RIFTVALLEY UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF BUSINESS ADMINSTRATION
MBA Program

Individual Assignment of International Business

Prepared By: RIYAD MOHAMMED

Id No: 0139/13

Submitted to: Inst.Seid (Ass. Prof)

JAN, 2022
HARAR, ETHIOPIA
A. Economic Integrations
In every usage the word integration denotes the bringing
together of parts into a whole.
In the economic literature the term Economic Integration does
not have such a clear –cut meaning. Some authors propose to
define Economic integration as a process and as a state of
affairs.
The difference Between Integration and Cooperation is
Qualitative and Quantitative.
Economic integration define in several forms that represent
varying degrees of integration. Such as,
 Free Trade area
 A customs Union
 A common Market
 An Economic Union
 Complete Economic integration.

The Liberalist and the Dirigist Ideal of Economic

Integration
The recent interest in Economic Integration has prompted
Various Proposals concerning the means and objectives of
integration. Two extreme views –an all-out liberalist and a
dirigist solution will be contrasted here. They regard of
economic integration as identical with trade (and payments)
liberalization.
B. Multinational Corporations
The multinational corporation is a business organization whose
activities are located in more than two countries and is the
organizational form that defines foreign direct investment. This
form consists of a country location where the firm is
incorporated and of the establishment of branches or subsidiaries
in foreign countries. Multinational companies can, obviously,
vary in the extent of their multinational activities in terms of the
number of countries in which they operate.
A large multinational corporation can operate in 100 countries,
with hundreds of thousands of employees located outside its
home country.
The economic definition emphasizes the ability of owners and
their managerial agents in one country to control the operations
in foreign countries.
The multinational corporation is, thus, the product of foreign
direct investment that is defined as the effective control of
operations in a country by foreign owners.

C. Tariffs and Quotas

On the tariffs versus quotas issue, the main point the authors
emphasize is that costly adjustment alters the relative present
values of the costs of using tariffs and quotas in favor of using
quotas to achieve any given target reduction in the present value
of trade deficits. I conjecture that this result is quite general and
is likely to hold for a variety of specifications of costs of
adjustment.

This is likely because the result depends on the central

distinction between tariffs and quotas, that the latter bite
immediately on quantities and hence have a larger ratio of short-
term to long-term trade balance effects in the presence of
adjustment costs. To illustrate the generality of this result and its
independence from the specific role of inventories, I think it
would be possible to relabel inventories as plant and equipment
and the analysis would carry through just as it does now,
providing we continue to make the assumption that capital
goods are an undifferentiated part of the homogeneous output of
the representative firm.

Given the practical importance of the choice between tariffs and

quotas and the likelihood that the result does not depend on the
authors’ specific assumptions about the role and costliness of
inventory adjustment, it would be helpful to provide some
indication of how it might be possible to assess the likely
magnitude of the partial preference of quotas over tariffs.
D. Free Trade Area
If the likely effect is small, then it can safely be treated as a
secondary member of the larger set of efficiency issues
surrounding the revenue, distribution, and political
consequences of the use of tariffs and quotas. In any event, fine-
tuning the choice between tariffs and quotas, as applied by one
country acting on its own, ought to be subservient to the larger
questions of the likelihood of retaliation of others and of the
systemic effects of making industry-specific tariffs and quotas a
feasible goal for firms that might better be spending their scarce
entrepreneurial talents finding new products, improving
production techniques, and developing new markets.

Although I regard the comparison of tariffs and quotas to be

more convincing than the arguments about the short-run
dynamic linkages between inventories and exports, the quality
of the analysis is high throughout the paper,

Economic Review— Fourth Quarter 1993 1 David M. Gould

Roy J. Ruffin Economist M. D. Anderson Professor of
Economics Federal Reserve Bank of Dallas University of
Houston Graeme L. Woodbridge Assistant Professor of
Economic University of Melbourne since the end of World War
II the U.S. share of world income has fallen, while U.S. trade
with the rest of the world has increased.
Many believe that these two trends are not coincidental. U.S.
firms that once dominated automobile, steel, and
Consumer electronics industries face stiff competition from
Japan and increasing competition from South Korea and other
industrializing countries.
In response to the changing pattern of world trade, the
automobile, steel, semiconductor, and other industries have
requested and received increased trade protection in the form of
voluntary export restraints, countervailing duties, and
antidumping lawsuits. The trend toward trade liberalization,
beginning with the Generalized Agreement on Tariffs and Trade
(GATT) in 1947, appears to be changing as the United States
and other countries escalate their use of protection to limit
imports especially imports from developing countries. The
perception that liberalized trade contributes to unemployment
has been a primary cause of the rise in protection. Indeed, much
of the debate surrounding the North American Free Trade
Agreement (NAFTA) has focused on the question of whether
free trade with Mexico will take jobs away from the United
States.
Does free trade cause unemployment, or does it enhance
economic growth? In this article, we examine the case for free
trade in theory and in the light of recent experience. Fortunately,
there is now a good deal of data on trade and protection from
numerous countries to use in assessing the role of trade in
economic performance.
Despite some theoretical exceptions to arguments for free
trade, the data suggest that free trade has worked best in
practice.
Comparative advantage and international trade The most
fundamental argument for international trade is that it enables a
country to expand the quantity of goods and services it
consumes.
Through imports, a country can acquire goods and services that
it either cannot produce at home or can produce at home only at
a cost that is greater than the cost of obtaining them indirectly by
exchanging them for the exports it produces.
In other words, through trade, a country can obtain goods and
services with greater efficiency by specializing in those
activities in which the country has a comparative advantage. For
example, the United States can spend its unique talents in
developing computing and communications technology while
Japan devotes its efforts to consumer electronics. If Japan did
not perform these tasks, the United States would have to shift
resources from other activities into the production of
camcorders, flat-panel displays, TV sets, and other items that the
United States currently imports. David Ricardo developed the
principle of comparative advantage in 1817. It says that every
country, no matter how inefficient in its overall production
structure, can always profitably export
The Theory and Practice of Free Trade Gerald P. O’Driscoll, Jr.
offered extremely helpful comments as the reviewer for this
article. We also benefited from the discussions and comments of
William C.Gruben. All remaining errors are solely our
responsibility.
2 Federal Reserve Bank of Dallas some goods to pay for its most
desired imports. A country’s wages reflect its general
productivity level and its overall standard of living, but they do
not determine its competitiveness or which goods it ultimately
exports. Countries with high overall productivity will have high
wages, and countries with low overall productivity will have low
wages.
What matters for trade is that within countries different
industries are more productive than others. It is unavoidable that
each country has industries with both higher than average and
lower than average productivities. Because a country’s high-
productivity industries need only pay that country’s competitive
market wage, these industries will have lower relative costs and
will be able to compete in world markets. This principle is the
basis for trade. For example, the United States has higher wages
than Mexico, but this difference does not prevent the United
States from selling products to Mexico. On the contrary, U.S.
industries with higher than average productivities, such as the
computer industry, can export substantial amounts to Mexico at
a lower cost than Mexico can produce them. Likewise, Mexico
will export goods and services from its industries with higher
than average productivities because these industries will have a
cost advantage in the United States. (See the box entitled, “A
Simple Example of Comparative Advantage.”)
Although we usually think of the benefits of international trade
as limited to the exchange goods and services, perhaps the
greatest benefit of international commerce results from
the transmission of ideas. Throughout history, international trade
has served as the principal means by which new goods (such as
the potato), services (such as the music of the Beatles), and
processes (such as Japanese just-in-time manufacturing) have
spread around the globe.

E. Foreign Direct Investment

Foreign direct investment (FDI) is an integral part of an open
and effective international economic system and a major catalyst
to development. Yet, the benefits of FDI do not accrue
automatically and evenly across countries, sectors and local
communities. National policies and the international investment
architecture matter for attracting FDI to a larger number of
developing countries and for reaping the full benefits of FDI for
development. The challenges primarily address host countries,
which need to establish a transparent, broad and effective
enabling policy environment for investment and to build the
human and institutional capacities to implement them. With
most FDI flows originating from OECD countries, developed
countries can contribute to advancing this agenda. They can
facilitate developing countries’ access to international markets
and technology, and ensure policy coherence for development
more generally; use overseas development assistance (ODA) to
leverage public/private investment projects; encourage non-
OECD countries to integrate further into rules-based
international frameworks for investment; actively promote the
OECD Guidelines for Multinational Enterprises, together with
other elements of the OECD Declaration on International
Investment; share with non-members the OECD peer review-
based approach to building investment capacity. Developing
countries, emerging economies and countries in transition have
come increasingly to see FDI as a source of economic
development and modernization, income growth and
employment. Countries have liberalized their FDI regimes and
pursued other policies to attract investment. They have
addressed the issue of how best to pursue domestic policies to
maximize the benefits of foreign presence in the domestic
economy. The study Foreign Direct Investment for Development
attempts primarily to shed light on the second issue, by focusing
on the overall effect of FDI on macroeconomic growth and other
welfare-enhancing processes, and on the channels through which
these benefits take effect. The overall benefits of FDI for
developing country economies are well documented. Given the
appropriate host-country policies and a basic level of
development, a preponderance of studies shows that FDI
triggers technology spillovers, assists human capital formation,
contributes to international trade integration, helps create a more
competitive business environment and enhances enterprise
development. All of these contribute to higher economic growth,
which is the most potent tool for alleviating poverty in
developing countries.
F. Licensing and Franchising.

License Arrangement
A license arrangement is primarily composed of 2 elements:
(1) The license of a name and/or logo; and
(2) The payment of initial and/or ongoing license or royalty fees.
A licensor can "police" trademark (such as display of the mark
or right of inspection) but cannot provide significant assistance
to the licensee or significant control over the licensee that a
franchisee can provide. In a true license arrangement, a licensor
is limited in the amount of initial and ongoing assistance it can
provide to a licensee. A licensee is also limited in the degree of
control it can exert over the licensee’s method of operation.
These limitations will, from a practical standpoint, adversely
affect the fees that the licensor can charge the licensee for the
license and limit the licensor’s ability to demand certain
uniformity among all businesses using the licensed mark.

Franchise Arrangement
A franchise relationship contains 3 elements, the first 2 being
similar elements as a license:
(1) The licensee/franchisee sells goods or services which meet
the licensor’s/franchisor's quality standards and operates under
the licensor’s/franchisor's marks or which are identified by the
licensor’s/franchisor's mark; and
(2) The licensee is required to make a payment of $500 or more
to the licensor/franchisor or a person affiliated with the
licensor/franchisor at any time before or within 6 months after
the business opens (excluding the wholesale price of inventory.
However, in order for the license arrangement to become a
franchise arrangement, the arrangement must also include the
licensor exercising significant control over, or gives the licensee
significant assistance in, the licensee's method of operation The
FTC Franchise Rule Interpretive Guides sets forth 9 examples of
significant types of controls and 5 examples of significant
promises of assistance over the franchisee's entire method of
operation.
Significant Types of Control
(i) Site approval for unestablished business;
(ii) Site design or appearance requirements;
(iii) Hours of operation;
(iv) Production techniques;
(v) Accounting practices;
(vi) Personnel policies and practices;
(vii) Promotional campaigns requiring the franchisee's
participation or financial contribution;

What if the License Arrangement is Held to be a Franchise?

The obvious advantages of licensing over franchising include
reduced legal costs, reduced accounting and auditing costs, no
registration and approval of the license program with any state,
and quicker entry into the marketplace. This is because licensing
is not subject to the FTC Franchise Rule or and other federal law
or rule requiring pre-sale disclosure. Licensing is also not
subject to state franchise disclosure and registration laws or
business opportunity disclosure and registration laws.
While there are certain advantages to embarking on a license
program rather than a franchise program, there may also be the
risk that the license program will be construed to be an illegal
franchise if challenged by an unhappy licensee. The cost of
defending the license program in just instance may prove to be
more costly than if the franchise laws were complied with at the
inception of the program. If the disgruntled licensee is
successful, the license may have the right to sue for rescission
(seeking the return of all monies paid to the licensor plus any
losses, court costs, attorneys’ fees and interest) or a suit for
damages.

G. Ethiopian Export and Import Procedures

It is important to know that all importers should pay their fees
through commercial banks. In addition, payments for amounts
above USD 2000 should be made through Letter of Credit (L/C)
or Cash against Document (CAD). Lastly, pre-shipment
inspection is mandatory for imports from China.
i) Pre-shipment Inspection
Goods that are imported from China are subject to mandatory
pre-shipment inspection. This requirement applies to all goods
purchased from China since January 1, 2007
The Ethiopia Ministry of Trade has made arrangements with the
China Inspection and Quarantine Bureau (CIQ) to carry out
inspections before shipment to Ethiopia and issue the quality
certificates.
The pre-shipment inspection certificate is one of the key
documents required to effect import payments from China. It is
mandatory to have this document if you plan to import goods
that are worth over USD 2000.
Commercial banks are required to ensure that the CIQ
inspection certificate accompanies the Letter of Credit and the
Purchase Order. If the inspection certificate is not attached to the
other documents, the bank will not accept them.
Pre-shipment inspection is also done in instances where an
importer and a supplier have a prior agreement, regardless of the
country of origin.
ii) Import Payment
Foreign exchange is availed by banks to importers if they
produce either of the following documents:

Import License from the Ministry of Trade Industry License

from the Ministry of Industry Investment License from the
Investment Agency Applications submitted for imports should
be accompanied by a preform a Invoice or contracts from
suppliers containing the following information:

Type of commodity Quantity of the commodity Price per unit of

the commodity FOB amount Freight costs (if applicable) other
charges Insurance payment/requirement (You cannot pay for
insurance using foreign currency. You will thus need to make
arrangements to purchase your insurance locally)

The allowed Modes of Payment for imports include:

Letter of Credit (L/C) Cash against Document (CAD)

Advance payments up to USD 5000 Documentation
requirements to effect payments the following sets of documents
are presented by the supplier to demand payment. Ethiopia
import procedures require that these documents be specified in
the L/C or Purchase Order for payment to be effected.
A final invoice – must be a commercial invoice that is verified
by the chamber of commerce in the country of origin (of the
supplier)
Depending on the mode of transportation used, the Bill of
Lading, Airway Bill, Truckway Bill, or Railway Manifest
(original sets only) Country of origin – the invoice must be
certified by the chamber of commerce of the supplier’s country
Packing list

A certificate of quality (where appropriate)

Importers who prefer to import using CAD must note the
following:

They should first get approval from their bank on the purchase
order they intend to give the supplier
The purchase order should state the document requirements
clearly, and the pre-shipment inspection certificate attached.
Shipping documents should also be attached, as the import payment will
not be released without them.
Payment on CAD will only be released after the importer gets prior
approval from the bank.

Verification of Documents Ethiopia Import and Export

Banks have the responsibility of checking that all the documents

are genuine and in order, and ensuring that the goods shipped
are as per the L/C or Purchase Order (in the case of Cash
Against Document) issued. The list of documents to be attached
and presented should be listed clearly on the L/C and Purchase
Order.
If the documents presented are deemed to be compliant with the
L/C and Purchase Order, they will be accepted, and the payment
released. If the documents are not accepted, they will be held
back until amendments and further clarifications are done.
iii) Required documents for imports (Summary) Agency
agreement Bank permit Bill of Lading/ Airway bill Certificate of
origin Commercial invoices Foreign exchange authorization
Import license Insurance certificate packing list Tax
identification number (TIN) certificate Pre-shipment inspection
clean report of findings Transit document VAT certificate
Ethiopia Export Procedures Any business owner who wants to
export goods from Ethiopia should familiarize themselves with
Ethiopia export procedures, which include:
Obtaining export permits from commercial banks Preparation of
Application for Quality Testing and Certification, to obtain the
Export Authorization Certificate from the Quality and Standards
Authority of Ethiopia Filling out the Customs declaration
i) Export permit from commercial banks The Documents
required for Export Permit approval are:

Seller’s invoice Tax registration certificate (TIN certificate)

Export license valid for the year A duly signed contract between
the seller and the buyer Export permit application form duly
filled, signed and stamped (as required) by the customer
Letter of undertaking from the customer indicating that the
consignment will be settled in full within 90 days from the date
of the Foreign Exchange Permit for the CAD, or the
Authenticated message of opened Letter of Credit.
Note that the National Bank of Ethiopia (NBE) issues a
delinquent list of exporters periodically. The customer’s name
should not appear on this list within the period of transaction. If
the client’s name is on the delinquent list, he must clear with the
NBE and his name placed on a list of cleared exporters before he
can transact any business.

Regarding payment, exporters should:

Investigate the foreign buyer’s financial soundness, reliability,

transaction history, integrity, reputation, address, etc.
Always have a Sales or purchase contract duly signed by the
importer and exporter
For the L/C mode of payment: Check the text of the L/C opened
in their favor and make sure that the buyer will comply. If there
are any doubts, amendments must be made by the opener before
consignment is shipped.
For the CAD mode of payment: Follow up the payment
immediately, as a delay in remittance above 90 days will have
the exporter put on the delinquent list.
ii) Application for Quality Testing & Certification
Once the products for export are ready, arrangements for
suitable packaging should be made. After packaging is done, the
exporter can apply to the Quality and Standards Authority of
Ethiopia for quality testing, after which the Export
Authorization Certificate is issued.

iii) Customs Declaration

An exporter can avoid costly delays by making sure he declares

all facts about the export consignment, and sends all supporting
documents (originals) to the Customs Clearing Agents. The
agents will then take care of the customs formalities and
authorize the dispatch of the export goods.
The documents that the exporter must hand over to the Customs
Clearing Agents are:
Ethiopian Customs Declaration Form A copy of the Customs
Declaration Annex Form Export Permit Certificate of Origin
Special Movement Forms and Certificates (the GSP Form A and
the EURI Movement Certificate) VAT and VAT Registration
for Exporters. All exports of goods and services are charged
VAT of 0%. An exporter is therefore allowed to reclaim VAT
on all goods and services used to produce the exports.

H. Balance Of Payment
1. Balance of payments statistics are included in a broad set of
economic statistics known as the national accounts. The System
of National Accounts 1993 (1993 SNA) presents the conceptual
framework for the national accounts, and the fifth edition (1993)
of the Balance of Payments Manual (the BPM) presents the
conceptual framework and the structure and classification of the
balance of payments.
The high level of concordance between the 1993 SNA and the
BPM is extremely important.
1. This first chapter of the Balance of Payments Textbook (the
Textbook) presents the balance of payments conceptual
framework and certain internationally agreed-upon accounting
conventions that have influenced the shape of that framework.
These concepts and specific aspects of methodology are
elaborated in subsequent Textbook chapters.

Definition of the Balance of Payments

2. As defined in the BPM, the balance of payments (BOP) is a
statistical statement that systematically summarizes, for a
specific time period, the economic transactions of an economy
with the rest of the world. Transactions, for the most part
between residents and nonresidents, consist of those involving
goods, services, and income; those involving financial claims
on, and liabilities to, the rest of the world; and those (such as
gifts) classified as transfers, which involve offsetting entries to
balance—in an accounting sense—one-sided transactions. Each
component of this important definition is subsequently
examined.
3. The balance of payments is concerned with transactions and
thus deals with flows rather than with stocks. That is, the
balance of payments deals with economic events that take place
during a reference period and not with outstanding totals of
economic assets and liabilities that exist at particular moments
in time.
4. The initial focus of the Textbook is on transactions (between
an economy and the rest of the world) in goods, services, and
income. Under what circumstances does an international
economic occurrence constitute a transaction in the BOP sense
of the word? In the framework of the national accounts,
transactions in goods, services, or income are the provision, by
one party to another, of real resources of this kind. Thus defined,
a transaction involves two parties or transactors. It is not always
clear, however, that there are two parties. Real resources are
often transferred internationally from one constituent unit to
another within the same legal entity. (For example, real
resources may be transferred between a branch and the head
office of a multinational enterprise.) It is equally difficult to
determine whether transactions take place when individuals
migrate and transfer assets from their former to their new
countries. In summary form, double entry accounting
conventions used in the balance of payments consist of:
 Credit (CR) entries
 Exports of goods and services
 Income receivable
 Offsets to real or financial resources received without a
 quid pro quo (transfers)
 Increases in liabilities
 Decreases in financial assets
 Debit (DR) entries
 Imports of goods and services
 Income payable
 Offsets to real or financial resources provided without a
 quid pro quo (transfers)
 Increases in financial assets
 Decreases in liabilities

I . GDP And GNP

The gross national product (GNP) and the gross domestic

product (GDP) are two of the most frequently used economic
indicators when assessing the status of the economy.
The gross national product (GNP) is defined as the total value of
income earned by residents of a country regardless of where the
income came from. GDP, on the other hand, is the total value of
production realized by resident producers in an economic
territory.
For instance, the GDP measures output of economic activities
within the economic territory of a country. There are areas
inside the geographic jurisdiction of the country that are not part
of the economic territory such as foreign embassies and offices
like the Asian Development Bank (ADB) and the United
Nations. At the same time, there are areas outside the country’s
geographic territory that are part of its economic territory like
the Philippine embassies located abroad.
Measuring GNP and GDP
How are these two concepts measured?
The measurement of the GDP, GNP, and other national
income accounts has always been an object of curiosity. This is
due to the fact that the economy is so large and encompassing
that it becomes difficult to even put a number to summarize its
activities and transactions. There are, however, at least two ways
of calculating the national income accounts. One is through the
production approach and another, through the expenditure
approach.
J. Strategic Alliance and Turnkey Projects

Meaning of Strategic Alliance

Strategic Alliance is important collaborative and partnership
agreement by two or more companies to attain a set of fixed
goals. These collaborations can be of many types, including
contractual and equity forms. These are synergistic deal where
the participating organizations of different capabilities and
strengths come together to the alliance. So we can say that an
alliance is an inter-firm collaboration over an agreed economic
time and space for the achievement of the participating
companies’ objectives. Partners offer the strategic alliance with
resources such as manufacturing capability, products,
distribution channels, capital equipment, project funding,
knowledge, or intellectual property. The alliance is a
collaboration or cooperation which brings synergy where every
partner believes that the profit from the alliance will be more
than those from individual work. The alliance usually involves
technology transfers and economic specialization and sharing of
expenses and risk.
Types of Strategic Alliances
Licensing
It includes the sale of a right to use certain proprietary
knowledge in a defined technology or geographical area; it’s
used mostly as a low cost way to enter foreign markets. The loss
of control over the technology is the major problem of licensing
because when it goes in other hands the risk of misuse arises.
Advantages
1. It has low financial cost and risks
2. Licensor can learn about foreign market potential
3. It helps the licensor to get access to foreign markets
Disadvantages
1. Foreign market access is controlled by contracted.
2. Licensee may not perform up to the expectations.
3. It may result in creating a future competitor.
FRANCHISING
•Licensing
•Franchising
•Joint R&D
•Turnkey Project

OTHER STRATEGIC ALLIANCES

•Joint venture
•Contract manufacturing
•Greenfield Strategy
•Management Contract
TURNKEY PROJECT
 Turnkey projects help in earning huge returns from the
exporting process technology or know how.
 If FDI is limited by any government rule then this
strategy is used to enter the market.
 If the political and economic environment of the country
is not stable then this strategy is less risky than the FDI.
This project refers to a project in which clients pay contractors
to design and create new facilities and train workforce. A
turnkey project is mode for a foreign company to export its
technology and process to other countries by building a plant in
that country. Industrial companies use turnkey projects as an
entry strategy when they specialize in complex production
technologies.