1. What is International Business? How does it differ from domestic business?

Ans:- In the post-independence era, Indian entrepreneurs concentrated on domestic operations

for more than half-century and the surplus production was exported. The physical movement of
goods, called EXPORT, cannot represent International business. International business is
defined as “any commercial transaction taking place across the boundary lines of a sovereign
entity”. It may take place either between countries or companies, or both. Private companies
involve themselves in such transactions for revenue, profit, and prosperity. If governments
are involved, they need to maintain their image, dependency, and economic growth.
Sometimes, economic ties are strengthened through such transactions. These transactions
include investments, the physical movements of goods and services, and the transfer of
technology and manufacturing. Today, every company, whether small or large, a single entity or
a partnership, a joint stock or government-owned, is determined to expand internationally. The
slogan “Export or Perish” has now become “Internationalize or Perish”.
Fundamental differences between DOMESTIC BUSINESS OPERATIONS AND INTERNATIONAL
BUSINESS OPERATIONS

Many well-known business units are highly successful in their home countries. However, they
are not able to face challenges abroad. On the other hand, there are organizations that do very
well in international business, but lose out in the local arena. There are a number of
organizations that do both domestic and international business successfully by properly
allocating the right resources in the right countries. These organizations are quick to see the
advantages and disadvantages involved in both operations. If business is slow in the home
country, they concentrate more on international business, and if the risk is high in international
business, they focus their attention on the domestic front. Understanding the differences and
deciding on policies and strategies enables organizations to succeed or fail.

There are certain similarities between domestic and international business in terms of broad
objectives and goals of the company, namely:

1. Generating revenue - either by creating opportunities or by optimizing strengths

2. Building a corporate image
3. Focusing on customer satisfaction and building loyalty as patronage buyers
4. Carrying out their operations while respecting and adhering to local regulations
5. Generating employment opportunities
6. Both are subject to a set code of conduct and ethics that includes corporate
governance.
7. Mass production through cost reduction and achieving economies of scale
8. Building a strong network in order to make products and services available in any part
of the nation or world
9. Adapting new standards and changes in style and function
 At the same time, there are major macro-level differences. These are analyzed below,
under various parameters.

DOMESTIC BUSINESS VERSUS INTERNATIONAL BUSINESS

Dimension Domestic Business Operations International Business Operations

The economic, political, legal, socio- The environment is not fully known.
cultural, competitive, and Innumerable hidden factors that may
1. Environment
technological environments are emerge any time and pose problems.
known They will lead to pitfalls.
Can be worked out for the short- Only long-term planning and strategy
2. Plan and strategy term and carried forward to the will work. Strategic inputs are required
long-term in multiples.
The maximum domestic competitive
3. Competitive International competitive forces play a
forces operate and one can
forces and their vital role and it is difficult to understand
understand their movements as
intensity their motive and movement
they are visible
Local currency is used for
Transactions are carried out in various
transactions. Costing, pricing,
currencies. Fluctuations in cross-
revenues, and margins are
4. Currencies and currency movement and associated
computed in a single currency.
their movements risks are common. Currency fluctuation
Volatility may have a minimum
influences pricing, as well as costing and
impact on the business in the short
investment decisions.
term. One can overcome this easily.
Comparatively, one can predict Very difficult to predict and risks may
future risks and shocks, and these crop up at any time due to political
5. Business risks
will not have a major impact on the situations, the society itself, as well as
businesses with strong background. several other unknown factors.
It is reasonable and easy to conduct Very expensive and difficult to conduct.
business research and to demand Reliability criteria depend on individual
6. Research
analysis and customer surveys. It is countries and there is no uniformity in
also reliable. the output and findings.
Due to past laurels and established
Multilingual, multi-strategic, and
systems, corporations can succeed
multicultural human resources, which
7. Human even if the human resources have
should be able to withstand large risks.
resources minimum skills and knowledge.
Every individual is a profit centre and
Team commitments are evaluated
hence, accountable.
and appraised
Narrowed down to work in a single
Broadened to cover many countries.
8. Organizational country with a steady growth
Geographic and cultural diversity may
vision and objective objective. Each one will easily
influence the vision and objective.
understand the vision and objective.

Adapted to the local environment as
per the requirements of the
9. Product and
domestic customers’ affordability,
usage
beliefs, values, cultural elements
and buying behaviour.
Only local regulations are fully
applicable to conduct business.
10. Legal aspects There is minimum adherence to
international regulations related to
IPR.
Depending on the size of the
business, one can start with a
11. Investment and minimum investment. Involvement
Sourcing of regulatory bodies is minimal.
Individual ability and repayment
terms determine the funds.
A majority of companies use cost-
12. Pricing strategy plus margin pricing or competitive
pricing.
The business house can use its
13. Distribution discretion to select any channel to
channels reach the customer. No restriction
exists here.
Advertising, personal selling and
other promotional methods are not
14. Promotion restricted through a strict legal
framework if they are not socially
objectionable.
Domestic players are involved in all
15. Logistics activities. The cost of logistics is very
high locally.
Varies from country to country, subject
to regulations. This is especially true for
consumer and medicinal items.
Standardization, adaptability, usage
pattern, and warranties are parts of the
product
International regulations and host
country regulations are applicable.
Advanced countries impose strict
regulations compared to LDCs. Strict
adherence to contractual obligations is
common.
All overseas operations except exports,
call for huge investments to set up and
expand the business in many countries.
Special regulatory bodies are involved
in the process since foreign currency is
transacted.
Companies use marginal cost pricing,
transfer pricing, or competitive pricing
to succeed.
Government or market practice governs
the distribution channel. Cash and
carry, shopping malls, and mail-order
services are becoming popular in
international business.
Different countries have different
restrictions. For example,
advertisements for liquor and cigarettes
are not permitted in some countries
and campaigns using female models are
banned in others.
International players with advanced
technology and systems are involved.
The cost is proportionately low for
physical movements.

Some business groups like Adanis started overseas operations without any link to domestic
operations right from the beginning. The Tata Group established a good name in their home
country and gradually moved to other countries. For companies in IT space, such as Wipro or
Infosys, the major focus is on overseas operations. All the companies cited above are successful
in their own right, but the strategies and operation systems differ from country to country.
 2. Discuss the prime motive behind companies and nations going in for
international business.
Ans :- REASONS TO ENTER INTERNATIONAL BUSINESS

All organizations, irrespective of their size, are keen to enter into international business.
Established companies are expanding their business. Many countries encourage trade and the
removal of strangulating trade barriers. This motivates companies to aggressively multiply their
targets. The governments of various countries are also determined to make their economy
grow through international business that has become an inevitable part of their economic
policy. The objective behind international business can be looked at:

1. From an individual company’s angle

2. From the government angle

From an individual company’s angle

All companies have products that pass through different stages of their life
cycles. After the product reaches the last stage of the life cycle, called the
declining stage, in one country, it is important for the company to identify other
countries where the whole cycle process could be encashed. For example,
Enfield India reached maturity and the declining stage in India for the 350cc
Managing the
motorcycle. The company entered Kenya, the West Indies, Mauritius, and other
product life cycle
international destinations where the heavy-engine two-wheeler became
popular. The Suzuki 800cc vehicle reached the last stage of its life cycle in Japan
and entered India in the early 1980s, where it is still doing well to this day. HP
laptops are moving all the developing countries the moment they reached
maturity in the U.S. market.
Even if companies expand their business at home, they may still look overseas
for new markets and better prospects. For example, Arvind Mills expanded
Geographic expansion their business by either setting up units or opening warehouses abroad.
as a growth strategy Ranbaxy’s growth is mainly attributed to yearly geographic expansion to new
territories. Arabindo Pharma, Cipla, and Dr. Reddys follow the same pattern.

The younger generation of business families have considerable International

exposure. They are willing to take risks and challenges, as well as create
The adventurous
opportunities for their business. Laxmi Mittal has emerged as the steel king of
spirit of the younger
the world, and Vijay Mallya of the UB Group took a major risk in setting up
generation
operations in South Africa. Kumar Birla expanded to Australia and Europe
through acquisitions.
Corporate ambition Every corporation in the country has strategic plans to multiply its sales
turnover. If some of the ventures fail, others will offset the losses because of
multi-location operations. For example, to this day, Coca Cola is still not earning
 any profits in a number of countries, but this will not affect the company
because more than a hundred countries are contributing to offset those losses.
Kelloggs cannot think of making profits in India for another five years, but they
are ambitious to be visible and gain future revenues.
Some companies have outstanding technologies through which they enjoy core
competencies. There is a need for such technologies in all countries. Biocon,
Infosys, and Gharda chemicals are known for their core competencies in
Technological
biotechnology, IT, and pesticides respectively, and a huge demand exists
advantage
throughout the world for these technologies. Thermax, Ion Exchange, Bharat
Heavy Electricals, and Larsen & Toubro have marched ahead in International
business
Prior to profit and revenue generation, many companies first build their
corporate image abroad. Once the image is built, generating revenues is a
comparatively easy task. Samsung and LG built their image in India for the first
Building a corporate three years and their generation of revenue and profits has been considerable,
image as they have expanded to semi-urban and rural India as well. Today, their
market share and penetration levels have gone far ahead of other players in
India.

Companies that are involved in international business enjoy fiscal, physical, and
infrastructural incentives when setting up their business in a host country. The
Incentives and
Aditya Birla Group enjoyed such incentives in Thailand and Indonesia. All such
business impact
incentives contribute to the company so that it may enjoy multiple advantages,
such as economies of scale, access to import inputs, competitive pricing, and
aggressive promotion.
Many companies have a highly productive labour force. Their unique skills may
not be available throughout the world. Manufacturing units in India have
consistently performed well, whether in the diamond, handicraft, woodwork, or
leather industry. Companies nurture the skills of the artisans and win world
Labour advantage
markets. Knitwear, handlooms, embroidery, metal ware, carpet weaving,
cashew processing, and seafood call for a cost-effective labour force. India is
endowed with such skills.

Many companies have entered into business abroad, seeing unlimited

opportunities. National foreign trade policies emphasize focus markets.
New business
Enormous amounts of growth potential are untapped in Latin America, Sub-
opportunities
Saharan Africa, CIS countries, and China.

Current approvals of Special economic zones, Agrizones, and Technology parks

Emergence of SEZ’S, by the Ministry of Commerce & Industry give new dimensions to international
EOU’S, AEZ business. The companies setting up units in SEZ’s enjoy innumerable benefits
and competitiveness.
 From a Government Angle

Earning valuable Foreign exchange earning is necessary to balance the payments for
foreign exchange imports. India imports crude oil, defence equipment, essential raw
materials, and medical equipment, the payments for which must be made
in foreign exchange. If the exports are high and imports are low, this
indicates a surplus balance of payment. On the other hand, if imports are
high and exports are low, this indicates an adverse balance of payment,
which all economies would want to avoid. A vast majority of the nations in
the world are facing an adverse balance of payment
Interdependency of From time immemorial, nations have depended on each other. Even
nations during the era of the Indus valley civilization, Egypt and the Indus Valley
depended on each other for various items. Today, India depends on the
Gulf regions for crude oil and in turn, the Gulf region depends on India for
tea, rice, and other such commodities. Developed countries depend on
developing countries for primary goods, whereas developing countries
depend on developed countries for value-added finished products. No
single country is endowed with all the resources to survive on its own.
Trade theories and The theories of absolute advantage, comparative advantage, and
their impact competitive advantage, which have been propounded by classical
economists, indicate that a few nations have certain advantages with
respect to resources. The resources may be in the form of labour,
infrastructure, technology, or even a proactive government policy. Such
theories are remaining as foundations until today, for international
business practices with few changes and trends.

Diplomatic relations Diplomacy and trade always go hand in hand. Many sovereign nations
send their diplomatic representatives to other countries with the intent to
promote trade in addition to maintaining cordial relations. Indian
diplomats in Latin America have done a remarkable job of promoting
India’s business in the 1990s. Indian embassies and high commissions in
all countries around the world play a catalytic role of promoting trade and
investment.
Core competency of Many countries are endowed with resources, which are produced at an
nations optimum level. Such countries can compete well anywhere in the world.
Rubber products from Malaysia, knitwear from India, rice from Thailand,
and wool from Australia are a few examples. Competing with a focused
competency in any major resource or technology gives core competency
status. India’s core competency in IT is known throughout the world
Investment for Over the years, all countries have invested huge amounts of money on
infrastructure infrastructure by building airports, seaports, economic zones, and inland
container terminals. If the trade activities do not increase, the country
cannot recover the amounts invested. Hence, the government fixes
 targets for every infrastructure unit, as well as a time frame to achieve it.
Economies like Mauritius, Hong Kong, Singapore, Malta, and Cyprus invest
in trade-related infrastructures in order to elevate themselves to be
foreign trade-oriented economies. Infrastructure and international
business are the two eyes of a growing economy.

National image A new era has emerged from conquering countries by sword to winning
them by trade. A businessman gives priority to the image of the country
he belongs to. We come across products with labels such as “Made in
China”, “Made in Japan”, and “Made in India”. Businessmen from India,
China, and Japan bring credentials to their country. When L.N. Mittal
operates in Indonesia, Kazakhstan, or Trinidad, he is perceived by the
people as Indian. The stigma cannot be detached.
All developing countries announce their trade policies. A clear road map is
drafted and given to promotional bodies so that timely implementation is
Foreign trade
possible. In the past, every trade policy in India had its agenda and action
policy and targets
plans, starting from the import control order in 1947. All the trade policies
had a threefold set of objectives in their agenda: production, promotion,
and competitiveness.
National targets By the year 2010, India aims to have a 2% share of the global market from
the current level of 1%. By the years 2009-2010, our trade status should
cross $500 billion.
WTO and international The apex body of world trade, the WTO, a free, transparent, and
agencies regulatory body, upholds provisions related to the elimination of tariffs
and non-tariff barriers. The International Bank for Reconstruction and
Development (IBRD), popularly called the World Bank, extends financial
assistance on a soft loan basis in order to assist developing countries in
their infrastructure and industrial development. The International
Monetary Fund (IMF) maintains currency stability in various countries
through regulatory mechanisms. Many more organizations, such as the
International Maritime Organization, the International Standard
Organization, the International Telecommunication Union, and the
International Civil Aviation Organization are major catalysts to promoting
trade between nations. Over the past few years, their role in the
promotion of trade, especially amongst developing economies has been
unprecedented.
 3. What is Multinational Corporation? Classify MNC’s depending upon their structure and
country of origin.

Ans: Read nikhilesh n yenkie notes jo samjh aaya wo likhana.

4. Discuss FDI and strategies to attract FDI from the investor’s point of view.

Definition and Importance

Investment is “the flow of funds from one destination to another” for any activity, including
industrial development, infrastructure, and manufacturing. When the investment goes from the
home country to another country, it is defined as ‘investment outflow’ and when foreign
investment comes in from other countries to the home country, it is termed ‘investment
inflow’. Both inward and outward movements are encouraged in the majority of countries
across the world.

All developing countries produce primary goods, and to exploit them, financial resources
are necessary. Developed countries are also in need of Foreign Direct Investment (FDI) for
modernization and the further development of technology.

The current FDI is related to investment in developing countries, and Less Developed
Countries (LDCs) require huge investments in other activities, such as infrastructure, healthcare,
housing, and power generation.

With the liberalization of the Indian economy, a large Indian market is being opened up
to foreign investors. Essentially, FDI represents foreign assets in domestic structures,
equipments, and organizations. It does not include foreign investment in stock markets. Foreign
direct investment is useful to a country if the focus is more on projects rather than investments
in the equity of companies, because equity investments are potentially “hot money” that can
leave at the first sign of trouble. Crises in South Korea, South Africa, and Argentina were
partially due to such problems.

When a firm invests directly in facilities in a foreign country, it is considered FDI. It

involves an active control of the investment in many cases. Such investments are not really
determined by the level of stock ownership in certain cases. Many multinational enterprises
become involved in FDI with the ultimate objective of reaping short term as well as long term
benefits. Ownership may become transnational, i.e., ownership in more than one country.
Factors influencing FDI are related to increasing business opportunities across national borders
and their involvement could be in the following functional areas:
 Production

 Marketing / services

 Research and development

 Raw materials or other resources

The parent company maintains direct managerial control, but the degree of control may
depend on the type of country and company policy. Prior to their investment decisions, it is
necessary for a company to carry out a risk analysis. MNCs do not develop blind faith in any
country. A team of experts analyze risks carefully and invest gradually.

CHARACTERISTICS OF FDI

FDI is an activity by which an investor, who is a resident in one country, obtains a lasting
interest in, and is a significant influence on, the management of an entity in another country.
This may involve either creating an entirely new enterprise, a so-called “Greenfield”
investment, or more typically, changing the ownership of existing enterprises via mergers and
acquisitions. Other types of financial transactions between related enterprises, such as
reinvesting the earnings of the FDI enterprises or other capital transfers, are also defined as
foreign direct investment.

 Follow Competitors – Oligopolistic industries and the interdependence of a few major

competitors force a strategic approach of following one’s competitors.

The American Motor Company (AMC) invested in the Shanghai Motor Company in China. All
others were on the beeline, including Japanese and South Korean companies besides other
American companies to invest in China.

 International Product Life Cycle – Reduces costs by shifting production to developing

countries. For instance, Essel Propack moved to China.

 Location – Specific advantages make FDI easier than exporting or licensing. Mahindra
tractors are manufactured in North America.

 Contract manufactures – Brings down the cost of manufacturing and also contributes to
consolidating competitive sourcing and competing in the world market. Honda Motors
manufactures its vehicles in Europe.

 Assured return on investment – R&D centres and futuristic projects enable the investor to
achieve great successes through high revenues. Roseh products invests huge amounts of
 money in Genentech in California to get innovative products to their outlets around the
world.

More than two thousand multinationals from the U.S.A. and Europe have invested in
Chinese Special Economies Zones and Export Processing Zones. Indonesia, Thailand, the
Philippines, and Malaysia have now also become attractive destinations. Latin America, Brazil,
Argentina, and Columbia are also beginning to attract huge investments. Malta, Cyprus,
Panama, Mans Island, and Mauritius are growing only through Foreign Direct Investment, in
manufacturing, trading, and other forms. The reputation of such destinations depends on their
ability to attract investments through their policies and hassle-free industrial climates.

1. POLITICAL RISKS
2. ECONOMIC RISKS

INVESTMENT PATTERNS
BENEFITS AND COSTS OF FDI

Benefits for Host Countries

 Capital: Multinational enterprises invest in long-term projects, taking risks and repatriating
profits only when the projects yield returns.

 Technology: The effects of technology emerge especially when the liberalization of the
investment flow drives a more rapid rate of technology development, diffusion, and
transfer. Such processes may involve the transfer of physical goods and/or the transfer of
knowledge. A vast majority of economic studies dealing with the relationship between FDI
and productivity and economic growth have found that the transfer of technology through
FDI has contributed positively to productivity and economic growth in host countries.

 Market access: Investors can provide access to export markets. The growth of exports
themselves offers benefits, such as technological learning and competitive stimuli. They can
transform normal customers into intellectual customers.

 Increase in domestic investment: The increase in FDI inflow is associated with a manifold
increase in the investment by national investors.

 Export promotion: It seems that FDI could be related to export trade in goods, and the host
country can benefit from an FDI-led export growth.

 Generating employment: FDI leads to the generation of both direct and indirect
employment opportunities in the host country.

 Infrastructure: In order to facilitate and enable investors to perform well, the host country
studies other competitive destinations and enhances the level of infrastructure to match
the requirements of the investors. India’s Silver Valley in Bangalore, Hitech City in
Hyderabad, and Tidel Park in Chennai have revolutionized the areas through connectivity.

 Social effects: Countries with closed economies have started to liberalize their economies
through market reforms that are favourable to foreign investors through privatization,
property rights, and liberal labour policies. Society at large benefits as employment,
infrastructure, literacy, and health care are bound to improve as an impact of FDI inflow.

 Formation of Clusters: Groups of similar projects and manufacturing centres are formed in a
specific location by way of providing common production, R&D, training, and pollution
control systems to a group of competing companies. In Italy, Brazil, and India, such clusters
have worked wonders.

 Spill over: Statistical evidence exists across the world to prove that FDIs have a number of
spill overs. Business history is replete with examples where individuals who trained with
companies started their own ventures and became successful leaders in their respective
 fields. Silicon Valley in the U.S. provides many examples of such spin-offs. Intel is a spin-off
of Fairchild. The main competitor to Intel today is its own spin-off. Even in India, the
machine tool industries of Ludhiana and Bangalore are spin-offs of yesteryears’ popular
companies, such as SKF, Bosch and MICO.

Cost for the Host Country

 The investing companies may not serve the host country’s interests.

 There is an outflow of earnings as they are repatriated to their home country.

 There is an import of substantial inputs from the investor’s country.

 Companies will hire expatriate managers for management positions.

 The investing country has controlling technologies, for which it charges a huge technology
fee.

 FDI can even wipe out local firms. Infant industries and other home industries may suffer if
they cannot compete. Home-country producers do not have money power or the
technology to withstand the onslaught of investors.

Benefits for Home Country

 Inward flow of earnings on a long term basis.

 High salaries for employees.

 Exposure to the foreign market.

Costs for the Home Country

 Initial capital outflow is extremely large.

 Exports may decrease.

 Imports may increase if FDI is intended to serve the home country.

 Employment will be lost to the home country population.

 Profits are repatriated abroad. They may not stay in the country for reinvestment.

 Major tax heavens will enjoy the money at the cost of home country.

MOTIVATIONS FOR FDI

 Exporting may not be feasible with high transportation costs and trade barriers.

 Companies with operations solely in the home country have a limited scope for prosperity,
and in order to grow more quickly, investing in fertile grounds outside is a strategic move.

 Ownership advantages are used to benefit from global expansion.

 Location-specific advantages are important at the time of selecting the right destination:

1. Availability of a low-cost labour force.

2. Abundant availability of natural resources that do not deplete.

3. The cost incurred in research and development can be recovered at the earliest by
identifying a suitable location.

4. The cost of transportation and logistics is low in the specific as well as neighbouring
countries.

STRATEGIES FOR INDIAN COMPANIES TO RAISE FUNDS

Foreign Investment through GDRs (Global Depository Receipts), ADRs (American

Depository Receipts), and FCCBs (Foreign Currency Convertible Bonds) are considers to be main
methods to generate funds for Indian companies.

Foreign Investments through GDRs, ADRs, and FCCBs are treated as Foreign Direct
Investments. Indian companies are allowed to raise equity capital in the international market
through the issuance of GDRs, ADRs, and FCCBs. These are not subject to any ceilings on
investment. A company seeking the Government’s approval in this regard should have a
consistent track record of good financial performance for a minimum of 3 years. This condition
can be relaxed for infrastructure projects, such as power generation, telecommunication,
petroleum exploration, and refining, ports, airports, and roads.

There is no restriction on the number of GDRs, ADRs, and FCCBs to be floated by a

company or a group of companies in a financial year. The reason for this is that a company
engaged in the manufacture of items covered under automatic route is likely to exceed the
percentage limits under automatic route, whose direct foreign investment after the proposed
GDRs/ADRs/FCCs is likely to exceed 50 percent / 51 percent / 74 percent as the case may be.
There are no end-use restrictions on GDRs/ADRs/ issue proceeds, except a ban on investment
in real estate and stock markets. The FCCB issue proceeds need to conform to external
commercial borrowing end-use requirements. Additionally, 25% of the FCCB proceeds can be
used for general corporate restructuring.
Use of GDRs

The proceeds of the GDRs can be used to finance capital goods imports, capital expenditures,
including the domestic purchase/installation of a plant, equipment and building, investments in
software development, prepayment or scheduled repayment of earlier external borrowings,
and equity investment in joint ventures and wholly-owned subsidiaries in India.

Restrictions

Investments in stock markets and real estate, however, are not permitted. Companies may
retain the proceeds abroad or may remit the funds into India in anticipation of the use of the
funds for approved end-uses. Any investment from a foreign firm into India requires the prior
approval of the Government of India.

FDI POLICY

The Government has put in place a liberal, transparent, and investor-friendly FDI policy,
wherein FDI up to 100% is allowed on the automatic route in most of the sectors, except in:

 Activities that attract industrial licensing.

 Proposals where the foreign collaborator has previous/existing ventures in India.

 Proposals for the acquisition of shares in an existing Indian company in favour of non-
residents.

 Activities where the automatic route is not available under the notified sectoral policy.

Salient Features of FDI Policy

In view of sectoral policies, security concerns, and other strategic considerations, restrictions,
such as equity cap, divestment condition, minimum capitalization, and lock-in periods have
been imposed on FDI in some sectors, including:

1. Agriculture and plantations, excluding tea plantations.

2. Real estate business, excluding integrated township development. However, NRI/OCB

investment is allowed for the real estate business.

3. Retail trade in any form.

4. Lottery, betting, and gambling activities.

5. Security services.

6. Atomic energy.

Non-Resident Indian Scheme

The general policy and facilities for Foreign Direct Investment as available to foreign
investors/companies are fully applicable to NRIs as well. Additionally, the Government has
extended some concessions for NRIs and Overseas Corporate Bodies in which NRIs have
invested more than 60%. These include:

 NRI/OCB investment in the real estate and housing sectors up to 100%:

 NRI/OCB investment in the domestic airline sectors up to 100%;

 NRI/OBC investment in the banking sector up to 74%.

Since 2001, the investments of NRIs in India have grown 20% every year until 2007 due to
liberal policies. Some NRIs from the Middle East and Europe invest huge amounts in real
estate and SEZs. The confidence level towards India has increased amongst NRIs, resulting
huge investments in India.

FDI Policy Initiatives

The FDI policy is reviewed on an ongoing basis and suitable liberalization measures are
taken. Some of the main initiatives undertaken are mentioned below.

 The issuance of equity shares has been allowed against a one-time fee or royalty and
External Commercial Borrowings received in convertible foreign currency, subject to
meeting all tax liabilities and procedures.

 The policy governing the payment of royalties under a foreign-technology collaboration

has been further liberalized by allowing all companies that have entered into foreign
technology agreements to pay royalties on the automatic route to a limit of 8% on
exports and 5% on domestic sales without any restrictions on the duration of the royalty
payments. This is irrespective of the extent of foreign equity in the shareholding.

 The foreign investment in the banking sector has been further liberalized by allowing an
FDI limit in private sector banks up to 74% under the automatic route including
investment by Foreign Institutional Investors.

 The foreign banks regulated by a banking supervisory authority in the home country and
meeting the Reserve Bank’s licensing criteria have been allowed to hold 100% paid up
capital to enable them to set up a wholly-owned subsidiary in India.
 An FDI up to 100% has been permitted in printing scientific and technical magazines,
periodicals, and journals, subject to compliance with all legalities and with the prior
approval of the Government.

 An FDI up to 100% has been permitted on the automatic route for the marketing of
petroleum products, subject to the existing sectoral policy and regulatory framework in
the oil marketing sector.

 An FDI up to 100% has been permitted on the automatic route in oil exploration in both
small- and medium-sized fields subject to and under the policy of the Government on
private participation in:

1. The exploration of oil.

2. The discovered fields of national companies.

 An FDI up to 100% has been permitted on the automatic route for petroleum product
pipelines subject to and permitted for Natural Gas/LNG pipelines with prior Government
approval.

 An FDI of 100% is permitted in any venture related to Special Economic Zones and 100%
export oriented units, as a developer, unit holder, or service provider. The same scheme
is applicable to agricultural zones and technology parks.

Country-wise distribution of approvals

In terms of the quantum of investment, Mauritius is the highest with 22.61% of total
approvals, followed by the U.S.A. (12.62%), the Netherlands (9.78%), the U.K.(8.28%), Japan
(5.68%), Singapore (3.59%), Germany (3.53%), Hong Kong (1.64%), Switzerland (1.39%), and
Belgium (1.27%). Other countries constitute the remaining 29.61% of approvals.

Sectoral distribution of approvals

The drug and pharmaceutical sector holds a major share of the approvals, followed by the
services sector, both financial and non-financial; electrical equipment, including computer
software and electronics; the food processing industry; telecommunications; and
automobiles. All together, these account for 60% of approvals. Other sectors account for
the remaining 40% of approvals.

Country-wise distribution of approvals

 In terms of the quantum of investment, Mauritius is the highest with 24.10% of total
approvals, followed by the U.S.A. (12.53%), Singapore (11.955%), the U.K. (7.93%), and the
U.A.E. (3.52%). Other countries constitute the remaining 39.97% of approvals.

State-wise distribution of approvals

The choice of location for projects depends on the commercial judgment of investors and is
based on factors such as market size, growth potential, the availability of skilled man-
power, the availability and reliability of infrastructure facilities, and fiscal and other
incentives provided by State Governments. The Central Government supplements the
efforts of the State Government by providing fiscal incentives for investments in the
infrastructure sector as well as high-priority industries, such as information technology,
through specific schemes such as the Growth Center Schemes, the Transport Subsidy
Schemes, the New Industrial Policy for the Northeast and other hill states, the Electronics
Hardware Technology Park (EHTP), the Software Technology Park (STP), Export Promotion
Zones (EPZs), and Special Economic Zones (SEZs). Maharashtra, Delhi, Tamil Nadu,
Karnataka, Gujarat, Andhra Pradesh, Madhya Pradesh, West Bengal, Orissa, and Uttar
Pradesh accounted for a major portion of FDI investment approvals during the cumulative
period, i.e. from August 1991 to March 2004.

FDI Promotion Initiatives

Several steps have been initiated during the year to facilitate increased FDI inflows, which
include, inter alia, the following:

 On the policy front: While our FDI policy is already very liberal, it is being further
progressively liberalized. Equity caps in the banking sector, the petroleum sector, and
the printing of scientific/technical magazines, periodicals, and journals have recently
been raised as a measure of further liberalisation of the policy.

 On the investment promotion front: The Government-organized “Destination

Authority”, which has been widely acknowledged as an effective problem-solving
platform has been actively involved to ensure the speedy resolution of investment-
related problems.

 On the competitiveness front: The Government has received reports regarding various
studies on the current potentials and risks involved in various business activities in India.
Different sectors with competitive advantages have been enlisted to attract foreign
investments.
  An exclusive website has been set up and hosted by the promotion authorities. It is
comprehensive and informative with online chat facilities. About 2000 investment-
related queries were replied to during the year.

 The Committee on Reforming Investment Approval and Implementation Procedures

submitted its reports on the simplification of investment procedures. Steps have already
been initiated to implement these recommendations. The department is coordinating
with other ministries to implement the same at all levels in the Central Government.

 Every state government takes a major initiative, such as Vibrant Gujarat, to bring in
investors from around the world, showcase their advantages, and encourage them to
invest.

The advantages of India as an investment destination rest on a number of factors, which

include a large and growing market; world-class scientific, technical, and managerial
manpower; cheap labour; an abundance of natural resources; a large English-speaking
population; and independent judiciary, among others. This has now been recognized by a
number of global investors who have either already established a base in India or are in the
process of doing so. Ongoing initiatives, such as the further simplification of legislation, de-
licensing, and the setup of regulatory authorities such as the Central/State Electricity
Regulatory Commissions is expected to provide the necessary impetus to increase FDI
inflows in the future.

Inflows of FDI would depend on domestic economic conditions, the FDI policy, world
economic trends, and the strategies of global investors. The Government, on its part, is fully
committed to creating strong economic fundamentals and an increasingly proactive FDI
policy regime.

The positive efforts of the Government towards improving the investment climate,
including the sustained improvement of infrastructure, have led to renewed optimism
about India as an emerging investment destination.

5. Discuss modern foreign trade theories and implications in trade

1. Theory of Mercantilism
1) The first theory of international trade emerged in England in the mid-16th century.
Referred to as mercantilism, its principle assertion was gold and silver were the
mainstays of national wealth and essential to vigorous commerce. At that time, gold and
silver were the currency of trade between countries; a country could earn gold and
silver by exporting goods.
2) The main tenet of mercantilism was that it was in a country’s hand to maintain a trade
surplus, to export more than it imported. By doing so, a country would accumulate gold
and silver and, consequently, increase its national wealth and prestige.
3) As the English mercantilist writer Thomas Mun put it in 1630, The ordinary means
therefore to increase our wealth and treasure is by foreign tread, where we must ever
observe this rule: to sell more to strangers yearly than we consume of theirs in value.
4) Consistent with this belief, the mercantilist doctrine advocated government intervention
to achieve a surplus in the balance of trade. The mercantilists saw no virtue in a large
volume of trade per se. Rather, they recommended policies to maximize exports and
minimize imports. To achieve this, imports were limited by tariffs and quotas, while
exports were subsidized.
5) The classical economist David Hume pointed out an inherent inconsistency in the
mercantilist doctrine in 1752. According to Hume, if England had a balance-of-trade
surplus with France (it exported more than it imported) the resulting inflow of gold and
silver would swell the domestic money supply and generated inflation in England. In
France, however the outflow of gold and silver would have the opposite effect. France’s
money supply would contract, and its prices would fall. This change in relative prices
between France and England would encourage the France to buy fewer English goods
(because they were becoming more expensive) and the English to buy more Franch
goods. The result would be deterioration in the English balance of trade and an
improvement in France’s trade balance, until the English surplus was eliminated.
6) Hence, according to Hume, in the long run no country could sustain a surplus OD the
balance of trade and so accumulate gold and silver as the mercantilists had envisaged.
7) The flaw with mercantilism was that it viewed trade as a zero game. (A zero-sum game
is one in which a gain by one country results in a loss by another.)

2. Absolute Advantage Theory

1) In his 1776 landmark book The Wealth of Nations, Adam Smith attacked the mercantilist
assumption that trade is a zerosum game.
2) Smith argued that countries differ in their ability to produce goods efficiently.
3) In his time, the English, by virtue of their superior manufacturing processes, were the
world’s most efficient textile manufacturers.
4) Due to the combination of favorable climate, good soils, and accumulated expertise, the
French had the world’s most efficient wine industry.
5) The English had an absolute advantage in the production of textiles, while the French
had an absolute advantage in the production of wine. Thus, a country has an absolute
 advantage in the production of a product when it is more efficient than any other
country in producing it.
6) According to Smith, countries should specialize in the production of goods for which
they have an absolute advantage and then trade these for goods produced by other
countries.
7) In Smith’s time, this suggested that the English should specialize in the production of
textiles while the French should specialize in the production of wine. England could get
all the wine it needed by selling its textiles to France and buying wine in exchange.
8) Similarly, France could get all the textiles it needed by selling wine to England and
buying textiles in exchange. Smith’s basic argument, therefore, is that you should never
produce goods at home that you can buy at a lower cost from other countries.
9) Smith demonstrates that by specializing in the production of goods in which each has an
absolute advantage, both countries benefit by engaging in trade.
10) Consider the effects of trade between Ghana and South Korea. The production of any
good (output) requires resources (inputs) such as land, labor, and capital. Assume that
Ghana and South Korea both have the same amount of resources and that these
resources can be used to produce either rice or cocoa.
11) Assume further that 200 units of resources are available in each country. Imagine that in
Ghana it takes 10 resources to produce one ton of cocoa and 20 resources to produce
one ton of rice. Thus, Ghana could produce 20 tons of cocoa and no rice, 10 tons of rice
and no cocoa, or some combination of rice and cocoa between these two extremes.
12) The different combinations that Ghana could produce are represented by the line GG’ in
Figure 2.1. This is referred to as Ghana’s production possibility frontier (PPF). Similarly,
imagine that in South Korea it takes 40 resources to produce one ton of cocoa and 10
resources to produce one ton of rice.
13) Thus, South Korea could produce 5 tons of cocoa and no rice, 20 tons of rice and no
cocoa, or some combination between these two extremes. The different combinations
available to South Korea are represented by the line KK’ in Figure 2.1, which is South
Korea’s PPF.
14) Clearly, Ghana has an absolute advantage in the production of cocoa. (More resources
are needed to produce a ton of cocoa in South Korea than in Ghana.) By the same token,
South Korea has an absolute advantage in the production of rice.
3. Ricardian Model (Comparative Advantage Theory)
1) David Ricardo took Adam Smith’s theory one step further by exploring what might
happen when one country has an absolute advantage in the production of all goods.
2) Smith’s theory of absolute advantage suggests that such a country might derive no
benefits from international trade.
3) In his 1817 book Principles of Political Economy, Ricardo showed that this was not the
case.
4) According to Ricardo’s theory of comparative advantage, it makes sense for a country to
specialize in the production of those goods that it produces most efficiently and to buy
the goods that it produces less efficiently from other countries, even if this means
buying goods from other countries that it could produce more efficiently itself.
5) While this may seem counter intuitive, the logic can be explained with a simple
example. Assume that Ghana is more efficient in the production of both cocoa and rice;
that is Ghana has an absolute advantage in the production of both products. In Ghana it
takes 10 resources to produce one ton one ton of cocoa and, 13 1/3 resources to
produce one ton of rice. Thus, given its 200 units of resources, Ghana can produce 20
tons of cocoa and no rice, 15 tons of rice and no cocoa, or any combination in between
on its PPF (the ling GG’ in figure 2.2). In South Korea it takes 40 resources to produce
one ton of cocoa and 20 resources to produce one ton of rice. Thus South Korea can
produce 5 tons of cocoa and no rice, 10 tons of rice and no cocoa, or any combination
on its PPF (the link KK’ in figure 2.2).
6) Again assume that without trade, each country uses half of its resources to produce rice
and
7) half to produce cocoa. Thus, without “trade, Ghana will produce 10 tons of cocoa, and
7.5 tons of rice (point A in
8) Figure 2.2), while South Korea will produce 2.5 tons of cocoa and 5 tons of rice (point B
in Figure2.2).
9) In light of Ghana’s absolute advantage in the production of both goods, why should it
trade with South Korea? Although Ghana has an absolute advantage in the production
of both cocoa and rice, it has a comparative advantage only in the production of cocoa:
 Ghana can produce 4 times as much cocoa as South Korea, but only 1.5 times as much
rice. Ghana is comparatively more efficient at producing cocoa than it is at producing
rice. Without trade the combined production of cocoa will be 12.5 tons (10 tons in
Ghana and 2.5 in South Korea), and the combined production of rice will also be 12.5
tons (7.5tons in Ghana and 5 tons in South Korea). Without trade each country must
consume what it produces. By engaging in trade, the two countries can increase their
combined production of rice and cocoa, and consumers in both nations can consume
more of both goods.

10) The Gains from Trade

a) Imagine that Ghana exploits its comparative advantage in the production of cocoa to
increase its output from 10 tons to 15 tons. This uses up 150 units of resources, leaving
the remaining50 units of resources to use in producing 3.75 tons of rice (point C in fig-
ure 1.2).
b) Meanwhile, South Korea specializes in the production of rice, producing l0 tons. The
combined output of both cocoa and rice has now increased.
c) Before specialization, the combined output was 12.5 tons of cocoa and 12.5 tons of
rice. Now it is 15 tons of cocoa and 13.75 tons of rice (3.75 tons in Ghana and 10 tons in
South Korea). The source of the increase in production is summarized in Table 2.2.
d) Not only is output higher, but also both countries can now benefit from trade. If
Ghana and South Korea swap cocoa and rice on a one-to-one basis, with both countries
choosing to exchange 4 tons of their export for 4 tons of the import, both countries are
able to consume more cocoa and rice than they could before specialization and trade
(see Table 2.2).
e) Thus, if Ghana exchanges 4 tons of cocoa with South Korea for 4 tons of rice, it is still
left with 11 tons of rice, which is 1 ton more than it had before trade. The 4 tons of rice
it gets from South Korea in exchange for its 4 tons of cocoa, when added to the 3.75
tons it now produces domestically, leaves it with a total of 7.75 tons of rice, which is 25
of a ton more than it had before specialization. Similarly, after swapping 4 tons of rice
with Ghana, South Korea still ends up with 6 tons office, which is more than it had
before specialization.
 f) In addition, the 4 tons of cocoa it receives in exchange is 1.5 tons more than it
produced before trade. Thus, consumption of cocoa and rice can increase in both
countries as a result of specialization and trade.
11) The basic message of the theory of comparative advantage is that potential’ world
production is greater with unrestricted free trade than it is with restricted trade.
12) Ricardo’s theory suggests that consumers in all nations can consume more if there are
no restrictions on trade. This occurs even in countries that lack an absolute advantage in
the production of any good.
13) In other words, to an even greater degree than the theory of absolute advantage, the
theory of comparative advantage suggests that trade is a positive-sum game in which all
countries that participate realize economic gains.
14) As such, this theory provides a strong rationale for encouraging free trade. So powerful
is Ricardo’s theory that it remains a major intellectual weapon for those who argue for
free trade.

4. Heckscher-Ohlin Theory

Swedish economists Eli Heckscher (in 1919) and Bertil Ohlin (in 1933) argued that comparative
advantage arises from differences in national factor endowments. By factor endowments they
meant the extent to which a country is endowed with such resources as land, labor, and
capital Nations have varying factor endowments, and different factor endowments explain
differences in factor costs. The more abundant a factor, the lower its cost. The Heckscher-
Ohlin theory predicts that countries will export those goods that make intensive use of factors
that are locally abundant, while importing goods that make intensive use of factors that are
locally scarce. Thus, the Heckscher-Ohlin theory attempts to explain the pattern of
international trade that we observe in the world economy. Like Ricardo’s theory the
Heckscher-Ohlin theory argues that free trade is beneficial. Unlike Ricardo’s theory, however,
the Heckscher-Ohlin theory argues that the pattern of international trade is determined by
differences in factor endowments, rather than differences in productivity. The Heckscher-Ohlin
theory also has commonsense appeal. For example, ‘United States has long been a substantial
exporter of agricultural goods, reflecting in part its unusual abundance of arable land. In
contrast, China excels in the export of goods produced in labor-intensive manufacturing
industries, such as textiles and footwear. This reflects China’s relative abundance of low-cost
labor. The United States, which lacks abundant low-cost labor, has been a primary importer of
these goods. Note that it is relative, not absolute, endowments that are important; a country
may have larger absolute amounts of land and labor than another country, but be relatively
abundant in one of them.
The Leontief Paradox

Using the Heckscher Ohlin theory, Wassily Leontief postulated that since the United States was
relatively abundant in capital compared to other nations, the United States would be an
exporter of capital-intensive goods and an importer of labor-intensive goods. To his surprise,
however, ‘he found that U.S. exports were less capital intensive than U.S. imports. Since this
result was at variance with the predictions of the theory, it has become known as the Leontief
paradox. No one is quite sure why we observe the Leontief paradox. One possible explanation
is that the United States has a special advantage in producing new products or goods made
with innovative technologies. Such products may be less capital intensive than products whose
technology has had time to mature and become suitable for mass production. Thus, the United
States may be exporting goods that heavily use skilled labor and innovative entrepreneurship,
such as computer software, while importing heavy manufacturing products that use large
amounts of capital.

What is Leontief Paradox?

Wassily Leontief (winner of the Nobel Prize in economics in 1973), many of these tests have
raised questions about the validity of the Heckscher- Ohlin theory.

As per Heckscher- Ohlin theory Leontief postulated that since the united States was relatively
abundant in capital compared to other nations, the united States would be an exporter of
capital-intensive goods and an importer of labor-intensive goods. To his surprise, however, ‘he
found that U.S. exports were less capital intensive than U.S. imports. Since this result was at
variance with the predictions of the theory, it has become known as the Leontief paradox.

No one is quite sure why we observe the Leontief paradox. One possible explanation is that
the United States has a special advantage in producing new products or goods made with
innovative technologies. Such products may be less capital intensive than products whose
technology has had time to mature and become suitable for mass production. Thus, United
States may be exporting goods that heavily use skilled labor and innovative entrepreneurship,
such as computer software, while importing heavy manufacturing products that use large
amounts of capital.

Example : As per the theory, United States exports commercial aircraft and imports
automobiles not because its factor endowments are especially suited to aircraft manufacture
and not suited to automobile manufacture, but because the United States is more efficient at
producing aircraft than automobiles. A key assumption in the Heckscher-Ohlin theory is that
technologies are .the same across countries. This may not to be the case, and differences in
technology may lead to differences in productivity, which in turn, drives international trade
patterns.
 5. The Product Life Cycle Theory

Raymond Vernon initially proposed the product life-cycle theory in the mid-1960s. Vernon’s
theory was based on the observation that for most of the 20th century a very large proportion
of the world’s new products had been developed by U.S. firms and sold first in the U.S. market
(e.g.mass-produced automobiles, televisions, instant cameras, photocopiers, personal
computers, and semiconductor chips). To explain this, Vernon argued that the wealth and size
of the U.S market gave U.S. firms a strong incentive to develop new consumer products.
Inaddition, the high cost of U.S. labor gave U.S. firms an incentiveto develop cost-saving
process innovations. -Just because a new product is developed by a U.S. firm and first sold in
the U.S. market, it does not follow that the product must be produced in the United States. It
could be produced abroad at some low-cost location and then exported back into the United
States. However, Vernon argued that most new products were initially products were initially
produced- in America. Apparently, the pioneering firms believed it was better to keep
production facilities close the market and to the firm’s center of decision making, given the
uncertainty and risks inherent in introducing new products. Also, the demand for most new
products tends to be based on nonprice factors.

Consequently, firms can charge relatively high prices for new products, which obviate the need
to look for low cost production sites in other countries. Vernon went on to argue that early in
the life cycle of a typical new product, demand is starting to grow rapidly in the United States,
demand in other advance countries is limited to highincome groups. The limited initial demand
in other advanced countries does not make it worthwhile for firms in those countries to start
producing the new product, but it does necessitate some exports from the United States to
those countries.

Over time, demand for the new product starts to grow in other advanced countries (e.g., Great
Britain, France, Germany, and Japan). As it does, it becomes worthwhile for foreign producers
to begin producing for their home markets. In addition, U.S.firms might set up production
facilities in those advanced countries where demand is growing. Consequently, production
within other advanced countries begins to limit the potential for exports from the United
States. As the market in the United States and other advanced nations matures, the product
becomes more standardized, and price becomes the main competitive weapon. As this occurs,
cost considerations start to play a greater role in the competitive process. Producers based in
advanced countries where labor costs are lower than in the United States (e.g., Italy, Spain)
might now be able to export to the United States. If cost pressures become intense, the
process might, not stop there. The cycle by which the United States lost its advantage to other
advanced countries might be repeated once more, as developing countries (e.g., Thailand)
begin to acquire a production advantage over advanced countries. Thus, the locus of global
production initially switches from the United States to other advanced nations and then from
those nations to developing countries.

The consequence of these trends for the pattern of world trade is that is over time the United
States switches, from being an exporter of the Product to an importer of product as
production becomes concentrated in lower-cost foreign locations.

Figure 2.5 shows the growth of production and consumption over time in the United States,
other advanced countries, and developing countries.

6. New Trade Theory

New Trade Theory (NTT) is the economic critique of international free trade from the
perspective of increasing returns to scale and the network effect

1. New Trade theorists challenge the assumption of diminishing returns to specialization

used in international trade theory. It argues that increasing returns to specialization
might exist in some industries.
2. New trade theory also argues that if the output required to realize significant scale
 economies represents a substantial proportion of total world demand for that product
the world market may be able to support only a limited number of firms based in a
limited number of countries producing that product
Example: The commercial aerospace industry, which is currently dominated by just two firms,
Boeing and Airbus, is a good example of this theory. Economies of scale in this industry come
from the ability to spread fixed costs over a large output.

Implication:

 "NTD" was the rigor of the mathematical economics used to model the increasing
returns to scale, and especially the use of the network effect to argue that the
formation of important industries was path dependent in a way which industrial
planning and judicious tariffs might control.
 The model they developed was highly technical, and predicted the possibilities of
national specialization-by-industry observed in the industrial world. The story of path-
dependent industrial concentrations sometimes leads to monopolistic competition.
Econometric evidence:

 The econometric evidence for NTT was mixed, and again, highly technical. Due to the
time-scales required and the particular nature of production in each 'monopolizable'
sector, statistical judgements have been hard to make. In many ways, there is too
limited a dataset to produce a reliable test of the hypothesis which doesn't require
arbitrary judgements from the researchers.
Japan is cited as evidence of the benefits of "intelligent" protectionism, but critics of NTT have
argued that the empirical support post-war Japan offers for beneficial protectionism is
unusual, and that the NTT argument is based on a selective sample of historical cases.
Although many examples (like Japanese cars) can be cited where a 'protected' industry
subsequently grew to world status, regressions on the outcomes of such "industrial policies" .

6. What is globalization? How do global organizations focus on strategies to

prosper?

Objective Action Plan Anticipated risks and End Result

Stages
hurdle

Stage:1 “Physical (i) Identify one (i) Local resistance for (i) Successful entry into
movement of country. outsider . one country.
goods and
(ii) Focus on one (ii) Technical and (ii) Learning experience
services from
product or service. commercial barriers. outside of the home
the country of
 its origin”. (iii) Explore the (iii) Competitive forces country.
opportunity for from local and
exports. imported goods.

“Strengthen (i) Build a strong (i) Local competitors (i) Strengthen one
and stabilize relationship in one pose threats. country by overcoming all
one overseas market. the hurdles.
(ii) A price war is
Stage:2 market.”
(ii) Promote brand inevitable. (ii) One or few importers
name with extend cooperation and
customers and support for a constant
channels. flow of goods.

“Establish a (i) Narrow down to (i) Competitors (i) Local production brings
manufacturing one local partner. increase their down the cost.
base in the production capacity.
(ii) Locate an ideal (ii) The enterprise
Stage:3 importing
place for production. (ii) Local regulations on becomes close to the
country”.
labour, transaction, customers.
(iii) Workout for
and infrastructure may
synergy together. (iii) Brand loyalty is built.
trouble the operation.

“Spread the (i) Quickly develop a (i) Every part of the (i) Access in the whole
distribution network in the region works region.
and increase neighbouring differently.
(ii) Easy to experiment in
production in countries.
(ii) Rules are not other regions.
Stage:4 the region”.
(ii) Set up a network uniform.
(iii) Revenue is increased.
of warehouses and
(iii) Demand level is not
sub-dealers in the
similar in every
region.
country.

Stage:5 “Move to other (i) Set up (i) Cross cultural (i) Global take-off
regions by subsidiaries. complexities. assured.
investing and
(ii) Develop strong (ii) Local adaptability. (ii) The enterprise has a
producing”.
systems. competency in a skill, and
(iii) Promotional
the knowledge to go
(iii) Induct right barriers.
global.
people with
performance and
 target.

(iv)Flexible to local
environment.

Globalization is the “strategy of optimizing” the resources available in various countries and
catering to customers throughout the world with internationally standardized products at
competitive prices. It advocates that the nation, company, or product involved be global. A
global man is one who is born in India, studies in the UK, wears Reid & Taylor, shops at Marks &
Spencer, drives a Lexus, acquires a steel plant in Kazakhstan, and ships his hot-rolled coil to
China. Thus, he becomes a part of globalization process.

Liberalisation, the rise of developing countries, new technologies, and falling trade
barriers are profoundly changing the economic landscape and contributing to fast-track
globalization in many countries. We are increasingly living in a global world. In practical terms,
this means that a steel company in the United States will consider other countries as well as the
U.S. when deciding where to locate a new $1 billion steel mill. Other examples are automobile
manufacturers, such as Ford Motors, who entered emerging markets such as China or India
with modified versions of existing cars, rather than designing a new car from scratch; and
Mazda, which designs its sports car in California, produces components in Tokyo, makes
prototypes in Worthington, and finally, assembles the car in Mexico in order to market it in
North America at a very low price. China sources its fibre from South Korea, uses funds from
Macau, a labour force in Beijing, and finally, markets its soft toys all over the world.

The economic landscape is not the same as it was twenty years ago, nor is the pace of
global economic change expected to slacken in the next twenty years. This will have an effect
on people in any position. India’s finance minister will have to view the integration of India’s
economy with the rest of the world as fundamental to the country’s transformation into an
economic superpower, and a junior manager in a firm will have virtually no chance of making it
into the top ranks of the company unless s/he combines superb qualities, skills, and job
performance with extensive international experience.

CRITERIA FOR GLOBAL ORGANIZATIONS

Assuming the trends described here are inevitable, the following issues need serious
consideration by any medium or large company inclined to go global.

1. Size of the market:

How extensive do you want your markets to be, particularly the major emerging markets for
your products and services? How should you build a necessary global presence?

2. Location advantage:

To what extent do you want to capture the cost-reducing and quality-enhancing potential of
locations around the world for the execution of various activities in your company’s value
chain? How should you deal with the problem of suboptimal locations currently in use?

3. Global competitiveness:

How effective do you want to be in exploiting a global presence and making your company truly
globally competitive, as opposed to globally mediocre? How should you eliminate existing
shortcomings and impediments?

4. Management efficiency and mindset:

Is the mindset of your company’s top management sufficiently global? As the world around you
changes and new opportunities open up in various parts of the world, is your company
generally a leader or a laggard in identifying and exploiting these opportunities? How should
you create the needed global mindset?

5. Vision and long-term objective:

Does your company have a vision? Is the vision present in every individual? Is the proper
roadmap in place? Is it only for the generating money, or for leadership?

6. Proper human resources to handle a global environment:

Do you have sufficient human resources to handle a global environment – more specifically,
technical resources? Or are such resources yet to be appointed in the location of operation?

Once a company has selected the country or countries that will serve as a launch vehicle for its
products, it must determine the appropriate mode of entry. This issue rests on two
fundamental questions:

 To what extent will the company rely on exports versus local production in the target
market?
Here, the firm has the following range of choices: 100% export of finished goods, export of
components with a localized assembly line, 100% local production.

 To what extent will the company exercise ownership and control over the activities carried
out locally in the target market? Again, it faces the following range of choices: 0%
 ownership through licensing or franchising, partial ownership such as joint ventures or
collaborations, 100% ownership as a wholly owned subsidiary.

Local production would be appropriate under the following conditions:

1. Larger local production: The local market is larger than the minimum efficient scale of
production. The larger the local market, the more local production will translate into scale
economies while holding down tariff and transportation costs. An example of this is the
Japanese tire group, Bridgestone, who, instead of exporting tires from Japan, entered the
U.S. market through the acquisition of the local production base of Firestone.
2. Cost of logistics and tariffs: The shipping and tariff costs of exporting to the target market
are so high that they neutralize any cost advantages of manufacturing the product at any
place other than the target market. This is the main reason why cement companies, such as
Cemex and Lafarge Copper, engage heavily in local production in all of the countries they
enter.
3. Localization and customization of products : The need to customize products to suit local
requirements is high. The customization of a product requires a deep understanding of local
market needs and the ability to incorporate this understanding into product design and
marketing. Localising production in the target market area significantly enhances a firm’s
ability to respond to local market needs.
4. Requirement for local production: This refers to situations in which there is a strong
requirement for local production by the host country. This is one of the major reasons why
foreign automobile companies rely heavily on local production in markets such as the
European Union, China, and India. The Hyundai Corporation has strengthened its
production base in India and its components are procured in India.

Besides the above criteria, the strategic approach for successful companies could be on the
following lines:

a. Product focus, i.e. Bic pens and Ray Ban glasses

b. Human Resources focus, i.e. Infosys and Wipro
c. Technological focus, i.e. Singapore airlines and Microsoft
d. Service focus, i.e. Singapore airlines and FEDEX. They are going in their respective
business with complete focus without any diversion.
The Extent of Ownership Control over Locally Performed Activities

Entering the market through an alliance permits a company to share the costs and risks
associated with market entry and allow rapid access to local knowledge.However, it also has
the potential for various types of conflict.
 7. What is risk analysis? How do companies overcome risks?
Any business is affected by its external environment. The major macroeconomic factors in the
external environment that affect the business are political, environmental, social and
technological.

A. POLITICAL ENVIRONMENT
The political environment of a country greatly influences the business operating in those
countries or business trading with those countries. The success and growth of international
business depends on the stable, collaborative, conducive and secure political system in the
country.

The following factors affect the political environment in a country.

1. Tax Policy:
The tax policy of a country affects the profitability of the business there. The Corporate
Taxation laws affect the profitability directly. The direct taxation laws also affect the
business because it influences consumer spending. The structure of indirect taxation in
a country like its excise duty structure, customs and sales tax greatly affects the input
costs of a business.
For e.g. Countries like UAE have very low direct taxation levels inducing great spending
and hence trading and marketing based business are successful. But due to very high
indirect taxation levels the manufacturing business is not very successful.

2. Government support:
One of the most important political factor is the Government support to international
businesses. Business can be successful only if the local government provides support in
terms o infrastructure, license clearing if required, transparent policy and quick dispute
resolution mechanism. Also the nature of the political system i.e. democracy,
communism etc. in the country influences the Government support.
 For e.g. the RBI has provided single window clearance for FDI and hence has greatly
increased the FDI levels in our country.

3. Labour Laws:
The labour laws in a country affect the viability of a business in that country. The
pension laws also play a critical role especially in cross border acquisitions. Many
businesses had to be withdrawn or closed because of the labor unrest in the country.
For e.g.: Withdrawal of Premier Automobiles due to union strikes in our country. The
problems faced by doctors and nurses in UK due to the restrictive laws in that country.

4. Environmental policy:
The countries environmental policy (under the Kyoto Protocol or otherwise) affects
many business like chemicals, refineries and heavy engineering.

5. Tariffs and duty structure:

The level of duties and tariffs that are imposed by the country influence its imports and
exports greatly. Some countries follow a protectionist policy to the domestic industry by
raising import barriers For e.g. India in the pre liberalization era, Russia.

6. Political stability and political milieu:

Political stability greatly affects the longevity of the businesses in a country. Political risk
assessment should be done to determine the country risk on the basis of following
parameters:
a. Confiscation: The nationalization of businesses without compensation. For e.g. India
during the nationalist wave during Indira Gandhi’s tenure.
b. Nationalization: Resource nationalization is a major risk for businesses involving
local resources like oil, minerals etc. For e.g. the resource nationalization in
Columbia.
 c. Instability risk: The possibility of military takeovers or huge government changes.
For e.g. the coups in Thailand or in Fiji has affected the profits of businesses there by
as much as 60% due to work stoppage and property destruction.
d. Domestication: The global company relinquishing control in favor of domestic
investors. For e.g. Barclays bank in South Africa
B. ECONOMIC FACTORS
The economic factors in a country greatly influence the business in that country. The following
factors are important in the macroeconomic environment.

1. Economic system:
The economic system in a country i.e. capitalism/ communism/ mixed economy (India)
is important for deciding the nature of the businesses. The nature of the system decides
the allocation of resources. Due to globalization there is a gradual shift toward market
forces to allocate resources even in the communist countries like China.
2. Interest rates:
The interest rates in the country affect the cost of capital (if raised locally) and the
operational costs. Interest rates also determine the confidence of the Government in
the economy and consumer spending.
3. Exchange rates:
The exchange rates affect international trade and capital inflows in the country.
4. Income levels and spending pattern:
Though it is more of a demographic parameter has is very important bearing on the sell
side of all international businesses. For e.g. In a country like India, with rising a spirer
population there is a market opportunity for products like IPod (considered luxury items
till now)

C. SOCIAL FACTORS
Businesses are driven by people both as human capital and as consumers. It is necessary for an
international businessman to understand the social and cultural aspects of the country they
operate in. The following are the important social factors.
 1. Age distribution:
The age distribution of the population is important to consider the consumption
patterns in the markets. Age distribution also determines the mindset of the market
and helps segmentation of the market accordingly. It also has a bearing on the
employee quality. A young population also determines a workforce.

2. Family system:
The family system has a bearing on the decision makers in consumption. For e.g. in
Islamic countries women have a less say in making consumption decisions. In emerging
economies like India children are gaining important role in consumption. This helps in
positioning of products.
3. Cultural aspects:
The cultural aspects influence the way the business is conducted in countries. In Japan
there is a different way in which contracts are signed and executed. In Russia being a
communist oriented mindset the business is conducted in a closed manner. Italians have
a seemingly lazy way of doing business and hence it is very difficult to conduct business
in the pacy US way.
4. Career attitudes:
The career attitude of the workforce is important social aspect.

D. TECHNOLOGICAL FACTORS
Technology has a very important role to play in determining the success of international
businesses because technology has made international business possible. The following are the
technological factors that influence the business.

1. R&D:
The support that the Government gives to R&D encourages setting up R&D business
levels. Also the ease of a qualified local workforce influence business.
 For e.g. The semiconductor industry in Taiwan

2. Technology transfer:
The ease of technology transfer influences the business climate. The environment where
the technology transfer is not viable gradually loses out on business from emerging
countries that seek technology transfers. For e.g. in the early 40s countries like
Czechoslovakia (the Czech Republic) was a very technologically advanced country but had
very low business interest due to the less chances of technology transfers. For e.g. GE
withdrew operations from a JV as there as they could not access local expertise)

8. Discuss the environmental factors influencing international business?

Ans:- A company that chooses to implement an international project is obligated to conduct a
thorough research in order to understand if such project is viable and can be brought to life in a
certain country. Numerous factors have to be taken into consideration and investigated; it has
to be done objectively from the point of view of the host country in which business will be
performed. Thus the home company can ensure the realization of the project in specified terms
with regards to projected profits and spending funds.

While analyzing foreign environment companies have to pay close attention to various factors
that will effect, or help if used efficiently, future success of business in a new economy. First of
all it is necessary to carefully examine the firm’s competitive position and understand if a
project is able to bring profit in the global industry. Adequate financial resources, successful
global ventures in the past, risk levels that a company is able to undertake and growing
international demand are those few questions that need to posed before a firm can make any
projections as to doing business abroad. There are also factors that are directly connected to
specific projects and situations and that influence the outcome of the venture and have to be
considered.

In case when a company is ready to start international project in terms of its internal situation,
it has to study issues and challenges that are caused by macro economical and other
environmental factors. Legal and political factors are essential for the implementation of the
project abroad and each country has its own laws and regulations that could be of negative or
positive influence which greatly depends on the nature of business. Economic condition of the
host county is a core issue in deciding where and when project will be carried out and if it is
feasible at all. Such environmental issues as GDP, inflation fluctuations and population growth
have to be considered in order to comprehend conditions in which business will operate.
Infrastructure and geography are among other factors that will affect the project or not allow
its execution in case a host county has severe weather conditions or undeveloped
infrastructure; for instance unpaved roads and no electrical power can easily fail the project in
the very beginning and thus knowing such conditions is necessary. Security of the country in
which project will be developed is essential as well, people make things happen and if they are
in a dangerous environment it is priory impossible to do business. Workers who are
knowledgeable about cultural differences in a host country are more likely to perform
successfully as traditions and holidays can play a huge role in certain marketing campaigns and
serve for the good image of the company.

Working in a foreign country requires a great deal of preparation and assessment of all possible
differences that the business is about to encounter. As was already said, major role in deciding
whether or not the project will be successful is comprehending macro environment of a new
country. Studying its economical condition, security levels and infrastructure system is a core
competence of a company who wants to be more successful that its competitors. In case when
all of those factors are studied and considered advantageous for a new enterprise, it is
important to bear in mind that cultural differences can make all efforts void. Thus businesses
must attentively analyze what changes have to be made in the business plan and what people
are best suit for its implementation. Often, companies hire professionals already experienced in
such ventures with foreign education who speak two or more languages. Those intermediaries
who are familiar with host country’s traditions and have social connections are great helpers in
establishing a good image of the company abroad and in avoiding mistakes in a setting up
period.

Selecting and training employees for the international project is very important for the future
success of the company. Culture shock and coping with it are issues that have to be addressed
to potential workers. Consequently firms need to inform and train employees on how to cope
with cultural diversities and benefit from them to better manage in the new environment.

9. What is WTO? How does it function to maintain its agenda? Discuss its
achievements and limitations?

Agreement Provisions Impact Policy issue

General Prohibits: Binding of tariff lines. -Competition from

Agreement on -Actions of (India is committed to foreign goods.
Trade'" Tariff. Government I a bind tariff lines at 40 -This affects efficacy of
(GATT) Organisations that per cent on finished Reservation Policy.
distort normal goods and 2S per cent Need for Reservation
-Discrimination on intermediate Policy to move in
between goods. machinery and tandem with OGL list,
Member nations equipment; phased with greater emphasis
-Discrimination reduction by 2005). on competitiveness.
between domestic -Quantitative -Need to strengthen
and lawfully imported restrictions of imports competitiveness
foreign to be phased out by among domestic SSI
goods 1.4.2000 (original through
deadline set was 2003. modernisation and
but India has lost in technology
the development.
Disputes Settlement
Case).
-Create freer trade
regime.
Agreement on Countries to follow -Greater transparency India bas amended the
valuation of uniform procedures in -Beneficial to both Customs Act in
Goods respect of customs importers and conformity with the
formalities. exporters Agreement.

Agreement on To check arbitrary Indian companies India does not use

Pre-shipment ways of PSI companies exporting to countries services of PSI
inspection (PSI) in valuation of goods. using companies.
PSI companies to
benefit
Agreement on -Conformity with -Indian exporters to -Bureau of Indian
Technical; international benefit. As import by Standards (SIS)
Barriers to Trade standards other countries are conforms to
(TBT) -Checks on misuse of subject to mandatory Agreement.
mandatory product standards. -SIS in conformity with
products standards -Enquiry points help International
-Establishment of facilitation. standards.
enquiry points -Process and -BIS to serve as
production methods enquiry point.
can be used to
discriminate against
Indian exports.
Agreement on Same as above except International Most of Indian
Sanitary and that countries standards to be standards in
Phytosanitary can deny import from adopted conformity with
Measure. (SPM) certain International
region/country on the standards.
 ground of
pest I disease
Agreement on Transparency and Beneficial to small Delays, discretion and
import licensing time bound businesses, as they misuse of licensing
are usually at the procedures to be cut.
receiving end of
restricted practices.
Rules Applicable -Allows export (to be -Neutralisation of -EXIM policy provides
on Exports relieved of indirect indirect taxes good. scheme for
taxes (e.g. Excise -Present schemes neutralisation of
Duty). providing waiver of incidence of indirect
-Prohibits direct tax Income Tax on export taxes (e.g. Duty
benefits (e.g. earnings to be drawback, advance
Income Tax waiver on scrapped. Would licenses etc.)
export earnings). affect price -Review of direct tax
-Allows levy of duties competitiveness benefits.
on exports
Agreement on -Prohibits export -Subsidies given to EXIM Policy to be
Subsidies and subsidies small businesses are made WTO
Countervailing -Phasing out by 2003. usually permissible compatible.
Measures (SCM) -Permits permissible and non-actionable.
subsidies. -Importing countries
can countervail
subsidies that are
actionable. Will make
Indian exports more
expensive.
-Small businesses
have to become more
competitive.
Agreement on Allows countries to Helpful provision Ministry of Commerce
Safeguard take action against & Industry is putting
Measures undue import surge required system in
injurious to domestic place.
industry during
transition period.
Measures can include
Quantitative
Restrictions (QRs),
duty enhancement
beyond bound rates
etc. period
extendable
Agreement on Allows countering Helpful provision Directorate of Anti-
Anti-Dumping unfair trade practices. Dumping established
Measures (ADP) in Ministry of
Commerce & Industry.

Trade Related Prohibits countries -Affects FOREX Measures underway to

Investment Measures from imposing position. terminate notified
(TRIMS) conditions such as -Affects Government TRIMs such as
localisation, export foreign Investment Dividend Balancing
obligation on Policy
investors. -Enhances
competition to
domestic industry
Market Access Binding of tariff lines -Increased India followed the
Negotiations competition from WTO time-table in
foreign goods. terms of reduction and
-Does not help Indian binding of tariff lines.
exporters, as tariffs in
developed countries
already low.
-India to really benefit
from removal of QRs
in these countries.
Agreement on MFN and National -India not partly to We need to carefully
Government Treatment on the agreement. review the policy.
Procurement Government -Under severe
procurement pressure to fall in line.
-Indian exporters of
goods and services
can
export to countries
who have signed this
agreement barring
USA.
-Can affect exports of
footwear, textiles,
computer hardware
and software,
stationary etc.
General Agreement -All services covered. Helpful to Indian India has made
on Trade in Services -MFN principle exporters of services. commitments in 33
(GATS) -Liberalisation service activities as
commitments. compared to an
average of 23
 developing countries.
Inflow of capital and
technology with
adequate employment
prospects is the main
consideration.
Trade Related -Provides protection -Reverse engineering Patent Act amended in
Intellectual to IPRs as patents, becomes more 1991. Allows product
Property Rights copy rights, trade difficult. patent in
(TRIPs) marks, -Transfer of pharmaceuticals, agro-
industrial designs, technology may chemicals and food.
layout designs, increase due to lesser Patent life increased to
geographical fear of counterfeit. 20 years. Micro
indications and -India's own R&D organisms made
undisclosed institutions could patentable. New laws
information benefit. being drafted for
-National and MFN trademarks, copyrights
treatment. etc. India has acceded
-Developing countries to Paris Convention.
to implement within 5
years.

Most Favoured Nation Treatment (MFN): No discrimination between member nations.

National Treatment: No discrimination between domestic products and lawfully imported

products.

Subsidies: Permissible - Actionable and non-actionable; non-permissible

10. Discuss the importance of international organizations and their role to promote
international business.
11. How will you do business with NAFTA?
12. Discuss the business strategy to do business in European Union.
13. How will you do business in ASEAN?

ANS:- 11,12,13:- MERCOSUR

Mercosur is a regional trade agreement among Argentina, Brazil ,Paraguay & Uruguay founded
in 1991 by the Treaty of Asunción, which was later amended and updated by the 1994 Treaty of
Ouro Preto. Its purpose is to promote free trade and the fluid movement of goods, people, and
currency. Bolivia, Chile, Colombia, Ecuador and Peru currently have associate member status.
Venezuela signed a membership agreement on 17 June 2006, but before becoming a full
member its entry has to be ratified by the Paraguayan and the Brazilian parliaments.

The bloc comprises a population of more than 263 million people, and the combined Gross
Domestic Product of the full-member nations is in excess of US$2.78 trillion a year (Purchasing
power parity, PPP) according to International Monetary Fund (IMF) numbers, making Mercosur
the fifth largest economy in the World.

OBJECTIVES OF MERCOSUR

 Free transit of production goods, services and factors between the member states with
inter alia, the elimination of customs rights and lifting of nontariff restrictions on the transit
of goods or any other measures with similar effects;
 Fixing of a common external tariff (TEC) and adopting of a common trade policy with regard
to non member states or groups of states, and the coordination of positions in regional and
international commercial and economic meetings;
 Coordination of macroeconomic and sectorial policies of member states relating to foreign
trade, agriculture, industry, taxes, monetary system, exchange and capital, services,
customs, transport and communications, and any others they may agree on, in order to
ensure free competition between member states; and
 The commitment by the member states to make the necessary adjustments to their laws in
pertinent areas to allow for the strengthening of the integration process. The Asuncion
Treaty is based on the doctrine of the reciprocal rights and obligations of the member
states.
MERCOSUR initially targeted free-trade zones, then customs unification and, finally, a common
market, where in addition to customs unification the free movement of manpower and capital
across the member nations' international frontiers is possible, and depends on equal rights and
duties being granted to all signatory countries. During the transition period, as a result of the
chronological differences in actual implementation of trade liberalization by the member states,
the rights and obligations of each party will initially be equivalent but not necessarily equal. In
addition to the reciprocity doctrine, the Asuncion Treaty also contains provisions regarding the
most-favored nation concept, according to which the member nations undertake to
automatically extend--after actual formation of the common market--to the other Treaty
signatories any advantage, favor, entitlement, immunity or privilege granted to a product
originating from or intended for countries that are not party to ALADI.

SAARC

The South Asian Association for Regional Cooperation (SAARC) is an economic and political
organization of eight countries in Southern Asia. It was established on December 8, 1985 by
India, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives and Bhutan. In April 2007, at the
Association's 14th summit, Afghanistan became its eighth member.Sheelkant Sharma is the
current secretary & Mahinda Rajapaksa is the current chairman of SAARC which is
headquartered at Kathmandu.

OBJECTIVES OF SAARC

 To promote the welfare of the peoples of South Asia and to improve their quality of life;
 To accelerate economic growth, social progress and cultural development in the region
and to provide all individuals the opportunity to live in dignity and to realize their full
potential;
 To promote and strengthen collective self-reliance among the countries of South Asia;
 To contribute to mutual trust, understanding and appreciation of one another's
problems;
 To promote active collaboration and mutual assistance in the economic, social, cultural,
technical and scientific fields;
 To strengthen cooperation with other developing countries;
 To strengthen cooperation among themselves in international forums on matters of
common interest; and
 To cooperate with international and regional organizations with similar aims and
purposes.
FREE TRADE AGREEMENT

Over the years, the SAARC members have expressed their unwillingness on signing a free trade
agreement. Though India has several trade pacts with Maldives, Nepal, Bhutan and Sri Lanka,
similar trade agreements with Pakistan and Bangladesh have been stalled due to political and
economic concerns on both sides. India has been constructing a barrier across its borders with
Bangladesh and Pakistan. In 1993, SAARC countries signed an agreement to gradually lower
tariffs within the region, in Dhaka. Eleven years later, at the 12th SAARC Summit at Islamabad,
SAARC countries devised the South Asia Free Trade Agreement which created a framework for
the establishment of a free trade area covering 1.4 billion people. This agreement went into
force on January 1, 2006. Under this agreement, SAARC members will bring their duties down
to 20 per cent by 2007.

The last summit (15th) was held in Colombo where four major agreements - the SAARC
development fund, the establishment of a SAARC standard organization, the SAARC convention
on mutual legal assistance in criminal matters, and the protocol on Afghanistan's admission to
the South Asia Free Trade Agreement (SAFTA) were adopted with emphasis on region-wide
food security.

NAFTA

The North American Free Trade Agreement (NAFTA) is a trilateral trade bloc in North America
created by the governments of the United States, Canada, and Mexico. In terms of combined
purchasing power parity GDP of its members, as of 2007 the trade bloc is the largest in the
world and second largest by nominal GDP comparison. It also is one of the most powerful,
wide-reaching treaties in the world.

The North American Free Trade Agreement (NAFTA) has two supplements, the North American
Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on
Labor Cooperation (NAALC).
Implementation of the North American Free Trade Agreement (NAFTA) began on January 1,
1994. This agreement will remove most barriers to trade and investment among the United
States, Canada, and Mexico.

Under the NAFTA, all non-tariff barriers to agricultural trade between the United States and
Mexico were eliminated. In addition, many tariffs were eliminated immediately, with others
being phased out over periods of 5 to 15 years.  This allowed for an orderly adjustment to free
trade with Mexico, with full implementation beginning January 1, 2008. 

The agricultural provisions of the U.S.-Canada Free Trade Agreement, in effect since 1989, were
incorporated into the NAFTA. Under these provisions, all tariffs affecting agricultural trade
between the United States and Canada, with a few exceptions for items covered by tariff-rate
quotas, were removed by January 1, 1998.

Mexico and Canada reached a separate bilateral NAFTA agreement on market access for
agricultural products. The Mexican-Canadian agreement eliminated most tariffs either
immediately or over 5, 10, or 15 years.

U.S. trade with Mexico and Canada has grown more rapidly than total U.S. trade since 1994.
The automotive, textile, and apparel industries have experienced the most significant changes
in trade flows, which may also have affected employment levels in these industries. The five
major U.S. industries that have high volumes of trade with Mexico and Canada are automotive
industry, chemicals and allied products, computer equipment, textiles and apparel, and
microelectronics.

The effects of NAFTA, both positive and negative, have been quantified by several economists.
Some argue that NAFTA has been positive for Mexico, which has seen its poverty rates fall and
real income rise (in the form of lower prices, especially food), even after accounting for the
1994–1995 economic crisis. Others argue that NAFTA has been beneficial to business owners
and elites in all three countries, but has had negative impacts on farmers in Mexico who saw
food prices fall based on cheap imports from U.S. agribusiness, and negative impacts on U.S.
workers in manufacturing and assembly industries who lost jobs. Critics also argue that NAFTA
has contributed to the rising levels of inequality in both the U.S. and Mexico.

EU

The European Union (EU) is a political and economic union of 27 member states, located
primarily in Europe. The EU generates an estimated 30% share of the world's nominal gross
domestic product (US$16.8 trillion in 2007). Thus EU presents an enormous export and investor
market that is both mature and sophisticated.

The EU has developed a single market through a standardised system of laws which apply in all
member states, guaranteeing the freedom of movement of people, goods, services and capital.
It maintains a common trade policy. Fifteen member states have adopted a common currency,
the euro.

OBJECTIVES OF THE EU

Its principal goal is to promote and expand cooperation among members’ states in economics,
trade, social issues, foreign policies, security, defense, and judicial matters. Another major goal
of the EU is to implement the Economic and Monetary Union, which introduced a single
currency, the Euro for the EU members.

The single market refers to the creation of a fully integrated market within the EU, which allows
for free movement of goods, services and factors of production. The EU, in conjunction with
Member States, has a number of policies designed to assist the functioning of the market. Some
of the policies are given below:

Competition Policy: The main competition lied in energy and transport sector. The union
designed this strategy to prevent price fixing, collusion (secret agreement), and abuse of
monopoly.

Free movement of goods: A custom union covering all trade in goods was established and a
common customs tariff was adopted with respect to countries outside the union.
Services: Any member nation has a right to provide services in other Member States.

Capital: There are no restrictions on the movement of capital and on payments with the EU and
between member states and third countries.

TRADE BETWEEN THE EUROPEAN UNION AND INDIA

India was one of the first Asian nations to accord recognition to the European Community in
1962. The EU is India’s largest trading partner and biggest source of FDI. It is a major
contributor of developmental aid and an important source of technology. Over the years, EU –
India trade has grown from 4.4 bn to 28.4 bn US$.

Top items of trade between India and EU

India’s exports to EU % India’s Imports from EU %

Textile and clothing 35 Gemstones and jewellery 31

Leather and leather products 25 Power generating equipment 28

Gemstones and jewellery 12 Chemical products 15

Agriculture products 10 Office machinery 10

Chemical products 9 Transport equipment 6

 India is EU’s 17th largest supplier and 20th largest destination for exports.
 Tariff and non-tariffs have been reduced, but compared to International standards they are
still high.
 Under the Bilateral trade between India and EU, it accounts for 26% of India’s exports and
25% of its imports.
 The European Union (EU) and India agreed on September 29,2008 at the EU-India summit in
Marseille, France's largest commercial port, to expand their cooperation in the fields of
nuclear energy and environmental protection and deepen their strategic partnership.
 Trade between India and the 27-nation EU has more than doubled from 25.6 billion euros
($36.7 billion) in 2000 to 55.6 billion euros last year, with further expansion to be seen.
ASEAN

The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in
Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines,
Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July
1995, Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999.

OBJECTIVES

The ASEAN Declaration states that the aims and purposes of the Association are:

(i) To accelerate the economic growth, social progress and cultural development in the
region through joint endeavors.
(ii) To promote regional peace and stability through abiding respect for justice and the rule
of law in the relationship among countries in the region and adherence to the principles
of the United Nations Charter.
(iii) To maintain close cooperation with the existing international and regional organizations
with similar aims.

WORKING OF ASEAN

The member countries of ASEAN have Preferential Trading Arrangements (PTA), which reduces
tariffs on products traded among member countries. In 1992, ASEAN developed a Common
Effective Preferential Tariffs (CEPT) plan to reduce tariffs systematically for manufactured and
processed products.

The members have also established a series of co-operative efforts to encourage joint
participation in industrial, agricultural and technical development projects and to increase
foreign investments in their economies. These efforts include an ASEAN finance corporation,
the ASEAN Industrial Joint Ventures Programme (AJIV) etc. ASEAN nations have introduced
some programmes for greater diversification in their economies.

INDIA AND ASEAN

 India is interested in maintaining close economic relations with the members of ASEAN,
as these countries are closer to India. The ASEAN countries are offering co-operation to
India in the field of trade, investment, science and technology and training of personnel.
Also, India’s trade with ASEAN countries is satisfactory in recent years

14. Compare and contrast the business potential in India and China.

FDI Climate between India, China and Vietnam

PARAMETER India

FDI IN 2008-09 23885 $

How to enter  Through financial alliance

 Through joint schemes and technical alliance
 Through capital markets, via Euro issues
 Through private placements or preferential
allotments

Sectors in which 100% equity is  Hotel & tourism

allowed  Trading companies
 Power generation/ transmission/distribution
 Drugs & Pharma
 Shipping
 Deep Sea Fishing
 Oil Exploration
 Housing and Real Estate Development
 Highways, Bridges and Ports
 Sick Industrial Units
 Industries Requiring Compulsory Licensing
 Industries Reserved for Small Scale Sector
100% is not allowed  Private banking (49%)
 Insurance (26%)
 Telecommunication (49% / 74 %)
 Retail (51% in single brand)
FDI not at all allowed  Arms and ammunition
 Atomic Energy
 Coal and lignite
 Rail Transport
 Mining of metals like iron, manganese,
chrome, gypsum, sulfur, gold, diamonds,
copper, zinc
 Highest FDI is in which sector? Financial & Non-Financial services (22%)

Topmost investing country Mauritius (44%)

FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises
which function outside of the domestic territory of the investor

Types:

1) Outward FDI: An outward-bound FDI is backed by the government against all types of
associated risks. This form of FDI is subject to tax incentives as well as disincentives of various
forms
2) Inward FDI: Here, investment of foreign capital occurs in local resources.
3) Vertical FDI: It takes place when a multinational corporation owns some shares of a foreign
enterprise, which supplies input for it or uses the output produced by the MNC.
4) Horizontal FDI: It happens when a multinational company carries out a similar business
operation in different nations.

I] CLIMATE IN INDIA: Several factors being attributed to the revival in foreign direct
investments (FDI) in the country include liberal investment policies and reforms, innovative and
technologically advanced products being manufactured in India and low cost and effective
solutions. FDI equity inflows amounting to US$ 10.532 billion were received during April-July
2009. The largest FDI of US$ 153.31 million will be brought in by Essel Group-promoted DTH
service provider. India is targeting annual foreign direct investments worth $50 billion by 2012.
It would double the inflows by 2017. The government has approved 17 (FDI) proposals
amounting to US$ 250.56 million. Among those projects approved were FDI applications for
steel maker ArcelorMittal and iron pipe maker Electrosteel Castings. With the government
planning more liberalisation measures across a broad range of sectors and continued investor
interest, the inflow of FDI into India is likely to further accelerate.

II]CLIMATE IN CHINA: The top sources of FDI in China in 2008 were: Hong Kong, the British
Virgin Islands, Singapore, Japan, the Cayman Islands, South Korea, the United States, Western
Samoa, and Taiwan. 
 The growth rate of foreign direct investment (FDI) into China accelerated to 23% in 2008 to
$92.3 billion, according to Ministry of Commerce statistics. According to the United Nations
Conference on Trade and Development (UNCTAD), in 2007, mainland China was the world’s
sixth largest FDI recipient, after the United States, the United Kingdom, France, Canada, and the
Netherlands. China also received the most votes in a 2007 UNCTAD poll of attractive
investment destinations, followed by India, the United States, Russia, Brazil, and Vietnam.

While FDI in China shot higher, investors continued to face a range of potential problems that
could expose them to risks in the future. Problems foreign investors face in China include lack
of transparency, inconsistently enforced laws and regulations, weak IPR protection, corruption,
industrial policies that protect and promote local firms, and an unreliable legal system. In 2008,
China continued to lay out a legal and regulatory framework granting it the authority to restrict
foreign investment that it deems not to be in China’s national interest. In many ways, the new
rules, codify standards and practices that China was already employing in its existing,
mandatory foreign investment approval process. Key terms and standards in the new
regulations are undefined. At the moment, China appears to be using the rules to restrict
foreign investments that are:

 intended to profit from currency speculation;

 in sectors where the government is trying to tamp down aggregate capital inflows and
inflation;
 in sectors where China is seeking to cultivate “national champions;”
 in sectors that have benefited historically from state-authorized monopolies or from a
legacy of state investment;
 in sectors deemed key to social stability, like foodstuffs and heavily polluting industries;
and
 nominally “foreign” investment that is actually Chinese capital that has been exported
and re-imported to take advantage of preferential treatment accorded to foreigners.
Although it remains to be seen how many of these rules will be applied, they present several
concerns to foreign investors. First, they appear to give regulators significant discretion to
shield inefficient or monopolistic enterprises from foreign competition. They are also often
applied in a manner that is not transparent. Finally, overall predictability for foreign investors
has suffered because investors are less certain that China will approve proposed investment
projects. Some areas where investment is restricted are news agencies radio and TV
transmission networks, film production, publication and importation of press and audio-visual
products, compulsory basic education, mining and processing of certain minerals, processing of
green and “special” tea using Chinese traditional crafts and preparation of Chinese traditional
medicine
At the end of 2008, in response to the weakening economy, China announced a stimulus
package that includes fiscal stimulus, business tax cuts, and support for priority sectors that
may present foreign investors with new opportunities. China offers preferences for investments
in sectors it seeks to develop, including transportation, communications, energy, metallurgy,
construction materials, machinery, chemicals, pharmaceuticals, medical equipment,
environmental protection, energy conservation, and electronics. Finally, China boasts numerous
national science parks, many focused on commercializing research developed in Chinese
universities. The parks provide infrastructure, management and funding support for start-ups
across a variety of industries, and welcome foreign firms.

Investment Guidelines

While insisting it remains open to inward investment, China’s leadership has also stated that
China is actively seeking to target investment in higher value-added sectors, including high
technology research and development, advanced manufacturing, energy efficiency, and
modern agriculture and services, rather than basic manufacturing. China would also seek to
spread the benefits of foreign investment beyond China’s more wealthy coastal areas by
encouraging multinationals to establish regional headquarters and operations in Central,
Western, and Northeastern China.

Distribution of Foreign Investment

The vast majority of foreign investment is concentrated in China's more prosperous coastal
areas, including Guangdong, Jiangsu, Fujian, and Shandong provinces, and Shanghai. Foreign
investment in most service sectors lags manufacturing, mainly due to government-imposed
restrictions. China is committed to gradually phasing out barriers in many service industries, but
progress has been slow

Dispute Settlement

Foreign firms report inconsistent results with all of China’s dispute settlement mechanisms,
none of which are independent of the government. The government often intervenes in
disputes. Corruption may also influence local court decisions and local officials may disregard
the judgments of domestic courts. Well-connected local business people are often in a better
position to win court cases than are foreign investors and it is possible that they may use their
connections to avoid prosecution for taking illegal actions against their former foreign partners.
China’s legal system rarely enforces foreign court judgments

As the economy has slowed, there have been anecdotal reports of local governments singling
out foreign investors, clients, and partners of Chinese businesses to repay debts incurred by
local businesses
 III] CLIMATE IN VIETNAM

Vietnam has seen a vertical surge in its FDI inflows in the recent years, thus becoming the
third most popular investment destination after China and India. The Vietnamese government
is also trying its best to mould the existing policies and laws, so as to keep the capital flow
coming. Statistically speaking, the FDI pledges in Vietnam have galloped from a meager $ 11.3
billion in 2005 to $ 50 million in 2008. This year though the FDI flows have taken a drubbing
because of the volatile economic prevalence and thus the reluctance of the foreign majors to
part with the cash, but the experts feel that Vietnam’s identity as an investor’s heaven is here
to stay. The major factors in the country which have led, multinationals park huge investments
in the country can be tabulated as follows-

 Availability of a young, literate and cheap workforce.

 A stable socio-political situation
 Vietnam’s professionalized investment promotion activities, policy formulation and
implementation
 Cost of land, cost of consumables, very low as compared to other locales
On account o the above stated reasons, the FDI in Vietnam surged to a level of $64 billion in
2008. The investments were primarily in sectors like

 Construction
 High-tech areas
 Production of electronics
 Telecommunications 
thus turning Vietnam into a manufacturing hub in Asia.

In 2009, the expected inflows in the country in the form of FDI pledges are reported to plunge
drastically on account of the skepticism, on the part of the global investors, due to the ongoing
slowdown. Experts have forecasted a figure of $ 20-25 billion for this financial year in terms of
the FDI pledges, which is a fall of above 60%. Apart from the slowdown, the various reasons
that can be attributed to the same are doubts of Vietnam’s capability to digest such huge
investment sums. The various factors that play a role here are

 inadequate infrastructure
 Management problems
 Shortage of adequately trained human resource 

This lack of absorption capability has become a huge spoilsport as it is believed that in 2006,
out of the total investment funds inflow, 60 % remained unutilized. These trends could further
intensify the dollar shortage faced by the country, on account of hoarding by companies
expecting the dong to depreciate. Thus the need of the hour for the government is to plan and
implement policies and infrastructure development, which will restore investor confidence in
Vietnam’s capability to absorb the incoming funds.

15. Discuss the challenges involved in global human resources management.

 International human resource management (HRM) involves ascertaining the corporate

strategy of the company and assessing the corresponding human resource needs;
determining the recruitment, staffing and organizational strategy; recruiting, inducting,
training and developing and motivating the personnel; putting in place the performance
appraisal and compensation plans and industrial relations strategy and the effective
management of all these.
 “The strategic role of HRM is complex enough in a purely domestic firm, but it is more
complex in an international business, where staffing, management development,
performance evaluation, and compensation activities are complicated by profound
differences between countries in labour markets, culture, legal systems, economic
systems, and the like.”
 It is not enough that the people recruited fit the skill requirement, but it is equally
important that they fit in to the organizational culture and the demand of the diverse
environments in which the organization functions.

FACTORS AFFECTING INTERNATIONAL HRM

The following are some of the important factors, which make international HRM complex and
challenging:

DIFFERENCES IN LABOUR MARKET CHARACTERISTICS

  The skill levels, the demand and supply conditions and the behaviour characteristics of
labour vary widely between countries. While some countries experience human
resource shortage in certain sectors, many countries have abundance.
 In the past, developing countries were regarded, generally, as pools of unskilled labour.
Today, however, many developing countries have abundance of skilled and scientific
manpower as well as unskilled and semiskilled labour.
 This changing trend is incasing significant shift of location of business activities. Hard
disk drive manufacturers are reported to be shifting their production base from
Singapore to cheaper locations like Malaysia, Thailand and China.
 While in the past unskilled and semiskilled labour intensive activities tended to be
located in the developing countries, today sophisticated activities also find favour with
developing countries.
 The changing quality attributes of human resources in the developing countries and
wage differentials are causing a location shift in business activities, resulting in new
trends in the global supply chain management.
 India is reported to be emerging as a global R&D hub. India and several other developing
countries are large sources of IT personnel.
 In short, the labour changing labour market characteristics have been causing global
restructuring of business processes and industries. And this causes a great challenge for
strategic HRM.

CULTURAL DIFFERENCES

 Cultural differences cause a great challenge to HRM.

 The behavioural attitude of workers, the social environment, values, beliefs, outlooks
etc., are important factors, which affect industrial relations, loyalty, productivity etc.
 There are also significant differences in aspects related to labour mobility. Cultural
factors are very relevant in inter personal behaviour also.
  In some countries it is common to address the boss Mr. so and so but in countries like
India addressing the boss by name would not be welcome.
 In countries like India people attach great value to designations and hierarchical levels.
This makes delivering and organisational restructuring difficult.

DIFFERENCES IN REGULATORY ENVIRONMENT

 A firm operating in different countries is confronted with different environments with

respect to government policies and regulations regarding labour.
 The attitude of employers and employees towards employment of people show great
variations is different nations. In some countries hire and fire is the common thing
whereas in a number of countries the ideal norm has been lifetime employment.
 In countries like India workers generally felt that while they, have the right to change
organisations, as they preferred, they had a right to lifetime employment in the
organisation they were employed with.
 In such situations it is very difficult to get rid of inefficient or surplus manpower. The
situation, however, is changing in many countries, including India.

DIFFERENCE IN CONDITIONS OF EMPLOYMENT

 Besides the tenancy of employment, there are several conditions of employment the
differences of which cause significant challenge to international HRM.
 The system of rewards, promotion, incentives and motivation, system of labour welfare
and social security etc., vary significantly between countries.