied by the

country of destination on imported products. A tariff increases the delivered price of a product,

and, at the higher price, the quantity demanded will be less.

A specific duty is a tariff that is assessed on a per unit basis; an ad valorem tariff is assessed as a

percentage of the value of an item. If both a specific duty and an ad valorem tariff are assessed

on the same product, it is known as a compound duty. A tariff controversy concerns the

treatment of manufactured exports to industrialized nations. While raw materials frequently

enter industrial countries tariff-free, when an ad valorem tariff is applied to manufacture goods,

it is generally applied to the total value of the product. Critics argue that the effective tariff on

the manufactured portion, i.e., the value-added portion, is higher than the published tariff.

Nontariff Barriers:

a) Direct Price Influences

Nontariff barriers (NTBs) represent administrative regulations, policies, and procedures, i.e.,

quantitative and qualitative barriers that directly or indirectly impede international trade.

Subsidies. Subsidies consist of direct or indirect financial assistance from governments to their

domestic firms to help them overcome market imperfections and thus make them more

competitive in the marketplace. From the standpoint of market efficiency, subsidies are more

justifiable than tariffs because they seek to overcome, rather than create, market

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imperfections. However, many international frictions result from disagreements about the

definition of a subsidy.

Aid and Loans. Governments may give aid and loans to other countries but require that the

recipient spend the funds in the donor country; this is known as tied aid or tied loans. In this

way some donor products that might otherwise be noncompetitive may find limited

international markets.

Customs Valuation. Because of the temptation to declare a low invoice price in order to pay a

lower ad valorem tariff, it is sometimes difficult to determine the true value of traded products.

First, customs officials should use the declared invoice price. If there is none, or if the

authenticity of the value is in doubt, then customs agents may assess the shipment on the basis

of the value of identical (preferable) or similar (acceptable) goods arriving at about the same

time. Further, because countries often impose different import barriers on products sourced

from different countries, customs officials must also determine a product’s true origin.

Other Direct Price Influences. Other means that countries may use to affect prices include

establishing special fees for consular and customs clearance and documentation, requirements

that customs deposits be made in advance of shipment, and minimum price levels at which

products can be sold after they receive customs clearance.

b) Quantity Controls

Governments use a variety of nontariff barriers to directly affect the quantity of imports and

exports. When the quantity of imports is limited, the resulting shift in the supply curve means

that the equilibrium price will then be higher.

Quotas. A quota represents a numerical limit on the quantity of a product that may be

imported or exported in a given period of time. (Because of the increase in the equilibrium

price, quotas may increase per unit revenues for firms that participate in the market.)

Voluntary export restraints (VERs) are negotiated limitations of exports from one country to

another and, as in the case of a quota, may result in higher prices to customers. An embargo

represents an outright ban on imports from or exports to a particular country. (A commodity

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cartel seeks higher, more stable prices for its goods by assigning production quotas to individual

countries and thus limiting overall output.)

“Buy Local” Legislation. Buy local legislation represents laws that are intended to favour the

purchase of domestically sourced products over imported products, particularly with respect to

government procurement. Local content requirements, i.e., costs incurred within the local

country (usually measured as a percentage of total costs), fall within this category.

Standards and Labels. The professed purpose of standards is to protect the safety or health of

the domestic population. However, countries may also devise classification, labelling, and

testing standards that facilitate the sale of domestic products but obstruct the sale of foreign-

sourced products.

Specific Permission Requirements. An import (and export) license requires that firms secure

permission from government authorities before conducting trade transactions. Such

procedures directly restrict trade when permission is denied and indirectly restrict trade

because of the cost, time, and uncertainty involved in the process. A foreign exchange control

requires an importer of a given product to apply to a government agency to secure the foreign

currency to pay for the product.

Administrative Delays. Intentional administrative delays create uncertainty and increase the

cost of carrying inventory. However, competitive pressures can motivate countries to improve

inefficient administrative systems.

Reciprocal Requirements. Governments may require that foreign suppliers accept products in

lieu of money. Barter, i.e., the direct exchange of products between two parties, and offsets,

i.e., the agreement by a foreign firm to purchase products with a specified percentage of the

proceeds from an original sale within the importing country, both represent forms of

countertrade.

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Restrictions on Services. Countries restrict trade in services such as transportation, insurance,

advertising, consulting, and banking for reasons of essentiality, the maintenance of standards,

and employment.

Essentiality. Countries consider certain services industries to be essential because they serve

strategic purposes or provide social assistance to citizens. Private companies of any sort may

be prohibited, and in other cases, price controls may be imposed by the government;

government-owned operations are often subsidized. Essential services can include the

transportation, postal, banking, utilities, security, and communications sectors.

Standards. Governments may limit foreign entry into particular service professions in order to

assure that practitioners are qualified. Licensing standards vary by country and extend to a

wide variety of occupations. Prerequisites for taking certification examinations may be lengthy.

Immigration. Government regulations often require that an organization, whether domestic or

foreign, demonstrate that the skills needed for a particular job are not available locally before

hiring a foreigner

CASE STUDY QUESTION’s

Q1) What overall mission Co. Is trying to achieve – huge expansion across widest geography

while global slow down? – Explain giving examples.

Strengthen presence in traditional and niche market &Establish regional alliances for marketing

The company has a strategy in place for the next stage of its expansion. Tata has been able to exchange expertise. For example after the Daewoo acquisition the Indian company leaned work discipline and how to get the final product µright first time. The companys dealership, sales, services and spare parts network comprised over 3500 touch points.

TATA motors has been famous to introduce newvehicles, this is possible just because of the strong research and development.

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Long term strategy

Develop ´Truck of the future& Leverage technical capabilities for product development

Tata Motors was interested in acquiring JLR as it would reduce the company's dependence on the Indian market, which accounted for 90% of its sales. The company was of the view that the acquisition would provide it with the opportunity to spread its business across different geographies and across different customer segments. Tata Motors had formed an integration committee with senior executives from the JLR and Tata Motors, to set milestones and long-term goals for the acquired entities.One of the major problems for Tata Motors could be the slowing down of the European and US automobile markets. It was expected that the company would address this issue by concentrating on countries like Russia, China, India, and the Middle East. Forming a part of the purchase consideration were JLR's manufacturing plants, two advanced design centers in the UK10, national sales companies spanning across the world, and also licenses of all necessary intellectual property rights.

Tata Motors had several major international acquisitions to its credit. It had acquired Tetley, South Korea-based Daewoo's commercial vehicle unit, and Anglo-Dutch Steel maker Corus.

Tata Motors' long-term strategy included consolidating its position in the domestic Indian market and expanding its international footprint by leveraging on in-house capabilities and products and also through acquisitions and strategic collaborations.

Analysts were of the view that the acquisition of JLR, which had a global presence and a repertoire of well established brands, would help Tata Motors become one of the major players in the global automobile industry.

Tata Motors, and Marcopolo will provide know-how in processes and systems for bodybuilding and bus body design.Tata and Marcopolo have launcheda low-floor city bus which is widely used by Chennai, Delhi, Mumbai, Lucknow and Bangloretransport corporations.

Tata Motors also formed a joint venture with Fiat and gained access to Fiat diesel engine technology.Tata Motors sells Fiat cars in India and is looking to extend its relationship with Fiatand Iveco to other segments. Tata has also formed several JV's with many small companies in various countries around the world

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Q2) “Acquiring widest range in

passenger as well in commercial

vehicles” Explain very high risks Co. Is

undergoing?

Economic slowdown resulting

in adverse impact on the sales

In Feb 2009, the sales in commercial vehicles segment showed a decline of 53% as compared to that of Feb 2008.

Tata Motors bought Jaguar Land Rover from Ford Motor Company for $2.3 billion. A bridge loan from a syndicate of banks was used to finance the deal.] The success of the takeover depends

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on the ability of TTM to fully integrate with Jaguar Land Rover and turn around the Jaguar Land Rover business. The economic slump has led to a drop in sales of the cars and made turnaround of the business difficult. TTM had to refinance the bridge loans in order to adjust for the lower sales.

TTM has lost market share in its passenger car and utility vehicles segment because of no new product launch. Although new variants have been introduced time and again, they have not been able to sustain the consumer interest as competitors have come up with new product launches. The Nano plant in Singur, West Bengal also had to be abandoned because of public protest and political complications. This has caused delays in the launch of Nano, which was originally scheduled to be launched in Feb 2009.

Operating in numerous countries across the world, Tata Motors functions with a global economic perspective while focusing on each individual market. Because Tata is in a rapid growth period, expanding or forming a joint venture in over five countries world-wide since 2004, a global approach enables Tata Motors to adapt and learn from the many different regions within the whole automotive industry. They have experience and resources from five continents across the globe, thus when any variable changes in the market they can gather information and resources from all over the world to address any issues. For instance, if the price of the aluminum required to make engine blocks goes up in Kenya, Tata has the option to get the aluminum from other suppliers in Europe or Asia who they would normally get from for production in Ukraine or Russia.

Tata Motors also has to pay close attention to shifts in currency rates throughout the world. Currency fluctuations can equate to higher or lower demands for Tata vehicles which in turn affect profitability. It can also mean a rise in costs or a drop in returns. But they also have to pay attention to not just the domestic currency, the rupee, but also to the dollar, euro, bhat, won, and pound, to just name a few. Just because the rupee is strong against the dollar does not mean it is strong against all the other currencies. Attention to currency is important because it influences where capital investment will develop and prosper.

In 2004, Tata Motors acquired Daewoo Commercial Vehicles Company, which was at the time Korea’s second largest truck maker. Rather than using de-culturation or assimilating Daewoo, Tata took an integrated approach, and continued building and marketing Daewoo’s current models as well as introducing a few new models globally just as it had been done under Korean management.

Q3) Will these global expansion help Tata motors long struggling- Nano and Indica Range

of products to go global? - Suggest strategies.

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Tata Motors is able to maintain, as well as increase, their market share by capitalizing on their core competencies. Tata Motors is active, competitive, and dynamic in all aspects of the automotive industry, which means that there must be many different activities going on in all areas of the company.

As a result of the ever evolving automotive industry Tata Motors must always be changing and one way to stay at the forefront of the industry is to make continuous improvements in technology through research and development.

One way that Tata Motors has done this is by producing one of the most efficient and low cost vehicles on the market. Acquisitions, mergers, and expansion is another core competency that Tata Motors has is embedded in their company structure and philosophy.

Another core competency that Tata Motors holds is being located in the India. This location has allowed them to understand not only the Indian market but also the dynamics of emerging and developing markets. This market understanding and knowledge allows Tata Motors to manufacture their products at lower costs, sell them to emerging markets while making profits as well as take advantage of the strong labor base in India.

Tata Motors excels when it comes to innovation through intensive research and development. Their ability to make the least expensive car on the market, the Nano which will retail for $2,500, is far beyond what any other car dealership has created. This innovation gives Tata Motors their main competitive advantage.

Tata Motors makes everything from tractor-trailers to the world’s least expensive car. This product diversity grants them a competitive advantage over their competitors because they can satisfy more markets and customer needs.

Another strength that Tata Motors possesses is high corporate responsibility. They donate a portion of their profits from stock increases towards a specific charity. This highlights Tata Motors overall desire for community improvement while also emphasizing Tata Motors’ high morals and values which is something money can not buy.

Tata Motors is also a very eco-friendly company. One of their goals is to produce an emission friendly car, and in 2000 Tata Motors launched the first compressed natural air bus. This air bus requires the owner to plug the car into a standard electric plug for four hours to fill the air tanks. This brought the concept of an “air-car” to reality and the name for this compressed natural air car is “OneCAT.” OneCAT has no gas costs or fossil fuel emissions which makes it a very attractive car for the more mature markets but also the upper classes in developing countries at this point.

It is also a great car to have in highly populated countries, such as China and India, because pollution with its adverse effects is a very large concern. OneCAT also is more efficient that any other present Hybrid car, so when inventors think they have the best product out on the market, they actually do not. There will always be something else to invent or improve on and Tata Motors is a prime example of that.

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Tata Motors is unique in a way in which when it buys a company. Tata Motors keeps the original management of that company intact. The company that Tata Motors purchases will look exactly the same in terms of management and organizational structure as if it was never purchased by Tata Motors.

International strategy based on the competitive advantage:

New product (eg. Tata Nano, the cheapest car in the World).

Acquisitions (eg. Land Rover and Jaguar brands from Ford Motors).

Partnership with established companies (eg. Alliance with Fiat since 2006) to enhance the product portfolio and knowledge exchange.

Facilities for learning from other companies.

Developing programmes for intensive management development.

Consolidate position in India by exploiting opportunities:

New mobility of young Indians.

Government’s substantial road-building program

GDP growth

Q4) In global widest acquisition – what competitive advantage Co. May have in domestic markets against competitors?

Today companies not only face competition from domestic players but also from global players

entering in to the market due to free trade and huge opportunities. In India, there is huge

competition to attract new customers by offering newer and newer products. One of the

strategies adopted by today’s companies is that go for mergers and expansion in order to gain a

larger market share and to cash on brands of the company so acquired/ merged.

Like Tata motors which have acquired so many companies in short period of 6 years from a

company which was specialised in day to day product i.e., Tata Tetley to company

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manufacturing high end aspirational products i.e., Jaguar and land Rover. With all these

acquisition Tata have emerged as a good option for people against its competitors as Tata can

now offer more variety in the existing products and also the products with new technologies

that Tata have got in the acquisition.By going global there is a twofold benefit, one to acquire

global market and second to increase the domestic market with latest and never known before

products of the other countries. Domestic market in comparing two companies/ products will

always look for new technology used or new innovation bought, thus companies which are

going global can get the benefit of all the improved techno, as domestic market instead of going

for foreign company can go for domestic company with foreign technology.

As in the case of Tata motors, they can even go for skimming pricing strategy for the newly

acquired Jaguar and Land Rover unit as they are comparatively the well know brand in foreign

and commands a good status therefore when these premium cars are launched in India by Tata

motors, it can keep the price high as customers will be more attracted to the premium products

of Tata, which already enjoy a good mind share in domestic market.

But also these acquisitions and mergers can take a long time to provide the synergies due to

some unsystematic risk prevailing in the markets but one has to be patient as sooner or later if

right strategies are adopted, and the market in which these companies are going to operate are

understood properly and efficient management is there, these synergies are bound to take

place

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