MASTER OF BUSINESS ADMINISTRATION SEMESTER 4

MB0053-INTERNATIONAL BUSINESS MANAGEMENT

Q.1) The world economy is globalizing at an accelerating pace. Discuss
this statement and list the benefits of globalisation.
Ans.) Globalisation is the process of international integration arising from the
interchange of world views, products, ideas, and other aspects of culture. Put in simple
terms, globalization refers to processes that increase world-wide exchanges of national
and cultural resources.
Advances in transportation and telecommunications infrastructure, including the rise of
the telegraph and its posterity the Internet, are major factors in globalization,
generating further interdependence of economic and cultural activities.
Globalization is a process where businesses are dealt in markets around the world,
apart from the local and national markets. According to business terminologies,
globalization is defined as the worldwide trend of businesses expanding beyond their
domestic boundaries. It is advantageous for the economy of countries because it
promotes prosperity in the countries that embrace globalization.
BENEFITS OF GLOBALIZATION
The merits and demerits of globalization are highly debatable. While globalization
creates employment opportunities in the host countries, it also exploits labour at a very
low cost compared to the home country. Let us consider the benefits and ill-effects of
globalization. Some of the benefits of globalization are as follows:

Promotes foreign trade and liberalization of economies.

Increases the living standards of people in several developing countries through capital
investments in developing countries by developed countries.
Benefits customers as companies outsource to low wage countries. Outsourcing helps
the companies to be competitive by keeping the cost low, with increased productivity.
Promotes better education and jobs.
Leads to free flow of information and wide acceptance of foreign products, ideas, ethics,
best practices, and culture.
Provides better quality of products, customer services, and standardised delivery
models across countries.
Gives better access to finance for corporate and sovereign borrowers.
Increases business travel, which in turn leads to a flourishing travel and hospitality
industry across the world.
Increases sales as the availability of cutting edge technologies and production techniques
decrease the cost of production.
Provides several platforms for international dispute resolutions in business, which
facilitates international trade.

Some of the ill-effects of globalization are as follows:

Leads to exploitation of labour in several cases.
Causes unemployment in the developed countries due to outsourcing.
Leads to the misuse of IPR, copyrights and so on due to the easy availability of
technology, digital communication, travel and so on.
Influences political decisions in foreign countries. The MNCs increasingly use
their economic powers to influence political decisions.
Causes ecological damage as the companies set up polluting production plants in
countries with limited or no regulations on pollution.
Harms the local businesses of a country due to dumping of cheaper foreign
goods.
Leads to adverse health issues due to rapid expansion of fast food chains and
increased consumption of junk food.
Causes destruction of ethnicity and culture of several regions worldwide in
favour of more accepted western culture.

Q.2) Compare the Adam Smith & David Ricardos theories of international
trade with examples.
Ans.) 1). THE ABSOLUTE ADVANTAGE (ADAM SMITH MODEL):

The main concept of absolute advantage is generally attributed to Adam Smith for his
1776 publication An Inquiry into the Nature and Causes of the Wealth of Nations in
which he countered mercantilist ideas. Smith argued that it was impossible for all
nations to become rich simultaneously by following mercantilism because the export of
one nation is another nations import and instead stated that all nations would gain
simultaneously if they practiced free trade and specialized in accordance with their
absolute advantage. Smith also stated that the wealth of nations depends upon the goods
and services available to their citizens, rather than their gold reserves. While there are
possible gains from trade with absolute advantage, the gains may not be mutually
beneficial. Comparative advantage focuses on the range of possible mutually beneficial
exchanges.
In the second half of the XVIII century, mercantilist policies became an obstacle for the
economic progress. Adam Smith (father of liberalism and economical science) brought
the argument in his book The Wealth of Nations, published in 1776, that the
mercantilist policies favourised producers and disadvantaged the interests of
consumers.
Adam Smiths theory starts with the idea that export is profitable if you can import
goods that could satisfy better the necessities of consumers instead of producing them on
the internal market.
The essence of Adam Smith theory is that the rule that leads the exchanges from any
market, internal or external, is to determine the value of goods by measuring the labour
incorporated in them.

In order to demonstrate its theory, Adam Smith analysed for the beginning country A,
using one factor of production, the productivity of labour, evaluated in the necessary of
hours needed to produce a unit of measure of the products X and Y. He used a
unifactorial system of economy.
Symbolizing H-hours, L-labour, the unitary necessary of labour for product X is HLX
and for Y HLY.
Because all the economies have limited resources, there are limits in the level of
production, and if a country wants to produce much of one product it has to give up
producing another goods, existing in this case renounce of trade. Renounces can be
illustrated by a graphic.
THE PRODUCTION POSSIBILITY FRONTIER
We have a single factor of production- labour, which results in productivity. This
country has a resource of labour of 8+4=12 hours.
- with 4 hours of labour the country can produce 1 kilo of cheese.
- with 8 hours of labour the country can produce 1 litre of wine
The production possibility frontier illustrates the variety of the mixing of goods that can
be produced by the economy. The opportunity cost is the number of measure units of
product Y to which the economy has to give up in order to produce one supplementary
unit of product X.
Country A is more productive than B in the production of X and it has a Country A is
more productive than B in the production of X and it has an absolute advantage in this
product and country B is more productive than A in producing product Y. It is
reasonable and in the benefit of 2 countries to concentrate all resources
of labour to the product for which they have comparative advantage. After
specialization, exchanging products, both countries gain from trade.
2). THE COMPARATIVE ADVANTAGE (DAVID RICARDO MODEL):
In 1817, David Ricardo, an English political economist, contributed theory of
comparative advantage in his book 'Principles of Political Economy and Taxation'. This
theory of comparative advantage, also called comparative cost theory, is regarded as the
classical theory of international trade.
David Ricardo theory demonstrates that countries can gain from trade even if one of
them is less productive then another to all goods that it produce.
David Ricardo stated a theory that other things being equal a country tends to specialise
in and exports those commodities in the production of which it has maximum
comparative cost advantage or minimum comparative disadvantage. Similarly the
country's imports will be of goods having relatively less comparative cost advantage or
greater disadvantage.
Ricardo's Assumptions:Ricardo explains his theory with the help of following assumptions:1.
There are two countries and two commodities.
2.
There is a perfect competition both in commodity and factor market.

3.
Cost of production is expressed in terms of labour i.e. value of a commodity is
measured in terms of labour hours/days required to produce it. Commodities are also
exchanged on the basis of labour content of each good.
4.
Labour is the only factor of production other than natural resources.
5.
Labour is homogeneous i.e. identical in efficiency, in a particular country.
6.
Labour is perfectly mobile within a country but perfectly immobile between
countries.
7.
There is free trade i.e. the movement of goods between countries is not
hindered by any restrictions.
8.
Production is subject to constant returns to scale.
9.
There is no technological change.
10.
Trade between two countries takes place on barter system.
11.
Full employment exists in both countries.
12.
There is no transport cost.
Ricardo's Example:On the basis of above assumptions, Ricardo explained his comparative cost difference
theory, by taking an example of England and Portugal as two countries
& Wine and Cloth as two commodities.
As pointed out in the assumptions, the cost is measured in terms of labour hour.
Portugal requires less hours of labour for both wine and cloth. One unit of wine in
Portugal is produced with the help of 80 labour hours as above 120 labour hours
required in England. In the case of cloth too, Portugal requires less labour hours than
England. From this it could be argued that there is no need for trade as Portugal
produces both commodities at a lower cost. Ricardo however tried to prove that
Portugal stands to gain by specialising in the commodity in which it has a greater
comparative advantage. Comparative cost advantage of Portugal can be expressed in
terms of cost ratio.

Q.3) Regional integration is helping the countries in growing their trade.

Discuss this statement. Describe in brief the various types of regional
integrations.
Ans.) Regional integration can be defined as the unification of countries into a larger
whole. It also reflects a countrys willingness to share or unify into a larger whole. The
level of integration of a country with other countries is determined by what it shares
and how it shares. Regional integration requires some compromise on the part of
participating countries. It should aim to improve the general quality of life for the
citizens of those countries.
TYPES OF REGIONAL INTEGRATION:
1. Preferential trading agreement
Preferential trading agreement is a trade pact between countries. It is the weakest type
of economic integration and aims to reduce taxes on few products to the countries who

sign the pact. The tariffs are not abolished completely but are lower than the tariffs
charged to countries not party to the agreement. India is in PTA with countries like
Afghanistan, Chile and South Common Market (MERCOSUR). The introduction of
PTA has generated an increase in the market size and resulted in the availability and
variety of new products.
2. Free trade area
Free Trade Area (FTA) is a type of trade bloc and can be considered as the second stage
of economic integration. It comprises of all countries that are willing to or agree to
reduce preferences, tariffs and quotas on services and goods traded between them.
Countries choose this kind of economic integration if their economic structures are
similar. If countries compete among themselves, they are likely to choose customs union.
The importers must obtain product information from all suppliers within the supply
chain in order to determine the eligibility for a Free Trade Agreement (FTA). After
receiving the supplier documentation, the importer must evaluate the eligibility of the
product depending on the rules pertaining the products. The importers product is
qualified individually by the FTA. The product should have a minimum percentage of
local content for it to be qualified.
3. Custom union
Custom Union is an agreement among two or more countries having already entered
into a free trade agreement to further align their external tariff to help remove trade
barriers. Custom union agreement among negotiating countries may encompass to
reduce or eliminate customs duty on mutual trade. Under customs union agreement,
countries generally impose a common external -tariff (CTF) on imports from nonmember countries. Such common external tariff helps the member countries to reap the
benefits of trade expansion, trade creation and trade diversification. In the absence of
common external tariff, there is a possibility that countries with lower custom duties
may become conduits for members which has higher custom duty. Custom union is
third stage in level of economic integration and is followed only after free trade
agreement among participating countries.
4. Common market
Common market is a group formed by countries within a geographical area to promote
duty free trade and free movement of labour and capital among its members. European
community is an example of common market. Common markets levy common external
tariff on imports from non-member countries.
A single market is a type of trade bloc, comprising a free trade area with common
policies on product regulation, and freedom of movement of goods, capital, labour and
services, which are known as the four factors of production.
5. Economic union
Economic union is a type of trade bloc and is instituted through a trade pact. It
comprises of a common market with a customs union. The countries that are part of an
economic union have common policies on the freedom of movement of four factors of
production, common product regulations and a common external trade policy.

The purpose of an economic union is to promote closer cultural and political ties while
increasing the economic efficiency between the member countries.
6. Political union
A political union is a type of country, which consists of smaller countries/nations. Here,
the individual nations share a common government and the union is acknowledged
internationally as a single political entity. A political union can also be termed as a
legislative union or state union.

Q.4) Write a short note on:

a) GATS (General Agreement on Trade in Services)
b) ILO (International Labour Organisation)
Ans.)
a) GATS (GENERAL AGREEMENT ON TRADE IN SERVICES)
The GATS is a multilateral agreement under the WTO that was negotiated in the
Uruguay Round and came into effect in 1995. It was essentially inspired by the same
objectives as the General Agreement on Tariffs and Trade (GATT), which is its
counterpart in merchandise trade:

Creating a credible and reliable system of international trade rules

Ensuring fair and equitable treatment of all participants (principle of nondiscrimination)

Stimulating economic activity through guaranteed policy bindings

Promoting trade and development through progressive trade liberalization.

GATS applies in principle to all service sectors, with two exceptions: Article I (3) of the
GATS excludes services supplied in the exercise of governmental authority. These are
services that are supplied neither on a commercial basis nor in competition with other
suppliers. Cases in point are social security schemes and any other public service, such
as health or education that is provided at non-market conditions. Still this article is
commonly discussed, as further described in chapter 4. Further, the Annex on Air
Transport Services exempts from coverage measures affecting air traffic rights and
services directly related to the exercise of traffic rights.
GATS consists of three parts

the framework, containing the general principles and rules.

national schedules, which list a countrys specific commitments on access to their

domestic market by foreign providers.

Annexes, in which specific limitations for each sector can be attached to the
schedule of commitments.

Through negotiating rounds, countries choose the sectors and modes of services trade
they wish to include in their schedules as well as the limitations to market access and
national treatment they wish to maintain. It is only by reference to the individual
country schedules that one can know not only the service sector(s) that will be
committed, but also the extent of commitment a country is prepared to make. There is
no minimum requirement as to its coverage, so that WTO members are free to leave
entire sectors out of their GATS commitments, or they may choose to grant market
access only in specific sectors, subject to the limitations they wish to maintain. Moreover
governments may limit commitments to one or more of the four recognized modes of
supply. Commitments may also be withdrawn or renegotiated.
The agreement contains a number of general obligations for all services, the most
important of which is the Most Favoured Nation (MFN) rule. Apart from these
obligations each member state defines its own obligations through the commitments
undertaken in its schedule. Market access and national treatment obligations for
instance apply only to the sectors in which a country chooses to make commitments.
b) ILO (INTERNATIONAL LABOUR ORGANISATION)
ILO stands for the International Labour Organization It came into existence on April
11, 1919 and was associated with the League of Nations. Now it is working in cooperation with U.N.O. as its specialized agency. All members of the U.N.O.
automatically become the members of the I.L.O. Besides, the I.L.O. can admit certain
nations of its own accord. It has its own Charter, which was renewed and modified in
1954.
ROLE OF ILO
For the achievement of these purposes I.L.O. is concerned with:
(1) regulation of hours of work,(2) the prevention of unemployment, (3) provision of
adequate living wages, (4) protection of workers against sickness, diseases, injury
arising out of their employment, (5) the protection of children and women, (6) provision
for old age and injury, (7) organization of technical and vocational education, (8)
provision for child welfare and maternity protection, (9) housing and other facilities for
workers.

Q.5) What is the difference between domestic and international accounting

and how will you measure this difference?
Ans.) DOMESTIC VS. INTERNATIONAL ACCOUNTING
Different countries whether domestic or international, have different accounting
standards. A common belief is that these differences reduce the quality and importance
of accounting information. Accounting standards determine the financial reporting

quality and provides separately verified information about an organisation's financial

performance to investors creditors.
Though there are differences in accounting methods, domestic businesses are not
affected. The accounting system of a domestic organisation must meet the specialised
and regulatory standards of its home country. But, an MNC and its subsidiaries must
meet differing accounting and auditing standards of all the countries in which it
operates. This leads to a need for comparability between businesses in the group. In
order to successfully manage and organise their operations, local managers require
accounting information, which should be prepared according to the local accounting
concepts and denomination in the local currency. Yet, for financial controllers, to
measure the foreign subsidiarys performance and worth, the subsidiarys accounts
must be translated into the organisations home currency. This translation is done using
accounting concepts and measures, which are detailed by the organisation. Investors
worldwide look for the highest possible returns on their capital, in order to interpret the
track record, though they use a currency and an accounting system of their own. The
organisation also has to pay taxes to the countries where it does business, based on the
accounting statements prepared in these countries. Besides this, when a parent
corporation tries to combine the accounting records of its subsidiaries to produce
consolidated financial statements, extra complexities occur because of the changes in the
value of the host and home currencies.
There are many differences between International Accounting Standards (IAS) and
Domestic Accounting Standards (DAS). On the basis of difference between the two, two
indices, namely 'divergence' and 'absence', are created. Absence is the difference
between DAS and IAS; the rules on certain accounting issues are missed out in DAS and
covered in IAS. Divergence represents the differences between DAS and IAS; the rules
on the same accounting issue differ in DAS and IAS.
MEASUREMENT OF DIFFERENCES BETWEEN IAS AND DAS
You can measure the differences between IAS and DAS in the following way:
Literature on international accounting differences Referring to earlier reports on
international accounting could give more information about the subject. Most of the
earlier reports understand international accounting differences as various options
adopted by nations for the similar accounting problems, which correspond to
divergence concept.
Framework

of analysis Links between variations in accounting standards and

financial reporting quality of various countries could be clearly seen from the reports
published earlier. We should consider the institutional determinants of accounting
differences such as legal origin, governance structure, economic development, and
equity market.
NATIONAL DIFFERENCES IN ACCOUNTING
One of the major problems encountered by an international business is lack of
consistency in accounting standards in various countries. Organisations show opposite
financial results because of the differences in accounting standards.
Differences in accounting standards exist because of diverse political, legal, economic,
and cultural systems of the countries. Accounting standards and practices are also

prejudiced by the sources of capital used to fund business. Figure 9.1 shows the
influencing factors on a countrys accounting practices.

You might think that accounting systems in the world were uniformly influenced by a
few historical developments. There could be some similarities but no two countries and
their systems are alike. Accounting systems are developed suiting the countrys specific
needs. It is a fact that different countries evolved in different ways. Accounting systems
were influenced by private ownership, industrialisation, inflation, and so on. When
there are differences in economic conditions, it is not surprising to find differences in
accounting practices. However, there are other influencing elements apart from
economic factors. These are legal systems, educational systems, socio cultural features,
and political systems. These also influence the need for accounting, speed and direction
of its development. Due to the increasing trend in globalisation of business,
understanding various accounting systems is important.

LEGAL SYSTEMS
Law system is divided into civil law and common law in countries worldwide. In
countries like US, Australia, UK and New Zealand accounting procedures originate
from decisions of independent standards setting boards, such as US Financial
Accounting Standards Board (FASB). Each board works with professional accounting
groups. In countries, which follow common law, accountants follow Generally Accepted
Accounting Principles (GAAP), which provides a 'true and fair view' of the
organisation's performance, based on the standards approved by these professional
boards. Many civil law countries also have a similar approach as that of GAAP.
Functioning within the limitations of these standards, accountants have freedom to
implement their professional judgment in reporting a 'true and fair' representation of
the organisation's performance.

Countries following civil law are likely to codify their national accounting measures and
standards. In these countries, accounting practices are determined by the law. To assist
the legal role, all business accounting records must be officially registered with the
government.
The way in which the accounting practices are imposed depends on the legal system.
Most of the developed countries depend on both private and public enforcement of
business performance, though the public or private combination varies from country to
country. The difference of legal system is a major restriction in the growth of accounting
standards. In some countries, the accounting policies are restricted to detailed
legislation, which is passed by governments. This restriction forms a major problem to
international accounting bodies that are created to increase harmonisation of national
accounting frameworks. This is because, such government-controlled regimes are
inclined to be less flexible, and perceive private sector influences as less acceptable.

Q.6) Discuss the various payment terms in international trade. Which is the
safest method and why?
Ans.) UNDERSTANDING PAYMENT MECHANISM IN FOREIGN TRADE

For successfully conducting international trade in todays competitive international

environment, it is essential for the exporters to offer attractive sales terms and payments
to importers so as to woo them for business. One of the major concerns for en exporter
is to choose the appropriate payment method in order to minimise risks related to
payments of trade transaction. Payment should be done after understanding the
economic scenario of importers country, importer credit worthiness and to certain
extent accommodating the needs of the importer. Exporter can choose any mode of
payment depending on risk perception, size of deal, importer credit worthiness and
economic situation in importers country.

SAFEST METHOD OF PAYMENT

In case of domestic business, main factor driving salesmans decision criteria for
realisation of payments is based on the buyer's ability, willingness and honesty to make
payment coupled with exporter trust on buyer. Usually sale in domestic market are on
open account and in certain cases it can be on cash in advance. Such methods also
depend on buyers and sellers power to negotiate and nature of competition such as:
Monopoly condition will favour to the seller.
Perfect competition will favour to the buyers.
However, in case of international trade, exporter has to take more precautions as some
methods of payment are unique and usually used in case of international trade only.
Key consideration while deciding upon a payment term in foreign trade is elaborated as
under.

A. Some of the major risks involved in realisation of payments in international trade

can be either at importer, importer bank and importers country such as insolvency and
default by importer, insolvency of importer bank and exchange control restrictions,
inconvertibility issues with importers country.
B. Some of the risks involved in international trade in Liberalisation, Privatisation and
Globalisation era can be under control of exporter but some cannot be. For example,
credit risk which arises from a change in the credit worthiness of importer can be
covered by ECGC. Exchange Rate Fluctuation risk can be covered by hedging the
currency invoiced in forward contract market but risk such as Force Majeure which
arises from change in policy of a country, which in turn affects the trade capability, and
by a natural disaster cannot be anticipated in complex international environments1.

Other risks mainly arises due to a difference in culture, law, or language are also beyond
exporter control.

C. International Trade Operations offers different types, quantum and location of risks,
thereby confusing the exporter with uncertainty over realisation of payments and
timing of payments between the exporter and importer2.
D. For exporters, any international sale will be equivalent to gift until he has not
realised the payment from the importer. For importer any payment is donation until he
has received the cargo as sent by exporter.
E. Exporter will always be interested to receive the payments as soon as he/she sends the
goods to importer through shipment. Importer will be willing to delay the payments as
he/she will be interested to sell these goods in markets and then make the payments to
exporter.
F. However, the selection criteria for mode of payment is based on mutual negotiation of
exporter and importer and in LPG&M era there are other parties such as bank, credit
insurer involved which helps in exporter in financing and assuring about the payment.
G. Though safe mode of payment such as L/C is getting popular, this is not usually used
by small exporters and importers due to heavy transaction costs. For example, L/C is
used as mode of payment only in 14% trade transactions due to heavy transactions
costs3.
H. Exporter can alternatively divide the payment category into secure mode and
unsecure mode. The secure mode of payment for exporter is cash in advance and letter
of credit. Unsecure mode of payment are Open Account, Documents against Acceptance
and Documents against Payments.