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International Business Mumbai University Solved Paper 2008 by - Shrund Kalse
International Business Mumbai University Solved Paper 2008 by - Shrund Kalse
Stage # 2
Find out a right partner. Jointly promote the product/s. establish brand in one market. Identify location or develop a complete network. Reduce the cost and service the mark Take the products from the unit and spread in nearby countries and build brand name Analyse the potential in
Stage # 3
Stage # 4
Stage # 5
Stage # 6
various regions. Evaluate the partners, investment climate and Socio-Cultural background Produce, distribute, invest and build corporate image and face competition
Global production Global investments Global brand name Status of global company
Q 2) Why do companies & the countries enter into International business, when the opportunities exist in the domestic business?
Ans: A mode of entry into an international market is the channel which your organization employs to gain entry to
a new international market. This lesson considers a number of key alternatives, but recognizes that alternatives are many and diverse. Here you will be consider modes of entry into international markets such as the Internet, Exporting, Licensing, International Agents, International Distributors, Strategic Alliances, Joint Ventures, Overseas Manufacture and International Sales Subsidiaries. Finally we consider the Stages of Internationalization. It is worth noting that not all authorities on international marketing agree as to which mode of entry sits where. For example, some see franchising as a stand alone mode, whilst others see franchising as part of licensing. In reality, the most important point is that you consider all useful modes of entry into international markets - over and above which pigeon-hole it fits into. If in doubt, always clarify your tutor's preferred view. The International Marketing Entry Evaluation Process is a five stage process, and its purpose is to gauge which international market or markets offer the best opportunities for our products or services to succeed. The five steps are Country Identification, Preliminary Screening, In-Depth Screening, Final Selection and Direct Experience. There are two types of indicators / variables that most companies consider when deciding where to operate abroad i.e. Opportunities & Risks A)Opportunities i. Market Size Expectation of a large market and sales growth is probably a potential locations major attraction. This depends on the economic variables. Some of the main things to consider when examining economic variables are : a)Obsolescence and leapfrogging of products b)Prices c)Income elasticity d)Substitution e)Income inequality
ii. Ease and Compatibility of Operations: Companies are highly attracted to countries that
i. TRANSLATION OR ACCOUNTING RISK Translation risk is a measure of variation of home currency value of assets and liabilities appearing in balance sheet denominated in foreign currency. It is also called as balance sheet or accounting risk. It is also referred to as accounting risk. It arises while consolidation of accounts (financial statements) involving foreign currency denominated assets and liabilities is prepared. Firms having foreign subsidiaries, require preparing the groups financial statements. ii. TRANSACTION RISK Transaction Risk is the measure of variation of home currency value of receivables and payables denominated in foreign currencies due to unanticipated changes in exchange rate. Transactions which give rise to forex receivables orpayables in future create transaction exposure. A US firm has exported to UK, goods valued at 1 million n UK pound, payable 3
iii. OPERATING OR ECONOMIC RISK In the case of transaction risk the operations pertaining to cash flow are all executed. Only the financial exchange has to be given effect. In operating risk, the manufacturing trading and financial transactions activities- are to fulfill an export of obligation. The prices of inputs might exchange. Operational uncertainties in production may take place. Yet the export price and obligation which are already freed cannot be changed, even if there is cost escalation. All these change the cost side of the operation. The revenue side of the operation, which is the amount of export earnings receivable, is also subject to change in exchange value. The expected home currency value of profit from the particular operation changes. B) Trade barriers
A trade barrier is defined as any hurdle, impediment or road block that hampers the smooth flow of goods, services and payments from one destination to another. They arise from the rules and regulations governing trade either from home country or host country or intermediary. Trade barriers are man-made obstacles to the free movement of goods between different countries, and impose artificial restrictions on trading activities between countries. Despite the fact that all international organizations such as GATT, WTO and UNCTAD advocate reduction or elimination of barriers, they still continue in different forms.
Objectives of trade barriers: 1 .To protect domestic industries from foreign goods. 2. To promote new industries and research and development activities by providing a home market for domestic industries. 3. To maintain favorable balance of payment, by restricting imports from foreign countries. 4. To conserve foreign exchange reserves of the country by restricting imports from fore ign countries. 5. To protect the national economy from dumping by other countries with surplus production. 6. To mobilize additional revenue by imposing heavy duties on imports. This also restricts conspicuous consumption within the country. 7. To counteract trade barriers imposed by other countries. 8. To encourage domestic production in the domestic market and thereby make the country strong and self- sufficient. Since trade barriers are harmful for the growth of free trade, efforts were made to reduce such trade barriers, and international organizations initiated collective efforts of all countries involved in trade.
Types of trade barriers: Broadly, Trade barriers are classified as tariff barriers and non-tariff barriers. A country may use both tariff and non-tariff barriers order to restrict the entry of foreign goods. Tariff Barriers A tariff is a special tax on imported goods (and sometimes, imported products), raising their price. To try to overcome this price handicap, the foreign exporter may try several different approaches. It may use marginal cost pricing. It may try to get a more favorable tariff classification with a lower duty. It may ship unassembled products. If none of these is sufficient, the firm may produce in the local market to get behind the tariff wall
o Administrative fees o Special supplementary duties o Import credit discriminations o Variable levies o Border taxes Others: O Voluntary export restraints o Orderly marketing agreements Monetary Barriers This is the most extensive tool of trade regulation because it involves restrictions on both trade and foreign exchange. It is practiced especially by former communist and developing countries. The international firm may have difficulty getting exchange to import products and supplies or components. It usually has greater difficulty getting exchange to remit profits. It is tempted to use transfer pricing to avoid these negative effects.
C) Intellectual Property Rights The term Intellectual Property Rights (IPR) is often shortened further to Intellectual Property (IP). Intellectual property is a series of legal rights that afford, in most cases temporary protection for different types of inventions, designs, brand names or original creations. The legal rights given are the rights to prevent unauthorized use of the invention, design, brand name or creation for the period of protection. The right given can be an absolute monopoly right orsimply aright to prevent reproduction.
2.Search carried out to ascertain originality 3.Examination carried out 4.Objections raised/No objections raised 5.Dealing with objections 6.Grant/Registration Q 4) Modern trade theories are essential for formulating business strategies at macro level in companies Discuss in detail only relevant three trade theories. Ans: MODERN THEORY OF INTERNATIONAL TRADE: THE HECKSCHER-OHILIN THEORY
The Heckscher-Ohlin theory explains why countries trade goods and services with each other, the emphasize being on the difference of resources between two countries. This model shows that the comparative advantage is actually influenced by the interaction between the resources countries have (relative abundance of production factors) and production technology (which influences the relative intensity by which the different production factors are being utilized during the production cycle.
The model starts with the presumption that country A produces two products: food (X) and textiles (Y). These two kinds of production need two different inputs, territory (T) and labour (L), which are available in limited quantities. In the same time, food production (X) requires more land, so it can be said it is territory intensive and textile (Y) production requires more labour, being in this way labour intensive.
Beginning with these presumptions, the Heckscher-Ohlin model explains the implications trade between two countries A and B has, if the countries produce the same products: food (X) and textiles (Y).
The relative resource abundance, factors intensity and trade specialization Country Inputs and production without trade
The relative abundance and trade specialization in the product for which there is a factor intensity
Product
Labour (L)
Territory (T)
L/T
T/L
X 20 10 30
Y 95 5 100 Y 5 2 7
NATIONAL COMPETITIVE ADVANTAGE It is a fact that Porter(1990) never focused primarily on the factors determining the pattern of trade, yet his theory of national competitive advantage does explain why a particular country is more competitive in a particular industry. If, for example, Italy maintains competitive advantage in the production of ceramic tiles and Switzerland possesses the competitive advantage in watched, it can be interpreted that the formerwill export ceramictiles and the latterwill export watches and both of them will import goods in which their own industry is not competitive. Why is this there a difference? Porter explains that there are four factors responsible for such diversity. He calls those factors the diamond of national advantage. The diamond includes: 1.Factor conditions 2.Demand conditions 3.Related and supporting industries 4.Firm strategy, structure and rivalry These factors have been more or less taken into account by earlier economists. What is crucial in Porters thesis is that it is the interaction among these factors that shapes the competitive advantage.
Factor conditions show how farthe factor of production in a country can be utilized successfully in a particularindustry. This concept goes beyond the factorproportions theory and explains that availability of the factors of production per se is not important, rather their contribution to the creation and upgradation of product is crucial for competitive advantage. If one says that Japan possesses competitiveadvantage in the production of automobiles, it is not simply because Japan has easy access to iron ore, but because the country has skilled labour force for making this industry competitive.
Thirdly, the firm operating along with its competitors as well as its complementary fi rms gathers benefit through aclose workingrelationship in form of competition orbackward and forward linkages. If competition is acute, every firm will like to produce better quality goods at a lower cost in order to survive in the market. Again, if there is agglomeration of complementary units in a particular region, there may be strong backward and forward linkages. All this will help attain national competitive advantage.
Figure 1: Porters Diamond of National Advantage Fourthly, the firms own strategy helps in augmenting export. There is no fixed rule regarding the adoption of a particular strategy. It depends upon a number of factors present in the home country or the importingcountry and it differs from time to time. Nevertheless, the strategic decisions of the firm have lastingeffects on theirfuture competitiveness. Again, equally important is the industry structure and rivalry amongdifferent companies. The greaterthe rivalry, the greater the competitive strength of the industry. Besides the fourfactors, Portergives weightage to a couple of factors, such as governmental policy and the role of chance of events. Governmental policy influences all the four factors through various regulatory/deregulatory measures. It can control the availability of various resources of change the pattern of demand through taxes and so on. It can encourage/discourage supportive industries through various incentives/disincentives. Similarly, chance of events, such as war or some unforeseen events like inventions/innovations; discontinuities in the supply of inputs; and so forth can eliminate the advantages possessed by competitors.
the study of Rugman and McIlveen (1985) shows that some Canadian industries emerged on the global map only on the basis of natural resource availability. Fifthly, Porter feels that sizeable domestic demand must be present for attaining competitive advantage. But there are industries that have flourished because of demand from foreign consumers. Forexample, a lions share of Nestles earnings comes from foreign sales. Nevertheless, these limitations do not undermine the significance of Porters theory.
It is a general trend that innovating countries no longer enjoy production advantage. Since many physical, fiscal and infrastructural incentives are offered by the developing countries, such innovators are lured and increase there production in developing countries. Today, we see such manufacturing units in Indonesia, Thailand, Malaysiaand Brazil. Indiais also emergingas astrong production centre for automobiles, health care and consumer products.
The WTO agreements cover: Goods It all began with trade in goods. From 1947 to 1994, GATT was the forum for negotiating lower customs duty rates and other trade barriers; the text of the General Agreement spelt out important rules, particularly nondiscrimination. Since 1995, the updated GATT has become the WTOs umbrella agreement for trade in goods. It has annexes dealing with specific sectors such as agriculture and textiles, and with specific issues such as state trading, product standards, subsidies and actions taken against dumping.
Services Banks, insurance firms, telecommunications companies, tour operators, hotel chains and transport companies looking to do business abroad can now enjoy the same principles of freer and fairer trade that originally only applied to trade in goods.
ACHIEVEMENTS OF WTO 1. Trade Liberalisation WTOs trade liberalization measures are embodied in a variety of agreements, No.60,which each country has to sign for becoming member of WTO. 2. Agreement on Agriculture (AOA) Tariffs on agricultural products are bound Non Tariff barriers such as Quotas for Import have been converted to tariff (Tariffication) to give predictability to trade in agriculture commodities. Developed countries have agreed to cut export subsidies by 36% (24% cut for developing countries). 3. Trade Related Investment Masures Agreement (TRIMS )Applies to measures that affect trade in goods. No country shall apply any measure that discriminates against foreigners or foreign products (Principle of National treatment). However, permits utilization of local resources through Local Content Requirements. Discourages trade belonging requirements of countries by restricting import & pushing exports. Deadlines for implementation Developed Countries - 1996 Developing Countries 1999 (extended) LDC - 2001 (extended) 4.SPS Agreement (Sanitary & Phyto Sanitary Agreement ) Anti Dumping Agreement Member Countries can resort to anti dumping measures if they can establish that goods are being dumped at price lower than the price prevailing in the exporting country. Extension of Import Duty can be levied to prevent dumping 5.Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) Enjoins on the member countries to protect the rights of the creators/invention of products or ideas. Copyrights, trademarks, geographical indications, Industrial designs, patterns etc. are covered. e.g. Computer programs, films, wires & spirits are protected. 6. General Agreement on Trade in Services (GATS) Lays down obligations of member countries to provide access to import of services on the basis of MFN principle.
The final resolution on Doha issues has still not been achieved, even after more than 8 years since its introduction. The reason is lack of forward movement by major negotiators on agriculture subsidy and tariff reduction, the two most intractable issues in the Round. Negotiations aimed at a world that no longer exists Neither the collapse of the Round, nor the recriminations to follow, should be taken too seriously. The mandate for negotiations under the auspices of the Doha Round has fallen further and further behind the pace of change in the world economy Success requires a different game, with different rules and different players Consider agriculture the proximate cause of the Doha collapse. According to World Bank commodity price indexes, in 2001 grain prices were only 70 % of their nominal 1995 levels. In defining the negotiating agenda for the Doha Round, the focus of commodity exporters in the WTO (Brazil, Argentina, Australia, etc.) has been to raise these prices by eliminating price-distorting policies. At the same time, major importers (India, China) have also been concerned about the impact of low prices on their farmers. Impasses over agriculture are as much an excuse as a cause of the breakdown In a sense, developing countries are collectively asking that food prices go up and down at the same time. The inconsistency reflects divergent interests across the newer, non-OECD members of the WTO. It also highlights the fact that remainingimpasses overagriculture are as much an excuse as a cause. The problem is irreconcilable differences in views on trade policy, linked to differences in stages of economic development. Non-agricultural issues Moving past agriculture to NAMA and services, developing country gains at this point really require SouthSouth dialog and South-South initiatives at liberalization. This is the message from much of the policy modeling literature. Indeed, model-based analysis of recent NAMA proposals simply reinforces the message from earlier research on the impacts of multilateral trade liberalization, namely: active developing country participation in terms of market access concessions is critical to their prospects Q 6) NAFTA is emerging as an effective trade partner for India despite of global slowdown if so, categories major sectors & business opportunities for Indian business houses to prosper in future in the NAFTA bloc. Ans: NAFTA- The north American free trade agreement (NAFTA) came into being on January 1,1994.the most affluent nations of the world ,i.e. the USA and Canada along with Mexico a developing country joined together to form a trade block. A free trade agreement was signed by the USA and Canada in 1989.this was extended to
Objectives To create new business opportunities particularly in the Mexico To enhance the competitive advantage of the companies operating in the USA,Canada and Mexico in wider international markets. To reduce the prices f the products and services by enhancing the competition To enhance industrial development and thereby employment throughout the region. To provide stable and predictable political environment for the investors. To develop industries in Mexico in order to create employment and to reduce migration from Mexico to the USA. To assist Mexico in earning additional foreign exchange to meet its foreign debt burden. To improve and consolidate political relationship among member countries. There are tremendous opportunities in Canada and globally for Canadian banks. Domestically, we are positioned as an alternative to the Canadian financial institutions; our model can be best identified as a full-service direct bank. In addition, our structure is flat and our size allows us to be close to our customers. Indian engineering exports and Free Trade Agreement amongst the three countries i.e. Canada, USA and Mexico, provided enormous opportunities for bilateral trade. Q 7) Enumerate all the challenges encountered by global human resources division operating in a cross border business environment. Ans: challenges related to managing people in management an internationally oriented business. Driving force for globalization 1.Foreign direct investment (FDI) flows 2.Cross-border inter-firm agreements Organizations expand beyond domestic boundaries to achieve 1.Satisfied employees 2.Competitive products and services 3.Searching for new or broader markets 4.Acquiring new, more efficient manufacturing technology 5.Large, inexpensive labor forces Global human resource management (GHRM) includes the same functions as domestic HRM, plus several aspects unique to international management 1.people challenge the most difficult for firms becoming international 2.Most critical to success, acquiring a competent workforce (survey of top execs.) The top HR challenges include 1.Finding suitable candidates 2.Intercultural understanding 3.Career management 4.Employee retention 5.Adjusting to environment 6.Partner dissatisfaction 7.Relocation reluctance The cultural nature of global human resource management cultural differences