LECTURE-1 UNIT-1 INTERNATIONAL TRADE: Export & Import of goods & services. INTERNATIONAL MARKETING: The m !ti"#tio"#!

comp#"ies $hich $ere prod ci"g the prod cts i" their home co "tries & m#r%eti"g them i" v#rio s foreig" co "tries. INTERNATIONAL &'(INE((: DE)INITION*: I"ter"#tio"#! + si"ess is the st d, of tr#"s#ctio"s t#%i"g p!#ce #cross "#tio"#! +orders for the p rpose of s#tisf,i"g the "eeds of i"divid #!s & org#"i-#tio"s. These eco"omic tr#"s#ctio"s co"sist of tr#de. #s i" the c#se of exporti"g or importi"g & direct i"vestme"t of f "ds i" overse#s oper#tio"s. The st d, of i"ter"#tio"#! + si"ess is he#vi!, foc sed o" #ctivities of !#rge MNEs. $hich #re he#d/ #rtered i" o"e co "tr, + t h#ve oper#tio"s i" other co "tries0 + t sm#!! sc#!e e"terprises #re #!so i"c! ded. DE)INITION 1: I"ter"#tio"#! + si"ess me#"s c#rr,i"g + si"ess #ctivities +e,o"d "#tio"#! +o "d#ries. It "orm#!!, i"c! des the tr#"s#ctio"s of eco"omic reso rces s ch #s goods. c#pit#!. services 2comprisi"g tech"o!og,. s%i!!ed !#+or. tr#"sport#tio" etc.3 #"d i"ter"#tio"#! prod ctio". 4rod ctio" m#, either i"vo!ve prod ctio" of ph,sic#! goods or provisio" of services !i%e +#"%i"g. fi"#"ce. i"s r#"ce. co"str ctio". tr#di"g #"d so o". Th s. i"ter"#tio"#! + si"ess i"c! des "ot o"!, i"ter"#tio"#! tr#de of goods & services + t #!so foreig" i"vestme"t especi#!!, foreig" direct i"vestme"t. (5O4E: I"ter"#tio"#! + si"ess re!#tes to tr#"s#ctio"s i"vo!vi"g more th#" o"e co "tr,. (cope of i"ter"#tio"#! + si"ess is ver, v#st. (cope exists to exch#"ge goods (ervices 2#cco "ti"g. !eg#! services. he#!thc#re. m#"#geme"t co"s !t#"c,. +#"%i"g. i"s r#"ce. tr#"sport#tio". to rism3 Tr#"sfer of %"o$!edge2 tech"o!og,. i""ov#tio". i"te!!ect #! propert, rights3. Other reso rces2 m#teri#!s. c#pit#! . peop!e3 .
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(%i!!s 2m#"#geri#! s%i!!s3. I"form#tio". 4eop!e.

IM4ORTAN5E: (t d, of I"ter"#tio"#! + si"ess h#s +ecome import#"t +ec# se It comprises # !#rge & gro$i"g portio" of $or!d6s tot#! + si"ess A!! comp#"ies #re #ffected +, g!o+#! eve"ts & competitio". $hether !#rge or sm#!! si"ce most se!! o tp t to & sec re r#$ m#teri#!s & s pp!ies from foreig" co "tries.

789 5OM4ANIE( ENGAGE IN INTERNATIONAL &'(INE((: TO E:4AND (ALE(; e.g. To,ot# i" <#p#" exp#"ded s#!es i" '( TO A5='IRE RE(O'R5E( TO MINIMI>E RI(K TO 5O'NTER 5OM4ETITOR( TO A?OID TARI)) & IM4ORT ='OTA(

RE5ENT TREND( The p#st co p!e of dec#des h#ve $it"essed sig"ific#"t gro$th i" i"ter"#tio"#! + si"ess. D'RING *@@A; the #mo "t of )DI o tf!o$ stood #t '( B1CD +i!!io". over t$o;thirds of $hich $ere #cco "ted for +, o"!, D co "tries . "#me!, . '"ited (t#tes of Americ#. '"ited Ki"gdom. <#p#". Germ#",. #"d )r#"ce. There $ere *EA.AAA foreig" #ffi!i#tes of over FE.AAA p#re"t comp#"ies. The $or!d$ide s#!es of these #ffi!i#tes $ere #pproxim#te!, '( BD.Dtri!!io". $hich $ere gre#ter th#t the $or!d export of goods #"d "o";f#ctor services. )DI o tf!o$ gre$ from '( B1CD +i!!io" i" *@@A to '(B*.*DA +i!!io" i" 1AAA. 8o$ever. d ri"g 1AAA. there $ere ps #"d do$"s i" the si-e of the f!o$. I" 1AAD. it $#s '( BEE@ +i!!io" $hich i"cre#sed to '( B*.GDG +i!!io" d ri"g 1AAG. The #"" #! gro$th r#te #sce"ded from *D.EH d ri"g *@@*;*@@D to FD.EH d ri"g *@@I; 1AAA + t $#s "eg#tive +, D.*H d ri"g 1AA*;1AAD.
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I" 1AAI;1AAE. the o tf!o$ i"cre#sed +, #ro "d DAH + t #g#i" i" 1AAG. d e to i"ter"#tio"#! fi"#"ci#! crisis. the gro$th r#te i" )DI o tf!o$ $#s "eg#tive +, *F.DH M&A formed # !#rge p#rt of the )DI o tf!o$. I" *@@As. the )DI thro gh cross;+order M&As h#d #mo "ted to '(B*D* +i!!io" $hich rose to '(B*.*CC +i!!io" i" 1AAA + t fe!! to '(BE*I +i!!io" i" 1AAD. D ri"g 1AAG. it $#s of the order of '(B*.1AD +i!!io". If o"e !oo%s #t the #"" #! gro$th r#te. it rose from 1F.FH i" *@@*;@D to D*.DH i" *@@I;1AAA + t fe!! to 1.1H d ri"g 1AA*; 1AAD. I" 1AAI & 1AAE. the cross +order M&As gre$ +, 1AH & CIH. respective!,. + t i" 1AAG. it $#s "eg#tive #t FDH.

A!o"g $ith rapid internationalization of firms. $or!d tr#de. both intra firm and inter-firm trade gre$ m#"ifo!d. The red ctio" of t#riff #"d "o";t#riff +#rriers "der the #egis of GATT #"d "o$ "der the 7TO m+re!!# too g#ve # fi!!ip to i"ter"#tio"#! tr#de. D ri"g t$o #"d # h#!f dec#des +egi""i"g from *@GA. the v#! e of $or!d tr#de increased almost fivefold;from '( BI.F1E +i!!io" i" 1AAA #"d to '( B*A.1 tri!!io" i" 1AAD. The $or!d tr#de i" 1AAG $#s #s high #s B*D.G tri!!io". MN5s h#ve # +ig ro!e i" the i"cre#si"g vo! me of tr#de. 8o$ever. i" rece"t dec#des. the sm#!! #"d medi m si-ed m !ti"#tio"#!s do #cco "t for si-e#+!e $or!d tr#de. There h#s "ot +ee" #", "otice#+!e ch#"ge i" the sh#re of the developed market economies i" the $or!d tr#de. Their share continued to remain at !"# Th s. i"ter"#tio"#! + si"ess h#s $it"essed # phe"ome"#! gro$th i" the rece"t p#st. INTERNATIONAL &'(INE(( ?s DOME(TI5 &'(INE(( The +#sic t#s%s & f "ctio"s of i"ter"#tio"#! + si"ess #re #!most the s#me #s domestic + si"ess0 + t the e"viro"me"t +ecomes comp!ex. The differe"ces #re pro"o "ced prim#ri!, i" the #re#s of c rre"c,. i"terest r#tes. i"f!#tio". t#x#tio" s,stems. gover"me"t reg !#tio"s. !#"g #ge. c !t r#! & eco"omic +#rriers. 7he" # comp#", oper#tes i"ter"#tio"#!!,. foreig" co"ditio"s #re #dded to domestic o"es m#%i"g exter"#! e"viro"me"t more diverse " comp!ex. i. IMMO&ILIT9 O) )A5TOR(: Mo+i!it, of differe"t f#ctors of prod ctio" is !ess #s +et$ee" "#tio"s th#" i" the co "tr, itse!f. 8o$ever. $ith the #dve"t of #ir tr#"sport. the mo+i!it, of !#+or h#s i"cre#sed m#"ifo!d. (imi!#r!, mo+i!it, of c#pit#! h#s i"cre#sed $ith the deve!opme"t of i"ter"#tio"#! +#"%i"g. I"spire of these deve!opme"ts. mo+i!it, of !#+or. c#pit#! is "ot #s m ch #s it is $ithi" the co "tr, itse!f.
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ii.

DI))EREN5E( IN NAT'RAL ENDO7MENT(: N#t r#! reso rces !i%e #v#i!#+i!it, of r#$ m#teri#!s. compositio" of soi!. ferti!it, of soi!. r#i"f#!!. temper#t re etc. differ $ide!, from co "tr, to co "tr,. O" the +#sis of this speci#!t,. co "tries speci#!i-e themse!ves i" the prod ctio" of cert#i" se!ected commodities & therefore the, prod ce +etter / #!it, of goods #t !o$er r#tes & se!! them i" i"ter"#tio"#! m#r%et. It c# ses differe"ce i" domestic & foreig" tr#de DI))ERENT 5'RREN5IE(: There is o"!, o"e c rre"c, #ccept#+!e #!! over the co "tr, & therefore there is "o diffic !t, i" m#%i"g p#,me"ts i" i"ter"#! tr#de. & t. e#ch co "tr, h#s its o$" mo"et#r, s,stem $hich differs from others .Exch#"ge r#te +et$ee" the t$o c rre"cies #re fixed +, the mo"et#r, # thorities "der the r !es fr#med +, the INTERNATIONAL MONETAR9 )'ND. A!! p#,me"ts for imports #re to +e m#de i" the exporti"g co "tr,6s c rre"c, $hich is "ot free!, #v#i!#+!e i" importers co "tr,. &ALAN5E O) 4A9MENT 4RO&LEM MARKET 5ONDITION( 4ROD'5T MO&ILIT9

iii.

iv. v.

vii. viii. ix. x. xi. xii.

8IG8 TRAN(4ORT 5O(T: Me#"s & costs of tr#"sport#tio" #!so co"tri+ te to the differe"ce. (8ARING O) GAIN( O) TRADE DI))ERENT TRADE 4OLI5IE( DI))ERENT E5ONOMI5 EN?IRONMENT LING'I(TI5 & 5'LT'RAL DI))EREN5E( (O?EREIGN 4OLITI5AL ENTITIE(: E#ch co "tr, is #" i"depe"de"t sovereig" po!itic#! e"tit,. Differe"t co "tries impose differe"t t,pes of restrictio"s o" imports & exports i" the "#tio"#! i"terest. These restrictio"s m#, +e: impositio" of t#riffs & c stoms d ties o" imports & exports. / #"tit#tive restrictio"s !i%e / ot#. Exch#"ge co"tro!. impositio" of more !oc#! t#xes etc. DI))ERENT LEGAL (9(TEM(: Differe"t !eg#! s,stems #re oper#ted +, differe"t co "tries & the, #!! $ide!, differ from e#ch other. The existe"ce of differe"t !eg#! s,stems m#%es the t#s% of + si"ess more diffic !t #s the, h#ve to fo!!o$ !eg#! provisio"s of the t$o co "tries #s reg#rds the p#rtic !#r tr#de. (5O4E O) INTERNATIONAL &'(INE((: (cope: 2i3 4rod ctsJM#r%et offered
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xiii.

2ii3 5#p#+i!ities 2iii3 Res !ts xiv. 5ATEGOR9 4rod ctsJM#r%et M#r%et "eeds 5#p#+i!ities Tech"o!og, 4rod ctio" c#p#+i!it, Method of s#!e Method of distri+ tio" N#t r#! reso rces Res !ts (i-eJgro$th Ret r"Jprofit (TRATEGI5 4LANNING 4RO5E(( 8.O. #ctivities 4rim#r, f!o$ of I"form#tio" ( +sidi#ries (TRATEGI5 AREA 4rod cts offered

5orpor#te G idi"g 4ri"cip!e KKKKKKKKKKKKKKKKKKKKKK 5orpor#te o+Lective A"#!,-e E"viro"me"t

KKKKKKKKKKKKKKKKKKKKKKKK ( +sidi#ries KKKKKKKKKKKKKKKKKKKKKKKK ( +sidi#ries

Ev#! #te 5orpor#te (tre"gths & 7e#%"esses KKKKKKKKKKK ( +sidi#ries (pecif, #!ter"#tive str#tegiesKKKKKKKKKKKKKKKKKKKKKKKK ( +sidi#ries Ev#! #te. se!ect & imp!eme"t (tr#teg, KKKKKKKKKKKKKKKK ( +sidi#ries Mo"itor (tr#teg, KKKKKKKKKKKKKKKKKKKKKKKKKKK ( +sidi#ries

5orpor#te G idi"g 4ri"cip!e 4rovides # !o"g;term vie$ of $h#t the firm is strivi"g to +ecome & provide directio" to divisio"#! & s +sidi#r, m#"#gers. some firms seM the decisio" circ!eM $hich is #" i"terre!#ted set of str#tegic choices of #" i"ter"#tio"#! firm.

I"p t (tr#tegies: !#+or. m#"#geme"t. o$"ership & fi"#"ci#!. The, #"s$er the / estio" of $here $i!! $e fi"d the right peop!e. $i!!i"g"ess to c#rr, the ris% & the "ecess#r, f "ds. M#r%eti"g & (o rci"g: 5o"stit te the +#sic str#tegies. The, #"s$er the / estio"s to $hom #re $e goi"g to se!! $h#t & from $here #"d ho$ $i!! $e s pp!, th#t m#r%et. A third set of str#tegies: !eg#! & co"tro! respo"d to the pro+!em of ho$ the firm is to str ct re itse!f to imp!eme"t the +#sic str#tegies give" the reso rces it c#" m ster. A fi"#! str#tegic #re#. p +!ic #ff#irs is sho$" #s # +#sic str#teg, simp!, +ec# se it p!#ces # restr#i"t o" #!! other str#teg, choices. These str#tegies i"f! e"ce e#ch other. A!tho gh these str#teg, #re#s #re sho$" sep#r#te!, i" the decisio" circ!e & #re tre#ted sep#r#te!,. these str#tegies m st +e i" co"st#"t reiter#tio" #s o"e move #ro "d the decisio" circ!e. LE5T'RE;1 INTERNATIONAL &'(INE((: 58ALLENGE( & O44ORT'NITIE(: The differe"t po!itic#!. LEGAL. (O5IAL. E5ONOMI5 AND GEOGRA48I5AL e"viro"me"ts #ffect the $#, # comp#", oper#tes #"d poses ch#!!e"ges i" the form of #dL stme"ts o"e m st m#%e to its oper#tio"s 2E.G. ho$ it prod ces & m#r%ets its prod cts #+ro#d. st#ff its oper#tio"s #"d m#i"t#i"s its #cco "ts i" # p#rtic !#r co "tr,3 *. DI))ERENT 4OLITI5AL EN?IRONMENT: 4o!itics ofte" determi"es $here & ho$ i"ter"#tio"#! + si"ess c#" t#%e p!#ce. 4o!itic#! disp tes. p#rtic !#r!, those th#t res !t i" mi!it#r, co"f!icts c#" disr pt tr#de & i"vestme"t. To oper#te #+ro#d org#"i-#tio"s sho !d +e #$#re #"d se"sitive to differe"t po!itic#! regime. E.g. dis#!!o$i"g Americ#" "#tio"#!s to do + si"ess i" 5 +#. +ec# se of +om+i"g of # hote! i" I"do"esi#. i"ter"#tio"#! i"vestors co"sidered I"do"esi# to +e # ris%ier p!#ce to p t f "ds etc. 1. LEGAL 4OLI5IE(: E#ch co "tr, h#s its o$" !#$s reg !#ti"g + si"ess. Domestic & i"ter"#tio"#! !#$s determi"e !#rge!, $h#t the m#"#gers of # comp#", oper#ti"g i"ter"#tio"#!!, c#" do. Domestic !#$s i"c! des reg !#tio"s i" +oth the home & host co "tries o" s ch m#tters #s t#x#tio". emp!o,me"t & foreig" exch#"ge tr#"s#ctio"s. I"ter"#tio"#! !#$ i" the form of !eg#! #greeme"ts +et$ee" t$o co "tries gover"s ho$ the e#r"i"gs #re t#xed +, +oth. I"ter"#tio"#! !#$ m#, #!so determi"e ho$ & $hether comp#"ies c#" oper#te i" cert#i" !oc#!es. 5omp#"ies sho !d "derst#"d the tre#ties #mo"gst the co "tries #"d the !#$s of e#ch co "tr, i" $hich the, $#"t to oper#te. #s $e!! #s ho$ the !#$s #re e"forced. to oper#te profit#+!, #+ro#d.

F. &E8A?IORAL )A5TOR(: The i"terperso"#! "orms of # co "tr, m#, "ecessit#te # comp#",6s #!ter#tio"s of oper#tio"s. M#"#gers sho !d "derst#"d societ#! v#! es. #ttit des & +e!iefs co"cer"i"g themse!ves #"d others. C. E5ONOMI5 )OR5E(: Eco"omics exp!#i"s $h, co "tries exch#"ge goods & services $ith e#ch other. $h, c#pit#! #"d peop!e tr#ve! #mo"g co "tries i" the co rse of + si"ess #"d $h, o"e co "tr,6s c rre"c, h#s # cert#i" v#! e comp#red to #"other6s. Eco"omics exp!#i"s co "tr, differe"ces i" costs. eco"omic v#! es #"d m#r%et si-e. ) rther eco"omics he!ps exp!#i" $h,. $here #"d $he" o"e co "tr, c#" prod ce goods or services !ess expe"sive!, th#" #"other. I" #dditio" # m#"#ger "eeds to h#ve %"o$!edge of differe"t #"#!,tic#! too!s to determi"e the imp#ct of #" i"ter"#tio"#! comp#", o" the eco"omies of the host #"d home co "tries #"d the effect of # co "tr,6s eco"omic po!icies & co"ditio"s o" the comp#",. D. DI))ERENT GEOGRA48I5AL IN)L'EN5E(: M#"#gers "eed to %"o$ geogr#ph, to +etter determi"e the !oc#tio". / #"tit,. / #!it, #"d the #v#i!#+i!it, of the $or!d6s reso rces. #s $e!! #s the +est $#, to exp!oit them. The "eve" distri+ tio" of reso rces res !ts i" differe"t prod cts #"d services +ei"g prod ced or offered i" differe"t p#rts of the $or!d. The pro+#+i!it, of "#t r#! dis#sters #"d #dverse c!im#tic co"ditio"s s ch #s f!oods. h rric#"es. e#rth/ #%es. ts "#mis or free-i"g $e#ther m#%e it ris%ier to i"vest i" some #re#s th#" i" others. I. 5OM4ETITI?E EN?IRONMENT: 5omp#"ies f#ce differe"t competitive sit #tio"s depe"di"g o" prod cts. str#tegies #"d co "tries $here the, oper#te. As the competitive e"viro"me"t v#ries #t #" i"ter"#tio"#! !eve! so do the i"ter"#tio"#! str#tegies. I" #dditio" comp#"ies f#ce i"ter"#tio"#! or !oc#! competitors #t home #"d i" foreig" m#r%ets. Therefore the, m st !e#r" #+o t e#ch other i" o"e co "tr, for predicti"g the str#tegies #"d #ctio"s i" other co "tries. E. 5'LT'RE: 5 !t re poses ch#!!e"ge for m#"#gers #s the, h#ve to h#"d!e differe"t v#! es. #ttit des #"d +eh#vior. M#"#gers h#ve to "derst#"d c !t r#! differe"ces #"d the $#,s the, m#"ifest themse!ves #"d to determi"e simi!#rities #cross c !t res #"d exp!oit them i" str#teg, form !#tio". To #chieve s ccess i" I"ter"#tio"#! + si"ess # m#"gerJorg#"i-#tio" h#s to sho$ c !t r#! #d#pt#+i!it,. p#tie"ce. f!exi+i!it, #"d #ppreci#tio" of others +e!iefs. G. 5RO((;NATIONAL 5OO4ERATION & AGREEMENT(: Tr#di"g gro ps $hether +i!#ter#! or regio"#! #re #" import#"t i"f! e"ce o" MNEs str#tegies. 5omp#"ies m st +e #$#re of the regio"#! eco"omic gro pi"gs th#t e"comp#ss co "tries #"d the, m st ch#"ge their org#"i-#tio"#! str ct re #"d oper#ti"g str#tegies to t#%e #dv#"t#ge of regio"#! tr#di"g gro ps.
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@. LANG'AGE: E"g!ish is # m#Lor !#"g #ge0 there #re sti!! # !#rge " m+er of N"o"; E"g!ish6 spe#%i"g co "tries. I& emp!o,ers sho !d tr#i" their emp!o,ees i" the !oc#! !#"g #ge of host co "tr,. *A. NATIONALI(M & &'(INE(( 4OLI59: N#tio"#!ism is # soci#! !ife of the peop!e of the host co "tries. N#tio"#!ism oper#tio"s of the MN5s dr#m#tic#!!, #"d dr#stic#!!,.'( Americ#" for # tomo+i!es #g#i"st <#p#"ese c#rs. Therefore c# tio s of "#tio"#!ism #"d its #ffects. domi"#ti"g f#ctor of the #!so #ffects the + si"ess sed O&e Americ#". & , I& comp#"ies sho !d +e

**. NATIONAL (E5'RIT9 4OLI5IE( O) T8E 8O(T 5O'NTRIE(: MN5s sho !d #+ide +, the "#tio"#! sec rit, po!icies of the host co "tr,. (overeig" gover"me"ts e"#ct #"d imp!eme"t !#$s #"d form !#te #"d imp!eme"t po!icies #"d reg !#tio"s. The i"ter"#tio"#! + si"ess ho ses sho !d fo!!o$ these to do + si"ess s ccessf !!,. $%%$RTUNITIE&' *. IM4RO?ED 5OMM'NI5ATION & TRAN(4ORTATION: 5o"d cti"g + si"ess o" #" i"ter"#tio"#! !eve! s #!!, i"vo!ves gre#ter dist#"ces $hich i"cre#ses oper#ti"g costs #"d m#%es co"tro! of # comp#",6s foreig" oper#tio"s more diffic !t. & t improved comm "ic#tio" #"d tr#"sport#tio" h#ve speeded p i"ter#ctio"s #"d h#ve improved # m#"#ger6s #+i!it, to co"tro! foreig" oper#tio"s. 1. LI&ERALI>ATION O) 5RO((;&ORDER TRADE & RE(O'R5E MO?EMENT(: To protect its o$" i"d stries. ever, comp#", restricts the moveme"t #cross its +orders of goods & services #"d other reso rces. s ch #s $or%ers & c#pit#!. ( ch restrictio"s m#%e i"ter"#tio"#! + si"ess more expe"sive. &ec# se the reg !#tio"s m#, ch#"ge #t #", time. i"ter"#tio"#! + si"ess is #!so ris%ier. 8o$ever. over time most gover"me"ts h#ve !o$ered some restrictio"s o" tr#de +ec# se: #. Their citi-e"s expressed the desire for e#sier #ccess to # gre#ter v#riet, of goods #"d services #t !o$er prices +. The, re#so" th#t their domestic prod cers $i!! +ecome more efficie"t #s # res !t of foreig" competitio". c. The hope to i"d ce other co "tries to !o$er their +#rriers i" t r". )e$er restrictio"s e"#+!es comp#"ies #"d i"divid #!s to t#%e +etter #dv#"t#ge of i"ter"#tio"#! opport "ities. F. DE?ELO4MENT O) (ER?I5E( T8AT ('44ORT INTERNATIONAL &'(INE((: 5omp#"ies #"d gover"me"ts h#ve deve!oped services th#t e#se the co"d ct of i"ter"#tio"#! + si"ess e.g. &#"%s h#ve deve!oped efficie"t me#"s for comp#"ies to receive p#,me"t i" their home;co "tr, c rre"cies. Ni%e se!!s sports$e#r to fre"ch
8

soccer te#m #s soo" #s the shipme"t #rrives i" )re"ch c stoms # +#"% i" 4#ris c#" co!!ect i" E ros #"d p#, Ni%e i" '.(. do!!#rs #t # +#"% i" the '"ited (t#tes. I"ter"#tio"#! post#! #greeme"ts #!!o$ ,o to se"d !etters #"d p#c%#ges i" #", p!#ce of the $or!d +, co"ve"ie"t!, p#,i"g post#ge o"!, i" the co "tr, #"d i" the c rre"c, from $hich ,o m#i! them. reg#rd!ess of $hether the, p#ss thro gh other co "tries or f!, o" the #ir!i"es. C. 58ANGING 4OLITI5AL (IT'ATION(: A m#Lor re#so" for the gro$th i" I"ter"#tio"#! + si"ess h#s +ee" the e"d of the divide +et$ee" 5omm "ist & "o"; 5omm "ist co "tries. )or "e#r!, h#!f # ce"t r, #fter 7or!d 7#r II. + si"ess +et$ee" the t$o gro ps $#s mi"im#!. ) rther eve" $ithi" the 5omm "ist +!oc. co "tries strove to #s m ch se!f s fficie"c, #s possi+!e. 7ith the tr#"sform#tio" of po!itic#! #"d eco"omic po!icies i" the former (oviet '"io". most of E#ster" E rope. 5hi"# #"d ?iet"#m tr#de "o$ f!o rishes +et$ee" those co "tries #"d the rest of the $or!d. A f rther po!itic#! f#ctor re!#tes to gover"me"ts #+i!ities to respo"d to press res. to e"h#"ce $or!d tr#de. As i"comes h#ve gro$" so h#ve the t#x reve" es. M ch of the reve" e h#s go"e to progr#ms #"d proLects !i%e improvi"g #irport #"d se#port f#ci!ities. + i!di"g efficie"t high$#,s th#t co""ect $ith those i" "eigh+ori"g co "tries. A!! these f#ctors h#ve cre#ted opport "ities to do + si"ess #+ro#d. D. GRO7ING 5ON('MER 4RE(('RE(: G!o+#! discretio"#r, i"come h#s rise" #"d "o$ there is # $idespre#d dem#"d for prod cts #"d services th#t $o !d h#ve +ee" co"sidered ! x ries i" p#st. I" the !#st h#!f of the t$e"tieth ce"t r,. g!o+#! co"s mptio" gre$ six fo!d. The gre#ter dem#"d h#s cre#ted f#vor#+!e opport "ities for i"cre#se i" I"ter"#tio"#! + si"ess. LE5T'RE;F Competitive (dvanta)e *eanin)' 7h#t # firm h#s th#t #!!o$s it to m#%e more profit th#" its riv#!s. A competitive #dv#"t#ge #rises $he" # firm is #+!e to give its c stomers the s#me thi"g #s its riv#!s + t $ith more +e"efits. the s#me thi"g + t #t !o$er cost. or +oth. There #re m#", $#,s # firm c#" g#i" the #+i!it, to give c stomers more +e"efits. the s#me +e"efits #t !o$er cost. or +oth: #ccess to che#per r#$ m#teri#!s0 +etter st#ff0 che#per !#+or0 +etter +r#"d recog"itio"0 propriet#r, tech"o!og,. #"d so o". 5oc#;5o!#6s competitive #dv#"t#ge. for ex#mp!e. co !d +e s#id to #rise d e to its s preme +r#"d recog"itio". 5ompetitive #dv#"t#ge c#" +e cre#ted or. #t the ver, !e#st. r#ised sig"ific#"t!,. The improveme"t of competitive"ess $ithi" #" eco"om, sho !d +e # %e, e!eme"t of "#tio"#! export str#teg,

I"ter"#tio"#! competitive #dv#"t#ge:

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*. 8IG8 LI?ING (TANDARD(: 5o "tries $hich h#ve the #dv#"t#ge of r#$ m#teri#!s. h m#" reso rces. "#t r#! reso rces & c!im#tic co"ditio"s. it c#" prod ce prod cts #t !o$ cost #"d #!so of high / #!it,. 5 stomers c#" + , more prod cts $ith the s#me mo"e,. I" t r". it c#" #!so e"h#"ce !ivi"g st#"d#rds of the peop!e thro gh e"h#"ced p rch#si"g po$er .E.g. if co "tr, h#s !#rge "ed c#ted $or% force it sho !d export !#+or i"te"sive prod cts. 1. IN5REA(ED (O5IO;E5ONOMI5 7EL)ARE: I"ter"#tio"#! + si"ess e"h#"ces co"s mptio" !eve! & eco"omic $e!f#re of the peop!e of the tr#di"g co "tries e.g. e!ectro"ic prod cts of <#p#" #"d coffee from &r#-i!. F. 7IDER MARKET: I"ter"#tio"#! + si"ess $ide"s m#r%et #"d i"cre#ses the m#r%et si-e. Therefore comp#"ies "eed "ot depe"d o" dem#"d for the prod ct i" # si"g!e co "tr,. C. RED'5ED E))E5T( O) &'(INE(( 595LE(: (t#ges of + si"ess c,c!es v#r, from co "tr, to co "tr,. Therefore MN56s c#" shift from the co "tr,. experie"ci"g recessio" to the co "tr, experie"ci"g N+oom6 co"ditio"s. D. RED'5ED RI(K(: &oth commerci#! & po!itic#! ris%s #re red ced for the co "tries e"g#ged i" i"ter"#tio"#! + si"ess d e to their spre#d i" differe"t co "tries. I. LARGE (5ALE E5ONOMIE(: MN56s d e to $ider & !#rger m#r%ets prod ce !#rger / #"tities. It provides +e"efits of !#rge;sc#!e eco"omies. E. 4OTENTIAL 'NTA44ED MARKET(: I"ter"#tio"#! + si"ess provides ch#"ces of exp!ori"g &exp!oiti"g pote"ti#! m#r%ets $hich #re "t#pped so f#r. G. 4RO?IDE O44ORT'NIT9 for &58ALLENGE TO DOME(TI5 &'(INE((: Opport "ities to domestic + si"ess i"c! de !#test tech"o!og,. m#"#geme"t expertise. m#r%et i"te!!ige"ce. prod ct deve!opme"t etc. @. DI?I(ION O) LA&O'R & (4E5IALIA>ATION: &r#-i! speci#!i-es i" coffee. Ke",# i" te#. <#p#" i" # tomo+i!es. *A. E5ONOMI5 GRO7T8 O) T8E 7ORLD: (peci#!i-#tio". divisio" of !#+or. e"h#"ceme"t of prod ctivit,. i""ov#tio"s to meet competitio" !e#d to the over#!! eco"omic gro$th of $or!d "#tio"s. **. O4TIM'M & 4RO4ER 'TILI>ATION O) 7ORLD RE(O'R5E( : I"ter"#tio"#! + si"ess provides for the f!o$ of r#$ m#teri#!s6. "#t r#! reso rces #"d h m#" reso rces from the co "tries $here the, #re i" excess s pp!, to those co "tries $hich #re i" short s pp!, or "eed most e.g. )!o$ of h m#" reso rces from I"di#. co"s mer goods from '.K. . )r#"ce . It#!, #"d Germ#", to deve!opi"g co "tries. This he!ps for the optim m #"d proper ti!i-#tio" of $or!d reso rces.
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*1. 5'LT'RAL TRAN()ORMATION: I"ter"#tio"#! + si"ess +e"efits #re "ot p re!, eco"omic#! or commerci#!. the, #re eve" soci#! & c !t r#! .Good c !t r#! v#! es #"d f#ctors of the E#st #re #c/ ired +, the 7est & vice vers#. Th s. there is # c!ose c !t r#! tr#"sform#tio" & i"tegr#tio". *F. KNITTING T8E 7ORLD INTO A 5LO(EL9 INTERA5TI?E TRADITIONAL ?ILLAGE: I"ter"#tio"#! + si"ess !tim#te!, %"its the g!o+#! eco"omies. societies #"d co "tries i"to # c!ose!, i"ter#ctive vi!!#ge $here o"e is for #!! #"d #!! #re for o"e. LE5T'RE;C INTERNATIONAL 5OM4ETITI?E AD?ANTAGE O) NATION( M'LTIDIMEN(IONAL ?IE7 O) 5OM4ETITI?ENE(( 4orter i"trod ced $h#t h#s +ecome %"o$" #s the Ndi#mo"d of "#tio"#! competitive"ess6 $ith fo r Nf#cets6 determi"i"g the competitive stre"gths #"d $e#%"esses of co "tries #"d their m#Lor sectors. Accordi"g to Mich#e! E. 4orter. fo r +ro#d #ttri+ tes. i"divid #!!, #"d i"ter#ctive!, determi"e "#tio"#! competitive #dv#"t#ge. These C +ro#d #ttri+ tes of # "#tio" sh#pe the e"viro"me"t i" $hich !oc#! firms compete. promote or impede the cre#tio" of competitive #dv#"t#ge. These f#ctors #re: )A5TOR 5ONDITION( DEMAND 5ONDITION( RELATED & ('44ORTING IND'(TRIE( )IRM (TRATEG9. (TR'5T'RE & RI?ALR9 4orter represe"ts these e!eme"ts #s the fo r cor"ers of # di#mo"d.

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*. )A5TOR 5ONDITION(: i"c! de !#"d. !#+or. "#t r#! reso rces #"d i"fr#str ct re. &ustained competitive advanta)e comes from #dv#"ced or speci#!i-ed f#ctors !i%e skilled labor+ capital and infrastructure# These #re created "ot L st i"herited# 5ompetitive #dv#"t#ge from f#ctors depe"ds o" ho$ effective!, & efficie"t!, the, #re emp!o,ed. AD?AN5ED )A5TOR( 2e.g. high!, ed c#ted perso""e! #"d rese#rch i"d stries i" sophistic#ted discip!i"es. (4E5IALI>ED )A5TOR( ; %"o$!edge +#sed i" p#rtic !#r fie!ds #re more critic#! i" determi"i"g competitive #dv#"t#ge th#" +#sic f#ctors 2s ch #s high$#, s,stems. s pp!, of de+t c#pit#! or # poo! of $e!! motiv#ted ed c#ted emp!o,ees. It6s #!so import#"t to "ote th#t se!ective dis#dv#"t#ges i" the more +#sic f#ctors c#" prod # co "tr, to i""ov#te #"d pgr#de e.g.i" <#p#" Ppoor positio" i" "#t r#! reso rces sp rred competitive i""ov#tio". De"m#r% h#s hospit#!s th#t speci#!i-e i" st d,i"g #"d tre#ti"g di#+etes0 De"m#r% #!so is # $or!d !e#di"g exporter of i"s !i". &, cre#ti"g speci#!i-ed f#ctors #"d the" $or%i"g to pgr#de them. co "tr, h#s m#i"t#i"ed its premier positio" i" he#!th c#re fie!d.
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1. DEMAND 5ONDITION(' i"c! des size #"d sophistication of its m#r%et. N#tio"s g#i" competitive #dv#"t#ge i" i"d stries $here the home dem#"d gives their comp#"ies #" e#r!ier pict re of emergi"g + ,er "eeds & $here dem#"di"g + ,ers press ri-e comp#"ies to i""ov#te f#ster & #chieve sophistic#ted competitive #dv#"t#ge th#" their foreig" riv#!s. The si-e & p#tter" of gro$th of home dem#"d c#" rei"force "#tio"#! #dv#"t#ge i" #" i"d str,. L#rge home m#r%et si-e c#" !e#d to competitive #dv#"t#ge i" i"d stries $here there #re eco"omies of sc#!e. ($ede" !o"g co"cer"ed $ith he!pi"g the dis#+!ed. h#s "o$ sp#$"ed # competitive i"d str, th#t foc ses o" the speci#! "eeds of these peop!e. De"m#r%6s e"viro"me"t#! co"cer" h#s res !ted i" D#"ish comp#"ies deve!opi"g high!, effective $#ter po!! tio" co"tro! e/ ipme"t #"d $i"dmi!!s. F. RELATED & ('44ORTING IND'(TRIE(: these e"h#"ce competitive advanta)e thr working relationships, joint research and problem solving, close proximity and sharing of knowledge and experience. C. )IRM (TRATEG9. (TR'5T'RE & RI?ALR9: ,i)orous domestic competitio" compe!s the firm to +ecome vi+r#"t " pro#ctive. (tr ct re refers to mgmt. st-le +ei"g pr#cticed +, the firm. National policies te"d to #ffect the firm6s i"ter"#tio"#! strate)ies# I" It#!,. s ccessf ! firms t,pic#!!, #re sm#!! or medi m si-ed0 oper#te i" fr#gme"ted i"d stries s ch #s f r"it re. !ighti"g. foot$e#r etc. #re m#"#ged !i%e exte"ded f#mi!ies #"d emp!o, # foc s str#teg, ge#red to$#rds meeti"g the "eeds of sm#!! m#r%et "iches. Germ#", te"ds to h#ve hier#rchic#! org#"i-#tio"s th#t emph#si-e tech"ic#! or e"gi"eeri"g co"te"t 2optics. chemic#!s . comp!ic#ted m#chi"er, #"d dem#"d precisio" m#" f#ct ri"g3. 5ompetitors: ($it-er!#"d: ph#rm#ce tic#!s firms of 8offm#";L# Roche. 5i+#;Geig, & (#"do- he!p the co "tr, to m#i"t#i" its i"ter"#tio"#!!, competitive edge.Germ#",;&A(). 8oechst & &#,er. he!p the co "tr, to %eep #he#d i" chemic#!s. A!o"g $ith C e!eme"ts i" the di#mo"d. 4orter +ri"gs 1 more e!eme"ts: role of )ovt# and role of chance .random eve"ts s ch #s m#Lor tech"o!ogic#! +re#%thro ghs. po!itic#! decisio"s +, gover"me"ts. $#r & destr ctio". f! ct #tio" i" exch#"ge r#tes etc.3 th#t e"h#"ces or impedes # firm6s competitive"ess. Limitations' *.
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1. )oc s more o" deve!oped co "tries. F. N#t r#! reso rces #re too import#"t. C. Govt. h#s # ro!e i" determi"i"g competitive"ess. D. 5h#"ce f#ctors p!#, their ro!e i" promoti"g or h#mperi"g competitive stre"gths of firms. 4ORTER6( DETERMINANT( A( A (9(TEM: E#ch of the determi"#"ts ofte" depe"d o" the others e.g. eve" if # co "tr, h#s sophistic#ted + ,ers th#t c#" provide # comp#", $ith feed+#c% #+o t ho$ to modif, or improve its prod cts 2dem#"d co"ditio"s3 . this i"form#tio" $i!! "ot +e sef ! if the firm !#c%s perso""e! $ith the s%i!!s to c#rr, o t these f "ctio"s 2f#ctor co"ditio"s3 . (imi!#r!,. if s pp!iers c#" provide the comp#", $ith !o$;cost i"p ts & fresh ide#s for i""ov#tio" 2re!#ted & s pporti"g i"d stries3 + t the firm c!e#r!, & e#si!, domi"#tes the i"d str, 2firm str#teg,. str ct re & riv#!r,3 #"d does "ot fee! # "eed to pgr#de the / #!it, of its prod cts #"d services. it $i!! eve"t #!!, !oose this competitive #dv#"t#ge. LE5T'RE;D INTERNATIONAL MONETAR9 (9(TEM(: The i"ter"#tio"#! mo"et#r, s,stem disc sses. #mo"g other thi"gs. the s,stem of exch#"ge r#te or the re!#tio"ship +et$ee" the v#! e of #", t$o c rre"cies. EARL9 (9(TEM: 5e"t ries #go. $he" there $#s "o est#+!ished s,stem & $he" the coi"s $ere m#de of v#! #+!e met#!. the exch#"ge r#te $#s determi"ed o" the +#sis of the v#! e of met#! co"t#i"ed i" the t$o c rre"cies. This s,stem $#s fo!!o$ed +, the go!d st#"d#rd. $hich $#s co"sidered of vit#! import#"ce +et$ee" *GEAs #"d *@*C. GOLD (TANDARD: Go!d st#"d#rd is # mo"et#r, s,stem $herei" the gover"me"t ho!ds go!d coi"s i" reserve #g#i"st +#"% c rre"c, "otes th#t #re i" circ !#tio". The +#"% "otes c#" +e exch#"ged for go!d o" dem#"d. The go!d st#"d#rd $#s s spe"ded d ri"g the Gre#t 7#r I. #fter $hich it $#s re#dopted. & t $ith s +st#"ti#! ch#"ges i" the i"ter"#tio"#! eco"omic sce"#rio. it did "ot rem#i" te"#+!e0 #"d +, *@FAs. it $#s fi"#!!, #+#"do"ed. T8E Go!d st#"d#rd possessed some i"here"t merits. (i"ce the fixed $eight of go!d h#d formed the +#sis for # "it of the c rre"c, #"d si"ce the free f!o$ of go!d $#s #!!o$ed #mo"g co "tries. the go!d st#"d#rd h#d provided for domestic price st#+i!it, #"d for # tom#tic #dL stme"t i" exch#"ge r#tes #"d i" the +#!#"ce of p#,me"ts.

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The s pp!, of go!d $#s fixed #"d so $#s the mo"e, s pp!,. As # res !t. the domestic price !eve! $#s st#+!e. A", deficit i" &#!#"ce of tr#de. co"se/ e"t o tf!o$ of go!d !ed to shri"%#ge i" mo"e, s pp!, #"d to # !o$er price !eve!. The !o$er price !eve! m#de the exports competitive. $hich i" t r" $iped o t the tr#de deficit. 9et #g#i". #", devi#tio" from mi"t p#rit, co !d +e #voided thro gh the free f!o$ of go!d from o"e co "tr, to the other. &RETTON 7OOD( (9(TEM O) E:58ANGE RATE( The demise of the go!d st#"d#rd !ed to !#rge sc#!e osci!!#tio" i" the exch#"ge r#te. It re/ ired the cre#tio" of #" i"ter"#tio"#! +od, th#t co !d he!p cre#te #" order!, exch#"ge r#te regime #"d co !d h#ve s rvei!!#"ce over it. The &retto" 7oods 5o"fere"ce of < !, *@CC reso!ved to cre#te the I"ter"#tio"#! Mo"et#r, ) "d 2IM)3 for this p rpose. The IM) $#s est#+!ished i" *@CD. A "e$ s,stem of exch#"ge r#te evo!ved. (i"ce this "e$ s,stem $#s the #fterm#th of the &retto" 7oods 5o"fere"ce. it $#s %"o$" #s the &retto" 7oods s,stem of exch#"ge r#tes. The &retto" $oods s,stem of exch#"ge r#tes represe"ted # fi/ed parit- s-stem 0ith ad1ustable pe)s# E#ch mem+er co "tr, $#s to set # fixed v#! e. c#!!ed the par value. of its currenc- in terms of )old or U& dollar. It $#s the p#r v#! e th#t determi"ed the exch#"ge r#te +et$ee" #", t$o c rre"cies. *inor fluctuations. if #",. $ithi" # +#"d of 21#3 or 4 1#3 $ere expected to +e corrected thro gh the #ctive i"terve"tio" of the mo"et#r, # thorities. & t if # co "tr, f#ced # f "d#me"t#! dise/ i!i+ri m i" its +#!#"ce of p#,me"ts. it co !d dev#! e its c rre"c,. It did "ot re/ ire #pprov#! of IM) for the ch#"ges p to D.A H i" the v#! e of the c rre"c,. + t +e,o"d this perce"t#ge. the IM)6s #pprov#! $#s "ecess#r,. The &retto" 7oods s,stem did +ri"g #+o t st#+i!it, i" the exch#"ge r#te. + t it co !d "ot go # !o"g $#,. It $#s prim#ri!, the !oss of co"fide"ce i" the '( do!!#r fo!!o$i"g deterior#tio" i" the '( +#!#"ce of p#,me"ts si"ce the !#te *@DAs th#t hi"dered the smooth f "ctio"i"g of this s,stem & !ed to its co!!#pse +, *@EF.(i"ce the '( do!!#r $#s the stro"gest c rre"c, i" the post;$#r ,e#rs #"d si"ce it $#s co"verti+!e i"to go!d. # " m+er of ce"tr#! +#"%s he!d # !#rge #mo "t of do!!#r de"omi"#ted sec rities #s reserves. 7he" the '( &#!#"ce of p#,me"t +eg#" deterior#ti"g i" the !#te *@DAs & the re#! v#! e of do!!#r $#s expected to +e !o$er. the ce"tr#! +#"%s st#rted co"verti"g these sec rities i"to go!d. This c# sed # h ge o tf!o$ of go!d from the '( Tre#s r,. $hich i" t r" $e#%e"ed the do!!#r. The $e#%e"i"g of the do!!#r !ed to f rther co"versio" of do!!#r de"omi"#ted sec rities i"to go!d. &#rri"g '( citi-e"s from + ,i"g go!d eroded their co"fide"ce f rther. Expect#tio"s of # record deficit i" *@E* i" the '( +#!#"ce of p#,me"ts res !ted i" m#ssive se!!i"g of do!!#r i" the i"ter"#tio"#! fi"#"ci#! m#r%et. The go!d price i" the free m#r%et rose. dist r+i"g the re!#tio"ship +et$ee" the do!!#r & go!d. &, A g st *@E*. # f !!;

+!o$" crisis #ppe#red #g#i"st the do!!#r. The Nixo" #dmi"istr#tio" s spe"ded the co"verti+i!it, of the do!!#r i"to go!d #"d this $#s # serio s +!o$ to the fixed p#rit, s,stem.
15

I" Decem+er *@E*. the (mithso"i#" Arr#"geme"t he!ped re#!ig" the p#r v#! e of m#Lor c rre"cies .)or ex#mp!e. '( do!!#r $#s depreci#ted. o" the other h#"d the c rre"cies of the s rp! s co "tries $ere #ppreci#ted. The f! ct #tio" +#"d of the p#r v#! es $#s r#ised from QJ; *.AH to QJ; 1.1DH i" order to provide gre#ter room to mem+er co "tries to m#"#ge their exch#"ge r#tes. & t this #rr#"geme"t too co !d "ot go f#r. There $#s # tide of spec !#tio" #g#i"st the do!!#r. The '( gover"me"t dev#! ed do!!#r f rther +, *AH i" )e+r #r, *@EF. + t it f#i!ed to improve the sit #tio". The foreig" exch#"ge m#r%ets $ere c!osed i" *@EF to #vert # crisis. & t $he" the, reope"ed. m#Lor c rre"cies c#me o" to f!o#t. th s de!iveri"g # de#th +!o$ to the R&retto" 7oods s,stem of exch#"ge r#tes. E5C6(N7E R(TE RE7I*E &INCE 189: The IM) #ppoi"ted the 5ommittee of T$e"t, $hich s ggested v#rio s optio"s for the exch#"ge r#te #rr#"geme"t. These s ggestio"s $ere #pproved #t <#m#ic# d ri"g )e+r #r, *@EI #"d $ere form#!!, i"corpor#ted i"to text of (eco"d Ame"dme"t to the Artic!es of Agreeme"t. I" # f!o#ti"g r#te s,stem. it is the m#r%et forces th#t determi"e the exch#"ge r#te +et$ee" t$o c rre"cies. Exch#"ge r#te is # tom#tic#!!, #dL sted #ccordi"g to the ch#"ges i" m#croeco"omic v#ri#+!es. Exch#"ge r#te is #!most st#+!e #ro "d the e/ i!i+ri m i" the !o"g r ". Deve!opi"g co "tries i" p#rtic !#r do "ot fi"d f!o#ti"g r#tes s it#+!e to their "eeds. (i"ce their eco"om, is "ot diversified #"d si"ce their export is s +Lect to fre/ e"t ch#"ges i" dem#"d & s pp!,. the, f#ce fre/ e"t ch#"ges i" exch#"ge r#tes. The f!o#ti"g r#te s,stem m#, +e either INDE4ENDENT or MANAGED )LOATING. The s,stem of m#"#ged f!o#ti"g i"vo!ves i"terve"tio" +, the mo"et#r, # thorities of the co "tr, for the p rpose of exch#"ge r#te st#+i!i-#tio". The process of i"terve"tio" i"terferes $ith the m#r%et forces #"d so it is %"o$" #s Odirt, f!o#ti"gM #s #g#i"st i"depe"de"t f!o#ti"g. $hich is %"o$" #s Oc!e#"M f!o#ti"g. INTER?ENTION is direct #s $e!! i"direct. 7he" the mo"et#r, # thorities st#+i!i-e the exch#"ge r#te thro gh ch#"gi"g i"terest r#tes. it is i"direct i"terve"tio". O" the other h#"d. i" c#se of direct i"terve"tio". the mo"et#r, # thorities p rch#se #"d se!! foreig" c rre"c, i" the domestic m#r%et. CURRENT E5C6N(7E R(TE RE7I*E&' 1#E5C6(N7E (RR(N7E*ENT ;IT6 N$ &E%(R(TE LE7(L TEN<ER.8= : '"der the #rr#"geme"t the c rre"c, of #"other co "tr, circ !#tes #s the so!e !eg#! te"der e.g. Ec #dor. E! (#!v#dor & 4#"#m# h#ve '( do!!#r #s the !eg#! te"der. ># E5C6(N7E R(TE (RR(N7E*ENT& ;6ERE *E*?ER& $@ T6E CURRENCA UNI$N &6(RE T6E &(*E LE7(L TEN<ER .:>=
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Central (frican Economic B *onetar- Communit-' 5#meroo". 5e"tr#! Afric#" Rep +!ic. 5h#d. Rep +!ic of 5o"go. E/ #tori#! G i"e#. G#+o" EU .European Union= $ith E ro #s the !eg#! te"der .Adopti"g s ch regimes imp!ies the comp!ete s rre"der of the mo"et#r, # thorities i"depe"de"t co"tro! over domestic mo"et#r, po!ic,. :# CURRENCA ?$(R< (RR(N7E*ENT .9=: This is # mo"et#r, regime +#sed o" !egis!#tive commitme"t to exch#"ge domestic c rre"c, for # specified foreig" c rre"c, #t # fixed exch#"ge r#te. To f !fi!! this !eg#! o+!ig#tio". c rre"c, +o#rd. $hich is the iss i"g # thorit, is empo$ered to iss e c rre"c, o"!, to the exte"t of foreig" exch#"ge reserves of the co "tr,. I" its c!#ssific#tio" referred to #+ove. IM) h#s c!#ssified eight co "tries P Arge"ti"#. &os"i#. &r "ei. & !g#ri#. DLi+o ti. Esto"i#. 8o"g Ko"g. #"d Lith #"i# P #s h#vi"g # c rre"c, +o#rd s,stem. !# C$N,ENTI$N(L @I5E< %E7 (RR(N7E*ENT&.C>=: 4eggi"g of # c rre"c, me#"s fixi"g its v#! e i" terms of #"other c rre"c,. The exter"#! v#! e of # pegged c rre"c, is "ot depe"de"t po" #", i"depe"de"t f#ctor. It ch#"ges $ith the ch#"ges i" the v#! e of the c rre"c, or c rre"cies to $hich it is pegged. 4eggi"g c#" +e do"e i" #", of the fo!!o$i"g $#,s: 4eggi"g to # m#Lor c rre"c, e.g. 5hi"ese 9 #" is pegged to '( do!!#r. 4eggi"g to # +#s%et of c rre"cies. the +#s%et is formed from the c rre"cies of m#Lor tr#di"g or fi"#"ci#! p#rt"ers #"d the $eights ref!ect the geogr#phic#! distri+ tio" of tr#de. services or c#pit#! f!o$s. 4eggi"g to # st#"d#rdi-ed c rre"c, composite s ch #s (DR. The exch#"ge r#te is #!!o$ed to f! ct #te $ithi" the "#rro$ m#rgi" of !ess th#" SJ; *H #ro "d ce"tr#! r#te for #t !e#st F mo"ths. The mo"et#r, # thorit, st#"ds re#d, to m#i"t#i" fixed p#rit, thro gh direct or i"direct i"terve"tio". Direct i"terve"tio" t#%es the form of s#!e or p rch#se of foreig" c rre"c, i" the m#r%et. I"direct i"terve"tio" is do"e thro gh #ggressive se of i"terest r#te po!ic,. impositio" of foreig" exch#"ge reg !#tio"s. mor#! s#"ctio" to co"str#i" foreig" exch#"ge #ctivit,. This is ide"tic#! to the &retto" 7oods s,stem $here # co "tr, pegs its c rre"c, to #"other or to # +#s%et of c rre"cies $ith # +#"d of v#ri#tio" "ot exceedi"g S*H #ro "d the ce"tr#! p#rit,. The peg is #dL st#+!e #t the discretio" of the domestic # thorities. F@ IM) mem+ers h#d #dopted this regime #s of *@@@. CR(;LIN7 %E7 .C=' The "cert#i"t, #ssoci#ted $ith fo!!o$i"g fixed peg $here the dev#! #tio" or rev#! #tio" occ rs #t !o"g i"terv#!s. #t "cert#i" times & i" ver, !#rge doses. '"der cr#$!i"g peg #dL stme"ts t#%e p!#ce periodic#!!, & therefore #dL stme"t is sm#!!er. The c rre"c, is #dL sted periodic#!!, i" sm#!! #mo "ts #t # fixed r#te i" respo"se to ch#"ges i"

17

se!ective / #"tit#tive i"dic#tors. s ch #s p#st i"f!#tio" etc. Ir#" . A-er+#iL#". 5ost# Ric#. Nic#rg #. E5C6(N7E R(TE& ;IT6IN 6$RID$NT(L ?(N<& : This s,stem com+i"es the fe#t res of hori-o"t#! +#"ds $ith cr#$!i"g pegs. The c rre"c, is m#i"t#i"ed $ithi" # cert#i" f! ct #tio" m#rgi"s of #t !e#st ST; *H #ro "d the ce"tr#! r#te or the m#rgi" +et$ee" m#xim m #"d mi"im m v#! e of the exch#"ge r#te exceeds 1H. The ce"tr#! r#te or m#rgi"s #re #dL sted periodic#!!, #t # fixed r#te or i" respo"se to ch#"ges i" se!ective / #"tit#tive i"dic#tors Isr#e! 2SJ; 11H3. 2SJ; EH3 8o"d r#s. 8 "g#r, 2SJ;1.1DH3 *(N(7E< @L$(TIN7.C1= : M#"#ged f!o#ti"g or dirt, f!o#t is # s,stem i" $hich c rre"c, is "orm#!!, f!o#ti"g + t mo"et#r, # thorit, i"terve"es $he" the m#r%et f! ct #tio"s #re vio!e"t. to +ri"g some order i" the m#r%et. The mo"et#r, # thorit, i"f! e"ces the exch#"ge r#te thro gh direct or i"direct i"terve"tio". &#"g!#desh. Th#i!#"d. 4#%ist#" #re co "tries fo!!o$i"g m#"#ged f!o#t. IM) c!#ssifies I"di# #!so "der this c rre"c,. IN<E%EN<ENTLA @L$(TIN7 : 7he" the c rre"c, is i"depe"de"t!, f!o#ti"g. its exch#"ge r#te is m#r%et determi"ed. 8o$ever. "o co "tr, is fo!!o$i"g the s,stem i" p re form. There m#, +e occ#sio"#! offici#! foreig" exch#"ge m#r%et i"terve"tio". ( ch i"terve"tio" is #imed #t moder#ti"g the r#te of ch#"ge & preve"ts "d e f! ct #tio"s i" the exch#"ge r#te. r#ther th#" est#+!ishi"g # !eve! for it. '(A. 'K. ($it-er!#"d & (ri L#"%# #re some co "tries $hose c rre"cies #re f!o#ti"g i"depe"de"t!,. 7L$?(L &CEN(RI$ $@ E5C6(N7E R(TE (RR(N7E*ENT&: )irms e"g#ged i" i"ter"#tio"#! + si"ess m st h#ve #" ide# #+o t the exch#"ge r#te #rr#"geme"t prev#i!i"g i" differe"t co "tries #s this $i!! f#ci!it#te their fi"#"ci#! decisio"s. At prese"t. #s m#", #s 1DH of # tot#! of *GE co "tries h#ve #" i"depe"de"t f!o#t $hi!e the other D* co "tries h#ve m#"#ged f!o#ti"g s,stem. The other E co "tries h#ve # cr#$!i"g peg. $hi!e DF co "tries h#ve pegs of differe"t %i"ds. The EM' #"d other 1A co "tries of Afric# #"d the 5#ri++e#" regio" come "der some %i"d of eco"omic #"d mo"et#r, i"tegr#tio" scheme i" $hich the, h#ve # commo" c rre"c,. L#st!, @ co "tries do "ot h#ve their o$" c rre"c, #s !eg#! te"der.

4ost;7or!d $#r II. co "tries re#!i-ed th#t p!#""ed i"ter"#tio"#! cooper#tio" fostered eco"omic deve!opme"t & prosperit,. Th s. immedi#te!, #fter the $#r. the, #greed to # fr#me$or% of i"ter"#tio"#! r !es P # code of +eh#vior Pto m#i"t#i" mo"et#r, discip!i"e INTERN(TI$N(L @IN(NCI(L *(REET&' International financial market c#" +e comp#rtme"t#!i-ed i"to 1 segme"ts. O"e is the i"ter"#tio"#! mo"e, m#r%et represe"ted +, the f!o$ of short term f "ds.
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International capital market forms the other segme"t $here medi m #"d !o"g term f "ds f!o$. There #re # " m+er of #ge"cies & i"str me"ts thro gh $hich f "ds move to reso rce "eed, i"stit tio"s or firms. A3 $fficial &ources' *. *ultilateral ()encies' 2i3 I"ter"#tio"#! Deve!opme"t &#"%s s ch #s 7or!d &#"%. I)5. #"d others 2ii3 Regio"#! Deve!opme"t &#"%s s ch #s Asi#" Deve!opme"t &#"% etc. ?= Non-7overnmental ()encies: *. &orro$i"g #"d Le"di"g M#r%et I"vo!vi"g I"ter"#tio"#! &#"%s 1. (ec rities m#r%et : #3 De+t (ec rities +3 E/ ities3 i" $hich the e ro e/ ities #"d de+t i"str me"ts s ch #s i"ter"#tio"#! +o"ds. medi m term e ro "otes. short term e ro "otes #"d e ro commerci#! p#pers #re so!d & p rch#sed. *ultilateral ()encies' I&RD & IDA; together c#me to +e %"o$" #s the 7or!d &#"%. I&RD. IDA. I)5 #"d MIGA P together #re %"o$" #s the 7or!d &#"% Gro p. The *@IAs $ere m#r%ed $ith the est#+!ishme"t of regio"#! deve!opme"t +#"%s i" L#ti" Americ#. Afric#. #"d Asi#. The Asi#" Deve!opme"t &#"%. me#"t for the deve!opme"t of the Asi#" regio". +eg#" oper#tio"s from *@IE. ?ilateral ()encies' Differe"t gover"me"ts Loi"ed h#"ds $ith priv#te #ge"cies & the export credits c#me to form # si-e#+!e p#rt of the +i!#ter#! #ssist#"ce progr#mme. International ?anks' Euro ?anks' E ro +#"%s de#! $ith +oth reside"ts #"d "o";reside"ts. The, esse"ti#!!, de#! i" #", c rre"c, other th#" the c rre"c, of the host co "tr,. )or ex#mp!e. if # E ro +#"% is !oc#ted i" Lo"do". it $i!! de#! i" #", c rre"c, other th#" the &ritish 4o "d. The deposits #"d !o#"s of the E ro +#"% #re rem "er#ted #t the i"terest r#te set +, the m#r%et forces oper#ti"g i" the e ro c rre"c, m#r%et #"d "ot +, the i"terest r#te prev#i!i"g #mo"g the domestic +#"%s i" the host co "tr,. E ro +#"%s #re free from the r !es #"d reg !#tio"s of the host gover"me"t #s the, #re co"cer"ed $ith the moveme"t of f "ds of the foreig" c rre"c,. $ffshore ?ankin) centers' O&56s de#! $ith "o";reside"ts o"!,. #!tho gh !i%e the E ro &#"%s. the, did "ot de#! i" the c rre"c, of the host co "tr,. O&56s c#me to c! ster #t p!#ces & i" co "tries $here the:
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The Gover"me"t#! co"tro! & reg !#tio"s $ere the !e#st i"terferi"g. T#x r#te $ere ver, !o$ 4o!itic#! & eco"omic st#+i!it, $#s fo "d Necess#r, i"fr#str ct re for their smooth oper#tio" s ch #s #" improved s,stem of comm "ic#tio". fi"#"ci#! comm "it, #"d so o" $#s #v#i!#+!e. &-ndicated Lendin)' is $he" +#"%s Loi" h#"ds to provide !#rge !o#"s. O"e of the !e"di"g +#"%s is the !e#d m#"#ger $ho origi"#tes the tr#"s#ctio". str ct res it. se!ects the !e"di"g mem+ers. #"d s pervises doc me"t#tio" & services !o#"s #fter the #greeme"t is comp!ete i" !ie of th#t it ch#rges #" #dditio"#! fee. Non-bank depositorsF borro0ers #re m#i"!, corpor#te +odies & gover"me"ts. Deposits i" E ro &#"%s & off shore +#"%i"g ce"ters #re "ot s +Lect to "#tio"#! reg !#tio"s s ch #s 5RR. As # res !t. the, #re #+!e to p#, # higher r#te o" deposits. INTERN(TI$N(L &ECURITIE& *(REET' International eGuities' do "ot represe"t )DI #s ho!ders do "ot e"Lo, voti"g rights. E ro e/ ities #re "ot de+ts #s ho!ders #re p#id divide"d. The, #re iss ed $he" domestic m#r%ets #re #!re#d, f!ooded $ith sh#res & the iss i"g comp#", $o !d "ot !i%e to #dd f rther stress to the domestic stoc% of sh#res. (i"ce s ch #dditio"s m#, c# se # f#!! i" sh#re prices. 5omp#"ies iss e s ch sh#res for g#i"i"g i"ter"#tio"#! recog"itio". ( ch iss es +ri"g i" sc#rce foreig" exch#"ge. 5#pit#! is #v#i!#+!e #t !o$er cost. f "ds r#ised this $#, do "ot #dd to foreig" exch#"ge expos re. INTERN(TI$N(L ?$N<&' @orei)n bond' A +o"d iss ed i" # foreig" co "tr,6s fi"#"ci#! m#r%et & de"omi"#ted i" the c rre"c, of th#t co "tr, is %"o$" #s # foreig" +o"d. Euro bond' iss ed i" # foreig" co "tr, is de"omi"#ted i" #", c rre"c, other th#" the c rre"c, of the co "tr, $here it is iss ed. G!o+#! +o"ds. coc%t#i! +o"ds 2 de"omi"#ted i" (DRs3. co"verti+!e +o"ds 2 co"verti+!e i"to e/ ities #fter # specific period3 Euro Notes' are promissor, "otes iss ed +, comp#"ies for r#isi"g short term f "ds. The, #re de"omi"#ted i" #", c rre"c, other th#" the c rre"c, of the co "tr, $here the, #re iss ed.
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Euro Commercial paper .EC%= ' E54 is # promissor, "ote !i%e the e ro "ote. It is "ot "der$ritte" & #!so it is iss ed o"!, +, high!, credit$orth, +orro$ers. LE5T'RE;E ;$RL< ?(NEFINTERN(TI$N(L <E,EL$%*ENT .I?R<= ?(NE @$R REC$N&TRUCTI$N B

7or!d &#"% is # multilateral development i"stit tio" $hose p rpose is to #ssist its deve!opi"g mem+er;co "tries f rther their eco"omic #"d soci#! progress so th#t their peop!e m#, !ive +etter #"d f !!er !ives. 7or!d &#"% is # vit#! so rce of fi"#"ci#! & tech"ic#! #ssist#"ce to deve!opi"g co "tries #ro "d the $or!d. The I"ter"#tio"#! &#"% for Reco"str ctio" #"d Deve!opme"t 2I&RD3. +etter %"o$" #s the 7or!d &#"%. $#s est#+!ished i" *@CC to he!p E rope recover from the dev#st#tio" of 7or!d 7#r II. The s ccess of th#t e"terprise !ed the &#"%. $ithi" # fe$ ,e#rs. to t r" its #tte"tio" to the deve!opi"g co "tries. 7or!d &#"% is he#d/ #rtered i" 7#shi"gto". D.5. &, tr#ditio". the &#"% preside"t is # '.(. "#tio"#! #"d is "omi"#ted +, the '"ited (t#tes. the &#"%Us !#rgest sh#reho!der. The 4reside"t is se!ected +, the &o#rd of Exec tive Directors for # five;,e#r. re"e$#+!e term. &, the *@DAs. it +ec#me c!e#r th#t the poorest deve!opi"g co "tries "eeded softer terms th#" those th#t co !d +e offered +, the &#"%. so the, co !d #fford to +orro$ the c#pit#! the, "eeded to gro$. 7ith the '"ited (t#tes t#%i"g the i"iti#tive. # gro p of the &#"%6s mem+er co "tries decided to set p #" #ge"c, th#t co !d !e"d to the poorest co "tries o" the most f#vor#+!e terms possi+!e. The, c#!!ed the #ge"c, the VInternational <evelopment (ssociation.V IDAUs Artic!es of Agreeme"t +ec#me effective i" *@IA. The first IDA !o#"s. %"o$" #s credits. $ere #pproved i" *@I* to 5hi!e. 8o"d r#s. I"di# #"d ( d#". (s its mission has e/panded+ the ;orld ?ank has created affiliated or)anizations' I<(+ I@C .INTERN(TI$N(L @IN(NCE C$R%$R(TI$N= *ULTIL(TER(L IN,E&T*ENT 7U(R(NTEE (7ENCA .*I7(= IC&I< .INTERN(TI$N(L CENTER @$R &ETTLE*ENT $@ IN,E&T*ENT <I&%UTE&= *E*?ER&6I% Total member countries in each institution
21

The I"ter"#tio"#! &#"% for Reco"str ctio" #"d Deve!opme"t 2I&RD3 The I"ter"#tio"#! Deve!opme"t Associ#tio" 2IDA3 The I"ter"#tio"#! )i"#"ce 5orpor#tio" 2I)53 The M !ti!#ter#! I"vestme"t G #r#"tee Age"c, 2MIGA3 The I"ter"#tio"#! 5e"tre for (ett!eme"t of I"vestme"t Disp tes 2I5(ID3

1H9 193 1H> 19C 1!!

The m#i" f "ctio" of the 7or!d &#"% is "o$ to provide !o#"s to the deve!opi"g co "tries for development projects and programs. (i"ce the credit r#ti"g of m#", deve!opi"g co "tries is poor. the, fi"d it diffic !t to r#ise reso rces i" i"ter"#tio"#! c#pit#! m#r%ets. $r)anization' The mem+er co "tries #re represe"ted +, # Board of Governors, $ho #re the po!ic, m#%ers #t the 7or!d &#"%. The gover"ors #re mem+er co "tries6 mi"isters of fi"#"ce or mi"isters of deve!opme"t. Gover"ors meet #"" #!!,. the, de!eg#te d ties to 1D Executive Directors. $ho $or% o" site #t +#"%. The five !#rgest sh#reho!ders. )r#"ce. Germ#",. <#p#". the '"ited Ki"gdom #"d the '"ited (t#tes #ppoi"t #" exec tive director. $hi!e other mem+er co "tries #re represe"ted +, 1A exec tive directors. @und 7eneration I&RD !e"di"g to deve!opi"g co "tries is prim#ri!, fi"#"ced +, se!!i"g AAA;r#ted +o"ds i" the $or!d6s fi"#"ci#! m#r%ets. 7hi!e I&RD e#r"s # sm#!! m#rgi" o" this !e"di"g. the gre#ter proportio" of its i"come comes from !e"di"g o t its o$" c#pit#!. This c#pit#! co"sists of reserves + i!t p over the ,e#rs #"d mo"e, p#id i" from the +#"%6s mem+er co "tr, sh#reho!ders. I&RD6s i"come #!so p#,s for 7or!d &#"% oper#ti"g expe"ses #"d h#s co"tri+ ted to IDA & de+t re!ief. IDA is the $or!d6s !#rgest so rce of i"terest free !o#"s & gr#"ts #ssist#"ce to the poorest co "tries. is rep!e"ished ever, three ,e#rs +, CA do"or co "tries. Additio"#! f "ds #re rege"er#ted thro gh rep#,me"ts of !o#" pri"cip#! o" FD;to;CA ,e#r. "o;i"terest !o#"s. $hich #re the" #v#i!#+!e for re;!e"di"g. Loans Thro gh the I&RD & IDA. the 7or!d &#"% offers t$o +#sic t,pes of !o#"s & credits: nvestment loans: #re m#de to co "tries for goods. $or%s & services i" s pport of eco"omic #"d soci#! deve!opme"t proLects i" # +ro#d r#"ge of eco"omic & soci#! sectors. Development policy loans !formerly known as adjustment loans" provide / ic%; dis+ rsi"g fi"#"ci"g to s pport co "tries po!ic, & i"stit tio"#! reforms.

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E#ch +orro$er6s proLect propos#! is #ssessed to e"s re th#t the proLect is eco"omic#!!,. fi"#"ci#!!,. soci#!!, & e"viro"me"t#!!, so "d. (nal-tic and (dvisor- &ervices Conditions for loans' It m st !e"d o"!, for prod ctive p rposes & m st stim !#te eco"omic gro$th i" the deve!opi"g co "tries $here it !e"ds. It m st give d e reg#rd to the prospects of rep#,me"t. E#ch !o#" is m#de to # gover"me"t or m st +e g #r#"teed +, the gover"me"t co"cer"ed. The &#"%6s decisio"s to !e"d m st +e +#sed o" eco"omic co"sider#tio"s. Lo#"s m st +e sed to meet the foreig" exch#"ge compo"e"t of the proLects. The r#te of i"terest is some$h#t !o$er + t re!#ted to m#r%et r#tes. The se of !o#"s c#""ot +e restricted to p rch#ses i" #", p#rtic !#r mem+er; co "tr,. I" other $ords. !o#"s #re "ot Ntied6. Capital' The I&RD fi"#"ces its !e"di"g oper#tio"s prim#ri!, from +orro$i"gs i" the $or!d c#pit#! m#r%ets. ) "ds from s ch other so rces #s gover"me"ts. commerci#! +#"%s. export;credit #ge"cies. & other m !ti!#ter#! i"stit tio"s #re i"cre#si"g!, +ei"g p#ired $ith 7or!d &#"% f "ds to co fi"#"ce proLects. The # thori-ed c#pit#! of the +#"% is divided i"to sh#res. these sh#res #re o"!, #v#i!#+!e to the mem+er co "tries. Of e#ch sh#re 2#31H is p#,#+!e i" go!d or '(D 2+3 *GH to +e p#id i" the c rre"c, of the mem+er co "tr,0 #"d 2c3 rem#i"i"g GAH is c#!!#+!e f "d i.e. . it is !i#+!e to +e c#!!ed if #"d $he" "eeded to meet o+!ig#tio" to !e"ders from $hom the &#"% h#s +orro$ed or to priv#te i"vestors $hose !o#"s the &#"% h#s g #r#"teed. Th s. o"!, 1AH of the tot#! c#pit#! is c#!!ed p +, the &#"% #"d is #v#i!#+!e for !e"di"g p rposes. LE5T'RE;G I<( .International <evelopment (ssociation=

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)or exte"di"g !o#"s o" co"cessio"#! terms to the deve!opi"g co "tries $hose rep#,me"t c#p#cit, is !imited. IDA i" *@IA $#s est#+!ished & h#s *EA mem+ers. The IDA offers credit to the e!igi+!e deve!opi"g co "tries o" extreme!, f#vor#+!e terms !#rge!, from reso rces provided +, its $e#!thier mem+ers. IDA comp!eme"ts the 7or!d &#"%6s other !e"di"g +r#"ch I&RD $hich serves midd!e;i"come co "tries $ith c#pit#! i"vestme"t #"d #dvisor, services. I&RD #"d IDA sh#re the s#me st#ff #"d he#d/ #rters #"d ev#! #te proLects $ith the s#me rigoro s st#"d#rds. IDA is o"e of the !#rgest so rces of #ssist#"ce for the $or!d6s EG poorest co "tries. F@ of $hich #re i" Afric#. It is the si"g!e !#rgest so rce of do"or f "ds for +#sic soci#! services i" the poorest co "tries. IDA !e"ds mo"e, 2%"o$" #s credits3 o" co"cessio"#! terms. This me#"s th#t IDA credits h#ve "o i"terest ch#rge #"d rep#,me"ts #re stretched over FD to CA ,e#rs. i"c! di"g # *A; ,e#r gr#ce period. E!igi+i!it, for IDA s pport depe"ds first #"d foremost o" # co "tr,6s re!#tive povert,. defi"ed #s GNI per c#pit# +e!o$ #" est#+!ished thresho!d #"d pd#ted #"" #!!,. IDA #!so s pports some co "tries. i"c! di"g sever#! sm#!! is!#"d eco"omies. $hich #re #+ove the oper#tio"#! c toff + t !#c% the credit$orthi"ess "eeded to +orro$ from I&RD. (ome co "tries. s ch #s I"di#. I"do"esi# #"d 4#%ist#". #re IDA;e!igi+!e +#sed o" per c#pit# i"come !eve!s. + t #re #!so credit$orth, for some I&RD +orro$i"g. The, #re referred to #s O+!e"dM co "tries. There is "o i"terest ch#rge. + t credits do c#rr, # sm#!! service ch#rge. c rre"t!, A.ED perce"t o" f "ds p#id o t. Lo#"s #ddress prim#r, ed c#tio". +#sic he#!th services. c!e#" $#ter #"d s#"it#tio". e"viro"me"t#! s#feg #rds. + si"ess c!im#te improveme"ts. i"fr#str ct re #"d i"stit tio"#! reforms. These proLects p#ve the $#, to$#rd eco"omic gro$th. Lo+ cre#tio". higher i"comes #"d +etter !ivi"g co"ditio"s. IDA emph#si-es +ro#d;+#sed gro$th. i"c! di"g: 2*3 (o "d eco"omic po!icies. r r#! deve!opme"t. priv#te + si"ess #"d s st#i"#+!e e"viro"me"t#! pr#ctices 213 I"vestme"t i" peop!e. i" ed c#tio" #"d he#!th. especi#!!, i" the str gg!e #g#i"st 8I?JAID(. m#!#ri# #"d T& 2F3 Exp#"sio" of +orro$er c#p#cit, to provide +#sic services #"d e"s re #cco "t#+i!it, for p +!ic reso rces 2C3 Recover, from civi! strife. #rmed co"f!ict #"d "#t r#! dis#ster 2D3 4romotio" of tr#de #"d regio"#! i"tegr#tio" IDA c#rries o t #"#!,tic#! st dies to + i!d the %"o$!edge +#se th#t #!!o$s i"te!!ige"t desig" of po!icies to red ce povert,. IDA #dvises gover"me"ts o" $#,s to +ro#de" the +#se of eco"omic gro$th #"d protect the poor from eco"omic shoc%s. IDA #!so coordi"#tes do"or #ssist#"ce to provide re!ief for poor co "tries th#t c#""ot m#"#ge their de+t;service + rde". IDA h#s deve!oped # s,stem for #!!oc#ti"g gr#"ts
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+#sed o" co "tries6 ris% of de+t distress. desig"ed to he!p co "tries e"s re de+t s st#i"#+i!it,. 7hi!e the I&RD r#ises most of its f "ds o" the $or!dUs fi"#"ci#! m#r%ets. IDA is f "ded !#rge!, +, co"tri+ tio"s from the gover"me"ts of the richer mem+er co "tries. Additio"#! f "ds come from I&RDUs i"come #"d from +orro$ersU rep#,me"ts of e#r!ier IDA credits. IDA Rep!e"ishme"ts Do"ors get together ever, three ,e#rs to rep!e"ish IDA f "ds. Do"or co"tri+ tio"s #cco "t for #+o t IAH of the '(BC*.I +i!!io" i" the IDA*D rep!e"ishme"t. $hich fi"#"ces proLects over the three;,e#r period e"di"g < "e FA. 1A**. The !#rgest p!edges to IDA*D $ere m#de +, the '"ited Ki"gdom. the '"ited (t#tes. <#p#". Germ#",. )r#"ce. 5#"#d#. It#!, #"d (p#i". + t !ess $e#!th, "#tio"s #!so co"tri+ te to IDA. I@C+ fo "ded i" *@DI. is !eg#!!, # sep#r#te e"tit, from the +#"% #!tho gh mem+ership i" the I)5 is "ot ope" to "o" mem+ers of the I&RD. The &o#rd of Gover"ors #"d the Exec tive Directors of the 7or!d &#"% #!so f "ctio" #s the &o#rd of Gover"ors & the Exec tive Directors of the I)5. The s +scriptio" / ot# of e#ch mem+er is proportio"#te to its sh#re of s +scriptio" to the c#pit#! of the 7or!d &#"%. The I)5 h#s its o$" !eg#! #"d oper#ti"g st#ff + t dr#$s o" the +#"% for #dmi"istr#tio" #"d other services. The I)5 f "ctio"s !i%e #" i"vestme"t +#"%. It p#rticip#tes direct!, i" e/ it, #s $e!! #s !o#" i"vestme"ts. It p#rticip#tes o"!, i" priv#te ve"t res #"d its !o#"s #re "ot depe"de"t o" gover"me"t g #r#"tees. Investment %olic2i3 2ii3 2iii3 2iv3 2v3 The I)5 co"siders o"!, those e"terprises $hich #re predomi"#"t!, i"d stri#! & co"tri+ te to eco"omic deve!opme"t of the co "tr,. The proLect to +e fi"#"ced +, the I)5 m st +e i" priv#te sector #"d m st +e prod ctive i" "#t re. &efore m#%i"g #", i"vestme"t . the 5orpor#tio" s#tisfies itse!f th#t the e"terprise h#s experie"ced #"d compete"t m#"#geme"t. The I)56s !o#" $i!! "ot +e more th#" h#!f of the c#pit#! "eeded for #" e"terprise. The r#te of i"terest for the I)5 !o#" is determi"ed +, m t #! "egoti#tio". depe"di"g po" the degree of ris% i"vo!ved & other terms of i"vestme"t.
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2vi3

The I)56s !o#" #re dis+ rsed i" ! mp;s m or i" i"st#!!me"ts #"d #re rep#,#+!e i" # period of D to *D ,e#rs.

The import#"t i"d stries fi"#"ced +, I)5 iro" & stee! . mi"i"g . ferti!i-ers. p#per. ceme"t. texti!es. chemic#!s etc. *I7( .*ultilateral Investment 7uarantee ()enc-= As # mem+er of the 7or!d &#"% Gro p. MIGAUs missio" is to promote foreig" direct i"vestme"t 2)DI3 i"to deve!opi"g co "tries to he!p s pport eco"omic gro$th. red ce povert,. #"d improve peop!eUs !ives. It does this +, providi"g political risk insurance (guarantees) to the priv#te sector. MIGA g #r#"tees cover proLects i" # +ro#d r#"ge of sectors #"d s +sectors. $ith proLects i" the fi"#"ci#! sector #cco "ti"g for the !#rgest sh#re 2D1 perce"t3 of the #ge"c,6s o tst#"di"g portfo!io #t the c!ose of fisc#! ,e#r 1A*A. The high expos re i" the sector is !#rge!, the res !t of MIGA6s s pport to the +#"%i"g sector i" the $#%e of the i"ter"#tio"#! fi"#"ci#! crisis. At FA perce"t of MIGA6s o tst#"di"g gross portfo!io. the i"fr#str ct re sector is # priorit, foc s for the #ge"c,. MIGA h#s # comp#r#tive #dv#"t#ge i" s pporti"g comp!ex i"fr#str ct re i"vestme"ts. p#rtic !#r!, $he" it comes to c#sh;i"te"sive i"vestme"ts th#t i"vo!ve m "icip#! gover"me"ts. #"d $he" it comes to sec ri"g fi"#"ci"g #t +etter r#tes #"d for !o"ger periods. I" fisc#! ,e#r 1A*A. the #gri+ si"ess. m#" f#ct ri"g. #"d services sector #cco "ted for ** perce"t. $hi!e the oi!. g#s #"d mi"i"g sector #cco "ted for E perce"t of the #ge"c,6s gross expos re. IC&I< .INTERN(TI$N(L CI&%UTE&= CENTRE @$R &ETTLE*ENT $@ IN,E&T*ENT

I5(ID is #" # to"omo s i"ter"#tio"#! i"stit tio" est#+!ished "der the 5o"ve"tio" o" the (ett!eme"t of I"vestme"t Disp tes +et$ee" (t#tes #"d N#tio"#!s of Other (t#tes 2the I5(ID or the 7#shi"gto" 5o"ve"tio"3 $ith over o"e h "dred #"d fort, mem+er (t#tes. The prim#r, p rpose of I5(ID is to provide f#ci!ities for conciliation and arbitration of i"ter"#tio"#! i"vestme"t disp tes. The I5(ID 5o"ve"tio" is # m !ti!#ter#! tre#t, form !#ted +, the Exec tive Directors of the I"ter"#tio"#! &#"% for Reco"str ctio" #"d Deve!opme"t 2the 7or!d &#"%3. It $#s ope"ed for sig"#t re o" M#rch *G. *@ID #"d e"tered i"to force o" Octo+er *C. *@II. The 5o"ve"tio" so ght to remove m#Lor impedime"ts to the free i"ter"#tio"#! f!o$s of priv#te i"vestme"t posed +, non-commercial risks #"d the absence of specialized international methods for investment dispute settlement . I5(ID $#s cre#ted +, the 5o"ve"tio" #s #"
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impartial international forum providi"g f#ci!ities for the reso! tio" of !eg#! disp tes +et$ee" e!igi+!e p#rties. thro gh co"ci!i#tio" or #r+itr#tio" proced res. Reco rse to the I5(ID f#ci!ities is #!$#,s s +Lect to the p#rtiesU co"se"t. As evide"ced +, its !#rge mem+ership. co"sider#+!e c#se!o#d. #"d +, the " mero s refere"ces to its #r+itr#tio" f#ci!ities i" i"vestme"t tre#ties #"d !#$s. I5(ID p!#,s #" import#"t ro!e i" the fie!d of i"ter"#tio"#! i"vestme"t #"d eco"omic deve!opme"t. Tod#,. I5(ID is co"sidered to +e the !e#di"g i"ter"#tio"#! #r+itr#tio" i"stit tio" devoted to investor-&tate dispute sett!eme"t.

LECTUREINTERN(TI$N(L *$NET(RA @UN< .I*@= Experts i" the '.(.A. & '.K. +eg#" p!#""i"g to so!ve the mo"et#r, pro+!ems to +e f#ced #fter the $#r. Ke,"es 4!#" & the 7hite 4!#". $ere the +#sis for the &retto" 7oods 5o"fere"ce $hich decided to set p IM) & the I&RD. The cre#tio" of the ) "d represe"ts # m#Lor effort #t i"ter"#tio"#! mo"et#r, co;oper#tio". The I"ter"#tio"#! Mo"et#r, ) "d 2IM)3 is #" org#"i-#tio" of *GE co "tries. $or%i"g to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Thro gh its economic surveillance. the IM) %eeps tr#c% of the economic health of its member countries, #!erti"g them to ris%s o" the hori-o" #"d providi"g po!ic, #dvice. It #!so !e"ds to co "tries i" diffic !t,. #"d provides technical assistance and training to help countries improve economic managemen t. This $or% is +#c%ed +, IM) rese#rch #"d st#tistics. $?IECTI,E& *. To promote exch#"ge st#+i!it, & order!, exch#"ge #rr#"geme"ts. 1. To he!p re;est#+!ish m !ti!#ter#! s,stem of tr#de & p#,me"ts & to e!imi"#te foreig" exch#"ge restrictio"s. F. To provide for i"ter"#tio"#! #dL stme"t. s perior to def!#tio". +, m#%i"g #v#i!#+!e i"cre#sed i"ter"#tio"#! reserves. C. To f#ci!it#te the exp#"sio" & +#!#"ced gro$th of i"ter"#tio"#! tr#de. RE&$URCE&

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'po" Loi"i"g. e#ch mem+er of the IM) is #ssig"ed # / ot#. +#sed +ro#d!, o" its national income & its position in the international trade. E#ch mem+er6s / ot# i" the ) "d determi"es its s +scriptio"s to the f "d. its dr#$i"g rights. voti"g po$er & sh#re of #", #!!oc#tio" of (DR6s Subscriptions: A mem+erUs / ot# s +scriptio" determi"es the m#xim m #mo "t of fi"#"ci#! reso rces the mem+er is o+!iged to provide to the IM). A mem+er m st p#, its s +scriptio" i" f !! po" Loi"i"g the IM): p to 1D perce"t m st +e p#id i" the IM)Us o$" c rre"c,. c#!!ed (peci#! Dr#$i"g Rights 2(DRs3 or $ide!, #ccepted c rre"cies 2s ch #s the do!!#r. the e ro. the ,e". or po "d ster!i"g3. $hi!e the rest is p#id i" the mem+erUs o$" c rre"c,. Voting power. The / ot# !#rge!, determi"es # mem+erUs voti"g po$er i" IM) decisio"s. E#ch IM) mem+er h#s 1DA +#sic votes p! s o"e #dditio"#! vote for e#ch (DR *AA.AAA of / ot#. Accordi"g!,. the '"ited (t#tes h#s FE*.ECF votes 2*I.EE perce"t of the tot#!3. #"d 4#!# h#s 1G* votes 2A.A* perce"t of the tot#!3. Access to financing: The #mo "t of fi"#"ci"g # mem+er c#" o+t#i" from the IM) 2its #ccess !imit3 is +#sed o" its / ot#. #nder $tand%By and Extended &rrangements, $hich #re t,pes of !o#"s. # mem+er c#" +orro$ p to 1AA perce"t of its / ot# #"" #!!, #"d IAA perce"t c m !#tive!,. 8o$ever. #ccess m#, +e higher i" exceptio"#! circ mst#"ces. $R7(NI&(TI$N $@ I*@' The m#"#geme"t of the f "d is "der the co"tro! of t$o +odies: 2#3 &o#rd of Gover"ors 2+3 &o#rd of Exec tive Directors 8ighest # thorit, of f "d is the &o#rd of Gover"ors. i" $hich e#ch of the mem+er co "tries is represe"ted +, # Gover"or & #" #!ter"#te Gover"or. &o#rd of Gover"ors h#s de!eg#ted m#", of its po$ers to the &o#rd of exec tive directors. Exec tive &o#rd de#!s reg !#r!, $ith # $ide v#riet, of #dmi"istr#tive & po!ic, m#tters & e!ects the m#"#gi"g director $ho is the ch#irperso" of the Exec tive &o#rd & 5hief of the oper#ti"g st#ff of the f "d. @UNCTI$N& $@ I*@' The +#sic f "ctio"s of IM) #re: *. To !#, do$" gro "d r !es for the co"d ct of i"ter"#tio"#! fi"#"ce. 1. To provide short & medi m Pterm #ssist#"ce for overcomi"g short;term +#!#"ce of p#,me"t deficits. F. 5re#tio" & distri+ tio" of reserves i" the form of (DRs.
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C. Tech"ic#! Assist#"ce: IM) #!so provides tech"ic#! #ssist#"ce to mem+er co "tries o" fi"#"ci#! m#tters. D. (tr ct r#! AdL stme"t )#ci!it,: The IM) est#+!ished i" M#rch *@GI (tr ct r#! AdL stme"t )#ci!it, 2(A)3 to provide #dditio"#! +#!#"ce of p#,me"ts #ssist#"ce o" co"cessio"#! terms to the poorer mem+er co "tries. '"der IM) mem+er co "tries #greed to co"tro! the !imits of their exch#"ge r#tes i" # predetermi"ed $#,. '"der the origi"#! #greeme"t. exch#"ge r#tes $ere permitted to v#r, +, *H #+ove or +e!o$ p#r. As # co "tr,6s r#te of exch#"ge #tt#i"ed or #ppro#ched either !imit. c#!!ed arbitrage support points, its ce"tr#! +#"% i"terve"ed i" the m#r%et to preve"t the r#te from p#ssi"g the !imit. MAIN )EAT'RE( O) T8E IM) A( IT E:I(TED '4 TO *@EF 4AR ?AL'E (9(TEM: The exch#"ge v#! e of # mem+er6s c rre"c, $#s fixed i" terms of go!d. (i"ce the price of go!d $#s offici#!!, fixed #t '.(. B FD per o "ce. it #!so me#"t th#t p#r v#! es $ere fixed i" terms of do!!#r. Do!!#r $#s sed #s the i"terve"tio" c rre"c, #s #t th#t time do!!#r $#s #s good #s go!d. I" f#ct. mem+ers preferred to %eep do!!#rs i" reserve. i" #s m ch #s do!!#rs e#r"ed i"terest $hi!e go!d reserves did "ot. 'hange in par (alue. I" order to #chieve short;term +#!#"ce of p#,me"ts e/ i!i+ri m. mem+ers co !d +orro$ f "ds from the IM). If # mem+er proposed # ch#"ge p to *AH. "o prior #pprov#! from the IM) $#s re/ ired. If the proposed ch#"ge $#s gre#ter th#" *AH. it co !d +e #!!o$ed provided 2i3 there $#s # f "d#me"t#! dise/ i!i+ri m. #"d 2ii3 dev#! #tio" $o !d +e the right remed, for f "d#me"t#! dise/ i!i+ri m. 58ANGE( MADE A)TER *@EF A mem+er c#" peg its c rre"c, to 2i3 either # si"g!e m#Lor c rre"c,. or 2ii3 # +#s%et of c rre"cies. or 2iii3 #!!o$ it to f!o#t i"depe"de"t!,. 2iv3 #dL st it to # set of i"dic#tors. A red ctio" i" ro!e of go!d i" I"ter"#tio"#! Mo"et#r, (,stem: (.D.R. is "o$ the "it of #cco "t for ) "d6s tr#"s#ctio". (DR 2(peci#! dr#$i"g rights3: The f "d cre#ted (DR6s i" *@I@.(ometimes c#!!ed paper gold, (DRs speci#! #cco "t e"tries o" the IM) +oo%s desig"ed to provide #dditio"#! !i/ idit, to s pport gro$i"g $or!d commerce. I"iti#!!, (DR6s $orth B@.D+i!!io" $ere cre#ted.

29

 The v#! e of the (DR is determi"ed d#i!, o" the +#sis of C c rre"cies;'( do!!#r. E ro do!!#r. <#p#"ese 9e" & &ritish 4o "d ster!i"g. The (DR v#! #tio" is revised ever, D ,e#rs. CRITIC(L (%%R(I&(L $@ I*@ E/pansion of @und' reso rces. (i"ce its i"ceptio". the IM) h#s progressed +oth i" mem+ership &

%rovision of credit' The perform#"ce of IM) h#s +ee" s#tisf#ctor, i" respect of the provisio" of fi"#"ci#! #ssist#"ce to its mem+er co "tries. E/chan)e &tabilit-' The IM) h#s +ee" m#%i"g si"cere efforts to promote exch#"ge st#+i!it, #mo"g the mem+er co "tries. The exch#"ge st#+i!it, #s experie"ced d ri"g the IM) er# is defi"ite!, s perior to the ch#otic co"ditio" of f! ct #ti"g exch#"ge r#tes. *achiner- for Consultation' The IM) m#chi"er, set p for providi"g expert g id#"ce to the mem+er co "tries i" mo"et#r, m#tters h#s proved ver, sef !. The fisc#! #"d fi"#"ci#! po!icies of the mem+er co "tries #re form !#ted %eepi"g i" vie$ the g ide!i"es s ggested +, the f "d. Increase in International LiGuidit-' 7ith the est#+!ishme"t of the scheme of (DRs. the IM) h#s i"cre#sed the i"ter"#tio"#! !i/ idit,. It provides credit to the "eed, co "tries thro gh its #cco "t. LE5T'RE;@ 7L$?(LI&(TI$N B @<I: GLO&ALI(ATION is the gro$i"g i"terdepe"de"ce of co "tries $or!d$ide thro gh i"cre#si"g vo! me #"d v#riet, of cross;+order tr#"s#ctio"s i" goods #"d services #"d of i"ter"#tio"#! c#pit#! f!o$s #"d #!so thro gh more r#pid #"d $idespre#d diff sio" of tech"o!og,. It is OThe shift to$#rds # more i"tegr#ted #"d i"terdepe"de"t $or!d eco"om,M. 7lobalization of investment refers to i"vestme"t of c#pit#! +, # g!o+#! comp#", i" #", p#rt of the $or!d. A g!o+#! comp#", co"d cts the #ssessme"t of the fi"#"ci#! fe#si+i!it, of "e$ proLects i" differe"t co "tries of the $or!d #"d i"vests c#pit#! i" th#t co "tr, $here it is re!#tive!, more profit#+!e. G!o+#!i-#tio" of i"vestme"t is #!so %"o$" #s foreig" direct i"vestme"t. )DI occ rs $he" # firm i"vests direct!, i" "e$ f#ci!ities to prod ce #"dJor m#r%et # prod ct or service i" # foreig" co "tr,. 5oc#;5o!# #c/ ired # " m+er of +ott!i"g comp#"ies thro gho t I"di# +, i"vesti"g the c#pit#! direct!,. REA(ON( )OR GLO&ALI(ATION O) IN?E(TMENT:
30

There h#s +ee" # r#pid i"cre#se i" the vo! me of g!o+#! tr#de. M#", co "tries provide more favorable environment for direct i"vestme"t. )or ex#mp!e Gover"me"t of I"di# provided for # tom#tic #pprov#! for )DI p to D*H of c#pit#! of # comp#",. M#", co "tries +efore *@FAs cre#ted +#rriers re!#ti"g to exports. imports & foreig" i"vestme"t. The est#+!ishme"t of 7TO h#s co"tri+ ted to the e!imi"#tio" of i"vestme"t +#rriers phe"ome"#!!,. A sig"ific#"t #mo "t of )DI is directed to the deve!opi"g co "tries i" A(IA & EA(TERN E'RO4E. (m#!! & medi m si-ed comp#"ies h#ve +eg " i"vesti"g i" v#rio s co "tries. I" #dditio" to i"cre#se i" the vo! me of )DI. its compositio" h#s #!so +ee" ch#"gi"g. I"iti#!!, )DI $#s directed most!, to$#rds the '(A. )DI. rece"t!, h#s +ee" directed to$#rds other co "tries especi#!!, the deve!opi"g co "tries of the $or!d. Li+er#!i-#tio" of f!o$ of c#pit#! #cross the +orders +, v#rio s co "tries. G!o+#! comp#"ies i" order to h#ve co"tro! over m#" f#ct ri"g & m#r%eti"g #ctivities i"vest i" the foreig" co "tries. I"ter"#tio"#! firms go for )DI i" order to #void the restrictio"s imposed +, the host co "tr, o" exports. )or ex#mp!e. To,ot#. # <#p#"ese # tomo+i!e comp#", i"cre#sed its i"vestme"t i" the '(A. the 'K co"se/ e"t po" impositio" of restrictio"s o" exports of # tomo+i!es +, the host co "tries. &ourcin) funds )loball-' The other f#ctor $hich co"tri+ tes for the i"cre#se i" g!o+#! i"vestme"t i" the so rci"g of f "ds g!o+#!!,. Most of the MN56s proc re f "ds from #", so rce i" the g!o+e. $herever the cost of c#pit#! is !o$ $ith fe#si+!e terms #"d co"ditio"s. Important sources of funds' o I&RD. I)5 2soft !o#" $i"do$3 . IDA. Asi#" Deve!opme"t +#"%. Afric#" deve!opme"t &#"% o I"vestors h#ve #!so st#rted i"vesti"g i" sh#res of foreig" comp#"ies. *odes of 7lobalization of investment

Ac/ isitio" of foreig" comp#"ies. <oi"t ve"t res .Lo"g term !o#"s. Iss i"g E/ it, (h#res. De+e"t res. &o"ds etc. #re the v#rio s so rces of fi"#"ce.

31

LE5T'RE;*A )OREIGN DIRE5T IN?E(TMENT)DI #s # mode of foreig" e"tr, i"vo!ves o$"ership of propert,. #ssets. proLects & + si"esses i"vested i" # host co "tr,.

7reen-field investment: This i"vo!ves the est#+!ishme"t of # $ho!!, "e$ oper#tio" i" # foreig" co "tr,. ?ro0n-field investment' 7he" # comp#", or gover"me"t e"tit, p rch#ses or !e#ses existi"g prod ctio" f#ci!ities to !# "ch # "e$ prod ctio" #ctivit,. (cGuirin) or mer)in) $ith #" existi"g firm i" the foreig" co "tr,. Ac/ isitio"s c#" +e mi"orit, 2$here the foreig" firm t#%es # *AH to C@H i"terest i" the firms voti"g stoc%3 or m#Lorit, 2foreig" i"terest of DAH;@@H3 or f !! o tright st#%e 2*AAH3 @orei)n portfolio investment .@%I=' i"vestme"t +, i"divid #!s. firms or p +!ic +odies 2e.g. gover"me"t +o"ds. foreig" stoc%s3. )4I does "ot i"vo!ve t#%i"g # sig"ific#"t e/ it, st#%e i" # foreig" + si"ess e"tit, 2i.e.. the e/ it, st#%e is !ess th#" *AH3.
32

It is # "o";co"tro!!i"g i"terest i" # comp#", or gr#"t of !o#" to #"other p#rt,. A portfo!io i"vestme"t t#%es o"e of the t$o forms: &hare investment i" # comp#", or loans to # comp#", or co "tr, i" the form of +o"ds. +i!!s or "otes th#t the i"vestor p rch#ses. 5omp#"ies se portfo!io i"vestme"t for short;term fi"#"ci#! g#i" $hich #!!o$s # comp#", to e#r" mo"e, o" its mo"e, $ith re!#tive s#fet,. 5omp#", tre#s rers ro ti"e!, move f "ds #mo"g co "tries to e#r" higher ,ie!d o" short;term i"vestme"ts. 6orizontal @<I' is )DI i" the s#me i"d str, i" $hich # firm oper#tes #t home. ,ertical @<I' is i"vestme"t i" #" i"d str, th#t provides i"p ts for # firms domestic oper#tio"s. or it m#, +e )DI i" #" i"d str, #+ro#d th#t se!!s the o tp t of # firms domestic oper#tio"s. ?ack0ard vertical )DI occ rs $he" the firm est#+!ishesJ#c/ ires the firm #+ro#d to m#" f#ct re i"termedi#ries $hich c#" +e sed i" the domestic firm or +, other s +sidi#ries. )or i"st#"ce. # comp ter m#" f#ct rer m#, est#+!ish # h#rd dis% m#" f#ct ri"g firm #+ro#d. @or0ard vertical )DI occ rs $he" the firm i"vests i" # foreig" firm to distri+ te its prod cts there. Con)lomerate @<I' It occ rs $he" the i"vestor firm i"vests i" # ve"t re i" the host co "tr, to m#" f#ct re # prod ct "re!#ted to its prod ct !i"e. The p rpose m#, +e to ti!i-e the opport "it, #+ro#d +, si"g its m#"#geri#! or c#pit#! reso rces. Efficienc- &eekin) @<I' A firm m#, decide to i"vest #+ro#d $he" it fi"ds th#t it c#" prod ce there $ith +etter cost efficie"c, th#" i" the domestic m#r%et. The efficie"c, m#, +e #chieved thro gh 2#3 !o$ cost of r#$ m#teri#!s #v#i!#+!e i" the host co "tr, 2+3 other i"p t costs. e.g.. tr#"sport #"d comm "ic#tio" costs. #"d cost of other i"termedi#te prod cts +ei"g che#per i" the host co "tr,. #"d 2c3 mem+ership of # regio"#! i"tegr#tio" #greeme"t co"d cive to the est#+!ishme"t of regio"#! corpor#te "et$or%. *arket &eekin) @<I' )irms t#%e the ro te of )DI $he" the, recog"i-e the "eed to exp#"d their m#r%et to gro$ or st#, competitive. A co "tr, $ith f#vor#+!e co"ditio"s of m#r%et si-e #"d per c#pit# i"come. m#r%et gro$th. #ccess to regio"#! & g!o+#! m#r%ets $i!! #ttr#ct )DI. Resources &eekin) @<I ' 8istoric#!!, #v#i!#+i!it, of "#t r#! reso rces h#s +ee" import#"t f#ctor i" #ttr#cti"g reso rce see%i"g )DIs i"to the host co "tr,. 8o$ever. prese"ce of "#t r#! reso rces s #!!, gives rise to tr#de r#ther th#" to )DI. I"vestme"t too% p!#ce $he" the reso rces #+ "d#"t co "tr, !#c%ed the re/ ired c#pit#! to exp!oit them or did "ot h#ve the tech"ic#! expertise or i"fr#str ct re to extr#ct & tr#de i" them. Created assets seekin) @<I' 5re#ted #ssets #re m#" m#de. Li%e comm "ic#tio" i"fr#str ct re or m#r%eti"g "et$or%. E@@ECT& $@ @<IF6$&T C$UNTRA
33

1# &pillover effects' !#rge MNEs h#ve #ccess to fi"#"ci#! reso rces $hich s pp!eme"t the domestic c#pit#! #v#i!#+!e. &e"efit of Technolo))DIs te"d to cre#te innovation B kno0led)e+ $hich #re dispersed thro gho t m#", !eve!s of !oc#! eco"om,. )oreig" mana)ers trained in latest mana)ement techniGues c#" he!p improve efficienc- of operations i" host co "tr,.

1. Emplo-ment effects' )DI f#ci!it#tes cre#tio" of Lo+s .<irect emplo-ment is res !t of foreig" MNE offeri"g Lo+s to !oc#!s. Indirect emplo-ment #rises #s # res !t of i"cre#sed i"vestme"t #s # res !t of i"cre#se i" co"s mptio" expe"dit re. F. ?alance of pa-ments effect' )DI c#" #ffect the +#!#"ce of p#,me"t positio" of # co "tr,. !# Competition and Economic )ro0th' 5ompetitio" drives do0n prices & i"cre#ses co"s mer $e!f#re. (tim !#tes c#pit#! i"vestme"t +, firms i" the domestic m#r%ets i" form of R& D. p!#"t. e/ ipme"t #s the, str gg!e to g#i" #" edge over their riv#!s. Lo"g term res !ts i"c! de increased productivit-+ product B process innovation B )reater )ro0th#

E@@ECT& $@ @<IF6$*E C$UNTRA %ER&%ECTI,E *. ncreased foreign earnings) rep#tri#ted divide"ds. !ice"se fee etc.

1. !mployment effect: i" the form of home;co "tr, exports of c#pit#! e/ ipme"t. i"termedi#te goods & comp!eme"t#r, prod cts. F. Ac"uisition of skills) reverse reso rce tr#"sfer #ffect #. !nsuring growth from organi$ational learning D. Advances of differences in factor endowments: firms #re prompted to i"vest #+ro#d to #c/ ire p#rtic !#r reso rces #t !o$er costs th#" co !d +e o+t#i"ed i" their home;co "tr, e.g. 4epsi5o6s i"vestme"t i" &r#-i!. Arge"ti"#. #"d Mexico. %. ncreasing return from ownership advantages.

7L$?(L @<I %(TTERN&

34

4#st 1A ,e#rs h#ve see" # m#r%ed i"cre#se i" +oth f!o$ & stoc% of )DI i" the $or!d eco"om,. )irms fe#ri"g protectio"ist me#s res see )DI #s # $#, of circ mve"ti"g tr#de +#rriers. A!tho gh deve!oped "#tio"s. '.(. i" p#rtic !#r sti!! #cco "t for !#rgest sh#re of )DI i"f!o$s. there h#s +ee" i"cre#se f!o$ of )DI i" deve!opi"g co "tries. Most rece"t i"f!o$s i"to deve!opi"g "#tio"s h#ve +ee" t#rgeted #t emergi"g eco"omies of (o th. E#st & (o th E#st Asi# fo!!o$ed +, L#ti" Americ# especi#!!, &r#-i! & Mexico. Gro$i"g import#"ce of 5hi"# #s # recipie"t of )DI. Afric# received sm#!!est #mo "t of i"$#rd i"vestme"t. '(A top recipie"t. E' rem#i"ed the !#rgest host regio". $ith C*H of tot#! )DI i"f!o$s.

W W W W

@<I $UT@L$;& W W W Tri#d co "tries 2'(. E rope & <#p#"3 #cco "ted for GDH of )DI o tf!o$. Deve!opi"g co "tries rem#i" # seco"d#r, ,et gro$i"g so rce of )DI. MNE6s from deve!oped co "tries more !i%e!, possess o$"ership or mo"opo!istic #dv#"t#ges. more !i%e!, to +e i""ov#tors. more !i%e!, to possess c#p#+i!ities to ve"t re #+ro#d. The !#rgest i"vestors '(A. 'K. )r#"ce. Germ#", & (p#i" #cco "ted for ICH of the tot#! o tf!o$. )rom *@GA to *@@A sh#re of deve!opi"g co "tries i" o tf!o$s gre$ from F to GH. co"tri+ ti"g to this f!o$ $ere most!, Asi#" firms #!tho gh L#ti" Americ#" firms #!so i"cre#sed their )DI o tf!o$s. @<I IN IN<I( W W W '"ti! *@@*. there $#s ver, !itt!e )DI #ctivit, i" I"di#. I"f!o$ $#s !imited & gover"me"t po!ic, co"str#i"ed pote"ti#! of I"di#" comp#"ies to m#%e for#, i"to foreig" co "tries. I" !#st fe$ ,e#rs I"di# h#s see" #" #sto "di"g gro$th i" o t$#rd )DI $hi!e i"$#rd )DI do +!ed. I"di#" firms #re movi"g m#ssive!, i"to IT & (ervices i" deve!oped co "tries. I"di#" firms #re diversif,i"g i"to %"o$!edge i"d str, #"dJor #c/ iri"g cro$" Le$e!s of E rope#" & '( m#" f#ct ri"g i"d str,. I" i"d stries s ch #s ph#rm#ce tic#!s. soft$#re. IT. te!ecomm "ic#tio"s. #"d tr#"sport. I"di#" MN56s +#se their i"vestme"t o" #dv#"ced tech"o!og,. high %"o$!edge i"te"sit, & o" c tti"g edge str#tegies.
35

W W

LE5T'RE;** @$REI7N IN,E&T*ENT %$LICA 4rior to eco"omic reforms. foreig" i"vestme"t i"to I"di# $#s #t # ver, !o$ !eve! d e to restrictive po!icies fo!!o$ed. (i"ce the !# "chi"g of the reform. the #"" #! / #"t m of foreig" direct i"vestme"t i"cre#sed from U&< 1>8 million i" 1881-8> to U&< 9#> billion i" >33C-3 . I"vestme"ts +, foreig" i"stit tio"#! i"vestors 2)II3 i" the I"di#" c#pit#! m#r%et h#s #!so i"cre#sed to U&< !C#: +i!!io" #t *arch>33 from U&< H>9 million #t Decem+er 188:#There h#s +ee" # sim !t#"eo s i"cre#se i" the I"di#" i"vestme"ts #+ro#d. The Ne0 %olic- 1881 The "e$ po!ic, h#s #!!o$ed m#Lorit, foreig" e/ it, $ith # tom#tic #pprov#! i" # !#rge " m+er of i"d stries. The "e$ po!ic, h#s #!so m#de the import of c#pit#! goods # tom#tic provided the foreig" exch#"ge re/ ireme"t for s ch import is e"s red thro gh foreig" e/ it,. @<I polic

)DI p to *AAH is #!!o$ed "der the # tom#tic ro te i" #!! #ctivitiesJsectors except the fo!!o$i"g $hich $i!! re/ ire #pprov#! of the Gover"me"t : ActivitiesJitems th#t re/ ire #" I"d stri#! Lice"se0

4ropos#!s i" $hich the foreig" co!!#+or#tor h#s # previo sJexisti"g ve"t reJtie p i" I"di# i" the s#me or #!!ied fie!d A!! propos#!s re!#ti"g to #c/ isitio" of sh#res i" #" existi"g I"di#" comp#", +, # foreig"JNRI i"vestor. A!! propos#!s f#!!i"g o tside "otified sector#! po!ic,Jc#ps or "der sectors i" $hich )DI is "ot permitted.

A" o"goi"g revie$ of the )DI po!ic, is c#rried o t so #s to i"iti#te more !i+er#!i-#tio". 5h#"ge i" sector#! po!ic,Jsector#! e/ it, c#p is "otified from time to time +, the (ecret#ri#t for I"d stri#! Assist#"ce 2(IA3 i" the Dep#rtme"t of I"d stri#! 4o!ic, & 4romotio". )DI i" sectorsJ#ctivities "der # tom#tic ro te does "ot re/ ire #", prior #pprov#! either +, the Gover"me"t or the R&I. The i"vestors #re re/ ired to "otif, the Regio"#! office co"cer"ed of R&I of receipt of i"$#rd remitt#"ces $ithi" FA d#,s of s ch receipt. The, $i!! h#ve to fi!e the re/ ired doc me"ts $ith th#t office $ithi" FA d#,s #fter iss e of sh#res to foreig" i"vestors. %rocedure for obtainin) 7overnment approval @I%?
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The )oreig" I"vestme"t 4romotio" &o#rd 2)I4&3 co"siders #pprovi"g #!! propos#!s for foreig" i"vestme"t. $hich re/ ires Gover"me"t #pprov#!. The )I4& #!so gr#"ts composite #pprov#!s i"vo!vi"g foreig" i"vestme"tJforeig" tech"ic#! co!!#+or#tio". Other th#" NRI I"vestme"ts #"d *AAH EO'. #pp!ic#tio"s see%i"g #pprov#! for )DI i" form )5;IL. sho !d +e s +mitted to the Dep#rtme"t of Eco"omic Aff#irs 2DEA3. Mi"istr, of )i"#"ce. @<I from NRI B for 133" E$U App!ic#tio"s for )DI $ith NRI I"vestme"ts & *AAH EO' sho !d +e s +mitted to the 4 +!ic Re!#tio" & 5omp!#i"t 24R&53 (ectio" of (ecret#ri#t of I"d stri#! Assist#"ce 2(IA3. Dep#rtme"t of I"d stri#! 4o!ic, & 4romotio". %roposals reGuirin) 7overnmentJs approval App!ic#tio" for propos#!s re/ iri"g prior Gover"me"tUs #pprov#! sho !d +e s +mitted to )I4& i" )5;IL form. 4!#i" p#per #pp!ic#tio"s c#rr,i"g #!! re!ev#"t det#i!s #re #!so #ccepted. No fee is p#,#+!e. A!! the propos#!s s +mitted to )I4& see%i"g )DI #pprov#! sho !d i"c! de the fo!!o$i"g i"form#tio":

7hether the #pp!ic#"t h#s h#d or h#s #", previo sJexisti"g fi"#"ci#!J tech"ic#! co!!#+or#tio" or tr#de m#r% #greeme"t i" I"di# i" the s#me or #!!ied fie!d for $hich #pprov#! h#s +ee" so ght0 If #" #pp!ic#"t h#s #", #pproved propos#! e#r!ier. det#i!s thereof #"d the L stific#tio" for proposi"g the "e$ ve"t reJ tech"ic#! co!!#+or#tio" 2i"c! di"g tr#dem#r%s3 h#s to +e s +mitted. App!ic#tio"s c#" #!so +e s +mitted $ith I"di#" Missio"s #+ro#d $ho $i!! for$#rd them to the Dep#rtme"t of Eco"omic Aff#irs 2DEA3 for f rther processi"g. )oreig" i"vestme"t propos#!s received i" the DEA #re p!#ced +efore the )oreig" I"vestme"t 4romotio" &o#rd 2)I4&3 $ithi" *D d#,s of receipt.

The decisio" of the Gover"me"t i" #!! c#ses is s #!!, co"ve,ed +, the DEA $ithi" FA d#,s of s +missio" of the )DI propos#!. IND'(TRIAL LI5EN(ING: 7ith progressive !i+er#!i-#tio" & dereg !#tio" of the eco"om, i"d stri#! !ice"se is re/ ired i" ver, fe$ c#ses. At prese"t i"d stri#! !ice"se is re/ ired for fo!!o$i"g: o A!coho!ic dri"%s o 5ig#rettes & to+#cco prod cts o E!ectro"ic #erosp#ce & defe"se e/ ipme"t o Exp!osives
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o 8#-#rdo s chemic#!s s ch #s isoc,"#tes. phosge"e etc. LO5ATIONAL RE(TRI5TION(: I"d stri#! "dert#%i"gs to +e !oc#ted $ithi" 1D Kms of the st#"d#rd r+#" #re# !imit of 1F cities h#vi"g # pop !#tio" of * mi!!io" #s per *@@* ce"s s re/ ire #pprov#!. I"d stri#! !ice"se eve" i" these c#ses is "ot re/ ired if # "it is !oc#ted i" #" #re# desig"#ted #s #" i"d stri#! #re# +efore *@@* or "o";po!! ti"g i"d stries s ch #s e!ectro"ics . comp ter soft$#re . pri"ti"g. ITEM( RE(ER?ED for Exc! sive m#" f#ct re +, MI5RO & (MALL E"terprise (ector I" 1AAG o"!, FD items #re !eft o" the reserved !ist $hich o"ce h#d GEF items. L#test de; reserv#tio" me#"s th#t p#stries. h#rd +oi!ed s g#r c#"d, & tooth po$der c#" +e m#" f#ct red +, !#rge "its too. (imi!#r!, + c%ets. p#per +#gs. p#per c ps. e"ve!opes. !etter p#ds. p#per "#p%i"s h#ve +ee" de!isted. Remainin) :C items' $ood. $ood prod cts. p#per prod cts. p!#stic prod cts. org#"ic chemic#!s. dr gs. g!#ss. cer#mics. mech#"ic#! e"gi"eeri"g & e!ectric#! m#chi"es etc. @<I is prohibited in the follo0in) sectors' Ret#i! tr#di"g. Atomic e"erg,. Lotter, + si"ess. G#m+!i"g & &etti"g. 2Exc! di"g )!oric !t re3. 8ortic !t re. deve!opme"t of seeds. A"im#! 8 s+#"dr,. 4iscic !t re & 5 !tiv#tio" of veget#+!es. m shrooms etc. "der co"tro!!ed co"ditio"s & services re!#ted to #gro & #!!ied sectors3 & 4!#"t#tio"s 2other th#" te# p!#"t#tio"s3. I" sectors other th#" those prohi+ited #+ove. i"vestme"ts c#" +e m#de either $ith the specific prior #pprov#! of the GOI. MO). )I4& or "der A tom#tic ro te of Reserve &#"%. &ome of the factors that e/plain the recent spurt in @<I inflo0s into India are' 4rogressive !i+er#!i-#tio" of )DI po!ic, h#s stre"gthe"ed i"vestor co"fide"ce ope"i"g p of "e$ sectors. remov#! of )DI c#ps i" most sectors. i"c! di"g #dvertisi"g. #irports. priv#te sector oi! refi"i"g. dr gs & ph#rm#ce tic#!s etc. Li+er#!i-#tio" of forei)n e/chan)e re)ulations +, $#, of simp!ific#tio" of proced res for m#%i"g i"$#rd & o t$#rd remitt#"ces. (ector#! reforms. especi#!!, i" sectors s ch #s te!ecom. i"form#tio" tech"o!og,& # tomo+i!es h#ve m#de them #ttr#ctive desti"#tio" for )DI. 4o!ic, to #!!o$ foreig" comp#"ies to set up 0holl- o0ned subsidiaries i" I"di# h#s e"#+!ed foreig" comp#"ies to co"vert their Loi"t ve"t res i"to $ho!!, o$"ed s +sidi#ries. The perce"t#ge of )DI thro gh merger & #c/ isitio"s ro te h#s i"cre#sed to #ro "d FAH 2 from #ro "d *AH i" *@@@3
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%ublic sector disinvestment h#s emerged #s #" import#"t me#"s to promote )DI. Liberal polic- to$#rds @orei)n ,enture Capital Investment .@,CI= h#s give" #" impet s to i"vestme"ts i" tech"o!og, & i"fr#str ct re proLects. @orei)n Investment Implementation (uthorit- .@II(= h#s +ee" #ctiv#ted & "o$ meets #t reg !#r i"terv#!s to revie$ & reso!ve i"vestme"t re!#ted pro+!ems.

&eside *AA perce"t re!#x#tio" of )DI i" re#! est#te. the gover"me"t po!icies o" )DI #!so offer opport "ities for foreig" i"vestors to i"vest i" differe"t sectors. This i"c! des *AA perce"t i" po$er tr#di"g. processi"g. deve!opme"t of "e$ #irports. !#,i"g of "#t r#! g#s pipe!i"es. petro!e m i"fr#str ct re #"d $#reho si"g of coffee #"d r ++er. Limit for te!ecoms services firms h#ve +ee" r#ised from C@ per ce"t to EC per ce"t. A"other c#p to the ret#i!i"g i"d str, i" I"di# is #!!o$i"g *AAH )DI i" si"g!e +r#"d o t!et & D*H )DI i" m !ti;+r#"d ret#i! #s $e!! #s D*H )DI i" #vi#tio" i"d str, from other priv#te #ir!i"es. Other me#s res $hich e"co r#ge foreig" i"vestme"t i"c! de the fo!!o$i"g: e"di"g the gover"me"t mo"opo!, i" i"s r#"ce0 ope"i"g p of the +#"%i"g sector0 protection of international trademarks B patents b- le)islation . co"c! sio" of bilateral investment treaties B double ta/ation treaties.

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