Xaviers Institute of Business Management Studies

MARKS : 80COURSE : MBA

SUB: INTERNATIONAL BUSINESS N. B.: 1) Attempt any four cases

2) All cases carries equal marks. No: 1

BPO – BANE OR BOON ?

Several MNCs are increasingly unbundling or vertical disintegrating their

activities. Put in simple language, they have begun outsourcing (also called business

process outsourcing) activities formerly performed in-house and concentrating their

energies on a few functions. Outsourcing involves withdrawing from certain

stages/activities and relaying on outside vendors to supply the needed products,

support services, or functional activities.

Take Infosys, its 250 engineers develop IT applications for BO/FA (Bank of

America). Elsewhere, Infosys staffers process home loans for green point mortgage of

Novato, California. At Wipro, five radiologists interpret 30 CT scans a day for

Massachusetts General Hospital.

2500 college educated men and women are buzzing at midnight at Wipro

Spectramind at Delhi. They are busy processing claims for a major US insurance

company and providing help-desk support for a big US Internet service provider-all at

a cost upto 60 percent lower than in the US. Seven Wipro Spectramind staff with

Ph.Ds in molecular biology sift through scientific research for western pharmaceutical

companies.

Another activist in BOP is Evalueserve, headquarterd in Bermuda and having

main operations near Delhi. It also has a US subsidiary based in New York and a

marketing office in Australia to cover the European market. As Alok Aggarwal (co-

founder and chairman) says, his company supplies a range of value-added services to

clients that include a dozen Fortune 500 companies and seven global consulting firms,

besides market research and venture capital firms. Much of its work involves dealing

with CEOs, CFOs, CTOs, CIOs, and other so called C-level executives.

Evaluserve provides services like patent writing, evaluation and assessment of

their commercialization potential for law firms and entrepreneurs. Its market research

services are aimed at top-rung financial service firms, to which it provides analysis of

investment opportunities and business plans. Another major offering is multilingual

services. Evalueserve trains and qualifies employees to communicate in Chinese,

Spanish, German, Japanese and Italian, among other languages. That skill set has

opened market opportunities in Europe and elsewhere, especially with global

corporations.

ICICI infotech Services in Edison, New Jersey, is another BOP services provider

that is offering marketing software products and diversifying into markets outside the

US. The firm has been promoted by $2-billion ICICI Bank, a large financial institution in

Mumbai that is listed on the New York Stock Exchange.

In its first year after setting up shop in March 1999, ICICI infotech spent $33

million acquiring two information technology services firms in New Jersy-Object

Experts and ivory Consulting – and command Systems in Connecticut. These

acquisitions were to help ICICI Infotech hit the ground in the US with a ready book of

contracts. But it soon found US companies increasingly outsourcing their

requirements to offshore locations, instead of hiring foreign employees to work onsite

at their offices. The company found other native modes for growth. It has started

marketing its products in banking, insurance and enterprise resource planning among

others. It has earmarket $10 million for its next US market offensive, which would go

towards R & D and back-end infrastructure support, and creating new versions of its

products to comply with US market requirements. It also has a joint venture –

Semantik Solutions GmbH in Berlin, Germany with the Fraunhofer Institute for

Software and Systems Engineering, which is based in Berlin and Dortmund, Germany

– Fraunhofer is a leading institute in applied research and development with 200

experts in software engineering and evolutionary information.

A relatively late entrant to the US market , ICICI Infotech started out with plain

vanilla IT services, including operating call centeres. As the market for traditional IT

services started wakening around mid-2000, ICICI Infotech repositioned itself as a

“Solutions” firm offering both products and services. Today , it offers bundied

packages of products and services in corporate and retail banking and include data

center and disaster recovery management and value chain management services.

ICICI Infotech’s expansion into new overseas markets has paid off. Its $50

million revenue for its latest financial year ending March 2003 has the US operations

generating some $15 million, while the Middle East and Far East markets brought in

another $9 million. It new boasts more than 700 customers in 30 countries, including

Dow Jones, Glazo-Smithkline, Panasonic and American Insurance Group.

The outsourcing industry is indeed growing form strength. Though technical

support and financial services have dominated India’s outsourcing industry, newer

fields are emerging which are expected to boost the industry many times over.

Outsourcing of human resource services or HR BPO is emerging as big

opportunity for Indian BPOs with global market in this segment estimated at $40-60

billion per annum. HR BPO comes to about 33 percent of the outsourcing revenue and

India has immense potential as more than 80 percent of Fortune 1000 companies

discuss offshore BOP as a way to cut costs and increase productivity.

Another potential area is ITES/BOP industry. According to A NASSCOM survey,

the global ITES/BOP industry was valued at around $773 billion during 2002 and it is

expected to grow at a compounded annual growth rate of nine percent during the

period 2002 – 06, NASSCOM lists the major indicators of the high growth potential of

ITES/BOP industry in India as the following.

During 2003 – 04, The ITES/BPO segment is estimated to have achieved a 54

percent growth in revenues as compared to the previous year. ITES exports

accounted for $3.6 billion in revenues, up form $2.5 billion in 2002 – 03. The ITES-

BPO segment also proved to be a major opportunity for job seekers, creating

employment for around 74,400 additional personnel in India during 2003 – 04. The

number of Indians working for this sector jumped to 245,500 by March 2004. By the

year 2008, the segment is expected to employ over 1.1 million Indians, according to

studies conducted by NASSCOM and McKinsey & Co. Market research shows that in

terms of job creation, the ITES-BOP industry is growing at over 50 per cent.

Legal outsourcing sector is another area India can look for. Legal transcription

involves conversion of interviews with clients or witnesses by lawyers into documents

which can be presented in courts. It is no different from any other transcription work

carried out in India. The bottom-line here is again cheap service. There is a strong

reason why India can prove to be a big legal outsourcing Industry.

India, like the US, is a common-law jurisdiction rooted in the British legal

tradition. Indian legal training is conducted solely in English. Appellate and Supreme

Court proceedings in India take place exclusively in English. Due to the time zone

differences, night time in the US is daytime in India which means that clients get 24

hour attention, and some projects can be completed overnight. Small and mid – sized

business offices can solve staff problems as the outsourced lawyers from India take on

the time – consuming labour intensive legal research and writing projects. Large law

firms also can solve problems of overstaffing by using the on – call lawyers.

Research firms such as Forrester Research, predict that by 2015 , more than

489,000 US lawyer jobs, nearly eight percent of the field, will shift abroad..

Many more new avenues are opening up for BOP services providers. Patent

writing and evaluation services are markets set to boom. Some 200.000 patent

applications are written in the western world annually, making for a market size of

between $5 billion and $7 billion. Outsourcing patent writing service could

significantly lower the cost of each patent application, now anywhere between

$12,000 and $15,000 apiece-which would help expand the market.

Offshoring of equity research is another major growth area. Translation services

are also becoming a big Indian plus. India produces some 3,000 graduates in German

each year, which is more than that in Switzerland.

Though going is good, the Indian BPO services providers cannot afford to be

complacent. Phillppines, Maxico and Hungary are emerging as potential offshore

locations. Likely competitor is Russia, although the absence of English speaking

people there holds the country back. But the dark horse could be South Affrica and

even China

BOP is based on sound economic reasons. Outsourcing helps gain cost

advantage. If an activity can be performed better or more cheaply by an outside

supplier, why not outsource it ? Many PC makers, for example, have shifted from in –

house assembly to utilizing contract assemblers to make their PCs. CISCO outsources

all productions and assembly of its routers and witching equipment to contract

manufactures that operate 37 factories, all linked via the internet.

Secondly, the activity (outsourced) is not crucial to the firm’s ability to gain

sustainable competitive advantage and won’t hollow out its core competence,

capabilities, or technical know how. Outsourcing of maintenance services, date

processing, accounting, and other administrative support activities to companies

specializing in these services has become common place. Thirdly, outsourcing

reduces the company’s risk exposure to changing technology and / or changing buyer

preferences.

Fourthly, BPO streamlines company operations in ways that improve

organizational flexibility, cut cycle time, speedup decision making and reduce

coordination costs. Finally, outsourcing allows a company to concentrate on its core

business and do what it does best. Are Indian companies listening ? If they listen, BPO

is a boon to them and not a bane.

Questions:

1. Which of the theories of international trade can help Indian services

providers gain competitive edge over their competitors?

2. Pick up some Indian services providers. With the help of Michael

Porter’s diamond, analyze their strengths and weaknesses as active

players in BPO.

3. Compare this case with the case given at the beginning of this chapter.

What similarities and dissimilarities do you notice? Your analysis

should be based on the theories explained.

No: 2

PERU

Peru is located on the west coast of South America. It is the third largest nation of the

continent (after Brazil and Argentina) , and covers almost 500.000 square miles

(about 14 per cent of the size of the United States). The land has enormous contrasts,

with a desert (drier than the Sahara), the towering snow – capped Andes mountains,

sparkling grass – covered plateaus, and thick rain forests. Peru has approximately 27

million people, of which about 20 per cent live in Lima, the capital. More Indians (one

half of the population) live in Peru than in any other country in the western

hemisphere. The ancestors of Peru’s Indians were the famous incas, who built a great

empire. The rest of the population is mixed and a small percentage is white. The

economy depends heavily on agriculture, fishing , mining, and services, GDP is

approximately $15 billion and per capita income in recent years has been around

$4,3000. In recent years the economy has gained some relative strength and

multinationals are now beginning to consider investing in the country.

One of these potential investors is a large New York based bank that is

considering a $25 million loan to the owner of a Peruvian fishing fleet. The owner

wants to refurbish the fleet and add one more ship.

During the 1970s, the Peruvian government nationalized a number of industries

and factories and began running them for the profit of the state in most cases, these

state – run ventures became disasters. In the late 1970s the fishing fleet owner was

given back his ships and allowed to operate his business as before. Since then, he

has managed to remain profitable, but the biggest problem is that his ships are

getting old and he needs an influx of capital of make repairs and add new technology.

As he explained it to the new York banker. “Fishing is no longer just an art. There is a

great deal of technology involved. And to keep costs low and be competitive on the

world market, you have to have the latest equipment for both locating as well as

catching and then loading and unloading the fish”

Having reviewed the fleet owner’s operation, the large multinational bank

believes that the loan is justified. The financial institution is concerned, however, that

the Peruvian government might step in during the next couple of years and again take

over the business. If this were to happen, it might take an additional decade for the

loan to be repaid. If the government were to allow the fleet owner to operate the fleet

the way he has over the last decade, the fleet the way he has over the last decade,

the loan could be repaid within seven years.

Right now, the bank is deciding on the specific terms of the agreement. Once

theses have been worked out, either a loan officer will fly down to Lima and close the

deal or the owner will be asked to come to New York for the signing. Whichever

approach is used, the bank realizes that final adjustments in the agreement will have

to be made on the spot. Therefore, if the bank sends a representative to Lima, the

individual will have to have the authority to commit the bank to specific terms. These

final matters should be worked out within the next ten days.

Questions:

1. What are some current issues facing Peru? What is the climate for

doing business in Peru today?

2. What type of political risks does this fishing company need to

evaluate? Identify and describe them.

3. What types of integrative and protective and defensive techniques can

the bank use?

4. Would the bank be better off negotiating the loan in New York or in

Lima ? Why?

No: 3

RED BECOMING THICKER

The Backdrop

There seems to be no end to the troubles of the coloured – water giant Coca Cola. The

cola giant had entered India decades back but left the country in the late 1970s. It

staged a comeback in the early 1990s through the acquisitions route. The professional

management style of Coca Cola did not jell with the local bottlers. Four CEOs were

changed in a span of seven years. Coke could not capitalize on the popularity of

Thums Up. Its arch rival Pepsi is well ahead and has been able to penetrate deep into

the Indian market. Red in the balance sheet of Coke is becoming thicker and industry

observers are of the opinion that it would take at least two decades more before Coke

could think of making profits in India.

The Story

It was in the early 1990s that India started liberalizing her economy. Seizing the

opportunity, Coca Cola wanted to stage a comeback in India. It chose Ramesh

Chauhan of Parle for entry into the market. Coke paid $100 million to Chauhan and

acquired his well established brands Thums Up, Goldspot and Limca. Coke also

bagged 56 bottlers of Chauhan as a part of the deal. Chauhan was made consultant

and was also given the first right of refusal to any large size bottling plants and

bottling contracts, the former in the Pune – Bangalore belt and the latter in the Delhi

and Mumbai areas.

Jayadeva Raja, the flamboyant management expert was made the first CEO of

Coke India. It did not take much time for him to realize that Coke had inherited

several weaknesses from Chauhan along with the brands and bottlers. Many bottling

plants were small in capacity (200 bottlers per minute as against the world standard

of 1600) and used obsolete technology. The bottlers were in no mood to increase

their capacities, nor were they willing to upgrade the trucks used for transporting the

bottle. Bottlers were more used to the paternalistic approach of Chauhan and the new

professional management styles of Coke did not go down well with them. Chauhan

also felt that he was alienated and was even suspected to be supplying concentrate

unofficially to the bottlers.

Raja was replaced by the hard – nosed Richard Niholas in 1995. The first thing

Nicholas did was to give an ultimatum to the bottlers to expand their plants or sell

out. Coke also demanded equity stakes in many of the bottling plants. The bottlers

had their own difficulties as well. They were running on low profit margins. Nor was

Coke willing to finance the bottlers on soft terms. The ultimatum backfired. Many

bottlers switched their loyalty and went to Pepsi. Chauhan allegedly supported the

bottlers, of course, from the sidelines.

Coke thought it had staged a coup over Pepsi when it (Coke) clamed the status

of official drink for the 1996 Cricket World Cup tournament. Pepsi took on Coke

mightily with the famous jingle “Nothing official about it”. Coke could have capitalized

on the sporty image of Thums Up to counter the campaign, but instead simply caved

in.

Donald Short replaced Nicholas as CEO in 1997. Armed with heavy financial

powers, Short bought out 38 bottlers for about $700 million. This worked out to about

Rs 7 per case, but the cost – effective figure was Rs 3 per case. Short also invested

heavily in manpower. By 1997, Coke’s workforce increased to 300. Three years later,

the parent company admitted that investment in India was a big mistake.

It is not in the culture of Coke to admit failure. It has decided to fight back.

Coke could not only sustain the loss, it could even spend more money on Indian

operations. It hiked the ad budget and appointed Chaitra Leo Burnett as its ad

agency. During 1998 – 99, Coke’s ad spend was almost three times that of Pepsi.

Coke is taking a look at its human resources and is taking initiatives to re –

orient the culture and inject an element of decentralization along with empowerment.

Each bottling plant is expected to meet predetermined profit, market share, and sales

volumes. For newly hired management trainees, a clearly defined career path has

been drawn to enable them to become profit centre heads shortly after completion of

their probation. Such a decentralized approach is something of a novelty in the Coke

culture worldwide.

But Alezander “Von Behr, who replaced Short as Chef of Indian operations,

reiterated Coke’s commitment to decentralization and local responsiveness. Coke has

divided India into six regions, each with a business head. Change in the organization

structure has disappointed many employees, some of whom even quit the company.

Coke started cutting down its costs. Executives have been asked to shift from

farm houses to smaller houses and rentals of Gurgaon headquarters have been

renegotiated. Discount rates have been standardized and information systems are

being upgraded to enable the Indian headquarters to access online financial status of

its outposts down to the depot level.

Coke has great hopes in Indian as the country has a huge population and the

current per capita consumption of beverages is just four bottles a year.

Right now, the parent company (head – quartered in the US) has bottle full of

problems. The recently appointed CEO-E Neville Isdell needs to struggle to do the

things that once made the Cola Company great. The problems include –

Meddling Board

Coke’s star- studded group of directors, many of whom date back to the

Goizueta era, has built a reputation for meddling.

Moribund Marketing

Once world class critics say that today the soda giant has become too

conservative, with ads that don’t resonate with the teenagers and young adults that

made up its most important audience.

Lack of Innovation

In the US market, Coke hasn’t created a best – selling new soda since Diet Coke

in 1982. In recent years Coke has been outbid by rival Pepsi Co for faster growing

noncarb beverages like SoBe Gatorade.

Friction with Bottlers

Over the past decade, Coke has often made its profit at the expenses of

bottlers, pushing aggressive price hikes on the concentrate it sells them. But key

bottlers are now fighting back with sharp increases in the price of coke at retail.

International Worries

Coke desperately needs more international growth to offset its flagging US

business, but while some markets like Japan remain lucrative, in the large German

market Coke has problems so far as bottling contracts go.

When its own house is not in order in the large country, will the company be

able to focus enough on the Indian market?

Questions:

1. Why is that Coke has not been able to make profit in its Indian

operations?

2. Do you think that Coke should continue to stay in India? If yes, why?

3. What cultural adaptations would you suggest to the US expatriate

managers regarding their management style?

4. Using the Hofstede and the value orientations cultural models, how

can you explain some of the cultural differences noted in this case?

NO. 4

THE ABB PBS JOINT VENTURE IN OPERATION

ABB Prvni Brnenska Stojirna Brno, Ltd. (ABB-PBS), Czechoslovakia was a joint

venture in which ABB has a 67 per cent stake and PBS a.s. has a 33 per cent stake.

This PBS share was determined nominally by the value of the land, plant and

equipment, employees and goodwill, ABB contributed cash and specified technologies

and assumed some of the debt of PBS. The new company started operations on April

15, 1993.

Business for the joint venture in its first two full years was good in most aspects.

Orders received in 1994, the first full year of the joint venture’s operation, were higher

than ever in the history of PBS. Orders received in 1995 were 2½ times those in

1994. The company was profitable in 1995 and ahead of 1994s results with a rate of

return on assets of 2.3 per cent and a rate of return on sales of 4.5 per cent.

The 1995 results showed substantial progress towards meeting the joint

venture’s strategic goals adopted in 1994 as part of a five year plan. One of the goals

was that exports should account for half of the total orders by 1999. (Exports had

accounted for more than a quarter of the PBS business before 1989, but most of this

business disappeared when the Soviet Union Collapsed). In 1995 exports increased as

a share of total orders to 28 per cent, up from 16 per cent the year before.

The external service business, organized and functioning as a separate business

for the first time in 1995, did not meet expectations. It accounted for five per cent of

all orders and revenues in 1995, below the 10 per cent goal set for it. The retrofitting

business, which was expected to be a major part of the service business, was

disappointing for ABB-PBS, partly because many other small companies began to

provide this service in 1994, including some started by former PBS employees who

took their knowledge of PBS-built power plants with them. However, ABB-PBS

managers hoped that as the company introduced new technologies, these former

employees would gradually lose their ability to perform these services, and the retrofit

and repair service business, would return to ABB-PBS.

ABB-PBS dominated the Czech boiler business with 70 per cent of the Czech

market in 1995, but managers expected this share to go down in the future as new

domestic and foreign competitors emerged. Furthermore, the west European boiler

market was actually declining because environmental laws caused a surge of

retrofitting to occur in the mid -1980 s, leaving less business in the 1990 s.

Accordingly ABB-PBS boiler orders were flat in 1995.

Top managers at ABB-PBS regarded business results to date as respectable, but

they were not satisfied with the company’s performance. Cash flow was not as good

as expected. Cost reduction had to go further. The more we succeed, the more we

see our shortcomings” said one official.

Restructuring

The first round of restructuring was largely completed in 1995, the last year of

the three-year restructuring plan. Plan logistics, information systems, and other

physical capital improvements were in place. The restricting included :

Renovating and reconstructing workshops and engineering facilities.

Achieving ISO 9001 for all four ABB-PBS divisions. (awarded in 1995)

Transfer of technology from ABB (this was an ongoing project)

Intallation of an information system.

Management training, especially in total quality assurance and English

language.

Implementing a project management approach.

A notable achievement of importance of top management in 1995 was a 50 per

cent increase in labour productivity, measured as value added per payroll crown.

However, in the future ABB-PBS expected its wage rates to go up faster than west

European wage rates (Czech wages were increasing about 15 per cent per year) so it

would be difficult to maintain the ABB-PBS unit cost advantage over west European

unit cost.

The Technology Role for ABB-PBS

The joint venture was expected from the beginning to play an important role in

technology development for part of ABB’s power generation business worldwide. PBS

a.s. had engineering capability in coal – fired steam boilers, and that capability was

expected to be especially useful to ABB as more countries became concerned about

air quality. (When asked if PBS really did have leading technology here, a boiler

engineering manager remarked, “Of course we do. We burn so much dirty coal in this

country; we have to have better technology”)

However, the envisioned technology leadership role for ABB-PBS had not been

realized by mid – 1996. Richard Kuba, the ABB-PBS managing director, realized the

slowness with which the technology role was being fulfilled, and he offered his

interpretation of events.

“ABB did not promise to make the joint venture its steam technology leader.

The main point we wanted to achieve in the joint venture agreement was for ABB-PBS

to be recognized as a full-fledged company, not just a factory. We were slowed down

on our technology plans because we had a problem keeping our good, young

engineers. The annual employee turnover rate for companies in the Czech Republic is

15 or 20 per cent, and the unemployment rate is zero. Our engineers have many

other good entrepreneurial opportunities. Now we’ve begun to stabilize our

engineering workforce. The restructing helped. We have better equipment and a

cleaner and safer work environment. We also had another problem which is a good

problem to have. The domestic power plant business turned out to be better than we

expected, so just meeting the needs of our regular customers forced some

postponement of new technology initiatives.”

ABB-PBS had benefited technologically from its relationship with ABB. One

example was the development of a new steam turbine line. This project was a

cooperative effort among ABB-PBS and two other ABB companies, one in Sweden and

one in Germany. Nevertheless, technology transfer was not the most important early

benefit of ABB relationship. Rather, one of the most important gains was the

opportunity to benchmark the joint venture’s performance against other established

western ABB companies on variables such as productivity, inventory and receivables.

Questions: 1. Where does the joint venture meet the needs of both the partners?

Where does it fall short? 2. Why had ABB-PBS failed to realize its technology leadership?3. What lessons one can draw from this incident for better management

of technology transfers?

NO. 5.

CHINESE EVOLVING ACCOUNTING SYSTEM

Attracted by its rapid transformation from a socialist planned economy into a

market economy, economic annual growth rate of around 12 per cent, and a

population in excess of 1.2 billion, Western firms over the past 10 years have favored

China as a site for foreign direct investment. Most see China as an emerging

economic superpower, with an economy that will be as large as that of Japan by 2000

and that of the US before 2010, if current growth projections hold true.

The Chinese government sees foreign direct investment as a primary engine of

China’s economic growth. To encourage such investment, the government has

offered generous tax incentives to foreign firms that invest in China, either on their

own or in a joint venture with a local enterprise. These tax incentives include a two –

year exemption from corporate income tax following an investment, plus a further

three years during which taxes are paid at only 50 per cent of the standard tax rate.

Such incentives when coupled with the promise of China’s vast internal market have

made the country a prime site for investment by Western firms. However, once

established in China, many Western firms find themselves struggling to comply with

the complex and often obtuse nature of China’s rapidly evolving accounting system.

Accounting in China has traditionally been rooted in information gathering and

compliance reporting designed to measure the government’s production and tax

goals. The Chinese system was based on the old Soviet system, which had little to do

with profit or accounting systems created to report financial positions or the results of

foreign operations.

Although the system is changing rapidly, many problems associated with the old

system still remain.

One problem for investors is a severe shortage of accountants, financial

managers, and auditors in China, especially those experienced with market economy

transactions and international accounting practices. As of 1995, there were only

25,000 accountants in china, far short of the hundreds of thousands that will be

needed if China continues on its path towards becoming a market economy. Chinese

enterprises, including equity and cooperative joint ventures with foreign firms, must

be audited by Chinese accounting firms, which are regulated by the state.

Traditionally, many experienced auditors have audited only state-owned enterprises,

working through the local province or city authorities and the state audit bureau to

report to the government entity overseeing the audited firm. In response to the

shortage of accountants schooled in the principles of private sector accounting,

several large international auditing firms have established joint ventures with

emerging Chinese accounting and auditing firms to bridge the growing need for

international accounting, tax and securities expertise.

A further problem concerns the somewhat halting evolution of China’s emerging

accounting standards. Current thinking is that China won’t simply adopt the

international accounting standards specified by the IASC, nor will it use the generally

accepted accounting principles of any particular country as its mode. Rather,

accounting standards in China are expected to evolve in a rather piecemeal fashion,

with the Chinese adopting a few standards as they are studied and deemed

appropriate for Chinese circumstances.

In the meantime, current Chinese accounting principles present difficult

problems for Western firms. For example, the former Chinese accounting system

didn’t need to accrue unrealized losses. In an economy where shortages were the

norm, if a state-owned company didn’t sell its inventory right away, it could store it

and use it for some other purpose later. Similarly, accounting principles assumed the

state always paid its debts – eventually. Thus, Chinese enterprises don’t generally

provide for lower-of-cost or market inventory adjustments or the creation of allowance

for bad debts, both of which are standard practices in the West.

Questions: 1. What factors have shaped the accounting system currently in use in

China?2. What problem does the accounting system, currently in sue in China,

present to foreign investors in joint ventures with Chinese companies?3. If the evolving Chinese system does not adhere to IASC standards, but

instead to standards that the Chinese governments deem appropriate to China’s “Special situation”, how might this affect foreign firms with operations in China ?

NO. 6

UNFAIR PROTECTION OR VALID DEFENSE ?

“Mexico Widens Anti – dumping Measure …………. Steel at the Core of US-Japan

Trade Tensions …. Competitors in Other Countries Are Destroying an American

Success Story … It Must Be Stopped”, scream headlines around the world.

International trade theories argue that nations should open their doors to trade.

Conventional free trade wisdom says that by trading with others, a country can offer

its citizens a greater volume and selection of goods at cheaper prices than it could in

the absence of it. Nevertheless, truly free trade still does not exist because national

governments intervene. Despite the efforts of the World Trade Organization (WTO)

and smaller groups of nations, governments seem to be crying foul in the trade game

now more than ever before.

We see efforts at protectionism in the rising trend in governments charging

foreign producers for “dumping” their goods on world markets. Worldwide, the

number of antidumping cases that were initiated stood at about 150 in 1995, 225 in

1996, 230 in 1997 , and 300 in 1998.

There is no shortage of similar examples. The Untied States charges Brazil,

Japan, and Russia with dumping their products in the US market as a way out of tough

economic times. The US steel industry wants the government to slap a 200 per cent

tariff on certain types of steel. But car markers in the United States are not

complaining, and General Motors even spoke out against the antidumping charge – as

it is enjoying the benefits of law – cost steel for use in its auto product ion. Canadian

steel makers followed the lead of the United States and are pushing for antidumping

actions against four nations.

Emerging markets, too, are jumping into the fray. Mexico recently expanded

coverage of its Automatic Import Advice System. The system requires importers

(from a select list of countries) to notify Mexican officials of the amount and price of a

shipment ten days prior to its expected arrival in Mexico. The ten-day notice gives

domestic producers advance warning of incoming low – priced products so they can

complain of dumping before the products clear customs and enter the marketplace.

India is also getting onboard by setting up a new government agency to handle

antidumping cases. Even Argentina, China, Indonesia, South Africa, South Korea, and

Thailand are using this recently – popularized tool of protectionism.

Why is dumping on the rise in the first place? The WTO has made major inroads

on the use of tariffs, slashing tem across almost every product category in recent

years. But the WTO does not have the authority to punish companies, but only

governments. Thus, the WTO cannot pass judgments against individual companies

that are dumping products in other markets. It can only pass rulings against the

government of the country that imposes an antidumping duty. But the WTO allows

countries to retaliate against nations whose producers are suspected of dumping

when it can be shown that : (1) the alleged offenders are significantly hurting

domestic producers, and (2) the export price is lower than the cost of production or

lower than the home – market price.

Supporters of antidumping tariffs claim that they prevent dumpers from

undercutting the prices charged by producers in a target market and driving them out

of business. Another claim in support of antidumping is that it is an excellent way of

retaining some protection against potential dangers of totally free trade. Detractors

of antidumping tariffs charge that once such tariffs are imposed they are rarely

removed. They also claim that it costs companies and governments a great deal of

time and money to file and argue their cases. It is also argued that the fear of being

charged with dumping causes international competitors to keep their prices higher in

a target market than would other wise be the case. This would allow domestic

companies to charge higher prices and not lose market share – forcing consumers to

pay more for their goods.

Questions

1. “You can’t tell consumers that the low price they are paying for a

particular fax machine or automobile is somehow unfair. They’re not

concerned with the profits of companies. To them, it’s just a great

bargain and they want it to continue.” Do you agree with this

statement? Do you think that people from different cultures would

respond differently to this statement? Explain your answers.

2. As we’ve seen, the WTO cannot currently get involved in punishing

individual companies for dumping – its actions can only be directed

toward governments of countries. Do you think this is a wise policy ?

Why or why not? Why do you think the WTO was not given the

authority to charge individual companies with dumping? Explain.

3. Identify a recent antidumping case that was brought before the WTO.

Locate as many articles in the press as you can that discuss the case.

Identify the nations, products (s), and potential punitive measures

involved. Supposing you were part of the WTO’s Dispute Settlement

Body, would you vote in favor of the measures taken by the retailing

nation? Why or why not?