International Business Solved Question Papers 2013 2006

@Cee_A_Dee MMM 2013-2016

Roll No: 13-M-22 International Marketing

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INTERNATIONAL BUSINESS

1. CALCULATE CIFC 10 Dubai in case of the following situations:

a. F.O.B Mumbai U.S. $ 10,000

b. Net Weight of the Cargo – 14 metric tonnes

c. Gross Weight of the Cargo – 14 metric tonnes

d. Dimensions of the cargo – 2 meters x 2 meters x 2 meters

e. Freight Rate U.S. $ 60 per metric tonne and U.S. $ 100 per cubic meter

f. Commission Payable to Agent 10% on F.O.B Mumbai

g. Insurance at 2% of CIF. Insure for 120% of CIF

2. CALCULATE CIFC 10% Dubai for the following:

a. F.O.B Mumbai Price – INR 100,000 per MT

b. Net Weight of the Goods exported – 10,000 KGS

c. Gross Weight of the Goods exported – 14,000 KGS

d. Volume of the cargo – 15 cubic meters

e. Freight Rate U.S. $ 50 per metric tonne and U.S. $ 60 per cubic meter

f. Insurance at 2% of CIF. Insure for 120% of CIF

g. U.S $1 = INR 50

(Q.5, 2013; Q.2a, 2007)



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3. Discuss the best payment terms for the following situations.

Bring out the MERITS & DEMERITS to the exporter

SITUATION # 1:

a. You are negotiating an export order with a customer. You have to extend 120 days credit to get

the order. This is a must to bag the order

b. Business is not possible unless you extend a credit of 120 days. You do not know the customer,

your margins are meager, ECGC is reluctant to cover insurance

c. You are negotiating an export order with a customer. Your credit limits are totally exhausted

and bill discounting is out of the question

d. You are negotiating an export order with a customer. The customer is not allowing the use of

his credit limits for discounting

e. You are negotiating an export order with a customer. The order is a matter of survival for you

f. You are negotiating an export order with a customer. You are not able to get a loan from any

source

g. You are getting an order from Nigeria for $100,000. Nigeria has a bad reputation on payments.

You want the order badly. Multiple terms are possible

h. Company is exporting a power project which will be completed in 3 years

i. You are in a working capital jam but extending credit is a must. All your bank limits are

exhausted. Needless to say, you want the business

j. You have been dealing with a German firm for several years through Letter of Credit & usuance

letter of credit. The customer is now requesting for change in the credit terms. The customer

wants 120 days free credit but you are reluctant

k. Shipment has to be effected every month for the next 12 months in equal installments. The

customer wants to avoid L/C opening every month. You do not want to forgo the comfort given

by L/C

SITUATION # 2: Your overseas customer wants to get into a rate contract with you for supply of

goods worth $ 100,000 every month for the next 12 months. You are required to ship the goods by

10th of every month to his country. These goods are made to the specifications of the customer. This

is your first transaction with the customer. You have sketchy information about his

creditworthiness.

(Q.5, 2012; Q.3, 2009, Q.5, 2008; Q.5, 2006; Q.2, 2005)



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4. LETTER OF CREDIT

The documentary letter of credit is supposed to balance the Interests and Concerns of Importer and

Exporter. List the needs of both. Which is the best L/C

What are the Pros and Cons of the following?

a. Sight Draft/Documents on presentation also called as Cash against documents

b. Documents on Acceptance – 120 days D/A

L/C is the most used payment term in International Trade. L/C is a perfect procedure to equally protect

your (seller) interests and your buyer's interests. Using L/C as a term of payment, you risk almost nothing

and at the same time it ensures the buyer that goods are shipped before the payment has occurred.

However, you only will be paid if all terms stipulated in the L/C are met and all documents specified in the

L/C strictly comply with agreed conditions and are presented in time.

Before choosing L/C as a term of trade, you must understand what it is, how it works and what you can

do to minimize risks involved in the L/C payment process.

L/C, ITS FORMS AND TYPES:

In "plain English", L/C is a conditional bank guarantee of payment for supplied goods. "Conditional" means

that to get paid you have to present the bank-guarantor with documents, which strictly comply with the

terms and conditions specified in the L/C.

There are different forms and types of L/C, which you may (or should not) use in your operations, viz.:

Revocable and Irrevocable L/C:

"A revocable L/C may be amended or cancelled by the Issuing Bank at any moment and without prior

notice to the Beneficiary." (UCP 500, Article 8, a). This is as simple, as that. Never accept this form of L/C

in your export arrangements.

Agree that the L/C is irrevocable before you go any further in your L/C negotiations. Although UCP 500

requires that L/C should indicate whether it is revocable or irrevocable (Article 6, b), it also says "in the

absence of such indication the Credit shall be deemed to be irrevocable." (Article 6, c)

Confirmed L/C:

When you export to a country with economic or political instability or if you are unfamiliar with the Issuing

Bank, you should require that the L/C be confirmed by a first-class bank. If L/C is confirmed, the confirming

bank is liable for the payment.



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Transferable L/C:

Transferable L/C is a perfect financial tool for middlemen to secure their margin without involving any

funds. It allows dealing with more than one beneficiary. When a transferable L/C is issued in your favor,

you can transfer it to your seller and use it as a payment.

L/C "can be transferred only if it is expressly designated as "transferable" (UCP 500, Article 48, b).

Transferable L/C must correspond with the original L/C, "with the exception of:

the amount of the L/C,

any unit price,

the expiry date,

the last date for presentation of documents,

the period for shipment,

Any or all of which may be reduced or curtailed." (UCP 500, Article 48, h)

L/C payable at sight

"Payable at sight" means that you'll be paid "immediately" (in fact, it may take up to 7 days) after

presentation of the documents stipulated in the L/C to the Issuing Bank or to the Confirming Bank if it was

confirmed.

L/C payable on the maturity date

If deferred payment was agreed, you'll be paid on the maturity date indicated in the L/C after presentation

of the documents stipulated in the L/C to the Issuing Bank. Don't forget to specify the date from which

the deferring period starts (e.g. 90 days after date of transport document).

The payments under L/C are usually made by the bank upon receipt of the documents stipulated in the

L/C and a bill of exchange issued by you.

The bill of exchange (the draft) is an unconditional order in writing, signed and addressed by the drawer

(you) to the drawee (the paying bank), requiring the drawee to pay the drawer a certain sum of money

according to the terms of the L/C.

Under L/C, always draw the draft on the bank, not on the buyer.

How L/C works:

There are at least four participants, when dealing with L/C:

The buyer – the Applicant

You - the Beneficiary



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Bank, the payment will come from – the Issuing Bank

Bank, the payment will go to – the Advising Bank.

a. D/P (documents against payment) a.k.a Cash against documents

The exporter (we) makes shipment and sends the shipping documents to the exporter's bank (the Bank

of China) for collection. The Bank of China then sends the shipping documents along with a collection

letter to the importer's bank, who then sends a collection notice to the importer. The importer makes

payment upon receiving the notice, and only after payment does the importer receive the original

shipping documents with which you take the physical possession of the goods.

The major advantage of the use of a cash against documents payment is the low cost, versus using a letter

of credit. But, this is offset by the risk that the importer will for some reason reject the documents (or

they will not be in order). Since the cargo would already be loaded (to generate the documents), we have

little recourse against the importer in cases of non-payment. So, a payment against documents

arrangement involves a high level of trust between the exporter and the importer.

b. D/A (documents against acceptance)

The D/A transaction utilizes a term or time draft. In this case, the documents required to take possession

of the goods are released by the clearing bank only after the buyer accepts a time draft drawn upon him.

In essence, this is a deferred payment or credit arrangement. The buyer’s assent is referred to as a trade

acceptance.

D/A terms are usually after sight, for instance “at 90 days sight”, or after a specific date, such as “at 150

days bill of lading date.”

As with open account terms, there are some inherent risks in selling on D/A:

As with a D/P, the importer can refuse to accept the goods for any reason, even if they are in good

condition.

The buyer can default on the payment of a trade acceptance. Unless it has been guaranteed by the

clearing bank, the seller will need to institute collection procedures and/or legal action.



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5. CASE STUDY – KABABS AND MORE (2013)

a. DEVELOP A GLOBAL BUSINESS ARCHITECTURE FOR CREATING WEALTH IN THE SELECTED MARKETS

AND IDENTIFY WHICH BUSINESS SYSTEM ATTRIBUTES NEED TO BE CREATED TO GENERATE

VOLUMES, CONTRIBUTION, MARGINS AND IDENTIFICATION OF NEW PRODUCT SEGMENTS ON AN

ONGOING BASIS?

WEALTH CREATION:

WEALTH = Volumes (Units per year) x Contribution Margin (USD per unit) x Market Segment (PLC in years)

VOLUMES = Volumes/use x No. of uses/year x No. of users/market segment x No. of Market Segments

FIVE COUNTRIES ARE: UK (London), USA (New York), UAE (Dubai), South Africa (Johannesburg), Canada

(Toronto)

REASONS FOR CHOOSING:

All of the above mentioned locations either have a good Indian population base or people who

predominantly are interested in good international cuisine.

IDENTIFY ANY TWO MOST IMPORTANT KASH+CV FACTORS FOR NURTURING IN YOUR EMPLOYEES THAT

WILL MAKE YOU A GLOBAL LEADER EVENTUALLY

i. Knowledge – (a) Company’s vision (b) Product

About products/ markets/ consumers/ competition/ substitutes/ technology/ sales/ distribution/ digital

marketing/ Finance/ HR/ PR

ii. Attitudes – (a) To remain on top of their job thus passionate (b) open to new ideas/ culture, etc. by

keeping customer in mind always.

List the ‘Must haves’ and the ‘Must not haves’

iii. Skills – (a) Good communication (b) Team work

Job related and soft skills

i. Habits – (a) Hard working (b) Give feedback

Lifestyle changes that your business requires / Answer “That one thing question”. Daily dose of motivation

ii. Character – (a) Motivating (b) Focused

Self-igniting / Motivating / Positive Thinking / Robust Physically and Mentally

iii. Values – (a) Disciplined (b) Ethical

Ethical / Bulb Principle

iv. Create Vision, Mission and Goals – Focus on Mission and Get Result as by product

v. Create a rich organizational culture conducive to growth



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6. DAVAR AND FROST FRAMEWORK PARAMETERS – assets/competencies transferrable abroad and

pressure in the industry to globalize.

Following liberalization in 1991 when Indian borders were thrown open to imports with removal of

barrier and very low import duties, India has witnessed massive entry of MNC’s and their products. The

market shares of companies in the domestic market are under threat. The Indian firms have no option

but to start looking outside India & step up International activities while simultaneously protecting

home turf

Explain with examples the strategies available to Indian Firms in the DAVAR and FROST framework

parameters viz. Assets/Competencies transferrable abroad and pressure in the Industry to

globalize. Cite Examples of Each Strategy suggested by you. (Q.2, 2012)

Explain the positioning for emerging market companies using DAVAR and FROST framework which

comprises of (a) Competitive Assets (b) Pressure to Globalize in the Industry (Q.3, 2010)

Discuss the DAVAR and FROST framework in terms of the competitive assets and the pressure to

globalize in the industry. Examine in detail the strategic options available to Indian companies (Q.1,

2007)

Discuss the Hexagon of Competitive advantage proposed by DAVAR and FROST which could help

Indian firms to go Global. Discuss at least four of the six hexagon points in detail with specific Indian

& International examples (Q.6, 2009; Q.3, 2013)

GEORGE YIP ARTICLE:

In today’s open economy with foreign companies coming to India, local companies have to not only

defend their turf but also enter markets outside India. Currently most Indian companies operate at the

bottom of the global value chain by selling components or unbranded products; their challenge is to

develop business capabilities that equip them to compete at the top of the value chain. In this article we

shall focus on global strategies that will help companies participate in international markets.

But how does a company decide whether it is ready for global expansion? N Dawar and T Frost of Harvard

Business School have developed a framework that can help companies make this decision. According to

this matrix (Figure 01) companies should first consider whether the pressure to globalize is high or low.

Whether their industry is a local industry or can it go global? Then they should consider the competitive

assets of the company. Are the assets customized to the local market or can they be transferred abroad?



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This framework throws up four positions (D-C-D-E) that emerging market companies can adopt in the

open economy.

01 DODGER: (Kwality Walls & Vist)

(Focus on creating a synergy viz. by entering into a joint venture with the multinational, or allow to be

acquired by the multinational.)

Companies that have a high pressure to globalize, or are vulnerable to global competition, and do not

have a transferable competitive advantage, have no other option but to dodge competition. These

companies focus on a locally oriented link in the value chain, enter a joint venture, or sell out to a

multinational.

For example, Kwality, a dominant player in the Indian ice-cream market sold its brands and manufacturing

assets to Unilever, making Kwality-Walls the market leader in the Indian ice-cream market.

Similarly, when the Iron Curtain came down, Vist, a Russian PC manufacturer did not compete with

American or Japanese companies, but shifted focus to PC distribution. This was an artful move because

distribution in Russia was ridden with corruption and foreign companies faced difficulties in distributing



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products. As a result of this today they form an important link and support the Japanese and American

MNCs in their business.

02 CONTENDER: (Sundaram Fasteners & Bharat Forge)

(Focus on upgrading the company's capabilities and resources so as to be able to match foreign nationals

or multinationals globally, often by concentrating to niche markets.)

Companies that have competitive advantages that can be leveraged abroad and also have a high pressure

to globalize can compete aggressively in global markets. They focus on upgrading capabilities and re-

sources to match multinationals globally, often by keeping to niche markets.

For example, Sundram Fasteners competes in global markets for niche auto components like radiator

caps. A measure of its global competitiveness is the fact that it won the General Motors', 'Supplier of the

Year' award for five consecutive years.

Similarly, Bharat Forge, the second largest forging company in the world, competes by being a global

supplier of specialized engine and chassis components for trucks and passenger cars. One out of every

two trucks in the US uses front axles made at Bharat Forge.

03 DEFENDER: (Shanghai Jahwa & Grupo Industrial Bimbo & Videocon)

(Focus on supplying local assets in segments where multinationals are not doing too well or weak)

Companies should adopt this position when they have low pressure to globalize and their competitive

assets are customized to the local market. This is a defensive strategy that focuses on leveraging local

assets in market segments where multinationals are weak.

For example, when Western cosmetic giants entered the Chinese market, Shanghai Jahwa, the local

cosmetic company did not compete with them head on by targeting their global product ranges. Instead

they responded by developing products that would suit the local complexion and appeal to local people.

Similarly Grupo Industrial Bimbo, a Mexican food company responded to global competition by defending

their distribution system, which could reach the remote rural areas of the country.

In India Videocon developed semi-automatic washing machines that were targeted at the value conscious

Indian consumer and has successfully countered MNC competition by focusing on this segment.

04 EXTENDER: (Televisa & Jollibee Foods)



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(Focus on expanding into international markets similar to those of the local market, using the

competencies that had been developed at home.)

Companies that possess competitive assets, that can be transferred abroad, can adopt this position when

the pressure to globalize is low. They focus on expanding into markets similar to those of the home base,

using competencies developed at home.

Televisa, a Mexican media company globalized by making their Spanish language products available to

the Spanish speaking population across the world.

Another good example would be the case of Jollibee foods, a Philip-pines fast food chain that faced off

McDonald's by developing spicier products better suited to the Filipino palate. They then followed the

Filipino population across the world to globalize.

DEFINING COMPETITIVE ADVANTAGE

Once a company has decided which position to adopt in the global scenario the next step is to identify its

inherent competitive advantage. To globalize successfully it is critical to have a strong basis of competitive

advantage that can be leveraged internationally. For newly internationalizing firms an initial competitive

advantage is the single greatest determinant of international success.



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7. MODES OF ENTRY IN INTERNATIONAL MARKETS:

<<From LEAST RISK to MAX RISK>>s

MODE CONDITIONS FAVOURING

THIS MODE

ADVANTAGES DISADVANTAGES

EXPORTING Limited Sales Potential In

The Target Country

Minimizes Risk And

Investments

Trade Barriers And Tariffs

May Be Imposed

Little Product Adaptation

Required

Speed Of Entry Transportation Costs

Distribution Channels

Available Close To Home

No Gestation Period May Render Exports

Unviable

Liberal Import Policies Of

The Target Market

Maximizes Capacity

Utilization

Limited Access To Local

Information

High Political Risk For

Other Modes

Lower Overall Costs Company Viewed As An

Outsider

LICENSING Import Barriers,

Investment Barriers

Minimizes Risk And

Investment

Lack Of Control Over Use

Of Assets

Local Protection Possible In

Target Markets

Speed Of Entry --Relatively

Speaking

Non-Adherence To

Quality By Licensee

Low Sales Potential In

Target Market To Justify

Investment

Able To Circumvent Trade

Barriers

Knowledge Spillover And

Leakage

Large Cultural Distance High Return On Investment Licensee May Become

Competitor

Licensee Does Not Have

the Potential To Become A

Competitor

Brand Presence May Be

Sustained

Limited Timeframe

JOINT VENTURE Import Barriers Overcomes Ownership

Restrictions

Conflict Of Interest

Large Cultural Distance Reduces Cultural Distance Management

Philosophies May Differ



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High Sales Potential Combines Resources Of Two

firms

Dilution Of Control

Low Political Risk Greater Risk Than

Exporting And Licensing

Government Restrictions

On Foreign Ownership

Potential For Learning

Local Partner Can Provide

Skills/Resource,

Distribution, Network,

Brand Name, Political

Connections

Closeness To Market Knowledge Spillovers

And Technology Leakage

Sharing Financial Risks Viewed As Insider JV Partner May Become

Competitor

Lower Investment Required--

Relatively

Possibility Of Paralyses By

Analyses

Management Control Delays In Decision

Making

Exploit Product Loss Of Opportunities

WHOLLY OWNED

SUBSIDIARY-

W.O.S

Import Barriers Greater Knowledge Of Local

Market

Highest Financial And

Political Risk

Small Cultural Distance

High Sales Potential

Minimizes Knowledge

Spillovers And Leakage

Greater Resources

Required

Low Political Risk Can Be Viewed As An Insider Cultural Shocks Possible

No Possibility Of

Nationalization And/or

Expropriation

Quick Decision Making Difficult To Manage Local

Resources

Greater And Absolute Control



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8. STRATEGIES FOR FIRM TO GO INTERNATIONAL

i. What are the entry strategies available for the firm to go International? Start with the Lowest Risk

(MINIMAL INVOLVEMENT) and move to the highest risk (MAXIMUM INVOLVEMENT). Explain the

merits, advantages and disadvantages of each strategy? (Q.3, 2012; Q.2, 2010)

ii. Explain and compare the following for going international / global. Bring out the merits and

demerits of the same

a. Waterfall Strategy

b. Sprinkler Strategy

c. Wave Strategy of Christopher Lymbersky (Q.2, 2013)

iii. Examine the pros & cons of Waterfall & Sprinkler strategies, cross subsidization and standardization

(Q.1, 2005; Q.4, 2007)



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CROSS SUBSIDIZATION

Use cash flow generation or accrual in one market to fight competition in another.

For Example, Japan selling products internationally at low prices, particularly in the U.S.A.

Japan Causing the demise of the American Consumer Electronics Industry.



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9. You are a bicycle manufacturer in India for last several years and had a very successful run a few

years ago. What problems you could be facing in today’s business environment in India particularly

after Liberalization, Privatization and Globalization commenced in 1991, why?

You have neither resources nor the inclination to manufacture motorized two-wheelers but wish to

continue in the bicycle business.

You want to explore the international market but you are a conservative firm you want to go from

least risk to higher risk levels. The pricing in the International markets will be taken care of by the

Importer in the respective overseas and so will be the distribution. You may be required to

change/adapt/modify the product and the communication mix. Apply WARREN KEAGAN’S

PRODUCT & COMMUNICATION ADAPTATION STRATEGIES as you go from the least risk to the

highest risk

Discuss Merits & Demerits of each strategy. Explain the concept of Environmental sensitivity to

products with examples. Is it relevant in the above situation?

(Q. 1 2012; Q.1, 2009; Q.3, 2005)

Once a decision for a market entry mode has been made, a firm must decide how much, if any, to adapt

its marketing mix—product, promotion, price, and distribution—to a foreign market. Warren J. Keegan

(1995) distinguished five adaptation strategies of product and communication to a foreign market (see

Table 1). These strategies are discussed briefly below:

STRAIGHT EXTENSION

In straight extension the same product is marketed to all countries (a "world" product), except for labeling

and language used in the product manuals. The assumption behind this strategy is that consumer needs

are essentially the same across national boundaries. Straight extension can be successful when products

are not culture sensitive and economies of scale are present. The Philip Morris USA tobacco company

used this strategy successfully with its Marlboro brand cigarette. The strategy has also been successful

with cameras, consumer electronics, and many machine tools.

PRODUCT MODIFICATION/ADAPTATION

A product modification strategy keeps the physical product essentially the same; modifications, however,

are made to meet local conditions or preference in package sizes or colors. Manufacturers of computers,

copiers, cars, and calculators have been successful in using this strategy. Companies may develop a



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country-specific product. If this strategy is employed, the product is substantially altered or new products

are produced across countries. For example, hand-powered washing machines have been successfully

marketed in Latin America.

COMMUNICATION ADAPTATION

It is extremely difficult to standardize advertising across countries because of variations in economic,

social, and political environments. Companies, however, can use one message everywhere, varying only

the language or color. Marlboro and Camel cigarettes, for example, essentially use the same message in

their international promotion programs. Transferability of an advertising message is still a difficult

problem even when the primary benefits of the product remain intact across national boundaries.

Some promotional blunders are well known to marketing students. Coors's slogan "Turn it loose" in

Spanish was read by some as "suffer from diarrhea"; in Spain, Chevrolet's Nova translated as "it doesn't

go"; and a laundry soap ad claiming to wash "really dirty parts" was translated in French-speaking Quebec

to read "a soap for washing private parts."

DUAL ADAPTATION

The fourth strategy, dual adaptation, involves altering both the product and the communications. The

classic example comes from National Cash Register, which manufactured a crank-operated cash register

and promoted it to businesses in less-developed countries.

PRODUCT INVENTION/INNOVATION

When products cannot be sold as they are, product invention strategy may be used. Ford and other

automakers have sold completely different makes of cars in Europe than the ones they sell in the United

States. Brewing companies have sold alcohol-free beer in countries where sales of alcoholic beverages are

prohibited.

PRICE STRATEGY

Multinational companies find it difficult to adopt a standardized pricing strategy across countries because

they have to deal with fluctuating exchange rates, differences among countries in transportation costs,

governmental tax policies, and controls (such as dumping and price callings).

Keegan proposed three global pricing alternatives:



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The first policy is called EXTENSION/ETHNOCENTRIC. Under this policy, the firm sets the same price

throughout the world and the customers absorb all freight and import duties. The main advantage of

this policy is its simplicity, but its weakness is its failure to take into account local markets' demand

and competitive conditions.

The second alternative is called ADAPTIVE/POLYCENTRIC. Under this policy, local management

establishes whatever price it deems appropriate at any particular time. This policy is sensitive to local

conditions; nevertheless, it may favor product arbitrage where differences in price between markets

exceed the freight and duty cost separating the markets.

The last alternative is called INVENTION/GEOCENTRIC PRICING. This policy is an intermediary

position. It neither sets a single worldwide price nor relinquishes total control over prices to local

management. This policy recognizes both the importance of local factors (including costs) and the

firm's market objectives.

CHANNELS OF DISTRIBUTION

Two major types of international alternatives are available to a domestic producer:

The first is the use of domestic middlemen who provide marketing services from their domestic

base. If this arrangement is chosen, there are several domestic middlemen available from which the

companies may choose. Export management companies, manufacturers' export agents, trading

companies, and complementary marketers are possible alternatives.

If a company is unwilling to deal with domestic middlemen, it may decide to deal directly with

middlemen in foreign countries. This alternative shortens the channel of distribution, thereby

bringing the manufacturer closer to the market. The main drawback of this alternative is that foreign

middlemen are some distance away and, therefore, more difficult to control than domestic ones.



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10. ENVIRONMENTAL SENSITIVITY:

Explain the concept of Environmental sensitivity to products with examples. Is it relevant in the above

situation?

Environmental sensitivity is the extent to which products must be adapted to the culture-specific needs

of different needs of different national markets. Environmental sensitivity can be measured by viewing

product on an environmental sensitivity continuum. At one end of the continuum are environmentally

insensitive products that do not require significant adaptation to the environments of local markets in the

world. At the other end of the continuum are products that are highly sensitive to different environmental

factors. A firm with environmental insensitive products will spend less time determining the specific

conditions of local markets as the product in question is universal in nature. In case of environmentally

sensitive products, managers need to address country-specific economic, regulations, technological,

social and cultural environmental conditions.

Computers have low levels of environmental sensitivity but variations in country voltage requirements

require some adaptation. At the top right of the figures we have products with high environmental

sensitivity. For example, food is highly sensitive to climate and culture.



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11. RAYMOND VERNON PRODUCT LIFECYCLE THEORY:

Explain Raymond Vernon Product Life Cycle Theory of Going Global. Cite Examples to support. (Q.4,

2012)

Vernon's international product life cycle theory (1996) is based on the experience of the U.S. market. At

that time, Vernon observed and found that a large proportion of the world's new products came from the

U.S. for most of the 20th century. It was concluded that U.S. was the first to introduce technological driver

products.

Vernon theory was used to explain certain types of foreign direct investment made by the U.S. companies

after the Second World War in the manufacturing industry.

The U.S. has become a major importer of many of the goods that had once developed, produced and

exported. Vernon's international product life cycle is used to attempt to explain why this happened.

According to Vernon, in the first stage the U.S. transnational companies create new innovative products

for local consumption and export the surplus in order to serve also the foreign markets.

According to the theory of production cycle, after the Second World War in Europe has increased demand

for manufactured products like those proposed in USA. Thus, America firms began to export, having the

advantage of technology on international competitors.



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In the first stage of production cycle, manufacturers have an advantage by possessing new technologies.

However at these early stages of production, the products were not standardized as the nature of the

goods has implications such as price elasticity, the communication throughout the industry and also the

location of the product itself.

As the product starts to mature, the conditions also start to change. A certain degree of standardization

takes place and the demand of the products appeared elsewhere. As demand has increased, overseas

markets were imitating those products at a cheaper labor and overall cost. The U.S. firms were forced to

perform production facilities on the local markets to maintain their market shares in those areas.

Consequently the U.S. exports were limited.

As the markets in the U.S. and these other developed countries mature, the product became standardized.

The developments of the life cycle were once again changed. There were more demand and cheaper labor

costs from overseas countries, the pricing became the main competitive tool and cost became more of an

issue than previously. The producers internationally based in advanced countries then had the

opportunity to export back to U.S. This has led to the undeveloped countries offering competitive

advantage for the location of production and finally they became exporters.

This evidence suggests that the more a product is standardized; the location of production is more likely

to change. At the same time there is also evidence that unstandardized products will maintain their

location in more phosphorus location.

This also explains; 1950 to 1970 there were certain types of investments in Europe Western made by U.S.

companies. There were areas where Americans have not possessed the technological advantage and

foreign direct investments were made during that period.

He believes that there are four stages of production cycle and the location of production depends on the

stage of the cycle:

STAGE 1: INTRODUCTION

New products are introduced to meet local needs, and new products are first exported to similar countries

i.e. countries with similar needs, preferences and incomes.



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STAGE 2: GROWTH

A copy product is produced elsewhere and introduced in the home country to capture growth in the home

market. This moves production to other countries, usually on the basis of cost of production.

STAGE 3: MATURITY

The industry contracts and concentrates and the lowest cost producer will win.

STAGE 4: DECLINE

Poor countries constitute the only markets for the product. Therefore almost all declining products are

produced in LDCs.

Vernon's product life cycle model can explain both trade and FDI. By adding a time dimension to the theory

of monopolistic advantage, the product life cycle model can explain a firm's shift from exporting to FDI.

Initially a firm when innovate a product, it produces at home enjoying its monopolistic advantage in the

export market, thus specializes and exports. Once the product becomes standardized in its growth product

phase, the firm may tend to invest abroad and export from there to retain its monopoly power. The rivals

from the home country may also follow to invest in the same foreign country's oligopolistic market.

Vernon's theory implies that overtime the main exporter may change from exporter to importer. This

leads to the low cost producers becoming exporters.

One weakness of this theory can be that Vernon's view is ethnocentric. It can also be said that many new

products are now produced in advanced economies such as Japan.

Globalization means that there is more dispersed and simultaneous production of comparative

advantage.

The final weakness of this theory is that this study was carried out in the 60s. The world's trading importing

and exporting has changed immensely over the years.



Page 24 of 48

12. DAVID RICARDO – Theory of Comparative Cost/Advantage

What are the CLASSICAL THEORIES OF INTERNATIONAL TRADE based on? Is David Ricardo theory still

relevant, if so, why so? If not, why not? Cite examples in both cases from Indian perspective. (Q.4, 2012)

RICARDIAN THEORY ASSUMES THAT:

1. Labor is the only productive factor.

2. Costs of production are measured in terms of the labor units involved.

3. Labor is perfectly mobile within a country but immobile internationally.

4. Labor is homogeneous.

5. There is unrestricted or free trade.

6. There are constant returns to scale.

7. There is full employment equilibrium.

8. There is perfect competition.

For further details, read: http://www.yourarticlelibrary.com/international-trade/theory-of-comparative-

advantage-of-international-trade-by-david-ricardo/26013/

13. CLASSICAL THEORIES OF INTERNATIONAL TRADE:

Adam Smith (1776) & David Ricardo (1817) developed theories to explain International Business &

Marketing. What were the basis of their theories and their limitations? Does Ricardian theory have

any validity/relevance today? If so, why so? If not, why not? Cite Examples. Michael Porter’s theory of

National Competitive advantage is very different from the classical theories. Explain Michael Porter’s

theory and cite examples (Q.1, 2010)

Classical Theories of International Trade propose that comparative advantage resides in the factor

endowments that a country may be fortunate enough to inherit. Factor endowments include land,

natural resources, labor and size of local population.

http://cis01.central.ucv.ro/iba/files/int_ec2.pdf

MERCANTILISM THE ABSOLUTE

ADVANTAGE

THE COMPARATIVE

ADVANTAGE

By Whom William Petty, Thomas Mun and

Antoine de Montchrétien

Adam Smith David Ricardo

http://www.yourarticlelibrary.com/international-trade/theory-of-comparative-advantage-of-international-trade-by-david-ricardo/26013/

http://www.yourarticlelibrary.com/international-trade/theory-of-comparative-advantage-of-international-trade-by-david-ricardo/26013/

http://cis01.central.ucv.ro/iba/files/int_ec2.pdf



Page 25 of 48

When 300 years ago 1776 1815

Basis of Theory The base of this theory was the

“commercial revolution”, the

transition from local economies

to national economies, from

feudalism to capitalism, from a

rudimentary trade to a larger

international trade.

Adam Smith’s theory starts

with the idea that export is

profitable if you can import

goods that could satisfy

better the necessities of

consumers instead of

producing them on the

internal market.

Each country should

specialize in the

production for which it

has less opportunity cost.

Theory States The theory states that the world

only contained a fixed amount of

wealth and that to increase a

country wealth; one country had

to take some wealth from

another, either through having a

higher import/export ratio. So,

this tendency, to export more

and import less and to receive in

exchange gold (the deficit is paid

in gold) is called MERCANTILISM

The essence of Adam Smith

theory is that the rule that

leads the exchanges from

any market, internal or

external, is to determine

the value of goods by

measuring the labor

incorporated in them.

David Ricardo theory

demonstrates that

countries can gain from

trade even

if one of them is less

productive than another

to all goods that it

produces

Advantages

Disadvantages

14. MICHAEL PORTERS NATIONAL COMPETITIVE ADVANTAGE

Explain the Michael Porter Diamond of National Competitive Advantage with examples. Is David

Ricardo’s theory of comparative costs relevant in today’s International environment?

(Q.6, 2007)

http://www.quickmba.com/strategy/global/diamond/

http://www.quickmba.com/strategy/global/diamond/



Page 26 of 48

15. ECGC and DUTY DRAWBACK:

What are the risks covered (export insurance bases) under ECGC? (Q.7, 2009; Q.7, 2010; Q.7, 2006)

What are the risks not covered under ECGC? (Q.6, 2012; Q.6, 2013; Q.7, 2006)

RISKS COVERED:

Risks covered by Standard Policies fall into two categories – Commercial Risks and Political Risks.

Commercial Risks which includes Insolvency of the buyer, Protracted default in payment (Importer has to

pay within four months of due date) and under special circumstances specified in the policy, buyer’s

failure to accept the goods though there is no fault on the part of exporter.

Political Risks

What are the clauses included in Political Risks under policies issued by ECGC?

There are mainly 6 types of covers included under political risks policies under ECGC.

i. Imposition of restrictions in buyer’s country by the Government for remittance sale proceeds

which may block or delay the payment to the exporter;

ii. War, revolution or civil disturbances in the buyer’s country;

iii. New import restrictions in the buyer’s country of cancellation of valid import license after the

date of shipment or contract, as applicable;

iv. Cancellation of valid export license or imposition of new licensing restrictions after the date of

contract, applicable under Contracts Policy;

v. Payment of additional transportation and insurance charges occasioned by interruption or

diversion of voyage which cannot be recovered from the buyer and

vi. Any other loss that has occurred in buyer’s country, which is not covered under general insurance

and beyond the control of exporter and / or the buyer.

In case, where the buyer happens to be foreign Government or Government department and it refuses to

pay, the default will fall under the category of political risks.

RISKS NOT COVERED:

i. Commercial disputes including the quality disputes raised by the buyer, unless the exporter obtains a

decree from a competent court in the importer’s country in his favor

ii. Causes inherent in the nature of the goods;

iii. Buyer’s failure to obtain import license or exchange authorization in his country



Page 27 of 48

iv. Insolvency or default of an agent of the exporter or the collecting banks;

v. Losses or damages which can be covered by commercial insurers; and

vi. Foreign Exchange fluctuations.

ECGC does not cover those risks that are covered by the commercial insurers. Exporter can take

comprehensive policy that covers both commercial and political risks. If the exporter wants, he can take

only policy that covers political risks, depending on the requirements. However, it is important to note

ECGC does not issue the policy covering only commercial risks.

If the goods are confiscated by the customs on charges of smuggling, then insurance does not cover.

DUTY DRAWBACK:

Concept of Duty Drawback / Duty Drawback Scheme (Q.6, 2013; Q.6, 2012; Q.6, 2008)

A refund that can be obtained when an import fee has already been paid for a good, but the good is then

subsequently exported. In order to obtain a duty drawback, a business does not have to have paid the

import duty, nor do they have had to perform the product's exportation, they only need to be assigned

the drawback from those to whom it would typically be due.

The term drawback is applied to a certain amount of duties of Customs and Central Excise, sometimes the

whole, sometimes only a part remitted or paid by Government on the exportation of the commodities on

which they were levied. To entitle goods to drawback, they must be exported to a foreign port, the object

of the relief afforded by the drawback being to enable the goods to be disposed of in the foreign market

as if they had never been taxed at all. For Customs purpose drawback means the refund of duty of customs

and duty of central excise that are chargeable on imported and indigenous materials used in the

manufacture of exported goods. Goods eligible for drawback applies to

a.) Export goods imported into India as such;

b.) Export goods imported into India after having been taken for use

c.) Export goods manufactured / produced out of imported material

d.) Export goods manufactured / produced out of indigenous material

e.) Export goods manufactured /produced out of imported or and indigenous materials. The Duty

Drawback is of two types: (i) All Industry Rate (AIR) and (ii) Brand Rate.

http://www.businessdictionary.com/definition/refund.html

http://www.businessdictionary.com/definition/obtain.html

http://www.businessdictionary.com/definition/fee.html

http://www.businessdictionary.com/definition/paid-for.html

http://www.businessdictionary.com/definition/subsequently.html

http://www.businessdictionary.com/definition/order.html

http://www.businessdictionary.com/definition/drawback.html

http://www.businessdictionary.com/definition/business.html

http://www.businessdictionary.com/definition/import-duty.html

http://www.businessdictionary.com/definition/product.html

http://www.businessdictionary.com/definition/need.html

http://www.businessdictionary.com/definition/assign.html

http://www.businessdictionary.com/definition/due.html



Page 28 of 48

The All Industry Rate (AIR) is essentially an average rate based on the average quantity and value of inputs

and duties (both Excise & Customs) borne by them and Service Tax suffered by a particular export product.

The All Industry Rates are notified by the Government in the form of a Drawback Schedule every year and

the present Schedule covers 2837 entries. The legal framework in this regard is provided under Sections

75 and 76 of the Customs Act, 1962 and the Customs and Central Excise Duties and Service Tax Drawback

Rules, 1995.

The Brand Rate of Duty Drawback is allowed in cases where the export product does not have any AIR of

Duty Drawback or the same neutralizes less than 4/5th of the duties paid on materials used in the

manufacture of export goods. This work is handled by the jurisdictional Commissioners of Customs &

Central Excise. Exporters who wish to avail of the Brand Rate of Duty Drawback need to apply for fixation

of the rate for their export goods to the jurisdictional Central Excise Commissionerate. The Brand Rate of

Duty Drawback is granted in terms of Rules 6 and 7 of the Drawback Rules, 1995



Page 29 of 48

16. EPRG SCHEMA

Discuss EPRG schema of Yoran, Wind and Perlmutter and the organizations required as one moves from

E to G in the schema. Examine the characteristics of each orientation. Give examples of each type of

company

Generally speaking, no company is strictly global but has elements of Multi Domestic Market Extension

concept. Comment and Discuss

(Q.2, 2008)

http://www.google.co.in/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCK6Rk4StmMkCFUG9GgodQN4AkQ&url=http://slideplayer.com/slide/1618860/&bvm=bv.107467506,d.d2s&psig=AFQjCNEMTq_06PQEipAE0bbCx0Cyz_xh1w&ust=1447880349438415

http://www.google.co.in/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCLOv1JetmMkCFQLGGgodI_IKdA&url=http://slideplayer.com/slide/1618860/&bvm=bv.107467506,d.d2s&psig=AFQjCNEMTq_06PQEipAE0bbCx0Cyz_xh1w&ust=1447880349438415



Page 30 of 48

17. MNCS AND CAPITAL FORMATION:

Less developed countries need capital / asset formation in a big way. Why?

What are the threats posed by MNC’s?

Examine all sources of Capital Formation and their advantages and disadvantages of each.

Which is the best source and why?

(Q.4, 2010; Q.7 2006)

Capital formation refers to net additions of capital stock such as equipment, buildings and other

intermediate goods. A nation uses capital stock in combination with labor to provide services and produce

goods; an increase in this capital stock is known as capital formation.

Generally, the higher the capital formation of an economy, the faster an economy can grow its aggregate

income. Increasing an economy's capital stock also increases its capacity for production, which means an

economy can produce more. Producing more goods and services can lead to an increase in national

income levels.

MNCs bring in:

Brings in much needed Capital required for capital Formation. The capital brought in has long-

term perspective and the WEALTH GENERATION ability stays in the country even after the foreign

partner decides to leave the country. The capital has very low flight potential.

Brings in latest and modern technology vital for growth. MNC/TNC is the ideal vehicle for the

same.

Skills upgradation and training to employees

Efficient Resource Utilization

Improved Productivity

Import Of High Tech Proprietary Equipment

Favorable Balance Of Payments

Access To Export Markets

Re-ploughing Of Profits

Ancillary Industries Development

No Repayment Of Principal Amount As These Are Not Debts

Permanency Of Assets Formed

Even after the exit of the foreign partner, the employment generation continues.

Local partner may provide marketing know-how and political collections



Page 31 of 48

THREATS POSED - Disadvantages of MNC:

May throttle/Pre-empt competition

Over dependence on technology and in some cases managerial expertise

Exploitation by paying poor prices for inputs

Profiteering

Fear of endangering host countries ’ sovereignty

Low transfer prices

Overpricing of imports

Under-pricing of exports to principals

No incentive for local R and D

Automation may defeat goal of employment generation

Dependence on critical imports

Export Restrictions

Political power with Money power

Neo-Colonialism

SOURCES OF CAPITAL FORMATION:

(A) CREATION OF SAVINGS:

An increase in the volume of real savings so that resources, that would have been devoted to the

production of consumption goods, should be released for purposes of capital formation.

Savings are done by individuals or households. They save by not spending all their incomes on consumer

goods. When individuals or households save, they release resources from the production of consumer

goods. Workers, natural resources, materials, etc., thus released are made available for the production of

capital goods.

The level of savings in a country depends upon the power to save and the will to save. The power to save

or saving capacity of an economy mainly depends upon the average level of income and the distribution

of national income. The higher the level of income, the greater will be the amount of savings.

The countries having higher levels of income are able to save more. That is why the rate of savings in the

U.S.A. and Western European countries is much higher than that in the under-developed and poor

countries like India. Further, the greater the inequalities of income, the greater will be the amount of

savings in the economy. Apart from the power to save, the total amount of savings depends upon the will

to save. Various personal, family, and national considerations induce the people to save.



Page 32 of 48

People save in order to provide against old age and unforeseen emergencies. Some people desire to save

a large sum to start new business or to expand the existing business. Moreover, people want to make

provision for education, marriage and to give a good start in business for their children.

Further, it may be noted that savings may be either voluntary or forced. Voluntary savings are those

savings which people do of their own free will. As explained above, voluntary savings depend upon the

power to save and the will to save of the people. On the other hand, taxes by the Government represent

forced savings.

Moreover, savings may be done not only by households but also by business enterprises” and

government. Business enterprises save when they do not distribute the whole of their profits, but retain

a part of them in the form of undistributed profits. They then use these undistributed profits for

investment in real capital.

The third source of savings is government. The government savings constitute the money collected as

taxes and the profits of public undertakings. The greater the amount of taxes collected and profits made,

the greater will be the government savings. The savings so made can be used by the government for

building up new capital goods like factories, machines, roads, etc., or it can lend them to private enterprise

to invest in capital goods.

(B) MOBILIZATION OF SAVINGS:

A finance and credit mechanism, so that the available resources are obtained by private investors or

government for capital formation.

The next step in the process of capital formation is that the savings of the households must be mobilized

and transferred to businessmen or entrepreneurs who require them for investment. In the capital market,

funds are supplied by the individual investors (who may buy securities or shares issued by companies),

banks, investment trusts, insurance companies, finance corporations, governments, etc.

If the rate of capital formation is to be stepped up, the development of capital market is very necessary.

A well- developed capital market will ensure that the savings of the society-will be mobilized and

transferred to the entrepreneurs or businessmen who require them.

(C) INVESTMENT OF SAVINGS:

The act of investment itself so that resources are actually used for the production of capital goods.



Page 33 of 48

For savings to result in capital formation, they must be invested. In order that the investment of savings

should take place, there must be a good number of honest and dynamic entrepreneurs in the country

who are able to take risks and bear uncertainty of production.

Given that a country has got a good number of venturesome entrepreneurs, investment will be made by

them only if there is sufficient inducement to invest. Inducement to invest depends on the marginal

efficiency of capital (i.e., the prospective rate of profit) on the one hand and the rate of interest, on the

other.

But of the two determinants of inducement to invest-the marginal efficiency of capital and the rate of

interest—it is the former which is of greater importance. Marginal efficiency of capital depends upon the

cost or supply prices of capital as well as the expectations of profits.

Fluctuations in investment are mainly due to changes in expectations regarding profits. But it is the size

of the market which provides scope for profitable investment. Thus, the primary factor which determines

the level of investment or capital formation, in any economy, is the size of the market for goods.

Foreign Capital:

Capital formation in a country can also take place with the help of foreign capital, i.e., foreign savings.

Foreign capital can take the form of:

(a) Direct private investment by foreigners,

(b) Loans or grants by foreign governments,

(c) Loans by international agencies like the World Bank.

There are very few countries which have successfully marched on the road to economic development

without making use of foreign capital in one form or the other. India is receiving a good amount of foreign

capital from abroad for investment and capital formation under the Five-Year Plans.

Deficit Financing:

Deficit financing, i.e., newly-created money is another source of capital formation in a developing

economy. Owing to very low standard of living of the people, the extent to which voluntary savings can

be mobilized is very much limited. Also, taxation beyond limit becomes oppressive and, therefore,

politically inexpedient. Deficit financing is, therefore, the method on which the government can fall back

to obtain funds.

However, the danger inherent in this source of development financing is that it may lead to inflationary

pressures in the economy. But a certain measure of deficit financing can be had without creating such

pressures.



Page 34 of 48

There is specially a good case for using deficit financing to utilize the existing under-employed labor in

schemes which yield quick returns. In this way, the inflationary potential of deficit financing can be

neutralized by an increase in the supply of output in the short-run.

Disguised Unemployment:

Another source of capital formation is to mobilize the saving potential that exists in the form of disguised

unemployment. Surplus agricultural workers can be transferred from the agricultural sector to the non-

agricultural sector without diminishing agricultural output.

The objective is to mobilize these unproductive workers and employ them on various capital creating

projects, such as roads, canals, building of schools, health centers and bunds for floods, in which they do

not require much more capital to work with. In this way’, the hitherto unemployed, labor can be utilized

productively and turned into capital, as it were.

Capital Formation in the Public Sector:

In these days, the role of government has greatly increased. In an under-developed country like India,

government is very much concerned with the development of the economy. Government is building dams,

steel plants, roads, machine-making factories and other forms of real capital in the country. Thus, capital

formation takes place not only in the private sector by individual entrepreneurs but also in the public

sector by government.

There are various ways in which a government can get resources for investment purposes or for capital

formation. The government can increase the level of direct and indirect taxation and then can finance its

various projects. Another way of obtaining the necessary resources is the borrowing by the Government

from the public.

The government can also finance its development plans by deficit financing. Deficit financing means the

creation of new money. By issuing more notes and exchanging them with the productive resources the

government can build real capital. But the method of deficit financing, as a source of development finance,

is dangerous because it often leads to inflationary pressures in the economy. A certain measure of deficit

financing, however, can be had without creating such pressures.

Another source of capital formation in the public sector is the profits of public undertakings which can be

used by the government for further investment. As stated above, government can also get loans from

foreign countries and international agencies like World Bank. India is getting a substantial amount of

foreign assistance for investment purposes under the Five-Year Plans.



Page 35 of 48

18. MOTIVATIONS TO GO GLOBAL

‘PUSH’ FACTORS

o Perceived/imminent saturation in domestic market

o Spreading of risk

o Consolidation of buying power

o Public policy constraints

o Economic conditions

o Maturity of format

o Increased taxes

‘PULL’ FACTORS

o Perceived/imminent

o Unexploited markets

o Pre-emption of rivals

o Higher profit margins

o Consumer market segments not yet exploited

o Access to new management

o Reaction to manufacturer internalization

o Following existing customers abroad

‘FACILITATING’ FACTORS

o Use of surplus capital/access to cheaper sources of capital

o Entrepreneurial vision

o Inducement from supplier to enter new markets

o Removal of barriers to entry

o Lower tariffs

MOTIVATIONS UNDERLYING GLOBAL STRATEGIES

o Obtaining Economies Of Scale

o Create Global brand Associations

o Access to low cost of labor and raw materials

o Access to National Investment Incentives

o Cross subsidizations

o Dodge Trade barriers

o Access to strategically Important markets



Page 36 of 48

o Overcome Xenophobia

o Be considered an insider and not an alien.

19. ADVANTAGES AND DISADVANTAGES OF STANDARDIZATION

ADVANTAGES OF STANDARDIZATION DISADVANTAGES

COST REDUCTION - E.G. ECONOMIES OF SCALE LACK OF UNIQUENESS - EXCLUSIVITY MAY BE

BEHIND PURCHASE DECISION

IMPROVED QUALITY - RESOURCES CAN BE FOCUSSED

OFF-TARGET - MISS THE CUSTOMER TARGET

COMPLETELY

ENHANCED CUSTOMER PREFERENCE - POSITIVE

EXPERIENCES LEAD TO GLOBAL BRAND LOYALTY

VULNERABLE TO TRADE BARRIERS - LOCAL

PRODUCTION MAY BE NECESSARY, SO ECONOMY

OF SCALE BENEFITS ARE LOST

GLOBAL CUSTOMERS - UNIFORM QUALITY AND

SERVICES

STRONG LOCAL COMPETITION - CUSTOMISATION

BY COMPETITORS, LACK OF LOCAL KNOWLEDGE

GLOBAL SEGMENTS - E.G. SOFTWARE, CAMERAS.

20. ADVANTAGES AND DISADVANTAGES OF CUSTOMIZATION

ADVANTAGES of CUSTOMISATION DISADVANTAGES

REFLECTS DIFFERENT CONDITIONS OF PRODUCT USE INCREASES MARKETING COSTS

ACKNOWLEDGES LOCAL LEGAL DIFFERENCES INHIBITS CENTRALISED CONTROL OF MARKETING

ACCOUNTS FOR DIFFERENCES IN BUYER BEHAVIOURS CREATES INEFFICIENCY IN RESEARCH AND

DEVELOPMENT

PROMOTES LOCAL MARKETING ACTIVITIES REDUCES SCALE ECONOMIES IN PRODUCTION

ACCOUNTS FOR DIFFERENCES IN INDIVIDUAL MARKETS IGNORES GLOBALISATION TRENDS



Page 37 of 48

21. BUYERS CREDIT

What is buyer’s credit? Examine the role of EXIM bank in extending buyers credit

(Q.3a, 2007)

A loan facility extended to an importer by a bank or financial institution to finance the purchase of capital

goods or services and other big-ticket items. Buyer’s credit is a very useful mode of financing in

international trade, since foreign buyers seldom pay cash for large purchases, while few exporters have

the capacity to extend substantial amounts of long-term credit to their buyers. A buyer’s credit facility

involves a bank that can extend credit to the importer, as well as an export finance agency based in the

exporter's country that guarantees the loan. Since buyer’s credit involves multiple parties and cross-

border legalities, it is generally only available for large export orders, with a minimum threshold of a few

million dollars.

Buyer’s credit benefits both the seller (exporter) and buyer (importer) in a trade transaction. The

exporter is paid in accordance with the terms of the sale contract with the importer, without undue

delays. The availability of buyer’s credit also makes it feasible for the exporter to pursue large export

orders. The importer obtains the flexibility to pay for the purchases over a period of time, as stipulated

in the terms of the buyer’s credit facility, rather than up front at the time of purchase. The importer can

also request funding in a major currency that is more stable than the domestic currency, especially if the

latter has a significant risk of devaluation.

The export finance agency's involvement is critical to the success of the buyer’s credit mechanism, since

its guarantee protects the bank or financial institution that makes the loan to the foreign buyer from the

risk of non-payment by the buyer. The export finance agency also provides coverage to the lending bank

from other political, economic and commercial risks. In return for this guarantee and risk coverage, the

export agency charges a fee or premium that is borne by the importer.

The buyer’s credit process typically has the following steps: The exporter enters into a commercial

contract with the foreign buyer that specifies the goods or services being supplied, prices, payment

terms, etc. The buyer obtains credit from a bank or financial institution to finance the purchase. An export

credit agency based in the exporter’s country provides a guarantee to the lending bank covering the risk

of default by the buyer. Once the exporter ships the goods, the lending bank pays the exporter as per

the terms of the contract with the buyer. The buyer makes principal and interest payments to the lending

bank according to the terms of the loan agreement until the loan has been repaid in full.

http://www.investopedia.com/terms/f/financialinstitution.asp

http://www.investopedia.com/terms/c/capitalgoods.asp

http://www.investopedia.com/terms/c/capitalgoods.asp

http://www.investopedia.com/terms/c/creditfacility.asp



Page 38 of 48

Benefits to Foreign Customers

Enables overseas buyers to obtain medium-and long-term financing

Competitive interest rate against host country's high cost of borrowing;

Eligibility:

Buyer's Credit is extended to a foreign project company that intends to award the project execution to an

Indian project exporter. The financing will be available to all kinds of projects and service exports from

India.

Facility is available for development, upgrading or expansion of infrastructure facilities; financing of public

or private projects such a plants and buildings; professional services such as surveyors, architecture,

consultations, etc.

22. REASONS FOR INDIAN FOREX RESERVES TO SWELL:

iv. From a low of US $1.10 billion in January 1991, the Indian forex reserves have swollen to close to

US $ 250 billion. Examine the factors responsible for this phenomenal growth (Q.1b, 2007; Q.1,

2008)

v. Discuss the reasons for recent weakening of Indian rupee vis-à-vis the U.S Dollar and its positive &

negative fallout. Recommend ideas to reverse the trend.

The recent global meltdown has resulted in the reserves going down some U.S dollars 260 billion.

Is this a cause for concern? (Q.1, 2008)

"The primary reason for the hike in reserves can be attributed to the Reserve Bank of India (RBI)

buying US dollars to prevent rupee from causing damage to our exports"

“Realignment of exchange rates especially, non-US currencies decline may have increased reserve

value"

“(Foreign Currency Assets) FCAs, expressed in dollar terms, include the effect of appreciation and

depreciation of non-US currencies such as the euro, pound and the yen, held in the reserves.”



Page 39 of 48

23. IMPACT OF RUPEE RISE:

As the rupee rises against the dollar (or conversely the dollar weakens) Indian exports firms earn less

and thus begin to lose their competitive edge -- whether it be textile, jewelry, software, drugs or

automobiles.

The impact is seen through:

Lower exports, as exporters are unable to maintain necessary profit margins if their dollar-linked

earnings fall. Analysts now predict that India's export target of $160 billion may not be met. A

more 'realistic' export target for this year has been pegged at $135-140 billion.

If the rupee continues to gain against the dollar, India's competitive strength in world trade (which

is already negligible) will weaken. This, in turn, shrinks new job avenues.

Exporters are keener to sell their product/services locally, if possible. This would increase local

supplies and lower prices and inflation. With factors suggesting that the rupee could rise, we

could see a scenario of an increasing percentage of goods and services being offered locally, which

would lead to lower prices and hence curb inflation further.

Companies will see their net income fall with rupee rise if they bill their clients in dollar terms.

Example: India's 'big four' in the software pack -- Infosys, TCS, Wipro and Satyam have already

seen their net income in the first quarter ending June, fall due to the sharp rupee rise.

A weak dollar thus hits currency-linked earnings.

However, a stronger rupee will benefit importers such as the oil marketing companies and airlines.

While exporters like software, textiles, drugs and auto components will be adversely impacted by the

stronger rupee, for global cyclicals, lower prices of landed imports will create downward pressure on

local prices, the brokerage told its clients, in a latest note.

How will the Rupee surge impact individuals?

Industries, where domestic prices are linked to the cost of imported raw material -- like metals,

have and will lead to further lowering of input cost of imported aluminum and copper. A reduction

in the domestic prices is expected. Obviously, importing price-sensitive electronics and gadgets

would also be cheaper, as would other retail items.

An appreciating rupee shows the strength of the economy, which can be seen when one travels

overseas, if you try to convert what the dollar is worth. So maybe you should plan your overseas

trip now, if you have enough disposable income.



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You obviously have concerns if you are an exporter or work in an export-house. Another groups

of people who may not be happy to see the rupee rising, would be those who hold dollar-

denominated accounts.

24. SELF REFERENCE CRITERIA

What are the pros and cons of Self Reference Criteria? (Q.6, 2013)

Not understanding the cultural differences and not appreciating them is called SELF REFERENCE

CRITERIA—S.R.C.

S.R.C. is looking at things from your own perspective and is a subconscious reference to one’s own

cultural values.

S. R. C. leads to business problems such as:

1. Delay in Deal closure

2. Non-closure of Deals

3. Upsetting the customers

4. Sending wrong Signals

5. Poor Positioning

6. Misunderstanding Subordinates and failure to develop them or alienating them

7. Product not meeting market requirements

8. Inadequate or erroneous market assessment

9. Inaccurate or incorrect interpretation of laws

10. Poor positioning

11. Wrong research results

WHERE CAN SRC BE SEEN?

A successful strategy in one culture could flop in another cultural environment. For Example—

Kellogg and McDonald in early years in India.



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What is acceptable in one culture may be taboo in another. For Example—Handshake with

women

Interpretation and implication of colors

Attitudes towards Humor

Subtle differences or not so subtle differences in Habits, Ethics, Attitudes, Mannerisms,

Etiquettes.

STEPS TO ELIMINATE SELF REFERENCE CRITERIA

• Define the problem or goal in terms of the host country culture, habits and norms

• Make no judgments based on your own culture and habits

• Isolate S R C influence. This is similar to Zero Based Budgeting.

• Solve the problem for the Host Country.

• Suspend assumptions based on previous experience

• Be prepared to acquire new knowledge about human behavior and motivation.



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25. COUNTERVAILING DUTIES

What is countervailing duty and its rationale? (Q.6, 2012; Q.7, 2010; Q.7, 2009)

Tariffs levied on imported goods to offset subsidies made to producers of these goods in the exporting

country. (An import tax imposed on certain goods in order to prevent dumping or counter export subsidies.)

Countervailing duties (CVD) are meant to level the playing field between domestic producers of a product

and foreign producers of the same product who can afford to sell it at a lower price because of the subsidy

they receive from their government. If left unchecked, such subsidized imports can have a severe effect

on domestic industry, forcing factory closures and causing huge job losses. As export subsidies are

considered to be an unfair trade practice, the World Trade Organization (WTO) – which deals with the

global rules of trade between nations – has detailed procedures in place to establish the circumstances

under which countervailing duties can be imposed by an importing nation.

Consider the following example of countervailing duties: Assume Country A provides an export subsidy

to widget makers in the nation, who export widgets en masse to Country B at $8 per widget. Country B

has its own widget industry and domestic widgets are available at $10 per widget. If Country B

determines that its domestic widget industry is being hurt by unrestrained imports of subsidized widgets,

it may impose a 25% countervailing duty on widgets imported from Country A, so that the resulting cost

of the imported widgets is also $10. This eliminates the unfair price advantage that widget makers in

Country A have due to the export subsidy from their government.

http://www.investopedia.com/terms/s/subsidy.asp

http://www.investopedia.com/terms/i/import.asp

http://www.investopedia.com/terms/e/export.asp

http://www.investopedia.com/terms/u/unfair-trade-practice.asp

http://www.investopedia.com/terms/w/wto.asp



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26. GATT / WTO:

Discuss the two main principles of GATT/WTO

(Q.3, 2008; Q.5; 2007; Q.4b, 2009)

Most Favored Nation Treatment (MFN)

All WTO members are bound to grant each other treatment as favorable as they give to any other

member in the application and administration of import and export duties and charges

National Treatment

The national treatment principle outlaws discrimination between imports and locally produced goods or

services and service suppliers or between foreign and national holders of intellectual property rights. Once

duties have been paid, imported goods must be given the same treatment as like domestic products in

relation to any charges, taxes or administrative or other regulations (GATT Article III)

Transparency

WTO members are obliged to publish and notify to the WTO Secretariat their trade- related laws and

regulations.

Notification requirements

Trade Policy Review Mechanism

Stability and Predictability of trade regulation

Predictable and growing access to markets is ensured through binding of tariffs

Bindings are undertakings under the WTO legal framework NOT to raise tariffs beyond an agreed level

Tariff Bindings

Tariff bindings are the central guarantee of market access within the WTO legal framework.

Once a rate of duty is bound, it may not be raised without compensating the affected parties

Binding is particularly important to free trade because it gives some assurance to importers and exporters

that they would not be subject to arbitrary tariff changes

CEILING Bindings: Bindings at levels higher than applied rates

Use of tariffs as instruments of protection

Any protection must be provided in the most visible and transparent form

Ad valorem tariffs have the important advantage of transparency, more predictability, non-discrimination,

being easier to bind or reduce, and less susceptibility to corruption than QRs (QUANTITY RESTRICTIONS)



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27. INDIRECT EXPORTING--PROS AND CONS

http://importexport.about.com/od/DevelopingSalesAndDistribution/a/Indirect-Exporting-Advantages-

And-Disadvantages-To-Indirect-Exporting.htm

Indirect exporting means selling to an intermediary, who in turn sells your products either directly to

customers or to importing wholesalers. The easiest method of indirect exporting is to sell to an

intermediary in your own country. When selling by this method, you normally are not responsible for

collecting payment from the overseas customer, nor for coordinating the shipping logistics.

An export management company (EMC) is one such intermediary. A good one will act in all respects

as a global extension of your own sales-and-service presence -- more or less what you are attempting

to do on behalf of a manufacturer! EMCs offer a wide range of services, but most specialize in

exporting a specific range of products to a well-defined customer base in a particular country or

region. Generally, the EMC buys the product from a manufacturer and marks up the price to cover

their profit. This is called a buy-resell arrangement. Other common compensation structures used by

EMCs include both commission and buy-and-resell, start-up or project fee only, fee plus commission,

or fee plus commission and buy-and-resell.

Export Trading Company (ETC). ETCs are virtually identical to EMCs, but they tend to function on a

more demand-driven basis, by which the demand of the market compels them to buy specific

commodities. They usually have long-standing customers for whom they source products on a regular

basis. For example, they might get a request from a customer to find a supplier of canned sweet peas

who can provide twenty container loads a month for a given number of months. The ETC will then

seek out a reputable manufacturer who can handle the demand at an economical price, and then

arrange for the transport of the goods to the customer. You can track down a good ETC via the same

channels recommended above for finding an EMC.

Indirect exporting can also involve selling to an intermediary in the country where you wish to

transact business, who in turn sells your products directly to customers or to other importing

distributors (wholesalers). Under these circumstances, you will not know who your ultimate

consumers are. When selling by this method, you are normally responsible for collecting payment

from the overseas customer and for coordinating the shipping logistics. In some instances, the

overseas agent might request that they be allowed to handle the shipping, usually because they

receive special transportation rates from carriers with whom they've done volume business for years.

http://importexport.about.com/od/DevelopingSalesAndDistribution/a/Indirect-Exporting-Advantages-And-Disadvantages-To-Indirect-Exporting.htm

http://importexport.about.com/od/DevelopingSalesAndDistribution/a/Indirect-Exporting-Advantages-And-Disadvantages-To-Indirect-Exporting.htm

http://importexport.about.com/od/DevelopingSalesAndDistribution/a/Indirect-Exporting-Advantages-And-Disadvantages-To-Indirect-Exporting_2.htm

http://importexport.about.com/od/DevelopingSalesAndDistribution/a/ExchangeInformationWithYourCustomer.htm

http://commodities.about.com/od/understandingthebasics/a/Learning-What-Commodities-Are-All-About.htm

http://commodities.about.com/od/understandingthebasics/a/Learning-What-Commodities-Are-All-About.htm

http://wholesalers.about.com/od/WholesaleDistribution/qt/Working-With-Distributors.htm

http://wholesalers.about.com/od/WholesaleDistribution/qt/Working-With-Distributors.htm

http://sbinfocanada.about.com/od/startup/f/bizstart.htm



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The advantages are:

It's an almost risk-free way to begin.

It demands minimal involvement in the export process.

It allows you to continue to concentrate on your domestic business.

You have limited liability for product marketing problems -- there's always someone else to point

the finger at!

You learn as you go about international marketing.

Depending on the type of intermediary with which you are dealing, you don't have to concern

yourself with shipment and other logistics.

You can field-test your products for export potential.

In some instances, your local agent can field technical questions and provide necessary product

support.

The disadvantages are:

Your profits are lower.

You lose control over your foreign sales.

You very rarely know who your customers are, and thus lose the opportunity to tailor your

offerings to their evolving needs.

When you visit, you are a step removed from the actual transaction. You feel out of the loop.

The intermediary might also be offering products similar to yours, including directly competitive

products, to the same customers instead of providing exclusive representation.

Your long-term outlook and goals for your export program can change rapidly, and if you've put

your product in someone else's hands, it's hard to redirect your efforts accordingly



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28. INCOTERMS

International Commercial Terms (‘Incoterms’) are internationally recognized standard trade terms used

in sales contracts. They’re used to make sure buyer and seller know:

Who is responsible for the cost of transporting the goods, including insurance, taxes and duties

Where the goods should be picked up from and transported to

Who is responsible for the goods at each step during transportation

Incoterms are used in contracts in a 3-letter format followed by the place specified in the contract (e.g.

the port or where the goods are to be picked up).

There are different terms for sea and inland waterways (e.g. rivers and canals) compared to all other

modes of transport. VAT isn’t covered by Incoterms - you need to specify who pays the VAT on both

imports and exports.

i. EXW (‘Ex Works’)

The seller makes the goods available to be collected at their premises and the buyer is responsible for all

other risks, transportation costs, taxes and duties from that point onwards. This term is commonly used

when quoting a price.

ii. FCA (‘Free Carrier’)

The seller gives the goods, cleared for export, to the buyer’s carrier at a specified place. The buyer is then

responsible for getting transported to the specified place of final delivery. This term is commonly used for

containers travelling by more than one mode of transport.

iii. FAS (‘Free Alongside Ship’)

The seller puts the goods alongside the ship at the specified port they’re going to be shipped from. The

seller must get the goods ready for export, but the buyer is responsible for the cost and risk involved in

loading them.

This term is commonly used for heavy-lift or bulk cargo (e.g. generators, boats), but not for goods

transported in containers by more than one mode of transport (FCA is usually used for this).

iv. FOB (‘Free on Board’)

The seller must get the goods ready for export and load them onto the specified ship. The buyer and seller

share the costs and risks when the goods are on board. This term is not used for goods transported in

containers by more than one mode of transport (FCA is usually used for this).



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v. CFR (‘Cost and Freight’)

The seller must pay the costs of bringing the goods to the specified port. The buyer is responsible for risks

when the goods are loaded onto the ship.

vi. CIF (‘Cost, Insurance and Freight’)

The seller must pay the costs of bringing the goods to the specified port. They also pay for insurance. The

buyer is responsible for risks when the goods are loaded onto the ship.

vii. CPT (‘Carriage Paid To’)

The seller pays to transport the goods to the specified destination. Responsibility for the goods transfers

to the buyer when the seller passes them to the first carrier.

viii. CIP (‘Carriage and Insurance Paid’)

The seller pays for insurance as well as transport to the specified destination. Responsibility for the goods

transfers to the buyer when the seller passes them to the first carrier.

CIP (‘Carriage and Insurance Paid’) is commonly used for goods being transported by container by more

than one mode of transport. If transporting only by sea, CIF is often used

ix. DAT (‘Delivered at Terminal’)

The seller pays for transport to a specified terminal at the agreed destination. The buyer is responsible for

the cost of importing the goods. The buyer takes responsibility once the goods are unloaded at the

terminal.

x. DAP (‘Delivered at Place’)

The seller pays for transport to the specified destination, but the buyer pays the cost of importing the

goods. The seller takes responsibility for the goods until they’re ready to be unloaded by the buyer.

xi. DDP/DTP (‘Delivered Duty Paid’)

The seller is responsible for delivering the goods to the named destination in the buyer’s country, including

all costs involved.



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29. BUSINESS IN CHINA - CHALLENGES

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