MB0051 - Legal Aspects of Business

Assignment | Semester 3
Master of Business Administration – MBA Semester 3
MB0051 – Legal Aspects of Business - 4 Credits
Assignment Set- 1
Q.1 Explain the concept and limitations of the theory of comparative costs. [10 marks]
Ans: In economics, the law of comparative advantage refers to the ability of a party (an individual, a firm, or a country)
to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a
product with the highest relative efficiency given all the other products that could be produced. It can be contrasted
with absolute advantage which refers to the ability of a party to produce a particular good at a lower absolute cost than
another.
Comparative advantage explains how trade can create value for both parties even when one can produce all goods with
fewer resources than the other. The net benefits of such an outcome are called gains from trade. It is the main concept of
the pure theory of international trade.
Q.2 What are the different market entry strategies for a company which is interested to enter International markets?
Discuss briefly. [10 marks]
Ans: Organizations that plan to go for international marketing should know the answers for some basic questions
like – a. In how many countries would the company like to operate? b. What are the types of countries it plans to
enter? That’s why companies evaluate each country against the market size, market growth, and cost of doing
business, competitive advantage and risk level.
Checklist for country evaluation
The Characteristics, weightages and score should be checked.
1. Political rights.
2. Civil liberties.
3. Control of corruption.
4. Government effectiveness.
5. Rule of law or legal issues.
6. Health expenditure
7. Education expenditure.
8. Regulatory quality.
9. Cost of starting a business.
10. Days to start a business.
11. Trade policy.
12. Inflation.
13. Fiscal policy.
14. Consumption patterns.
15. Competition.
International Market Entry Strategies
Once the market is found to be attractive, companies should decide how to enter this market. Companies can enter
the international market by adopting any one of the following strategies. They are:
a. Exporting
b. Licensing
c. Contract manufacturing
d. Management contract
e. Joint ownership
f. Direct investment
Exporting is the technique of selling the goods produced in the domestic country in a foreign country with some
modifications. For example, Gokaldas textiles export the cloth to different countries from India. Exporting may be
indirect or direct. In case of indirect exporting, company works with independent international marketing
intermediaries. This is cost effective and less risky too. Direct exporting is the technique in which organization
exports the goods on its own by taking all the risks. Maruti Udyog Limited, India’s leading car manufacturer
exports its cars on its own. Company can also set up overseas branches to sell their products. Adani Exports,
another leading exporter from India has international office in Singapore.
Licensing: According to Philip Kotler, licensing is a method of entering a foreign market in which the company
enters into an agreement with a license in the foreign market, offering the right to use a manufacturing process,
trademark, patent, or other item of value for a fee or royalty. For example, Torrent Pharmaceuticals has licensed
the cardiovascular drugs of Chinese manufacturer Tasly. Licensing may cause some problems to the parent
company. Licensee may violate the agreement and can use the technology of the parent company.
Legal Aspects of Business - MB0051 Page 1 of 19

Contract manufacturing: Company enters the international market with a tie up between manufacturer to
produce the product or the service. For example, Gigabyte Technology has contract manufacturing agreement with
D-link India to produce and sell their mother boards.
Another significant manufacturer is TVS Electronics; it produces key boards in its own name as well as for other
companies too.
Management contracting: In this case, a company enters the international market by providing the knowhow of
the product to the domestic manufacturer. The capital, marketing and other activities are carried out by the local
manufacturer, hence it is less risky too.
Joint ownership: A form of joint venture in which an international company invests equally with a domestic
manufacturer. Therefore it also has equal right in the controlling operations. For example, Barbara, a lingerie
manufacturer has joint venture with Gokaldas Images in India.
Direct Investment: In this method of international market entry, Company invests in manufacturing or
assembling. The company may enjoy the low cost advantages of that country. Many manufacturing firms invested
directly in the Chinese market to get its low cost advantage. Some governments provide incentives and tax
benefits to the company which manufactures the product in their country. There is government restriction in some
countries to opt only for direct investment, as it produces the jobs to the local people. This mode also depends on
the country attractiveness. It may become risky if the market matures or unstable government exists
Q.3. a. What are the benefits of MNC’s? [5 marks]

b. Give a short note on OPEC. [5 marks]
Ans 3a: Multinational Companies
A multinational company has branches in many countries. Ford and Sony are examples.
Multinational companies do bring some benefits to developing countries. They provide jobs and increase the wealth of
the local people. The country gains some wealth by way of taxes.
However, there are some problems as well. The jobs are often low-skilled and poorly paid. Much of the profit will go
out of the country, and the company may pull out to relocate in a country where it can make a greater profit.
Multinational companies are primarily interested in making profits for their shareholders. Paying wages is an expense
that the company will try to reduce to as low a level as possible.
A multinational corporation (MNC), also called a Trans-National Co-operation,(TNC) or multinational
enterprise (MNE), is a corporation or an enterprise that manages production or delivers services in more than one
country. It can also be referred to as an international corporation. The International Labor Organization (ILO) has
defined an MNC as a corporation that has its management headquarters in one country, known as the home country, and
operates in several other countries, known as host countries.
The Dutch East India Company was the first multinational corporation in the world and the first company to
issue stock. It was also arguably the world's first mega corporation, possessing quasi-governmental powers, including the
ability to wage war, negotiate treaties, coin money, and establish colonies.
The first modern multinational corporation is generally thought to be the East India Company. Many corporations have
offices, branches or manufacturing plants in different countries from where their original and main headquarters is
located.
Some multinational corporations are very big, with budgets that exceed some nations' GDPs. Multinational corporations
can have a powerful influence in local economies, and even the world economy, and play an important role
in international relations and globalization.
Multinational companies (MNCs) are not without benefits, which may be to the government, the economy, and the
people or even to itself. Cole (1996) stated that the size of multinational organization is enormous; many of them have
total sales well in excess of the GND of many of the world's nations. Cole also stated that World Bank statistics of
comparison between multinational companies and national GNPs shows, for example, that large oil firms such as Exxon
and Shell are large in economic terms that nations such as South Africa, Australia and Argentina are substantially greater
than nations such as Greece, Bulgaria and Egypt.
Other large multinational companies include General Motors, British Petroleum, Ford and International Business
Machine (IBM). Some of the benefits of multinational companies are:
1. There is usually huge capital investment in major economic activities
2. The country enjoys varieties of products, services and facilities, brought to their door steps
3. There is creation of more jobs for the populace
4. The nation's pool of skills are best utilized and put to use effectively and efficiently
5. There is advancement in technology as these companies bring in state-of-the-art-technology for their
businesses
6. The demand for training and retraining and advancement in the people's education becomes absolutely
necessary. This will in turn help strengthen the economy of the nation
7. The living standard of the people is boosted
8. Friendliness between and among nations in trade i.e. it strengthen international relation
9. The balance of payments of nations in trade are improved on

In the words of Cole (1996), he stated that the sheer size (and wealth) of multinationals means that they can have a
significant effect on host country. To Cole, most of the effects are beneficial and include some of the above or all. The
Electronic Library of Scientific Literature (1996) explained the benefits of MNCs under a theory known as 'The Theory
of Externalities'. The theory considers the benefits of MNCs from the point of view of those who maintain the importance
of Foreign Direct Investment (FDI) as part of the engine necessary for growth. In the contribution of Davies (1989), he
gave some theories on the benefits/advantages of multinational. Davies (1989:260) tagged this 'Economic Theory' and
the multinational where he took a comprehensive and critical look at the benefits of MNCs.
More benefits came along with these people's theories and some are:
1. There is significant injection into the local economy in respect to investment
2. Best utilization of the country's natural resources
3. They help in strengthening domestic competition
4. They are good source of technological expertise
5. Expansion of market in the host country
Ans 3(b): Organization of Petroleum Exporting Countries (OPEC): A collective of countries founded in 1960
that choose to collaborate in order to manage the exportation of their crude oil to the rest of the world. Because of their
ability to adjust production levels, they possess a great deal of influence on the price of oil.
Q.4. a. How will socio-cultural environment of a country have an impact on a multinational business? Explain with an
example. [5 marks]
b. Discuss the origin of WTO and its principles. [5 marks]
Ans 4a: Business, now-a-days is vitally affected by the economic, social, legal, technological and political factors. These
factors collectively form business environment. Business environment, as such, is the total of all external forces, which
affect the organization and operations of business. The environment of an organization has got internal, operational and
general lives managers must be aware of these three environmental levels and their relationship and importance.
The term 'business environment implies those external forces, factors and institutions that are beyond the control of
individual business organizations and their management and affect the business enterprise. It implies all external forces
within which a business enterprise operates. Business environment influence the functioning of the business system.
Thus, business environment may be defined as all those conditions and forces which are external to the business and are
beyond the individual business unit, but it operates within it. These forces are customer, creditors, competitors,
government, socio-cultural organizations, political parties national and international organizations etc. some of those
forces affect the business directly which some others have indirect effect on the business.
Business environment as such are classified into the following three major categories, they are:
 Internal environment
 Operational environment
 General/external environment
Both internal and operational environment are the creation of the enterprise itself. The factors of external or general
environment are broad in scope and least controlled and influenced by the management of the enterprises.
Now we discuss those factors in details as below:
Economic dimensions of environment
Economic environment refers to the aggregate of the nature of economic system of the country, the structural anatomy of
the economy to economic policies of the government the organization of the capital market, the nature of factor
endowment, business cycles, the socio-economic infrastructure etc. The successful businessman visualizes the external
factors affecting the business, anticipating the prospective market situations and makes suitable to get the maximum with
minimize cost.
Social dimensions or environment
The social dimension or environment of a nation determines the value system of the society which, in turn affects
the functioning of the business. Sociological factors such as costs structure, customs and conventions, cultural heritage,
view toward wealth and income and scientific methods, respect for seniority, mobility of labor etc. have far-reaching
impact on the business. These factors determine the work culture and mobility of labor, work groups etc. For instance,
the nature of goods and services to be produced depends upon the demand of the people which in turn is affected by their
attitudes, customs, so as cultural values fashion etc. Socio-cultural environment determines the code of conduct the
business should follow. The social groups such as trade unions or consumer forum will intervene if the business follows
the unethical practices. For instance, if the firm is not paying fair wages to its business in indulging in black marketing or
adulteration, consumer’s forums and various government agencies will take action against the business.
Political environment

The political environment of a country is influenced by the political organizations such as philosophy of political parties,
ideology of government or party in power, nature and extent of bureaucracy influence of primary groups etc. political
stability in the country, foreign policy, Defense and military policy, image of the country and its leaders in and outside
the country. The political environment of the country influences the business to a great extent. For instance, the
Government of India, bottling and sale of coca-cola was discontinued in India in the late seventies following policy of
restricting the growth of multinationals in Indian markets. But, its entry was allowed under the New Industrial policy of
1991. Under this new policy, government allowed liberalized licensing, imports and exports, inflow of foreign capital
and technology on more liberal terms. The trend towards globalization and signing of GATT in 1993 has posed new
challenges before Indian business.
Legal regulatory environment
Legal environment includes flexibility and adaptability of law and other legal rules governing the business. It may
include the exact rulings and decision of the courts. These affect the business and its managers to a great extent. For
instance, in 1992, the Supreme Court ordered the closure of a number of tanneries in Kanpur as they were polluting Holy
Ganga. In August 1993 several foundries around the famous Taj Mahal were ordered to be closed down because of air-
pollution caused by them had adverse impact on the whiteness of Taj Mahal.
Technical environment
The business in a country is greatly influenced by the technological development. The technology adopted by the
industries determines the type and quality of goods and services to be produced and the type and quality of plant and
equipment to be used. Technological environment influences the business in terms of investment in technology,
consistent application of technology and the effects of technology on markets.
Ans 4b: Introduction:

The World Trade Organization is a Multi-lateral organization which facilitates the free flow of goods and services across
the world and encourages fair trade among nations. The result is that the global income increases due to increased trade
and there is supposed to be overall enhancement in the prosperity levels of the member nations. To put it in brief WTO
encourages a multi-lateral trading system within its member countries.
Origin and Evolution of WTO: - GATT to Uruguay
WTO is of a very recent origin, it came into formal existence on January 1 st 1995. As an organization it has vast powers
and functions than what its predecessor GATT (General Agreement on Tariffs and Trade) had, the objectives and goals
of both being broadly the same. GATT came into existence in the year 1948, after long negotiations to form an
organization called ITO immediately after the Second World War did not materialize. The ITO was supposed to be the
third international organization in the "Golden Triangle" that was supposed to come into existence, the first two being
IMF and World Bank.
To begin with 23 countries became founding GATT members (officially, "contracting parties"). GATT remained the only
multilateral instrument governing international trade from 1948 until the WTO was established in 1995. There were
several controversies on whether the GATT had actually contributed to enhancement of world trade and did it serve its
purpose of a multi-lateral trading organization. The liberalization of international trade during GATT era in its true sense
was always debatable. However, it is very clear that over the period of 47 years of its existence, GATT was successful in
initiating a process of tariff cutting in several groups of manufactured goods. Moreover the signatories in the GATT
increased from 23 to more than 100 in a short span, ratifying the fact that being in the system was proved and considered
more beneficial than not being in it.
On the other front, the internal and domestic economic problems and fluctuations made some economies to go back to
increase the levels of protection and increase trade barriers to enable faster domestic growth and recovery. The problem
was not just a deteriorating trade policy environment, but some other serious issues. GATT negotiations did not include
services and agricultural trade in its gamut. As the world trade grew in size, the share of services trade along with that of
merchandise started to increase leading to the insufficiency of the GATT principles to cover the expanding aspects of
ever evolving global trade. As a result, these loopholes were taken as advantage by many trading countries, resulting in a
lopsided development of world trade. These and other factors convinced GATT members that a new effort to reinforce
and extend the multilateral system should be attempted. That effort resulted in the Uruguay Round, the Marrakesh
Declaration, and the creation of the WTO.
Q. 5 a. Explain the merits and demerits of BoP theory? [6 marks]

b. Distinguish between fixed and flexible exchange rates. [4 marks]
Ans 5a: A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and
the rest of the world. These transactions include payments for the country's exports and imports of goods, services,
and financial capital, as well as financial transfers. The BOP summaries international transactions for a specific period,

usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of
funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items.
Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item.
When all components of the BOP sheet are included it must balance – that is, it must sum to zero – there can be no
overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit,
but the shortfall will have to be counter balanced in other ways – such as by funds earned from its foreign investments,
by running down reserves or by receiving loans from other countries.
While the overall BOP sheet will always balance when all types of payments are included, imbalances are possible on
individual elements of the BOP, such as the current account. This can result in surplus countries accumulating hoards of
wealth, while deficit nations become increasingly indebted. Historically there have been different approaches to the
question of how to correct imbalances and debate on whether they are something governments should be concerned
about. With record imbalances held up as one of the contributing factors to the financial crisis of 2007–2010, plans to
address global imbalances are now high on the agenda of policy makers for 2010.
Ans 5b: Distinguish between fixed and flexible exchange rates

FIXED RATES
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein
a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another
measure of value, such as gold.
A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to. This makes
trade and investments between the two countries easier and more predictable, and is especially useful for small
economies where external trade forms a large part of their GDP.
It can also be used as a means to control inflation. However, as the reference value rises and falls, so does the currency
pegged to it. In addition, according to the Mundell-Fleming model, with perfect capital mobility, a fixed exchange rate
prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.
There are no major economic players that use a fixed exchange rate (except the countries using the Euro and the Chinese
Yuan). The currencies of the countries that now use the euro are still existing (e.g. for old bonds). The rates of these
currencies are fixed with respect to the euro and to each other. The most recent such country to discontinue their fixed
exchange rate was the People's Republic of China, which did so in July 2005. However, as of September 2010, the fixed-
exchange rate of the Chinese Yuan has already increased 1.5% in the last 3 months.
flexible exchange rates.
A flexible exchange rate system is a currency system that allows the exchange rate to be determined by supply and
demand.
After the failure of Bretton Woods system several currency regimes have emerged spanning the spectrum of rigidly fixed
rate regime to independently flexible regimes.
Every country that has its own currency must decide what type of exchange rate arrangement to maintain. In academic
discussions, the decision is often posed as a choice between a fixed or a flexible exchange rate. In reality however, there
are different varieties of fixed and flexible arrangements, providing a range of alternatives. The different alternatives
have different implications for the extent to which national authorities participate in the foreign exchange markets.
According to their degree of flexibility, exchange rate regimes are arranged into three categories: Currency unions,
dollarized regimes, currency boards and conventional fixed pegs are defined as “fixed-rate regimes”; Horizontal bands,
crawling pegs and crawling bands are grouped into “intermediate regimes”; Managed and independent floats are defined
as flexible regimes.
Monetary Union is a zone where a single monetary policy prevails and inside which a single currency or currencies,
which are perfect substitutes, circulate freely. A Monetary Union has common monetary and fiscal policy to ensure
control over the creation of high-powered money and the expansion of government debts; it has a central management of
the common pool of foreign exchange reserves, external debts and exchange rate policies. The Monetary Union has
common regional monetary authority i.e. common regional central bank, which is the sole issuer of economy wide
currency, in the case of a full currency union. The Monetary Union reduces the time inconsistency problem by requiring
multinational agreement on policy and reduces real exchange rate volatility. The potential drawbacks are that member
countries suffering asymmetric shocks lose a stabilization tool. The cost depends on the extent of asymmetric costs and
the availability and effectiveness of alternative adjustment tools.
Dollarization/Euroization A foreign currency acts as legal tender. Dollarization is a summary measure of the use of
foreign currency in its capacity to produce all types of money services in the domestic economy. Monetary policy is
delegated to the anchor country. Dollarization/Euroization reduces the time inconsistency problem and real exchange rate
volatility. Under dollarization exchange rate movements cannot buffer external shocks.
Currency Board is monetary regime adopted by countries that intend to discipline their Central Banks, as well as solve
their external credibility problems by “tying their hands” with institutionally binding arrangements. A currency board
combines three elements: an exchange rate that is fixed to an “anchor currency”; automatic convertibility or the right to
exchange domestic currency at this fixed rate whenever desired; and a long-term commitment to the system. The time
inconsistency problem is reduced and real exchange rate volatility is diminished. A currency board system can be

credible only if central bank holds official foreign exchange reserves sufficient to at least cover the entire monetary base.
Exchange rate movements cannot buffer external shocks.
Fixed peg means fixed rate against a single currency or a currency basket. The time inconsistency problem is reduced
through commitment to a verifiable target. Devaluation option provides potentially valuable policy tool in response to
large shocks. It’s potential drawbacks are: provides a target for speculative attacks, avoids real exchange rate volatility
but not necessarily persistent misalignments, does not by itself place hard constrains on monetary and fiscal policy, the
credibility effect depends on accompanying institutional measures and record of accomplishment.
Crawling peg A rule based system for altering the par value, typically at a predetermined rate or as a function of inflation
differentials. It is an attempt to combine flexibility and stability. Often used by (initially) high inflation countries pegging
to low inflation countries in attempt to avoid trend real appreciation. At the margins a crawling peg provides a target for
speculative attacks. Among variants of fixed exchange rates, it imposes the least restrictions, and may hence yield the
smallest credibility benefits. The credibility effect depends on accompanying institutional measures and record of
accomplishment.
Bands Exchange rate is flexible within a present band; endpoints are defended through intervention, typically with some
intra-band intervention. An attempt to mix market-determined rates with exchange rate stabilizing intervention in a rule
based system. It provides a limited role for exchange rate movements to counteract external shocks and partial
expectations anchor, retains exchange rate uncertainty and thus motivates development of exchange rate risk
management tools. On the margin a band is subject to speculative attacks. Does not by itself place hard constrains on
monetary and fiscal policy, and thus provides only partial solution against the time inconsistency problem. The
credibility effect depends on accompanying institutional measures, record of accomplishment and the characteristics of
the band (firm or adjustable, secret or public, width, strength of intervention requirement).
Managed float Exchange rates are determined in the foreign exchange market. Authorities can and do intervene, but are
not bound by any intervention rule. Often accompanied by a separate nominal anchor, such as inflation target. The
arrangement provides a way to mix market-determined rates with stabilizing intervention in a non-rule-based system. Its
potential drawbacks are that it doesn’t place hard constrains on monetary and fiscal policy. Absence of rule conditions
credibility, gain on credibility of monetary authorities. Limited transparency.
Pure float The exchange rate is determined in the market without public sector intervention. Adjustments to shocks can
take place through exchange rate movements. Eliminates the requirement to hold large reserves. This arrangement does
not provide an expectations anchor. Exchange rate regime places no restrictions on monetary and fiscal policy; time
inconvenience arises unless addressed by other institutional measures.
Q. 6. Discuss the need for HRM Strategies and International employee relations strategies in International business. [10
marks]
Ans: Human resource management (HRM) is the strategic and coherent approach to the management of an organization's
most valued assets - the people working there who individually and collectively contribute to the achievement of the
objectives of the business.[1] The terms "human resource management" and "human resources" (HR) have largely
replaced the term "personnel management" as a description of the processes involved in managing people in
organizations. In simple words, HRM means employing people, developing their capacities, utilizing, maintaining and
compensating their services in tune with the job and organizational requirement.
An HRM strategy pertains to the means as to how to implement the specific functions of HRM. An organization's HR
function may possess recruitment and selection policies, disciplinary procedures, reward/recognition policies, an HR
plan, or learning and development policies, however all of these functional areas of HRM need to be aligned and
correlated, in order to correspond with the overall business strategy. An HRM strategy thus is an overall plan, concerning
the implementation of specific HRM functional areas.
An HRM strategy typically consists of the following factors:-
 "Best fit" and "best practice" - meaning that there is correlation between the HRM strategy and the overall
corporate strategy. As HRM as a field seeks to manage human resources in order to achieve properly organizational
goals, an organization's HRM strategy seeks to accomplish such management by applying a firm's personnel needs
with the goals/objectives of the organization. As an example, a firm selling cars could have a corporate strategy of
increasing car sales by 10% over a five year period. Accordingly, the HRM strategy would seek to facilitate how
exactly to manage personnel in order to achieve the 10% figure. Specific HRM functions, such as recruitment and
selection, reward/recognition, an HR plan, or learning and development policies, would be tailored to achieve the
corporate objectives.
 Close co-operation (at least in theory) between HR and the top/senior management, in the development of the
corporate strategy. Theoretically, a senior HR representative should be present when an organization's corporate
objectives are devised. This is so, since it is a firm's personnel who actually construct a good, or provide a service.
The personnel's proper management is vital in the firm being successful, or even existing as a going concern. Thus,
HR can be seen as one of the critical departments within the functional area of an organization.
 Continual monitoring of the strategy, via employee feedback, surveys, etc.
The implementation of an HR strategy is not always required, and may depend on a number of factors, namely the size of
the firm, the organizational culture within the firm or the industry that the firm operates in and also the people in the firm.
An HRM strategy can be divided, in general, into two facets - the people strategy and the HR functional strategy. The
people strategy pertains to the point listed in the first paragraph, namely the careful correlation of HRM policies/actions
to attain the goals laid down in the corporate strategy. The HR functional strategy relates to the policies employed within
the HR functional area itself, regarding the management of persons internal to it, to ensure its own departmental goals are
met.

Master of Business Administration - MBA Semester 3
MB0051 – Legal Aspects of Business - 4 Credits
Assignment Set- 2
Q.1 Discuss the issues involved in international product policy and International branding with a few examples. [10
marks]
Ans: Products and Services. Some marketing scholars and professionals tend to draw a strong distinction between
conventional products and services, emphasizing service characteristics such as heterogeneity (variation in standards
among providers, frequently even among different locations of the same firm), inseparability from consumption,
intangibility, and, in some cases, perishability—the idea that a service cannot generally be created during times of slack
and be “stored” for use later. However, almost all products have at least some service component—e.g., a warranty,
documentation, and distribution—and this service component is an integral part of the product and its positioning. Thus,
it may be more useful to look at the product-service continuum as one between very low and very high levels of
tangibility of the service. Income tax preparation, for example, is almost entirely intangible—the client may receive a
few printouts, but most of the value is in the service. On the other hand, a customer who picks up rocks for construction
from a landowner gets a tangible product with very little value added for service. Firms that offer highly tangible
products often seek to add an intangible component to improve perception. Conversely, adding a tangible element to a
service—e.g., a binder with information—may address many consumers’ psychological need to get something to show
for their money.
On the topic of services, cultural issues may be even more prominent than they are for tangible goods. There are large
variations in willingness to pay for quality, and often very large differences in expectations. In some countries, it may be
more difficult to entice employees to embrace a firm’s customer service philosophy. Labor regulations in some countries
make it difficult to terminate employees whose treatment of customers is substandard. Speed of service is typically
important in the U.S. and western countries but personal interaction may seem more important in other countries.
Product Need Satisfaction. We often take for granted the “obvious” need that products seem to fill in our own culture;
however, functions served may be very different in others—for example, while cars have a large transportation role in the
U.S., they are impractical to drive in Japan, and thus cars there serve more of a role of being a status symbol or providing
for individual indulgence. In the U.S., fast food and instant drinks such as Tang are intended for convenience; elsewhere,
they may represent more of a treat. Thus, it is important to examine through marketing research consumers’ true
motives, desires, and expectations in buying a product.
Approaches to Product Introduction. Firms face a choice of alternatives in marketing their products across markets.
An extreme strategy involves customization, whereby the firm introduces a unique product in each country, usually with
the belief tastes differ so much between countries that it is necessary more or less to start from “scratch” in creating a
product for each market. On the other extreme, standardization involves making one global product in the belief the
same product can be sold across markets without significant modification—e.g., Intel microprocessors are the same
regardless of the country in which they are sold. Finally, in most cases firms will resort to some kind of adaptation,
whereby a common product is modified to some extent when moved between some markets—e.g., in the United States,
where fuel is relatively less expensive, many cars have larger engines than their comparable models in Europe and Asia;
however, much of the design is similar or identical, so some economies are achieved. Similarly, while Kentucky Fried
Chicken serves much the same chicken with the eleven herbs and spices in Japan, a lesser amount of sugar is used in the
potato salad, and fries are substituted for mashed potatoes.
There are certain benefits to standardization. Firms that produce a global product can obtain economies of scale in
manufacturing, and higher quantities produced also lead to a faster advancement along the experience curve. Further, it
is more feasible to establish a global brand as less confusion will occur when consumers travel across countries and see
the same product. On the down side, there may be significant differences in desires between cultures and physical
environments—e.g., software sold in the U.S. and Europe will often utter a “beep” to alert the user when a mistake has
been made; however, in Asia, where office workers are often seated closely together, this could cause embarrassment.
Adaptations come in several forms. Mandatory adaptations involve changes that have to be made before the product can
be used—e.g., appliances made for the U.S. and Europe must run on different voltages, and a major problem was
experienced in the European Union when hoses for restaurant frying machines could not simultaneously meet the legal
requirements of different countries. “Discretionary” changes are changes that do not have to be made before a product
can be introduced (e.g., there is nothing to prevent an American firm from introducing an overly sweet soft drink into the
Japanese market), although products may face poor sales if such changes are not made. Discretionary changes may also
involve cultural adaptations—e.g., in Sesame Street, the Big Bird became the Big Camel in Saudi Arabia.

Another distinction involves physical product vs. communication adaptations. In order for gasoline to be effective in

high altitude regions, its octane must be higher, but it can be promoted much the same way. On the other hand, while the
same bicycle might be sold in China and the U.S., it might be positioned as a serious means of transportation in the
former and as a recreational tool in the latter. In some cases, products may not need to be adapted in either way (e.g.,
industrial equipment), while in other cases, it might have to be adapted in both (e.g., greeting cards, where the occasions,
language, and motivations for sending differ). Finally, a market may exist abroad for a product which has no analogue
at home—e.g., hand-powered washing machines.
Branding. While Americans seem to be comfortable with category specific brands, this is not the case for Asian
consumers. American firms observed that their products would be closely examined by Japanese consumers who could
not find a major brand name on the packages, which was required as a sign of quality. Note that Japanese keiretsus span
and use their brand name across multiple industries—e.g., Mitsubishi, among other things, sells food, automobiles,
electronics, and heavy construction equipment.
The International Product Life Cycle (PLC). Consumers in different countries differ in the speed with which they
adopt new products, in part for economic reasons (fewer Malaysian than American consumers can afford to buy VCRs)
and in part because of attitudes toward new products (pharmaceuticals upset the power afforded to traditional faith
healers, for example). Thus, it may be possible, when one market has been saturated, to continue growth in another
market—e.g., while somewhere between one third and one half of American homes now contain a computer, the
corresponding figures for even Europe and Japan are much lower and thus, many computer manufacturers see greater
growth potential there. Note that expensive capital equipment may also cycle between countries—e.g., airlines in
economically developed countries will often buy the newest and most desired aircraft and sell off older ones to their
counterparts in developing countries. While in developed countries, “three part” canning machines that solder on the
bottom with lead are unacceptable for health reasons, they have found a market in developing countries.
Diffusion of innovation. Good new innovations often do not spread as quickly as one might expect—e.g., although the
technology for microwave ovens has existed since the 1950s, they really did not take off in the United States until the late
seventies or early eighties, and their penetration is much lower in most other countries. The typewriter, telephone
answering machines, and cellular phones also existed for a long time before they were widely adopted.
Certain characteristics of products make them more or less likely to spread. One factor is relative advantage. While a
computer offers a huge advantage over a typewriter, for example, the added gain from having an electric typewriter over
a manual one was much smaller. Another issue is compatibility, both in the social and physical sense. A major problem
with the personal computer was that it could not read the manual files that firms had maintained, and birth control
programs are resisted in many countries due to conflicts with religious values. Complexity refers to how difficult a new
product is to use—e.g., some people have resisted getting computers because learning to use them takes
time. Trialability refers to the extent to which one can examine the merits of a new product without having to commit a
huge financial or personal investment—e.g., it is relatively easy to try a restaurant with a new ethnic cuisine, but
investing in a global positioning navigation system is riskier since this has to be bought and installed in one’s car before
the consumer can determine whether it is worthwhile in practice. Finally, observability refers to the extent to which
consumers can readily see others using the product—e.g., people who do not have ATM cards or cellular phones can
easily see the convenience that other people experience using them; on the other hand, VCRs are mostly used in people’s
homes, and thus only an owner’s close friends would be likely to see it.
At the societal level, several factors influence the spread of an innovation. Not surprisingly, cosmopolitanism, the extent
to which a country is connected to other cultures, is useful. Innovations are more likely to spread where there is a higher
percentage of women in the work force; these women both have more economic power and are able to see other people
use the products and/or discuss them. Modernity refers to the extent to which a culture values “progress.” In the U.S.,
“new and improved” is considered highly attractive; in more traditional countries, their potential for disruption cause new
products to be seen with more skepticism. Although U.S. consumers appear to adopt new products more quickly than
those of other countries, we actually score lower onhomiphily, the extent to which consumers are relatively similar to
each other, and physical distance, where consumers who are more spread out are less likely to interact with other users of
the product. Japan, which ranks second only to the U.S., on the other hand, scores very well on these latter two factors.
International Promotion
Promotional tools. Numerous tools can be used to influence consumer purchases:
 Advertising—in or on newspapers, radio, television, billboards, busses, taxis, or the Internet.
 Price promotions—products are being made available temporarily as at a lower price, or some premium (e.g.,
toothbrush with a package of toothpaste) is being offered for free.
 Sponsorships
 Point-of-purchase—the manufacturer pays for extra display space in the store or puts a coupon right by the
product
 Other method of getting the consumer’s attention—all the Gap stores in France may benefit from the
prominence of the new store located on the Champs-Elysees
Promotional objectives. Promotional objectives involve the question of what the firm hopes to achieve with a campaign
—“increasing profits” is too vague an objective, since this has to be achieved through some intermediate outcome (such
as increasing market share, which in turn is achieved by some change in consumers which cause them to buy more).
Some common objectives that firms may hold:
 Awareness. Many French consumers do not know that the Gap even exists, so they cannot decide to go
shopping there. This objective is often achieved through advertising, but could also be achieved through
favorable point-of-purchase displays. Note that since advertising and promotional stimuli are often afforded
very little attention by consumers, potential buyers may have to be exposed to the promotional stimulus
numerous times before it “registers.”
 Trial. Even when consumers know that a product exists and could possibly satisfy some of their desires, it may
take a while before they get around to trying the product—especially when there are so many other products that
compete for their attention and wallets. Thus, the next step is often to try get consumer to try the product at
least once, with the hope that they will make repeat purchases. Coupons are often an effective way of achieving
trial, but these are illegal in some countries and in some others, the infrastructure to readily accept coupons
(e.g., clearing houses) does not exist. Continued advertising and point-of-purchase displays may be effective.
Although Coca Cola is widely known in China, a large part of the population has not yet tried the product.
 Attitude toward the product. A high percentage of people in the U.S. and Europe have tried Coca Cola, so a
more reasonable objective is to get people to believe positive things about the product—e.g., that it has a
superior taste and is better than generics or store brands. This is often achieved through advertising.
 Temporary sales increases. For mature products and categories, attitudes may be fairly well established and not
subject to cost-effective change. Thus, it may be more useful to work on getting temporary increases in sales
(which are likely to go away the incentives are removed). In the U.S. and Japan, for example, fast food
restaurants may run temporary price promotions to get people to eat out more or switch from competitors, but
when these promotions end, sales are likely to move back down again (in developing countries, in contrast, trial
may be a more appropriate objective in this category).
Note that in new or emerging markets, the first objectives are more likely to be useful while, for established products, the
latter objectives may be more useful in mature markets such as Japan, the U.S., and Western Europe.
Constraints on Global Communications Strategies. Although firms that seek standardized positions may seek
globally unified campaigns, there are several constraints:
 Language barriers: The advertising will have to be translated, not just into the generic language category (e.g.,
Portuguese) but also into the specific version spoken in the region (e.g., Brazilian Portuguese). (Occasionally,
foreign language ads are deliberately run to add mystique to a product, but this is the exception rather than the
rule).
 Cultural barriers. Subtle cultural differences may make an ad that tested well in one country unsuitable in
another—e.g., an ad that featured a man walking in to join his wife in the bathroom was considered an
inappropriate invasion in Japan. Symbolism often differs between cultures, and humor, which is based on the
contrast to people’s experiences, tends not to travel well. Values also tend to differ between cultures—in the
U.S. and Australia, excelling above the group is often desirable, while in Japan, “The nail that sticks out gets
hammered down.” In the U.S., “The early bird gets the worm” while in China “The first bird in the flock gets
shot down.”
 Local attitudes toward advertising. People in some countries are more receptive to advertising than others.
While advertising is accepted as a fact of life in the U.S., some Europeans find it too crass and commercial.
 Media infrastructure. Cable TV is not well developed in some countries and regions, and not all media in all
countries accept advertising. Consumer media habits also differ dramatically; newspapers appear to have a
higher reach than television and radio in parts of Latin America.
 Advertising regulations. Countries often have arbitrary rules on what can be advertised and what can be
claimed. Comparative advertising is banned almost everywhere outside the U.S. Holland requires that a
toothbrush be displayed in advertisements for sweets, and some countries require that advertising to be shown
there be produced in the country.

Some cultural dimensions:

 Directness vs. indirectness: U.S. advertising tends to emphasize directly why someone would benefit from
buying the product. This, however, is considered too pushy for Japanese consumers, where it is felt to be
arrogant of the seller to presume to know what the consumer would like.
 Comparison: Comparative advertising is banned in most countries and would probably be very
counterproductive, as an insulting instance of confrontation and bragging, in Asia even if it were allowed. In the
U.S., comparison advertising has proven somewhat effective (although its implementation is tricky) as a way to
persuade consumers what to buy.
 Humor. Although humor is a relatively universal phenomenon, what is considered funny between countries
differs greatly, so pre-testing is essential.
 Gender roles. A study found that women in U.S. advertising tended to be shown in more traditional roles in the
U.S. than in Europe or Australia. On the other hand, some countries are even more traditional—e.g., a Japanese
ad that claimed a camera to be “so simple that even a woman can use it” was not found to be unusually
insulting.
 Explicitness. Europeans tend to allow for considerably more explicit advertisements, often with sexual
overtones, than Americans.
 Sophistication. Europeans, particularly the French, demand considerably more sophistication than Americans
who may react more favorably to emotional appeals—e.g., an ad showing a mentally retarded young man
succeeding in a job at McDonald’s was very favorably received in the U.S. but was booed at the Cannes film
festival in France.
 Popular vs. traditional culture. U.S. ads tend to employ contemporary, popular culture, often including current
music while those in more traditional cultures tend to refer more to classical culture.
 Information content vs. fluff. American ads contain a great deal of “puffery,” which was found to be very
ineffective in Eastern European countries because it resembled communist propaganda too much. The Eastern
European consumers instead wanted hard, cold facts.
Advertising standardization. Issues surrounding advertising standardization tend to parallel issues surrounding product
and positioning standardization. On the plus side, economies of scale are achieved, a consistent image can be established
across markets, creative talent can be utilized across markets, and good ideas can be transplanted from one market to
others. On the down side, cultural differences, peculiar country regulations, and differences in product life cycle
stages make this approach difficult. Further, local advertising professionals may resist campaigns imposed from the
outside—sometimes with good reasons and sometimes merely to preserve their own creative autonomy.
Legal issues. Countries differ in their regulations of advertising, and some products are banned from advertising on
certain media (large supermarket chains are not allowed to advertise on TV in France, for example). Other forms of
promotion may also be banned or regulated. In some European countries, for example, it is illegal to price discriminate
between consumers, and thus coupons are banned and in some, it is illegal to offer products on sale outside a very narrow
seasonal and percentage range.

Pricing Issues in International Marketing
Price can best be defined in ratio terms, giving the equation
resources given up
price = ———————————————
goods received
This implies that there are several ways that the price can be changed:
 "Sticker" price changes—the most obvious way to change the price is the price tag— you get the same thing,
but for a different (usually larger) amount of money.
 Change quantity. Often, consumers respond unfavorably to an increased sticker price, and changes in quantity
are sometimes noticed less—e.g., in the 1970s, the wholesale cost of chocolate increased dramatically, and
candy manufacturers responded by making smaller candy bars. Note that, for cash flow reasons, consumers in
less affluent countries may need to buy smaller packages at any one time (e.g., forking out the money for a large
tube of toothpaste is no big deal for most American families, but it introduces a greater strain on the budget of a
family closer to the subsistence level).
 Change quality. Another way candy manufacturers have effectively increased prices is through a reduction in
quality. In a candy bar, the "gooey" stuff is much cheaper than chocolate. It is frequently tempting for foreign
licensees of a major brand name to use inferior ingredients.
 Change terms. In the old days, most software manufacturers provided free support for their programs—it used to
be possible to call the WordPerfect Corporation on an 800 number to get free help. Nowadays, you either have
to call a 900 number or have a credit card handy to get help from many software makers. Another way to change
terms is to do away with favorable financing terms.
Reference Prices. Consumers often develop internal reference prices, or expectations about what something should cost,
based mostly on their experience. Most drivers with long commutes develop a good feeling of what gasoline should cost,
and can tell a bargain or a rip-off.
Reference prices are more likely to be more precise for frequently purchased and highly visible products. Therefore,
retailers very often promote soft drinks, since consumers tend to have a good idea of prices and these products are quite
visible. The trick, then, is to be more expensive on products where price expectations are muddier.
Marketers often try to influence people's price perceptions through the use of external reference prices—indicators given
to the consumer as to how much something should cost. Examples include:
 Manufacturer's Suggested Retail Price (MSRP). This is often pure fiction. The suggested retail prices in certain
categories are deliberately set so high that even full service retailers can sell at a "discount." Thus, although the
consumer may contrast the offering price against the MSRP, this latter figure is quite misleading.
 "SALE! Now $2.99; Regular Price $5.00." For this strategy to be used legally in most countries, the claim must
be true (consistency of enforcement in some countries is, of course, another matter). However, certain products
are put on sale so frequently that the "regular" price is meaningless. In the early 1990s, Sears was reported to
sell some 55% of its merchandise on sale.
 "WAS $10.00, now $6.99."
 "Sold elsewhere for $150.00; our price: $99.99."
Reference prices have significant international implications. While marketers may choose to introduce a product at a low
price in order to induce trial, which is useful in a new market where the penetration of a product is low, this may have
serious repercussions as consumers may develop a low reference price and may thus resist paying higher prices in the
future.
Selected International Pricing Issues. In some cultures, particularly where retail stores are smaller and the buyer has the
opportunity to interact with the owner, bargaining may be more common, and it may thus be more difficult for the
manufacturer to influence retail level pricing.
Two phenomena may occur when products are sold in disparate markets. When a product is exported, price escalation,
whereby the product dramatically increases in price in the export market, is likely to take place. This usually occurs
because a longer distribution chain is necessary and because smaller quantities sold through this route will usually not
allow for economies of scale. "Gray" markets occur when products are diverted from one market in which they are
cheaper to another one where prices are higher—e.g., Luis Vuitton bags were significantly more expensive in Japan than
in France, since the profit maximizing price in Japan was higher and thus bags would be bought in France and shipped to
Japan for resale. The manufacturer therefore imposed quantity limits on buyers. Since these quantity limits were
circumvented by enterprising exchange students who were recruited to buy their quota on a daily basis, prices eventually
had to be lowered in Japan to make the practice of diversion unattractive. Where the local government imposes price
controls, a firm may find the market profitable to enter nevertheless since revenues from the new market only have to
cover marginal costs. However, products may then be attractive to divert to countries without such controls.
Transfer pricing involves what one subsidiary will charge another for products or components supplied for use in another
country. Firms will often try to charge high prices to subsidiaries in countries with high taxes so that the income earned
there will be minimized.

Antitrust laws are relevant in pricing decisions, and anti-dumping regulations are especially noteworthy. In general, it is
illegal to sell a product below your cost of production, which may make a penetration pricing entry strategy infeasible.
Japan has actively lobbied the World Trade Organization (WTO) to relax its regulations, which generally require firms to
price no lower than their average fully absorbed cost (which incorporates both variable and fixed costs).
Alternatives to "hard" currency deals. Buyers in some countries do not have ready access to convertible currency, and
governments will often try limit firms’ ability to spend money abroad. Thus, some firms have been forced into non-cash
deals. In barter, the seller takes payment in some product produced in the buying country—e.g., Lockheed (back when it
was an independent firm) took Spanish wine in return for aircraft, and sellers to Eastern Europe have taken their payment
in ham. An offset contract is somewhat more flexible in that the buyer can get paid but instead has to buy, or cause others
to buy, products for a certain value within a specified period of time.
Psychological issues: Most pricing research has been done on North Americans, and this raises serious problems of
generalizability. Americans are used to sales, for example, while consumers in countries where goods are more scarce
may attribute a sale to low quality rather than a desire to gain market share. There is some evidence that perceived price
quality relationships are quite high in Britain and Japan (thus, discount stores have had difficulty there), while in
developing countries, there is less trust in the market. Cultural differences may influence the extent of effort put into
evaluating deals (potentially impacting the effectiveness of odd-even pricing and promotion signaling). The fact that
consumers in some economies are usually paid weekly, as opposed to biweekly or monthly, may influence the
effectiveness of framing attempts—"a dollar a day" is a much bigger chunk from a weekly than a monthly paycheck.
International Distribution
Promotional tools. Numerous tools can be used to influence consumer purchases:
 Advertising—in or on newspapers, radio, television, billboards, busses, taxis, or the Internet.
 Price promotions—products are being made available temporarily as at a lower price, or some premium (e.g.,
toothbrush with a package of toothpaste) is being offered for free.
 Sponsorships
 Point-of-purchase—the manufacturer pays for extra display space in the store or puts a coupon right by the
product
 Other method of getting the consumer’s attention—all the Gap stores in France may benefit from the
prominence of the new store located on the Champs-Elysees.
Promotional objectives. Promotional objectives involve the question of what the firm hopes to achieve with a campaign
—“increasing profits” is too vague an objective, since this has to be achieved through some intermediate outcome (such
as increasing market share, which in turn is achieved by some change in consumers which cause them to buy more).
Some common objectives that firms may hold:
 Awareness. Many French consumers do not know that the Gap even exists, so they cannot decide to go
shopping there. This objective is often achieved through advertising, but could also be achieved through
favorable point-of-purchase displays. Note that since advertising and promotional stimuli are often afforded
very little attention by consumers, potential buyers may have to be exposed to the promotional stimulus
numerous times before it “registers.”
 Trial. Even when consumers know that a product exists and could possibly satisfy some of their desires, it may
take a while before they get around to trying the product—especially when there are so many other products that
compete for their attention and wallets. Thus, the next step is often to try get consumer to try the product at
least once, with the hope that they will make repeat purchases. Coupons are often an effective way of achieving
trial, but these are illegal in some countries and in some others, the infrastructure to readily accept coupons
(e.g., clearing houses) does not exist. Continued advertising and point-of-purchase displays may be effective.
Although Coca Cola is widely known in China, a large part of the population has not yet tried the product.
 Attitude toward the product. A high percentage of people in the U.S. and Europe have tried Coca Cola, so a
more reasonable objective is to get people to believe positive things about the product—e.g., that it has a
superior taste and is better than generics or store brands. This is often achieved through advertising.
 Temporary sales increases. For mature products and categories, attitudes may be fairly well established and not
subject to cost-effective change. Thus, it may be more useful to work on getting temporary increases in sales
(which are likely to go away the incentives are removed). In the U.S. and Japan, for example, fast food
restaurants may run temporary price promotions to get people to eat out more or switch from competitors, but
when these promotions end, sales are likely to move back down again (in developing countries, in contrast, trial
may be a more appropriate objective in this category).
Note that in new or emerging markets, the first objectives are more likely to be useful while, for established products, the
latter objectives may be more useful in mature markets such as Japan, the U.S., and Western Europe.
Constraints on Global Communications Strategies. Although firms that seek standardized positions may seek
globally unified campaigns, there are several constraints:
 Language barriers: The advertising will have to be translated, not just into the generic language category (e.g.,
Portuguese) but also into the specific version spoken in the region (e.g., Brazilian Portuguese). (Occasionally,
foreign language ads are deliberately run to add mystique to a product, but this is the exception rather than the
rule).
 Cultural barriers. Subtle cultural differences may make an ad that tested well in one country unsuitable in
another—e.g., an ad that featured a man walking in to join his wife in the bathroom was considered an
inappropriate invasion in Japan. Symbolism often differs between cultures, and humor, which is based on the
contrast to people’s experiences, tends not to travel well. Values also tend to differ between cultures—in the
U.S. and Australia, excelling above the group is often desirable, while in Japan, “The nail that sticks out gets
hammered down.” In the U.S., “The early bird gets the worm” while in China “The first bird in the flock gets
shot down.”
 Local attitudes toward advertising. People in some countries are more receptive to advertising than others.
While advertising is accepted as a fact of life in the U.S., some Europeans find it too crass and commercial.
 Media infrastructure. Cable TV is not well developed in some countries and regions, and not all media in all
countries accept advertising. Consumer media habits also differ dramatically; newspapers appear to have a
higher reach than television and radio in parts of Latin America.
 Advertising regulations. Countries often have arbitrary rules on what can be advertised and what can be
claimed. Comparative advertising is banned almost everywhere outside the U.S. Holland requires that a
toothbrush be displayed in advertisements for sweets, and some countries require that advertising to be shown
there be produced in the country.
Some cultural dimensions:
 Directness vs. indirectness: U.S. advertising tends to emphasize directly why someone would benefit from
buying the product. This, however, is considered too pushy for Japanese consumers, where it is felt to be
arrogant of the seller to presume to know what the consumer would like.
 Comparison: Comparative advertising is banned in most countries and would probably be very
counterproductive, as an insulting instance of confrontation and bragging, in Asia even if it were allowed. In the
U.S., comparison advertising has proven somewhat effective (although its implementation is tricky) as a way to
persuade consumers what to buy.
 Humor. Although humor is a relatively universal phenomenon, what is considered funny between countries
differs greatly, so pre-testing is essential.
 Gender roles. A study found that women in U.S. advertising tended to be shown in more traditional roles in the
U.S. than in Europe or Australia. On the other hand, some countries are even more traditional—e.g., a Japanese
ad that claimed a camera to be “so simple that even a woman can use it” was not found to be unusually
insulting.
 Explicitness. Europeans tend to allow for considerably more explicit advertisements, often with sexual
overtones, than Americans.

 Sophistication. Europeans, particularly the French, demand considerably more sophistication than Americans
who may react more favorably to emotional appeals—e.g., an ad showing a mentally retarded young man
succeeding in a job at McDonald’s was very favorably received in the U.S. but was booed at the Cannes film
festival in France.
 Popular vs. traditional culture. U.S. ads tend to employ contemporary, popular culture, often including current
music while those in more traditional cultures tend to refer more to classical culture.
 Information content vs. fluff. American ads contain a great deal of “puffery,” which was found to be very
ineffective in Eastern European countries because it resembled communist propaganda too much. The Eastern
European consumers instead wanted hard, cold facts.
Advertising standardization. Issues surrounding advertising standardization tend to parallel issues surrounding product
and positioning standardization. On the plus side, economies of scale are achieved, a consistent image can be established
across markets, creative talent can be utilized across markets, and good ideas can be transplanted from one market to
others. On the down side, cultural differences, peculiar country regulations, and differences in product life cycle
stages make this approach difficult. Further, local advertising professionals may resist campaigns imposed from the
outside—sometimes with good reasons and sometimes merely to preserve their own creative autonomy.
Legal issues. Countries differ in their regulations of advertising, and some products are banned from advertising on
certain media (large supermarket chains are not allowed to advertise on TV in France, for example). Other forms of
promotion may also be banned or regulated. In some European countries, for example, it is illegal to price discriminate
between consumers, and thus coupons are banned and in some, it is illegal to offer products on sale outside a very narrow
seasonal and percentage range.
Q.2 a. Why do you think International quality standards are essential in International business? [4 marks]
Ans: International business is a term used to collectively describe all commercial transactions
(private and governmental, sales, investments, logistics, and transportation) that take place between two or more nations.
Usually, private companies undertake such transactions for profit; governments undertake them for profit and
for political reasons. It refers to all those business activities which involves cross border transactions of goods, services,
resources between two or more nations. Transaction of economic resources include capital, skills, people etc. for
international production of physical goods and services such as finance, banking, insurance, construction etc.
A multinational enterprise (MNE) is a company that has a worldwide approach to markets and production or one with
operations in more than a country. An MNE is often called multinational corporation (MNC) or transnational company
(TNC). Well known MNCs include fast food companies such as McDonald's and Yum Brands, vehicle manufacturers
such as General Motors, Ford Motor Company and Toyota, consumer electronics companies
like Samsung, LG and Sony, and energy companies such as ExxonMobil, Shell and BP. Most of the largest corporations
operate in multiple national markets.
Areas of study within this topic include differences in legal systems, political systems, economic
policy, language, accounting standards, labor standards, living standards, environmental standards, local
culture, corporate culture, foreign exchange market, tariffs, import and export regulations, trade
agreements, climate, education and many more topics. Each of these factors requires significant changes in how
individual business units operate from one country to the next.
The conduct of international operations depends on companies' objectives and the means with which they carry them out.
The operations affect and are affected by the physical and societal factors and the competitive environment.
ROBOTICS
The understanding that the morphology performs computation can also be used to analyze the relationship between
morphology and control and to theoretically guide the design of robots with reduced control requirements.
This provides the basis for a new field of research, in which theoretical methods can be developed to analyze and
quantify the relationship between morphology and control.
Based on such analysis, robots can be designed which use the morphology to perform a computational role in the system,
and the ease the computational requirements on the controller. A nice example of this was provided by Rolf Pfeifer and
Fumiya Iida, introducing the idea to the robotics community, through the design of a robotic hand.
Note: Some people in robotics use the phrase "morphological computation" in a broad sense as describing the trade-off
between morphology and control in robots. That is, every instance in which the robot morphology is shown to aid the
control, they say the body performs "morphological computation". This is technically inaccurate, as there are other
mechanisms besides computation which can also give rise to the morphology and control trade-off. Without an analysis
which proves the existence of computation in the specific robot structure, it is not accurate to claim that it performs
morphological computation.
A flexible manufacturing system (FMS) is a manufacturing system in which there is some amount of flexibility that
allows the system to react in the case of changes, whether predicted or unpredicted. This flexibility is generally
considered to fall into two categories, which both contain numerous subcategories.
The first category, machine flexibility, covers the system's ability to be changed to produce new product types, and ability
to change the order of operations executed on a part. The second category is called routing flexibility, which consists of
the ability to use multiple machines to perform the same operation on a part, as well as the system's ability to absorb
large-scale changes, such as in volume, capacity, or capability.
Most FMS systems consist of three main systems. The work machines which are often automated CNC machines are
connected by a material handling system to optimize parts flow and the central control computer which controls material
movements and machine flow.
The main advantages of an FMS are its high flexibility in managing manufacturing resources like time and effort in order
to manufacture a new product. The best application of an FMS is found in the production of small sets of products like
those from a mass production.
Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties
for good, services, or use of property (including intangible property). Transfer prices among components of an enterprise
which may be used to reflect allocation of resources among such components, or for other purposes. OECD Transfer
Pricing Guidelines state, “Transfer prices are significant for both taxpayers and tax administrations because they
determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax
jurisdictions.”
Many governments have adopted transfer pricing rules that apply in determining or adjusting income taxes of domestic
and multinational taxpayers. The OECD has adopted guidelines followed, in whole or in part, by many of its member
countries in adopting rules. United States and Canadian rules are similar in many respects to OECD guidelines, with
certain points of material difference. A few countries follow rules that are materially different overall.
The rules of nearly all countries permit related parties to set prices in any manner, but permit the tax authorities to adjust
those prices where the prices charged are outside an arm's length range. Rules are generally provided for determining
what constitutes such arm's length prices, and how any analysis should proceed. Prices actually charged are compared to
prices or measures of profitability for unrelated transactions and parties. The rules generally require that market level,
functions, risks, and terms of sale of unrelated party transactions or activities be reasonably comparable to such items
with respect to the related party transactions or profitability being tested.
Most systems allow use of multiple methods, where appropriate and supported by reliable data, to test related party
prices. Among the commonly used methods are comparable uncontrolled prices, cost plus, resale price or markup, and
profitability based methods. Many systems differentiate methods of testing goods from those for services or use of
property due to inherent differences in business aspects of such broad types of transactions. Some systems provide
mechanisms for sharing or allocation of costs of acquiring assets (including intangible assets) among related parties in a
manner designed to reduce tax controversy.
Most tax treaties and many tax systems provide mechanisms for resolving disputes among taxpayers and governments in
a manner designed to reduce the potential for double taxation. Many systems also permit advance agreement between
taxpayers and one or more governments regarding mechanisms for setting related party prices.
Many systems impose penalties where the tax authority has adjusted related party prices. Some tax systems provide that
taxpayers may avoid such penalties by preparing documentation in advance regarding prices charged between the
taxpayer and related parties. Some systems require that such documentation be prepared in advance in all cases.
b. Give a note on Robotics and flexible manufacturing. [6 marks]

Ans: In brief, a "bill of exchange" or a "Hundi" is a kind of legal negotiable instrument used to settle a payment at a
future date. It is drawn by a drawer on a drawee wherein drawee accepts the payment liability at a date stated in the
instrument. The Drawer of the Bill of Exchange draws the bill on the drawee and sends it to him for his acceptance. Once
accepted by the drawee, it becomes a legitimate negotiable instrument in the financial market and a debt against the
drawee. The drawer may, on acceptance, have the Bill of Exchange discounted from his bank for immediate payment to
have his working capital funds. On due date, the bill is again presented to the drawee for the payment accepted by him, as
stated therein the bill.
Letter of Credit (LC) is a declaration of financial soundness and commitment, by a bank for its client, for the amount
stated in the LC document, to the other party (beneficiary) named therein. The LCs may or may not be endorse-able. In
case of default of payment by the party under obligation to pay, the LC issuing Bank undertakes to honor the payment -
with or without conditions. Normally, there may be sight LCs or DA LCs containing a set of conditions in both the cases.
There "may be" Bills of Exchange(s) drawn under the overall limits of the LC amount for payment later on.
Q. 5 a. Make a note of the functions and achievements of UNCTAD. [6 marks]

b. Give reasons for the slow growth towards achieving international accounting standards. [4 marks]
Ans: There is no denying the fact that, as UNCTAD's mandate has become multidimensional, so its achievements have
therefore been of different kinds. The most significant achievements included. a) the agreement on Generalized System
of Preferences(GSP)1971; b) the setting up of the Global System of Trade Preferences among developing
Countries(1989); c) negotiation of International Commodity Agreements; d) the establishment of transparent market
mechanisms in the form of intergovernmental commodity expert and study groups, involving consumers and producers;
e) the negotiation of the Common Fund for Commodities(1989); f) the adoption of the resolution on the retroactive
adjustment of terms of Official Development Assistance debt of low-income developing countries; g) the establishment
of guidelines for international action in the area of debt rescheduling(1980); h) the Programme of Action for Least
Developed Countries for the 1990s and I) the negotiation of convention in the area of maritime transport. In addition to
above UNCTAD made some contributions on matters for implementation in other forums. For example, it has
contribution in the improvement of the Implementation compensatory facility for export earnings shortfalls of developing
countries; the creation of the Special Drawing Rights by IMF; the reduction of commercial bank debt for the highly
indebted countries promoted by the World Bank. UNCTAD had also some contribution in the area of code of conduct for
the transfer of technology, computerized systems in the area of customs and debt management.
Although for many limitations as I mentioned earlier UNCTAD could not fulfill all expectations but it has tried and still
trying with its limited resources to do its work. For the cause of the developing countries the role of UNCTAD should be
strengthen. To make it more dynamic and effective some measures should be taken like as follows:
a) The Third World countries should minimize their differences and have to sacrifice their own interest for the sake of
other developing countries. It will be easier for UNCTAD to work in a co-operative atmosphere than of conflict.
b) UNCTAD should give emphasis those issues in which it possesses considerable expertise. Here the proposal is not to
alter its earlier position, but to focus more strongly on specific matters which are covered little if at all by other
organizations. In trade field UNCTAD should give importance on consensus building. As UNCTAD provides a universal
forum for policy analysis, so for consensus on trade policy issue it can help to prepare ground for later negotiations
within WTO. UNCTAD and WTO should co-operate with each other in the field of international trade. It is encouraging
that two organizations have already started their co-operation. In their joint meeting held in 8th Oct. 1996 WTO Director
General said "the convergence between WTO and UNCTAD was evidenced in regular meetings between the heads of the
two organizations, joint research projects, co-ordinate technical assistance and generally a more intense working
relationship at all levels of the organizations." As the main functions of WTO are the implementation and negotiation of
contractual trading rules and discipline, there is considerable scope for complementarily between WTO and UNCTAD.
The policy analysis and consensus building functions of UNCTAD can make essential contribution to the
intergovernmental consideration of trade issues to the point where they can be fruitfully negotiated in WTO.
d) In post cold war economic environment, the need for collective action by the Third World countries to meet the
evolving challenges is more important than ever. UNCTAD is the only body in the UN which has some scope to deal
with global economic issues from a development perspective. UNCTAD should be equipped for that purpose.
e) UNCTAD's monitoring and analytical capacities should be increased sufficiently.
f) Its efficiency in the area of foreign investment, technology transfer, competition policy regarding Multinational
Corporation should be strengthening.
g) UNCTAD should prepare its answer for Third World country regarding liberalization and regional groupings.
Since it has been reorganized to make it more efficient there is no need to dismantle it. Because it still serves a primary
purpose to achieve international co-operation in solving international problems of an economic nature. And UNCTAD is
the only organization in the world which gives the impression of being trade and development in an integrated way
which is very important.
Q. 6 a. Give a note on the Japanese approach to HRM. [4 marks]

b. Explain briefly the Purchasing power parity theory. [6 marks]
Ans: A key element in the Japanese system was the headquarters HR department, which administered employment and
labor relations. Among its myriad duties, the HR department was in charge of rotating managers around the company
and winnowing out people for senior positions. HR was linked to corporate governance indirectly—by grooming people
for the board of directors, comprised of management insiders—and directly though the board membership of the senior
HR executive.
Managers viewed HR as a beneficial posting since it was a place to network with other managers. It ranked about
halfway down the list of functions that were precursors to a senior executive promotion--behind marketing but ahead of
engineering, R&D, and others. In the early 1990s, one-third of corporate directors in non-manufacturing firms had
previous experience in the HR function. (Tachibanaki, 1998; Inohara 1990) On the company board, the HR executive
voiced employee concerns to other executives and served as the advocate of the seishain—the career employees—in
strategic decision-making.
In the United States, by contrast, the senior HR executive traditionally was low man—or woman—in the managerial
hierarchy. The function’s low status was reflected by a relatively high proportion of women in HR positions and
relatively low pay for HR executives. (Jacoby 2002b) For the past fifty years or more, the powerhouse function of the
U.S. corporation has been finance.
At various times, however, HR did have its day in the sun. During the 1940s, HR (then called “personnel”) was
temporarily elevated in status as U.S. companies accommodated to the rise of unions or sought ways to avoid them. In
some nonunion companies, the HR executive functioned as an employee advocate, being the two-way transmission point
between employees and management. In the 1960s and 1970s, new regulations put HR in the position of having to
develop systems for complying with the law on affirmative action, occupational safety, and other issues. As for corporate
governance, companies at least gave lip service to the notion that the corporation was a social institution with
responsibilities not only to shareholders but to employees, customers, and communities.
In the 1980s and 1990s, however, most U.S. companies became increasingly financialized, undiversified, and oriented to
shareholder concerns. Ties between employees and companies grew weaker, and HR executives in these companies
adapted, or were forced to adapt, to the status quo. They focused on flexibility and on treating employees as costs to be
minimized. Some U.S. companies, however, sought competitive advantage not in market power but in having inimitable
resources such as intellectual and organizational capital. Here, HR managers took a different approach, giving rise to
Japanese-style emphases on participation and culture.
Today there is pressure on Japanese companies to conform to U.S.-style corporate governance and to adopt market-
oriented employment practices that would weaken the corporate HR function. Studying the role of the senior HR
executive provides a window on the process of institutional adjustment in Japan and allows us to see whether there is
convergence to U.S. practices. Is it, in fact, the case that HR is losing its high standing inside the Japanese corporation
and becoming more like the U.S. system?
As for the U.S., despite a huge prescriptive literature on HR, we know relatively little about what is happening to HR at
the top of U.S. companies and how this is related to recent changes in corporate governance and other factors. Are HR
executives losing influence as the focus shifts increasingly to labor-cost minimization? Or is HR on the ascendant, either
through an emphasis on intellectual capital or through a market-oriented alignment with shareholder interests?
The Study
We conducted a mail survey of senior HR executives in large public U.S. and Japanese companies. We asked about
various issues including the company’s HR structure, the involvement of headquarters in operating and strategic
decisions, and relations between HR and other corporate functions. We also surveyed CFOs (chief financial officers) in
the United States. Out of about 1,000 surveys sent in each country, we had usable responses from 230 Japanese firms
and from 145 U.S firms. While the response rate may seem low.
The theory that, in the long run, identical products and services in different countries should cost the same in different
countries. This is based on the belief that exchange rates will adjust to eliminate the arbitrage opportunity of buying a
product or service in one country and selling it in another. For example, consider a laptop computer that costs 1,500
Euros in Germany and a rate of 2 Euros to 1 U.S. Dollar. If the same laptop cost 1,000 dollars in the United, U.S.
consumers would buy the laptop in Germany. If done on a large scale, the influx of U.S. dollars would drive up the price
of the Euro, until it equalized at 1.5 Euros to 1 U.S. Dollar - the same ratio of the price of the laptop in Germany to the
price of the laptop in the U.S. The theory only applies to tradable goods, not to immobile goods or local services. The
theory also discounts several real world factors, such as transportation costs, tariffs and transaction costs. It also assumes
there are competitive markets for the goods and services in both countries.

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Assignment | Semester 3

Master of Business Administration – MBA Semester 3

MB0051 – Legal Aspects of Business - 4 Credits

Legal Aspects of Business - MB0051 Page 1 of 19

Q.3. a. What are the benefits of MNC’s? [5 marks]

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Ans 4b: Introduction:

Q. 5 a. Explain the merits and demerits of BoP theory? [6 marks]

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Ans 5b: Distinguish between fixed and flexible exchange rates

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MB0051 – Legal Aspects of Business - 4 Credits

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Another distinction involves physical product vs. communication adaptations. In order for gasoline to be effective in

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Some cultural dimensions:

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b. Give a note on Robotics and flexible manufacturing. [6 marks]

Q. 5 a. Make a note of the functions and achievements of UNCTAD. [6 marks]

Q. 6 a. Give a note on the Japanese approach to HRM. [4 marks]

Legal Aspects of Business - MB0051 Page 19 of 19

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