Course Pack

Subject Title: International Business

Course Code: 204

Course: MBA
Semester: II
Year: 2021-22
Course Instructors: Dr. Nancy Goel
Dr. Rita
Ms. Swati Rohatgi
Course Leader: Dr. Nancy Goel

Dr. Neetu jain Dr. A. K. Srivastav Dr. Yamini Agarwal

Checked by: Program Coordinator Forwarded by: HOD Approved by: Director

Institute of Management & Research, New Delhi

An ISO 9001:2015 & 14001:2015 Certified Institute
A-4, Paschim Vihar, New Delhi – 110063
(Ph.: 011-25284396, 25285808 Fax: 011-25286442)

“Strictly for internal use only”

Bharati Vidyapeeth Institute of Management and Research, New Delhi

BVIMR SNAPSHOT

Established in 1992, Bharati Vidyapeeth (Deemed to be University) Institute of Management and Research
(BVIMR), New Delhi focuses on imbibing the said values across various stakeholders through adequate creation,
inclusion and dissemination of knowledge in management education.
The institute has over the past few years emerged in the lead with a vision of Leadership in professional education
through innovation and excellence. This excellence is sustained by consistent value enhancement and initiation of
value-added academic processes in institutue's academic sytems.

Based on the fabulous architecture and layout on the lines of Nalanda Vishwa Vidyalaya, the institute is a scenic
marvel of lush green landscape with modern interiors. The Institute which is ISO 9001:2015 certified is under the
ambit of Bharati Vidyapeeth University (BVU), Pune as approved by Govt. of India on the recommendation of
UGC under Section 3 of UGC Act vide its letter notification No. F. 9 – 16 / 2004 – U3 dated 25th February, 2005.

Strategically located in West Delhi on the main Rohtak Road, BVIMR, New Delhi has splendid layout on
sprawling four acres of plot with 'state-of-art' facilities with all class rooms, Library Labs, Auditorium etc., that
are fully air-conditioned. The Institute that has an adjacent Metro station “PaschimVihar (East)”, connects the
entire Delhi and NCR.

We nurture our learners to be job providers rather than job seekers. This is resorted to by fostering the skill and
enhancement of knowledge base of our students through various extracurricular, co-curricular and curricular
activities by our faculty, who keep themselves abreast by various research and FDPs and attending
Seminars/Conferences. The Alumni has a key role here by inception of SAARTHI Mentorship program who
update and create professional environment for learners centric academic ambiance and bridging industry-
acdemia gap.

Our faculty make distinctive contribution not only to students but to Academia through publications, seminars,
conferences apart from quality education. We also believe in enhancing corporate level interaction including
industrial projects, undertaken by our students under continuous guidance of our faculty. These form the core of
our efforts which has resulted in being one of the premier institutes of management.

At BVIMR, we are imparting quality education in management at Doctorate, Post Graduate and Under Graduate
levels.
PROFILE OF COURSE INSTRUCTORS
Dr.Nancy Goel is working as assistant professor with Bharati vidyapeeth institute of management and research.
She has completed her doctorate degree from BVIMR, New Delhi. She has qualified UGC NET and also done
Masters in business administration, bachelors in business administration, graduate diplome in international
business. She has industry experience of two years as Buisness Development Executive in import export
department and more than nine years of teaching experience.
Dr. Rita is a Guest Faculty in Bharati Vidyapeeth Institute of Management and Research, New Delhi. She has
completed her MBA-IB (Specialization- International Business) from Bharati Vidyapeeth University, Pune and
has an experience of 11 years. She has cleared NET Exam in Management. She did her doctorate from Bharati
Vidyapeeth University, Pune. Dr Rita has several research papers to her credit which are published in reputed
national and international journals. She is a member of academic advisory at Centre for Leadership in Management
& Technology Institute, Delhi. She has attended several national and international conferences/seminars. Her areas of
interests are Marketing Management, International Business, Human Resource Management, Principles of
Marketing, Research Methodology.
Ms. Swati Rohatgi is a visiting faculty at Bharati Vidyapeeth Institute of Management and Research (BVIMR),
New Delhi. She has a work experience of 14 years in the academic sector. Along with that, she has worked for 2
years in the consultancy field. She is currently pursuing Ph.D. from BVIMR, New Delhi.
 INDEX

Content Page No.

Course Outline 3 - 11

Unit-1 Introduction of International Business and 12 - 25

Entry Strategies
Unit -2 Globalization and Cultural Issues 26 - 51

Unit -3 Trade Theories, Trade Policy, Trade 52 - 67

Analytics
Unit -4 Balance of Payments and FEMA Act 68 - 84

Unit -5 International Finance and Trade organization 85 - 106

Unit -6 Foreign Exchange Markets and types of 107 - 113

exchange rates
Case Studies 114 - 120

MCQ’s 121- 130

Internal and External papers 131 - 153

 COURSE OUTLINE MBA –II Sem
Course Title INTERNATIONAL BUSINESS
Course Code Code: 204
No of credits 3 As per Syllabus (Expected no of hours -30)
Department Management
Course Leader Dr Nancy Goel
Faculty Dr Nancy Goel, Ms. Swati Rohatgi and Dr Rita
email nancy.goel@bharatividyapeeth.edu
Phone no 011-25285808-Ext 211
Course Type Core Course
Offer in Academic Year 2021-22 2nd Sem
COURSE
DESCRIPTION

5
 COURSE CONTENT (INCLUDE THE UNIVERSITY SYLLABUS)

Course : MBA (General) CBCS 2020 – w.e.f. - Year 202 – 2021

Semester Course Code Course Title
II 204 International Business
Type Credits Evaluation Marks
Core 3 CES UE:IE = 50:50

Unit No. Contents Hrs.

1 Introduction of International Business and Entry Strategies- Definition of 06
International Business, Nature and Scope of International Business, Domestic
Trade versus International Trade, Forms of Countertrade. Market Entry
Strategies – Exporting, Importing, Joint venture, Franchising, Merger and
acquisition.
2 Globalization and Cultural Issues - Definition of Globalization, Globalization 06
of Markets, Pros and cons of Globalisation, Drivers of Globalization ,
Cultural environment in International Business (Hofstede Theory –
Application in trade). Ease of Doing Business (Parameters given by world
bank) in India and across BRICS.
3 Trade Theories, Trade Policy, Trade Analytics - Trade theories – 10
Mercantilism, Absolute Advantage, Revealed Comparative Advantage, H.O
Theory and Porters Diamond Model.
International Trade Classification and Harmonized System (HS), Current
Foreign Trade Policy in force (General Provisions), Incentives offered under
FTP (Ch-3 and Ch-4 of Foreign Trade Policy).
Trade Map Analytics and calculation of RCA, TII for various products, Ease
4 Balance
of Doing of Payment and FEMA Act - Components of BOP (Current and
Business. 08
Capital Account) , Credit and Debit Entries in BOP, Differentiate between
BOT and BOP , Key Provisions of FEMA Act 1999 and difference between
FERA and FEMA. Country Risk Analysis and Lessons from ASIAN financial
Crisis in 1997.
5 International Financial and Trade Organizations - Role of GATT, WTO, IMF 09
and World Bank group. Dispute settlement mechanism through WTO. Levels of
trade integration. Basic conceptual note of NAFTA, SAARC and European
Union. Role of BRICS.
6 Foreign Exchange Market and Types of exchange rates - Direct and indirect 06
Quotes, Concept of Nostro and Vostro Account, Types of Exchange -Fixed vs.
Flexible Exchange Rate (Independent and Managed Float) , Factors affecting
Foreign Exchange Rate , Role, Functions and Participants of Foreign Exchange
Market

6
 COURSE LEARNING OUTCOMES
1. To enable the students to take decisions related to global issues and policies.
2. To be able to Interpret Foreign trade policy and avail incentives offered under
various schemes.
3. To analyze the trade data for decision making as to what to export and where to
export.
4. To recall the role and functions of Global Institutions IMF, WTO and World Bank.
5. To acquaint with the trade blocks SAARC, NAFTA, EU etc.
6. To comprehend the exchange rates practically and its implications on trade.
COURSE ASSESSMENT METHODS
Evaluation Criteria:
Component Description Weight
1. End Term It will be based on conceptual questions, situation specific 50 %
Exams application oriented questions and short case studies, End term exam
will cover both pre mid-term and post mid-term course coverage.
Course readings are an integral component of learning in this course.

Internal Assessment:
Component Description Marks
1 Internal Examination 30 (15 each 1st and 2nd internal)
2 Attendance 10
3 CES: 10
Class test: 10 marks
Quiz: 10 marks
Case analysis: 10 marks
Total 50

Note: The passing marks for Internal is 20 (40%). You need to pass separately in internal and External both.

CES Evaluation Description

Component Description Marks
1. Case study A case study will be given. Students will be required to 10
brief the given data by using statistical tools.
2. Moodle Quiz It will be based on multiple choice, open ended and fill
in the blanks type of questions. 10
3. Class test There would be a class test for which individual 10
assessment will be done to recall their subject
learning.

7
Reference Books:
Sr. No. Name of the Author Title of the Book Year Edition Publisher
Company
1 – National Rakesh Mohan Joshi International Business 2009 OXFORD
(IIFT)
2 – National V.K Bhalla International Business (1 December S. Chand
2013)
3 – National K. Aswathappa International Business 6th Edition McGraw Hill
2017 Education
4– Donald Ball and International Business: The 9th Edition McGraw-Hill
International MichealGeringer Challenge of Global Education
Competition
5– Charles W. L. Hill International Business: 10 edition (1 McGraw Hill
International Competing in the Global July 2017) Education
Market Place
6– PrashantSalwan John D. International Business, Fifteenth Pearson
International Daniels, Lee H. 15/e Fifteenth Edition, edition (28
Radebaugh, Kindle Edition July 2016)
7– Ricky W. International 8th Edition on Pearson
International Griffin (Author), Michael Business, Global (May 15,
Pustay (Author) Edition 2014)

Online Resources:
Online Web site address
Resources No
1 www.imf.orf
2 www.wto.org
3 www.trademap.org
4 www.commerce.nic.in
5 www.dgft.gov.in
6 International Business Review https://www.journals.elsevier.com/international-
business-review
7 Journal of International Business Studies http://www.jibs.net/
8 Open Textbook Library https://open.umn.edu/opentextbooks/textbooks/
international-business
MOOCs:
Resource Subject Web site
s address
N1 International Business https://www.openlearning.com/courses/GFMA2023/
o2 International Business EDX
Environement and Global https://www.edx.org/course/international-business-
Startegy –IIMB (SushilVachani) environment-and-global-stra
3 International Business EDX https://www.edx.org/learn/international-business
4 International Business I (Coursera) COURSERA
Taught by -Doug E https://www.coursera.org/learn/international-business
Thomas(university of New
Mexico)
5 International Financial https://nptel.ac.in/courses/110105031/
Environment
8
Lesson Plan:
Unit Lecture Topic Reading Pg-No. Learning
No. Outcome
1 -Introduction 1. Definition of International Business, K Aswathappa 1
of Chapter 1 pg1-5
International 2. Nature and Scope of International Business K Aswathappa 1
Business and Chapter 1 pg1-5
Entry 3. Domestic Trade versus International K Aswathappa 1
Strategies Trade Chapter 1 pg1-5
4. Forms of Countertrade. K Aswathappa 1
Chapter 1 pg1-5
5. Market Entry Strategies – Exporting, K Aswathappa 1
Importing, Joint venture, Franchising, Chapter 1 pg1-5
Merger and acquisition.
6. Market Entry Strategies – Exporting, K Aswathappa 1
Importing, Joint venture, Franchising, Chapter 1 pg1-5
Merger and acquisition.
2- 7. Definition of Globalization, Globalization Rakesh Mohan 2
Globalization of Markets Joshi Chapter 13
and Cultural pg155-166
Issues 8. Case Study on Globalisation Case - Rakesh Mohan 2
Diverse Perspectives on Globalisation Joshi Chapter 13

9. Pros and cons of Globalization, Drivers Rakesh Mohan 2

of Globalization , Joshi Chapter 2
pg55-61
10. Cultural environment in International Rakesh Mohan 2
Business Joshi Chapter 2
pg55-61
11. Hofstede Theory – Application in trade. Rakesh Mohan 2
Joshi Chapter 2
pg55-61
12. Ease of Doing Business (Parameters given Rakesh Mohan 2
by world bank) in India and across BRICS. Joshi Chapter 2
pg55-61
3- Trade 13. - Trade theories –Mercantilism, Rakesh Mohan 2
Theories, Absolute Advantage Joshi Chapter 2
Trade Policy, pg55-61
Trade 14. Revealed Comparative Advantage, H.O Justin Paul 2
Analytics Theory and Porters Diamond Model. Chapter 12 pg255-
261
15. International Trade Classification and Justin Paul 3
Harmonized System (HS), Chapter 12 pg255-
261
16. Current Foreign Trade Policy in force Justin Paul 3
(General Provisions), Incentives offered Chapter 12 pg255-
9
 under FTP (Ch-3 and Ch-4 of Foreign 261
Trade Policy).
17. Current Foreign Trade Policy in force Justin Paul 3
(General Provisions), Incentives offered Chapter 12 pg255-
under FTP (Ch-3 and Ch-4 of Foreign 261
Trade Policy).
18. Trade Map Analytics and calculation of Justin Paul 3
RCA, TII for various products, Ease of Chapter 12 pg255-
Doing Business. 261
4- Balance of 19. Components of BOP (Current and Rakesh Mohan 4
Payment and Capital Account) , Joshi Chapter 3
FEMA Act pg45-51
20. Credit and Debit Entries in BOP, Rakesh Mohan 4
Differentiate between BOT and BOP Joshi Chapter 3
pg45-51
21. , Key Provisions of FEMA Act 1999 Rakesh Mohan 4
Joshi Chapter 3
pg45-51
22. Difference between FERA and FEMA. Rakesh Mohan 4
Joshi Chapter 3
pg45-51
23. Country Risk Analysis and Lessons from Rakesh Mohan 4
ASIAN financial Joshi Chapter 3
Crisis in 1997. pg45-51
5- International 24. Role of GATT, WTO, Rakesh Mohan 4
Financial and Joshi Chapter 4
Trade pg62-75
Organizations 25. IMF and World Bank group Mohan Joshi 5
Chapter 4 pg62-75
26. Dispute settlement mechanism through WTO. Mohan Joshi 5
Chapter 4 pg62-75
27. Levels of trade integration. Basic conceptual Mohan Joshi 5
note of NAFTA Chapter 4 pg62-75
28. Basic conceptual note of SAARC and Daniels, Chapter 7 5
European Union. pg 208-214
29. Role of BRICS. Daniels, Chapter 7 5
pg 208-214
6- Foreign 30. Direct and indirect Quotes, Concept of Rakesh Mohan 6
Exchange Nostro and Vostro Account, Joshi Chapter 17
Market and Pg 214-232
Types of 31. Types of Exchange -Fixed vs. Flexible Rakesh Mohan 6
Exchange Rate (Independent and Managed Joshi Chapter 17
exchange rates Pg 214-232
Float) ,
32. Types of Exchange -Fixed vs. Flexible Rakesh Mohan 6
Exchange Rate (Independent and Managed Joshi Chapter 17
Float) , Pg 214-232

10
33. Factors affecting Foreign Exchange Rate Rakesh Mohan 6
Joshi Chapter 17
Pg 214-232

34. , Role, Functions of Foreign Exchange Justin Paul Chapter 6

Market 11
Pg 214-232

35. Participants of Foreign Exchange Market Justin Paul Chapter 6

11
Pg 214-232

11
UNIT 1

12
 Concept of International Business

International business is the business which involves activities that take place by crossing the
national border. International business involves exporting and importing of goods and
services, however there are different strategies to get into international business.These modes
of entry into international business include Exporting, Importing, Joint Venture, Merger &
Acquisition, FDI, Licensing, strategic alliance and Franchising. As an example, Tata acquired
Corus in order toenter into European markets. Thus the following key activities are
considered as part of International business.
International trade: exporting and importing

Exports and imports of merchandise

Exports and importsof commodities

Exports and imports of services

Why Companies Go Global

The key reason for companies to go global is to increase the profit and sales. Also, it
facilitates protection from competition. Some other important reasons include:
• Creation of new markets due to economic integration.
• Fast-growing foreign markets as compared to domestic markets.
• Reduced cost of R&D per unit of product in foreign markets.
• Ease of relocation to the markets with lower manufacturing costs.
• Constraints or low acceptance in the domestic market.
• Increase of profit and sales by entering new markets.
• Opportunity to diversify by entering emerging new markets.
• Continuous and uninterrupted supply of raw materials with high reliability.
• Acquisition of technical and managerial know-how for in-house development.
• Strategic vision to enter foreign markets for expansion.

IMPORTANCE OF INTERNATIONAL BUSINESS

As resources are widely distributed throughout the globe, any country which has to meet all the
production requirements of its economy has to seek resources outside its own national boundaries.
International trade makes it possible for a country to acquire the goods it cannot produce at all or
cannot produce in an economic way. Trade developments particularly increase in exports lead to
stimulate other sectors such as transport, insurance and shipping, which further helps in creating
13
jobs. Further, external trade is determinant for the sustainability and the growth of an economy.
Shortfall of goods is fulfilled through import of goods from international market, thus the role of
international trade is to bridge the gap of demand and supply of goods. In some cases, there is
noteworthy dependence on the international trade. For example, the Indian producers of jute and
tea are mostly dependent on overseas markets for their products. The firms having their
dependence on exports are producing in bulk quantities by using economies of scale to compete in
international market. The role of globalisation of production could be applied as to where to
produce in order to take the benefit of low labour cost. Countries such as India and china, which
are known as the emerging economies are primarily considered for investment and production
centres due to low cost labour cost and factors of production.
Division of Labour and Specialisation: - Moreover, the principle of comparative cost advantage
is applied by countries in order to take the benefit of factors of production in relative terms. These
countries can produce commodities in excess of their requirements and exchange extra production
with other countries for the commodities they are deficient in.
Increases National Income and Per-capita Income: - Due to division of labour and
specialization, each country produces commodities for which it is best suited and exports extra
production. Likewise, each country imports commodities for which it has comparative cost
disadvantage. This generates additional income and saves real income by making available
imported articles at competitive rates.
Facilitates Transfer of Technology: - Developed nations like Japan, USA, UK and Germany are
advanced in terms of technology while most of the Afro-Asian and South American countries are
backward in technology. This guides the flow of technology from technically advanced countries
to technically backward countries of the world.
Resolves Balance of Payments Crisis: - Balance of payments may be defined as the difference
between the monetary value of exports and imports of a country. When the outflow of foreign
currency exceeds the inflow, a country suffers from an unfavourable balance of payments. In order
to solve such imbalance a country of the world.
Global Peace: - In the age of nuclear weapons, there is a greater need of promoting dialogue
between various countries across the globe. International trade may be a medium for promoting
exchange of ideas and thoughts and thereby help promoting international peace and friendly
relations among the countries of the world.
Optimum Utilizations of Resources: - A country can make optimum utilization of its natural and
human resource by promoting exports. Moreover, if the resources remain unutilized or
underutilized due to the want of demand in the domestic market, the same can be well utilized by
promoting exports of surplus production.
Employment Opportunities: - Overseas trade, though highly competitive also helps in increase
in employment opportunities. Moreover, the global markets aids in creating employment
opportunities in the external trade as well as in sectors such as banking, insurance, and logistics.
Research and Development: - Technological developments could further be taken by import of
technology or joint ventures thus enhancing the research and developments for a nation.

14
Challenges of International Trade

International business is complex as well as time-consuming process since it is subject to global

rules and regulations of trading countries. At the same time, there are other problems such as long
distance, currency fluctuations and high degree of competition. Some of the common issues in
trade are mentioned as follows:
Long Distance:- International trade is spread over the world and therefore, goods are to be
transported over a considerable distance. During transportation goods are exposed to risk and
uncertainties of transportation and perils of sea. At the same time, a lot of time is taken for custom
formalities and at the port.
High Risks and Uncertainties:- International trade is further having multiple risks such as
payment risk, war issues, insolvency, fluctuations and quality issues. Thus, one has to take
precautions to cover risk and required to undertake insurance policies. At the same time the risk
could be mitigated with the help of agencies like ECGC (Export credit Guarantee Corporation).
Customs Formalities: - Customs formalities varies across the nations. At the same time these
formalities are very lengthy as well as time consuming due to trade complexity across the
countries.
Trade Barriers: - Trade barriers are of two types, viz., tariff and non-tariff barriers are in the form
of taxes and customs duties. Non-tariff barriers are in the form of taxes and customs duties. Non-
tariff barriers are in the form of quotas and licences. However, efforts are being made by the World
Trade Organization (WTO) to eliminate and simplify trade barriers.
Three-faced Competition: - An exporter faces competition from three angles:-
Exporters from his own country, other countries and local suppliers in importing country.
However, an exporter can sustain international competition by upgrading the quality of product,
innovations and inventions and cost reduction.
Payment Difficulties: -Diverse countries have different currencies and conversion rates. These
rates are subject to fluctuations. Thus, an exporter may suffer a loss if there is a change in the
exchange rate after entering into a contract with a foreign buyer. Losses on account of fluctuations
in the exchange rates can be eliminated by entering into forward contracts.
Documentation Formalities:- There are a number of documents to be filed with various
authorities while exporting goods. For example in India, an exporter is required to prepare and file
more than 10 documents comprising of regulatory as well as commercial documents.
Diverse Languages, Customs and Traditions: - Languages, customs and traditions are very
sensitive issues and must be taken into consideration while exporting goods to overseas countries.
An exporter is expected to get first-hand information about such issues before exporting goods.
Unstable governments. High indebtedness, high inflation, and high unemployment in countries
have resulted in highly unstable governments that expose foreign firms to the risks of
expropriation, nationalisation, and limits to profit repatriation.
Exchange instability. Fluctuations in the currency also is one of the big challenge to be tackled
technically.

15
Corruption. Officials in several countries require bribes in order to co-operate. They often award
business to the highest briber rather than the best bidder.
High cost of product and communication adaptation. A company going abroad must study each
foreign market carefully, become sensitive to its economics, politics, and culture and make some
adaptations in its products and communications to suit foreign tastes otherwise it might make some
serious blunders.
Commitment and cultural issues –One of the important challenge of external trade is the lack of
commitment. Commitment is a function of performance, thus if level of commitment is low than
export performance will be low and therefore shall affect the trade. Cultural differences across the
countries like taste and preference, language, beliefs, customs also play key role and are inhibitors
to trade in case not handled properly.

Domestic V/s International Trade

Dimension Domestic Trade Foreign Trade

1.Environment
2. Plan and Strategy
3. Competitive forces and
their intensity
4 Currency
5 Business Risk
Environmental factors like
PESTEL are known i.e
Political, Economic, Social,
technological, ecological and
legal.
Short term as well as long term
plans could be designed in the
domestic market.
Competitive forces could be
studied by using porters 5
forces model of competition
and movements are visible.
Local currency is used for
domestic trade and costing,
pricing and margins are
computed in a single currency.
Risk measurement and
management is possible
through various tools.
Global environment is unknown
and its effects could be severe
eg- attack on world trade centre,
spread of SARS disease, global
economic crisis.
Long term strategy is the
possibility to enter into
international trade.
It is difficult to assess the
international competitive model
even by using diamond model
of porter.
Transactions are carried out in
International currency which
are widely accepted in
international market for e.g. –
USD, JPY, EUR.
Measurement of risk and
management of risk is very
difficult in changing global
environment variables.

16
6 Legal aspects In order to conduct domestic
trade there is a need to
understand and follow the
local rules and regulations
framed by the Government.
7 Mode of Transportation Normally, rail and road are the Sea is the most common mode
key modes of transportation in of transportation for bulk goods
the domestic trade.
8 Containerisation Less use of containers for
domestic trade.
9 Documentation Less documents are used in
the domestic trade and time
taken to prepare is less.
10 Method of Payment In domestic trade the mode of Mode
payment is cash, cheque and
draft.
11. Cultural In domestic trade there is
better knowledge of domestic variances in culture and thus is a
market in terms of culture.
12. Clearing and Less or no use of C&F agent
forwarding agent in domestic trade.
13.Organisational vision Narrowed down to work in a
and objective single country with a steady
growth objective.
14. Marketing research Marketing research and
analysis is easy in home
country and reliable.
17
In order to conduct International
trade there is a need to
understand and follow the
international rules and
regulations. Strict adherence to
contractual obligation is
required.
and other may be air.
Containerisation is most
commonly used and has become
the practice of international
trade.
It is a time consuming process to
develop and process the export
documents from various
authorities. Eg- certificate of
origin from chamber of
commerce etc.
of payment in
International trade is through
LC, swift, advance payment
through cheque and bill of
exchange.
In international market there are
time consuming process to
study and research for the
market.
Most of the export and import
is taken care by clearing and
forwarding agent.
Strategic vision and objectives
are directed for covering the
global market and are framed on
the basisi of cultural diversity.
Marketing research in
international market is
expensive and difficult to
conduct.
 15 Language Normally the language of
business is Hindi or English
but depends on the state and
region which is known in the
normal course of business.
Doing business with different
economies will help if the
language of that country is
known. Normally, French,
German, Arabic and Japanese
are the language which an
international manager must
learn for competency.

Nature and Scope of International Business

Scope of International Business
1. Scope of international business here includes setting of a branch/subsidiary for
processing/packaging, assembly or even complete manufacturing through direct investment.
2. Establishing joint ventures in foreign countries for manufacturing or marketing.
3. Scope of International business further covers consultancy services & undertaking turnkey
projects abroad.
4. Scope of international business is wide and covers international marketing that is how to deal
in global markets. International marketing further helps in understanding the EPRG
Framework (Ethnocentric, polycentric, geocentric and regiocentric) to take various decision.
5. Scope of trade includes the negotiation for licensing/franchising arrangements whereby global
enterprises are granted the right to use the exporting co’s know-how, patents, processes or
trademarks with or without financial investment.
6. Scope of trade further helps in understanding the foreign exchange transactions which is
fluctuating and thus should be properly handled.

Countertrade constitutes an estimated 5 to 30 percent of total world trade. Countertrade greatly

proliferated in the 1980s. Perhaps, the single most important contributing factor is Least Developed
Countries (LDC’s) decreasing ability to finance their import needs through bank loans.

Countertrade, one of the oldest forms of trade, is a government mandate to pay for goods and services
with something other than cash. It is a practice, which requires a seller as a condition of sale, to commit
contractually to reciprocate and undertake certain business initiatives that compensate and benefit the
buyer. In short, a goods-for-goods deal is countertrade. Unlike monetary trade, suppliers are required to
take customers products for their use or for resale. In most cases, there are multiple deals that are
separate yet related, and a contract links these separable transactions. Countertrade may involve several
products, and such products may move at different points in time while involving several countries.
Monetary payments may or may not be part of the deal.

There are three primary reasons for countertrade: (1) countertrade provides a trade financing alternative
to those countries that have international debt and liquidity problems, (2) countertrade relationships may

18
 provide LDCs and MNCs with access to new markets, and (3) countertrade fits well conceptually with
the resurgence of bilateral trade agreements between governments. The advantages of countertrade
cluster around three subjects: market access, foreign exchange, and pricing. Countertrade offers several
advantages. It moves inventory for both a buyer and a seller. The seller gains other benefits, too. Other
than the tax advantage, the seller is able to sell the product at full price and can convert the inventory to
an account receivable. The cash-tight buyer that lacks hard currency is able to use any cash received for
other operating purposes.

Types of Countertrade
There are several types of countertrade, including barter, counter purchase, compensation trade, switch
trading, offsets and clearing agreements.

1. Barter- Barter, possibly the simplest of the many types of counter trade, is a onetime direct and simultaneous
exchange of products of equal value (i.e., one product for another). By removing money as a medium of exchange
barter makes it possible for cash-tight countries to buy and sell. Although price must be considered in any counter
trade, price is only implicit at best in the case of barter. For example, Chinese coal was exchanged for the
construction of a seaport by the Dutch, and Polish coal was exchanged for concerts given by a Swedish band in
Poland. In these cases. the agreement dealt with how many tons of coal was to be given by China and Poland
rather than the actual monetary value of the construction project or concerts. It is estimated that about half of the
U.S. corporations engage in some form of barter primarily within the local markets of the United States.
2. Counter purchase (Parallel Barter) – Counter purchase occurs when there are two contracts or a set of parallel
cash sales agreements, each paid in cash. Unlike barter which is a single transaction with an exchange price only
implied. A counter purchase involves two separate transactions-each with its own cash value. A supplier sells a
facility or product at a set price and orders unrelated or non-resultant products to offset the cost to the initial
buyer. Thus, the buyer pays with hard currency, whereas the supplier agrees to buy certain products within a
specified period. Therefore money does not need to change hands. In effect, the practice allows the original buyer
to earn back the currency. GE won a contract worth $300’million to build aircraft engines for Sweden’s JAS
fighters for cash only after agreeing to buy Swedish industrial products over a period of time in the same amount
through a counter purchase deal. Brazil exports vehicles, steel, and farm products to oil-producing countries from
which it buys oil in return.
3. Compensation Trade (Buyback) – A compensation trade requires a company to provide machinery, factories, or
technology and to buy products made from this machinery over an agreed-on period. Unlike counter purchase,
which involves two unrelated products, the two contracts in a compensation trade are highly related. Under a
separate agreement to the sale of plant or equipment, a supplier agrees to buy part of the plant’s output for a
number of years. For example, a Japanese company sold sewing machines to China and received payment in the
form of 300,000 pairs of pajamas. Russia welcomes buyback.
4. Switch Trading – Switch trading involves a triangular rather than bilateral trade agreement. When goods, all or
part, from the buying country are not easily usable or salable; it may be necessary to bring in a third party to
dispose of the merchandise. The third party pays hard currency for the unwanted merchandise at a considerable
discount. A hypothetical example could involve Italy having a credit of $4 million for Austria’s hams, which Italy
cannot use, A third-party company may decide to sell Italy some desired merchandise worth $3 million for a claim
on the Austrian hams. The price differential or margin is accepted as being necessary to cover the costs of doing
19
 business this way. The company can ‘then sell the acquired hams to Switzerland for Swiss francs, which are freely
convertible to dollars.
5. Offset – In an offset, a foreign supplier is required to manufacture/assemble the product locally and/or purchase
local components as an exchange for the right to sell its products locally. In effect, the supplier has to manufacture
at a location that may not be optimal from an economic standpoint. Offsets are often found in purchases of aircraft
and military equipment. One study found that more than half of the companies counter trading with the Middle
East were in the defense industry and
6. Clearing Agreement – A clearing agreement is clearing account barter with no currency transaction required. With
a line of credit being established in the central banks of the two countries, the trade in this case is continuous, and the
exchange of products between two governments is designed to achieve an agreed-on value or volume of trade
tabulated or calculated in nonconvertible “clearing account units.” For example, the former Soviet Union’s rationing
of hard currency limited imports and payment of copiers. Rank Xerox decided to circumvent the problem by making
copiers in India for sale to the Soviets under the country’s “clearing” agreement with India. The contract set forth
goods, ratio of exchange, and time length for completion. Any imbalances after the end of the year were settled by
credit into the next year, acceptance of unwanted goods, payment of penalty, or hard currency payment. Although
nonconvertible in theory, clearing units in practice can be sold at a discount to trading specialists who use them to
buy salable products.

Market Entry Strategies

Foreign market entry modes present different kinds of risk, the control and commitment of resources
they require and the return on investment they promise. There are two types of entry modes: equity and
non-equity modes. The non-equity modes category includes export and
contractual agreements. The equity modes category includes: joint venture and wholly owned subsidiaries.

Exporting

Exporting is the process of selling of goods and services that are produced in one country to other
countries. There are two types of exporting: direct and indirect.

Direct exports

Direct exports highlight the most basic mode of exporting made by a (holding) company, capitalizing on
economies of scale in production concentrated in the home country and affording better control over
distribution. The core characteristic of direct exports entry model is that there are no intermediaries.

Advantages

Control over selection of foreign markets and choice of foreign representative companies.
Good information feedback from target market, developing better relationships with the
buyers
Better protection of trademarks, patents, goodwill, and other intangible property

20
 Potentially better sales, and consequently greater profit, in comparison to indirect
exporting.

Disadvantages

Higher start-up costs and higher risks as opposed to indirect exporting

Requires higher investments of time, resources and personnel and also organisational
changes
Greater information requirements
Longer time-to-market as opposed to indirect exporting.

Indirect exports
Indirect exports are the process of exporting through locally based export intermediaries like
export through middlemen. The exporter loses control over its products in the overseas market.

Advantages

Indirect exports provide fast market access to the global markets.

Indirect exports are having more concentration of resources towards production.
Little or no financial commitment as the clients' exports usually covers most expenses
associated with international sales.
Low risk exists for companies who consider their domestic market to be more important
and for companies that are still developing their R&D, marketing, and sales strategies.
Export management is outsourced, alleviating pressure from management team
Indirect exporters do not handle the export processes directly.

Disadvantages

Indirect exporters owns higher risk in comparison to direct exports.

Indirect exporters do not have any control over distribution, sales, and marketing.
Indirect exporters are unable to acquire knowledge and thus unable to learn about global
operations.
The chances of failure are high in indirect exporting due to selection of market and distributor
leading to inadequate market feedback.

21
Those companies that seriously consider international markets as a crucial part of their success would
likely consider direct exporting as the market entry tool. Indirect exporting is preferred by companies who
would want to avoid financial risk as a threat to their other goals.

Licensing

Licensing is a specific strategy wherein the licensor permits the licensee to use its brand names,
copyrights, patents against certain fee. Moreover, in international market, a licensor can form the limited
rules to the licensee in host country.

It includes-
Patents
Copyrights
Trademarks
Technology
Technical know-how
Specific business skills

The licensor took only one time payment. That can be the royalty payments, one time payments or
technical fees and these are usually calculated as a percentage of sales.

Licensor leases the right to use IPRs, brand names etc. Licensee uses it to form a product. Thus, licensee
makes a royalty payment to Licensor and receives revenues with low investment.

There are various advantages of the licensing for the licensee.

Licensing strategy is basically important for small firms which lacks resources to
conduct research in order to provide better and acceptable products.
There may also be licensing in opportunities which paired with the company’s current
portfolio, can create new products and market opportunities.
Licensing strategy also helps to reach new market.
Licensing strategy is low risk and low investment process to expand internationally.

Some of the disadvantages are-

Licensing comprises of higher risk in comparison to exporting.

Risk of incompetent foreign partner firm.
Lower income compared to other modes of international expansion.

22
Franchising

Another important strategy to enter into global markets and expansion is franchising. Franchisor is the one
who offers the franchisee and the person who received is franchisee.Franchisee has to pay the requisite
fees to the Franchisor. Unlike licensing, the franchisor needs to exercise more control over the franchisee
as compared to licensing.Franchisee is required to pay the fixed prices as well as the royalty on the
sales. The Franchisor permits the franchisee relative flexibility.
Franchisor helps in establishing the manufacturing facilities and Franchisee agree to adhere to
follow the Franchisor’s requirements.

Advantages

Franchising has considerable low financial risks.

Low-cost way to assess market potential.
Franchisor maintains more control than Licensing.
It avoids tariffs, NTBs and the restrictions on foreign investment.

Disadvantages

Franchising business offers limited market opportunities.

Franchising leads to the dependence on the franchisee.
Franchising business has the possibility of likely conflicts with the franchisee.

Turnkey projects

A turnkey project is a project for which the firm approves to fully design, construct and equip a
manufacturing facility and turns the project over to the project holder when it is ready for set-up. The
key benefit of turnkey project is that they avoid operational risk and have considerable focus on firm’s
resources towards the expertise area. However, the turnkey projects also have disadvantages which are
of two types that is financial risk and construction risk.

Wholly owned subsidiaries (WOS)

Greenfield investment and the acquisitions are the two types of strategies covered under wholly owned

23
subsidiary. Moreover, it depends on situation whether to use Greenfield investmentor the
acquisitionstrategy. The foundation of a wholly owned subsidiary is the greenfield strategy which is not
only complex but also expensive. At the same time,it can give full control to the firm and has the
maximum potential to give above average return. The preferred sectors where wholly owned
subsidiaries are practices are service sectors where considerably high levels of professional skills and
customization are required. Other reasons for having preference towards Greenfield strategy are where
capital intensive plants are planned.The disadvantage of using Greenfield strategy lies in high risk as
the costs of establishing a new business in a new country. In business
set up, knowledge plays vital role and thus the firm may need to acquire knowledge. The knowledge
gap could be filled throughthe experts, consultant, or business partners. This entry strategy takes
relatively more time due to distribution networks and adapting the environment as well as learnings
from the system.

Acquisitionstrategy is preferred for its fast access to international markets. Moreover, firms prefer to
expand using acquisition strategy. Acquisition has been increasing as it is a way to achieve
superiormarket power. The market share gets affected by market powerusually. Considering the risk
factor, acquisition is less risky in comparison to Greenfield investment.

At the same time, the acquisition strategy has certain disadvantages such as cultural differences across
two organisations. The other disadvantages are issues of integration control systems. Acquisition
strategy also increases the debts which sometimes create issues due to non- commitment of financials
and may lead to bankruptcy.

Joint venture

Joint venture is preferred as a strategy to enter into foreign market when two firms have different
competencies and forms an agreement for a specific period of time for specific purpose. The benefits
could lead to technology sharing, reward sharing and entering new markets. Moreover, the advantages
of joint venture include political networks as well as access to distribution channel.

Strategic alliance

Strategic alliance is essentially a form of cooperative agreement across the firms. Generally, the
strategic alliances are between the firms in industrialised countries. The duration of strategic alliance is
short. The aim of strategic alliance is creating of new products or technologies. The major advantage of
strategic alliance is key technological innovations and helps the companies to be competitive through
innovation. Moreover, combining different resources from the firms helps in cost reduction due to
economies of scale. Strategic alliance are said to be alternative to merger and acquisition since there
occurs certain restrictions in undergoing global merger and acquisitions.

24
UNIT 2

25
Meaning and concept of Globalisation

Globalisation is a process of moving from localisation towards internationalisation and when the
degree of internationalisation becomes high it can be said to be globalised country. In fact it may
be defined as the integration of nation with rest of the countries in terms of trade, culture, financial
flow, human resource and the technology. Globalisation as a term means opening the door of an
economy for other economies. In other word it means trading between the economies of a country
with the world economy. It has multidimensional aspect. It consists of political, cultural and social
dimensions. The borders of economy of a country are being opened for other countries by through
movement of goods, services, people and information across national boundaries. In general this
term stands for permitting trade with outer world. In India, globalization took place in 1991 after
approval of LPG policies by government and the main focus was on giving license to private sector
which made India a step head towards globalisation.

Globalisation has been said to be the tool used for the growth of the economy, adapting knowledge
through different economies, transfer of technology, contributes to the competition and thus
innovation, recognition and brand positioning but for all these ultimately government of an
economy is said to be accountable. Government of an economy can decide various factors say
tariffs, taxes, subsidies, trade regulations, foreign trade policy and the agreements between the
countries and so the degree of globalisation largely depends on the Government policies. Also, we
find that there is difference in the level of integration of one economy with the rest of the world
which has been addressed through the research carried out by AT Kearney and has been termed as
the globalisation index.

Drivers of Globalisation
The key drivers of globalisation are communication, technology, liberalisation, government
policies and the logistics which ultimately are leading to the integration of an economy with rest
of the world. These drives are responsible to boost globalisation and are inter-related in nature.
Government which plays a major part in promoting globalization either making government
policies or trade restrictions.
 Government is accountable for degree of globalization to a great extent and the reduction in
official obstacles is possible through the government efforts. Trade barriers have been
reduced over a period of years and as a result the globalization has increased. Government
also forms agreements with other countries like FTAs (Free trade agreement) with other in
orderto increase the external trade thus leading to the higher globalization. One of the
examples is Indo-Srilanka (ISLFTA) free trade agreement. Some other global agreements are
EU (European Union) and NAFTA (North America free trade agreement). These agreements
improve the external trade as well as trade relations across the countries and thus lead to
integration of trade. Moreover, trade agreements not only promote trade across other
economies but also helped country to meet necessity of life for the country men by increasing
imports.
26
  Liberalization of trade – Trade has been liberalized through the apex organization that is
WTO (World trade organization) which is the organization for deciding the global rules of
trade. Moreover, the developed and developing countries are members of WTO and can
negotiate on terms of trade on international forum. Government of a country by way of
foreign trade policy, tax exemptions, reduction in tariff and non-tariff barriers also leads to
increase in globalization since the external trade increases with the reduction in duties and
obstacles.
Fast reduction and convergence of transaction costs associated with doing this business. The
government has been using ICT tools and techniques to reduce the transaction cost. More use
of electronic means of transactions like payments, communication with various government
authorities, getting licenses like e-IEC (electronic importer exporter code) have been some
of the steps to reduce the transaction cost and save time. Recently, India has invested in
Chabahar port and will invest in north and south corridor to promote trade. As well as
ashgabad agreement is also an example of promoting globlisation, investing to save cost and
take benefit in long term.
 Communications (traditional media and internet) – Communication has improved the
business across the borders in multiple ways viz. the time taken is less, the offer and
acceptance is possible, outsourcing and consultancy has emerged with the better
communication across the countries. Now, important issues can be discussed through
conferencing on video calls.

 Technology – Technology is a key driver for globalization by shrinking the world to global
village and then to global table/palm. Thus, improved technologies are reducing the
geographical distances and also cause of increase in globalization across the countries.

Pros and Cons of Globalisation

Globalisation has both advantages and disadvantages and it varies from country to country as well
as sector to sector. Developed countries have been able to get more benefits from globalisation in
comparison to the developing and the least developed countries due to better resources. However,
globalisation has also been a threat to SMEs (small and medium enterprises) and to the
environment as a whole which has been discussed in detail.

Advantages of Globalisation
 Increased market share due to wider market-Capturing the market is a basic business
motto and Globalisation provides us an opportunity to trade in different economies as a
result the market share increases in global world. The increased market share also helps in
reducing the cost of production and increase the GDP of an economy, due to economies of
scaleForeg. Wal-mart deals in more than 100 countries with an economic concept of
economies of scale and economies of scope thus selling the product on the basis of ‘every
27
 day low prices’.
 Recognition of Brands – Once the product is introduced and is accepted on a large scale
than brand is said to have established. This establishment of brand helps in the recognition
of brand across the different countries. Example: SURF: half customers speak word surf
not detergent due to the surf excel brand rather, a unique brand. For ex, McDonalds
isglobal brand and well recognised across the economies. Similarly, the low cost tata-nano has
been recognised globally.
 Growth opportunities – Globalisation is a buzz word due to various opportunities available
across the borders. Growth opportunities are more for business in globalised market. Thus,
the firms can capitalise their business across the borders based on cost, quality, brand image
and availability of goods. MNCs are strategising the business by having their presence in
different countries in order to prosper and grow.
 Producing in different countries to reduce the cost of production – MNCs are looking
forward to the emerging economies like BRICS and particularly India and china to set up
their businesses which are labour intensive to reduce the cost of production. For e.g.
recently Havells has established in India and automobile companies have preferred India
and china to be the favourite destination for manufacturing.

Economic Benefits
An economy can be benefited in terms of macro-economic factors by way of globalisation and
the same can be illustrated as follows.

Increase in External Trade Increase in GDP Increase in PPP Standard of Lining will increase

Thus, if the external trade of an economy is increasing it will contribute to the GDP of the nation
followed by an increase in the Purchasing Power Parity and thus the standard of living of people
in the nation will increase which is also the ultimate objective of any economy. An economy
can be benefited in the tough time of inflationary pressures and at that point of time the nation
starts importing in turn taking benefits from the low cost economies across the globe. The
development of an economy can take place by liberalisation and the FDI policies of the
government which will utilise the resources and contribute to the development of the nation.
Globalisation of an economy will contribute towards the increase in the privatisation of the
economy and reduction of the Monopoly powers as well. Entry of Multi-National Companies
(MNCs) in an economy will contribute to the utilisation of resources as well as will create
opportunities for the employment. MNCs will bring innovative methods in the Industry and
contribute to the training and development of the personnel which will add value to their
employability.

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Disadvantages of Globalisation
 MNCs are exploiting resources by setting business in developing countries.
 Income gap between high-income and low income countries has grown.
 Increase Poverty and inequality –Richer are becoming rich and poor are becoming
poorer.
 Displaces workers from high-wage jobs and decreases the demand for less skilled
workers.
 Globalization is deepening food insecurity the world over.
 With greater volatility of financial markets and increased risk, real interest rates have
risen substantially
 Exploitation of SMEs that is Can effect domestic enterprise of developing countries.

Globalisation of Market

Globalization of markets involves the growing interdependency among the economies of the
world; multinational nature of sourcing, manufacturing, trading, and investment activities;
increasing frequency of cross-border transactions and financing; and heightened intensity of
competition among a larger number of players. Globalization of markets is best reflected in the
"internationalization" of business transactions. This means that one or more aspects of economic
activity carry an international character. One of the parties to the transaction may be a foreign
partner; the transaction may involve a foreign currency; financing may involve foreign lenders;
technology may originate from a foreign partner; and so on.
Globalization of markets is basically the merging of different markets into single market. The
process is based on the perception, culture, norm, values and convenience and which gradually
ends into more use of product or service. Moreover, the size of the market may not be too large.
Globalization of markets has also cast a favourable effect on various sectors in India. According
to recent surveys, the industrial sector in the country has significantly grown at a rate of around
6.8%. This rate is expected to be more in the years to come. Due to the development in
technologies and innovation, the exports in the industrial sector has also grown to a great extent
and today the country ranks as a great market in the Asia-Pacific region. The industrial sector
has a share of around 29% of the total GDP.

Reasons for Globalization of Markets

One of the reasons is the business and trade links between various countries across the globe which
has probably given rise to the globalization of markets. In addition to the above, companies look
forward to the global markets to increase their profits. MNCs also response to the demand across
the global market and hence could be one more reason to enter into global markets. The other
reason is to reduce the risk of globalization and thus the companies look forward for globalization
29
of markets through diversification.

1. Globalisation of Production
Globalisation of production refers to the dispersal of production across the countries so that the
objectives of the firm like cost minimisation or quality maximisation could be achieved.
Multinational companies are looking forward to cost reduction by locating the manufacturing units
to the countries where the cost of production is least. Companies are also sourcing the raw-material
and labour where the cost is relatively less. For e.g. the assembly of computers is largely done
from the developing countries like India and china. Moreover, the companies are relocating
themselves to the countries where the cost of production is less. Furthermore, the benefits from
production across the countries have been discussed in detail.
 Access to Low-Cost manpower–Global companies are in search of manpower from
different countries to reduce the cost of production. Most of the American and European
companies have been looking towards Indian manpower for IT services and customer
services due to cost differentials. Some of the services can be produced at remote locations
due to the reason that labour cost is relatively less. Countries like India and China have
ample of labour.
 Technical expertise – One of the reasons to shift the production unit or service unit from
host country to other nations is the technical knowhow. A developed country such as
America is well acquainted for its capital intensive techniques. Moreover, the American
economy is hub for technology enabled companies example can be Google.
 Availability of production inputs – Most importantly, the reason of relocating the business
to different countries is the availability of inputs for production. Thus, the quest for natural
resources is one of the important reasons for relocating the business to different economies
and capitalising the benefits from those economies.
Benefits of Globalisation of Production
 One of the key benefits is the availability of raw materials at cheaper price.

 Other benefits of globalization of production are that the producers can get the benefit
from cheap labor all around the world.

 Relocating the business can get the skilled human resource at low cost.
 To take the benefit of reduced cost of transportation to neighboring foreign countries.
All above help companies to compete in the global market.
 Also it has resulted in increased benefits to the consumers around the globe with respect to
the selection of the products.

 The increased financial linkage with the countries around the globe has increased the
degree of diversification in the products and services offered by the companies.

30
 Example of Globalization of Production - We can take the example of the Honda who is
making the spare parts in China, designing the engine in the Japan and assembling the
products in Pakistan so the production is distributed into three different countries.

Effect of Globalization on India:

Globalization has its impact on India which is a developing country. The impact of globalization
can be analysed as follows:

1. Access to Technology:

Globalization has drastically, improved the access to technology. Internet facility has not only
enabled India to gain access to knowledge and services from around the world but at the same time
use of mobile telephone has revolutionisedthe IT industry. Now in India internet facility, mobile
or other technological system became a necessity, even for a small business enterprise.

2. Growth of international trade:

Tariff barriers have been removed which has resulted in the growth of trade among nations. Global
trade has been facilitated by GATT, WTO etc.
3. Increase in production:

Globalization has resulted in increase in the production of a variety of goods. MNCs have
established manufacturing plants all over the world.
4. Employment opportunities:

Establishment of MNCs have resulted in the increase of employment opportunities.

5. Free flow of foreign capital:

Globalization has encouraged free flow of capital which has improved the economy of developing
countries to some extent. It has increased the capital formation.

Negative effect of globalization:

Globalization is not free from negative effects. They can be summed up as follows:

1. Inequalities within countries:

Globalisation has increased inequalities among the countries. Some of the policies of Globalization
(liberalisation, WTO policies etc.) are more beneficial to developed countries. The countries which
have adopted the free trade agenda have become highly successful. E.g.: China is a classic example
of success of globalization. But a country like India is not able to overcome the problem.

31
2. Financial Instability:

As a result of globalization there is free flow of foreign capital poured into developing countries.
But the economy is subject to constant fluctuationsdue to variations in the flow of foreign capital.
3. Impact on workers:

Globalization has opened up employment opportunities. But there is no job security for employees.
The nature of work has created new pressures on workers. Workers are not permitted to organise
trade unions.
4. Impact on farmers:

Indian farmers are facing a lot of threat from global markets. They are facing a serious competition
from powerful agricultural industries quite often cheaply produced agro products in developed
countries are being dumped into India.

5. Impact on Environment:

Globalization has led to 50% rise in the volume of world trade. Mass movement of goods across
the world has resulted in gas emission. Some of the projects financed by World Bank are
potentially devastating to ecological balance. E.g.: Extensive import or export of meat.
6. Domination by MNCs:

The flip side of globalization is increasing dominance of MNCs over the growing Indian
corporate. Multinational companies are emerging as growing corporate power. They are
exploiting the cheap labour and natural resources of the host countries.Taking an example ofkhadi
clothes, which was at times well accepted dress material of Indian is replaced by modern branded
clothes. The reasons could be the quality of fabrics which is influenced by global markets and
is less costlier than khadi.

7. Threat to national sovereignty:

Globalizations results in shift of economic power from independent countries to international

organisations, like WTO United Nations etc. The sovereignty of the elected governments are
naturally undermined, as the policies are formulated in favour of globalization. Thus globalization
has its own positive and negative consequences. Just like a coin, globalization too has two sides
i.e. its own positive and negative consequences. According to Peter F Drucker “Globalization for
better or worse has changed the way the world does business”. The phenomenon of Globalization
is inevitable recently and as per the need of hour, India should acquire global competitiveness in
various fields to stay competitive in the global markets.

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Cultural Environment

Culture is the shared characteristics, values, and beliefs of a group that distinguishes them from
another group such as religion, language, and heritage.
"To understand anyone's culture and environment you have to actually not only live in the
geographical location but also mix with the people and interact with them on a daily basis.

Thus, a culture comprises of values, rituals, languages and the customs in order to socially interact
within and outside the society. It is of utmost important to know the cultural differences across the
nations in order to have better trade relations. Moreover, culture could also be understood through
four dimensions of Hofstede’s theory. The four dimensions are as follows:

Dimensions of Culture Explanation

Individualism and Individualistic nature exhibits the lack of team spirit and the ties
collectivism between the individuals are loose. Collectivism refers to the more
integrated style, team work and the integration is strong.
Uncertainty Avoidance Uncertainty avoidance means the behavior to avoid the unforeseen
events and the group of people is not prepared to take risk.
Power distance Power distance between the human being that is between superior
and subordinates. Also power is unequally distributed.
Masculinity femininity Masculinity explains to cultures where social gender roles are
clearly visible. Femininity defines the cultures wherein the social
gender roles are not clear.

33
 Maculinity vs
Femininity

Individualism
Vs
Power Long term
orientation
Collectivism
Distance

Uncertainity
Avoidance

Fig –Dimensions of Culture (Hofstede’s Theory)

With the help of international business one is able to analyze how different people behave as they
belong to the different culture. Therefore, it is necessary for a manager to make decisions keeping
in mind to what extent the culture can affect their business and make decisions accordingly
(Hofstede, 1994).
When it comes to culture researchers generally used a qualitative approach like an interview or
uses the secondary data but in at times, quantitative method has also been used to give a new
dimension containing numerical statistics, which helps in increasing the validity and the reliability
of the study (Bryman and Bel, 2015).
A brand had to acquire a cultural meaning in their advertisement style, which can be associated
with price, distribution channel, advertisement message and in any other form to better connect
with their customer and hence influence the brand image (Aaker, 1997). Moreover, scholar like
Schiffman & Kanuk (2010) mentioned that the purchase decision of a customer gets influenced by
the culture, sub-culture and with their level of interactively with the brand. While communicating
through advertisements the companies must deal with different culture. Thus, they need to work
to find a solution to manage the changes that occur due to the existence of cultural difference.

We shall further try to understand the cultural aspects of Germany, USA and America to
understand the differences.

34
Cultural Aspect of Germany

German
Language

Tough
negotiators

Conservative
dress

Serious in
nature

Punctuality is
must

Individualisti
c

Germans are highly individualistic and guard their private life. Thus, it is preferred not to
call them over phone without permission. Business is taken seriously and they go into the
details of business. In business meetings, age takes preference over youth. If you are in a
group setting, the eldest person enters first.
Germans keep a larger personal space around them, approximately 6 inches more space than
North Americans do.
People that have worked together for years still shake hands each morning as if it were the
first time they met.
German men frequently greet each other with Herr 'last name', even when they know each
other very well. Titles are very important to Germans. Do your best to address people by
their full, correct title, no matter how extraordinarily long that title may seem to foreigners.
This is also true when addressing a letter.

Japanese Culture

Collectivism Approach

High Commitment

35
 Long term relations

Team Building

Avoid
risk

Japanese are highly committed and expect others as well. Kaizen has emerged from Japan
that is high quality. The language is Japanese and the religion is Shinto Buddhism. The
currency used in Japan is Yen. Japanese are said to be technology oriented, moreover JIT
(Just in time) is the outcome of Japanese approach. Japanese appreciate the gifts due to
their social behavior. Consider bringing a small souvenir that represents well your
hometown to give to your host.

American Culture

"American companies should visualize that their expansion into an international market is like
extending their arms and that the fingers represent their agents in every country. If the arm does
not provide support to the fingers, how would the fingers function well?"

Individualistic Approach

Power distance -Low

Hire and fire policy

Punctuality and commitment to be honoured.

36
 Americans are open minded people and discuss on point to pint basis. Americans are
performance oriented people and humour is expected during the meetings. Americans opine
about the freedom of choice. The official language in America is English.

The Ease of Doing Business (EoDB) index is a ranking system established by the World
Bank Group. In the EoDB index, ‘higher rankings’ (a lower numerical value) indicate better,
usually simpler, regulations for businesses and stronger protections of property rights. The
research presents data for 190 economies and aggregates information from 10 areas of
business regulation:

1. Starting a Business of all

2. Dealing with Construction Permits
3. Getting Electricity
4. Registering Property
5. Getting Credit
6. Protecting Minority Investors
7. Paying Taxes
8. Trading across Borders
9. Enforcing Contracts
10. Resolving Insolvency

Rankings and weights on each of the mentioned parameters are used to develop an overall
EoDB ranking. A high EoDB ranking means the regulatory environment is more conducive
for starting and operating businesses.

INDIA – EASE OF DOING BUSINESS RANKING

Among the chosen 190 countries, India ranked 63rd in Doing Business 2020: World Bank
Report. In 2014, the Government of India launched an ambitious program of regulatory
reforms aimed at making it easier to do business in India. The program represents a great
deal of effort to create a more business-friendly environment. India as one of the top 10
improvers, for the 3rd time in a row, with an improvement of 67 ranks in 3 years.

India has emerged as one of the most attractive destinations not only for investments but
also for doing business. India jumps 79 positions from 142nd (2014) to 63rd (2019) in
'World Bank's Ease of Doing Business Ranking 2020'.

With the aim to improve the ease of living and the ease of doing business in India, more than
25,000 compliances have been reduced by the GOI. Positive changes have led to this
impressive improvement in India’s ranking in the EoDB index. India’s major achievement is
summarised here:

Construction Permits: India’s ranking on this parameter has improved from 184 in 2014 to
27 in 2019.4 This improvement has been mainly on the account of a decrease in the number
of procedures and time taken for obtaining construction permits in India.
37
 Getting Electricity: India’s ranking on this parameter has improved from 137 in 2014 to
22 in 2019. It takes just 53 days and 4 procedures for a business to get an electricity
connection in India.

Apart from these significant improvements, among the 190 economies, India ranks 13th in
Protecting Minority Investors and 25th in Getting Credit.

Central Government Initiatives

Starting a Business

1. Permanent Account Number (PAN), Tax Deduction & Collection Account Number (TAN),
Director Identification Number (DIN) have now been merged into a single form (SPICe) for
company incorporation.
2. Elimination of incorporation fee for companies with an authorised capital of up to Rs. 15
Lakh.
3. Five-page form and other attachments for reserving the name of the Company with the
Ministry of Corporate Affairs have been simplified into a simple web service with only three
fields to be filled.
4. Registration under Employee State Insurance Corporation (ESIC) and Employee Provident
Fund Organisation (EPFO) is available at Shram Suvidha portal as a common online service
with no physical touchpoint.
5. No requirement of inspection before registration under the Shops & Establishment Act in
Mumbai and Delhi.
6. Companies Act was amended to eliminate the requirement of a common company seal.

Dealing with Construction Permits

1. Municipal Corporations of Delhi, as well as Municipal Corporation of Greater Mumbai,

have introduced fast track approval system for issuing building permits with features such as
Common Application Form (CAF), provision of using digital signature and online scrutiny
of building plans.
2. Delhi has uniform building by-laws which allow for risk-based classification regimes for
different building types. It has a provision of deemed approval of sanctioning building plans
within 30 days.
3. For construction permits, the time reduced from 128.5 to 98 days in Mumbai and from 157.5
to 113.5 days in Delhi between Doing Business 2018 and 2020 reports.
4. The total number of procedures reduced to 19 in Mumbai and 11 in Delhi.
5. Cost of obtaining construction permits reduced from 23.2% to 5.4% of the economy’s per
capita income.

Trading Across Borders

1. The Central Board of Excise and Customs (CBEC) has implemented the ‘Indian Customs
Single Window Project’ to facilitate trade. Importers and exporters can electronically lodge
38
 their Customs clearance documents at a single point. The government has launched ‘PCS1x’
which intends to integrate 27 maritime stakeholders at one platform.
2. The number of mandatory documents required for customs purposes, for both import and
export of goods, has been reduced to three.
3. E-Sanchit, an online application system, allows traders to file all documents electronically.
4. The electronic self-sealing of the container at the factory has reduced time and cost for
exporting firms.
5. A computerized risk management system has brought transparency and reduced the
frequency of custom inspections significantly.
6. Central Board of Indirect Taxes and Customs has provided a facility for Advance Bill of
Entry (Advance Import Declaration).

Enforcing Contracts

1. The Commercial Courts and Appellate Division of High Courts have been established in
Mumbai and Delhi.
2. National Judicial Data Grid (NJDG), provides case data including case registration, cause
list, case status and orders/ judgements of courts district-wise across the country. NJDG is
open to the public since 2015.
3. New cases in district courts are assigned to Judges randomly through an automated system
in Delhi and Mumbai.
4. E-filing of cases has been introduced in district courts of Delhi and Mumbai.
5. A case management tool has been developed with the functionality of sending a notification
to lawyers, viewing court orders/ judgements, tracking the status of cases, semi-
automatically generate court orders etc.

Getting Credit

1. Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI) is a

geographically unified electronic registry that provides for registration by asset type. Since
2017, CERSAI also provides search through debtor's name.
2. Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) (Central Registry) Rules, 2011 was amended to include additional
types of charges, including a security interest in - immovable property by the mortgage,
hypothecation of plant and machinery, stocks, debt including book debt or receivables,
intangible assets, patent, copyright, trademark, under-construction building.
3. The definition of property, which now includes immovable as well as intangible, allows
CERSAI to register these additional charges.

Getting Electricity

1. Electricity connection is provided within 7 days if no Right of Way (RoW) is required and
within 15 days where RoW is required.
2. Service line cum Development charges are now capped at USD 339.84 in Delhi.

39
3. The number of documents required for getting an electricity connection has been reduced to
tow and no physical documents are accepted.
4. The total number of procedures reduced to 3 in Delhi and 4 in Mumbai.

Registering Property

1. All sub-registrar offices have been digitized and its records have been integrated with the
Land Records Department, in both Delhi and Mumbai.
2. In Mumbai, all property tax records have been digitized. Property is mutated automatically
after registration. The digitization of property records ensures transparency and allows
citizens to ascertain the history of transactions in digital mode.
3. Online service for charges search at Registrar of Companies reduces the time taken for this
procedure significantly.
4. Statistics regarding the number of land disputes at Revenue Courts are available online in
both Delhi and Mumbai.

Resolving Insolvency

1. The Insolvency and Bankruptcy Code of 2016 has introduced new dimensions in resolving
insolvency in India. It is India’s first comprehensive legislation on corporate insolvency.
2. Under Fast-track Corporate Insolvency Resolution Process (CIRP) for mid-sized companies,
the process for insolvency shall be completed within 90 days with a maximum grace period
of another 45 days.

Paying Taxes

1. Reduction of corporate tax from 30% to 25% for mid-sized companies.

2. Domestic companies can opt for concessional tax regime @ 22% (effective tax rate: 25.17%
inclusive of surcharge and cess). Such a company cannot claim any income tax incentive or
exemption. Such companies are not liable to pay the Minimum Alternate Tax (MAT)
3. The tax rate for new domestic manufacturing companies is now 15% (17.01% inclusive of
surcharge and cess). Companies that have been incorporated on or after 1st October 2019,
making fresh investment manufacturing and commencing production on or before 31 March
2023, may opt for such a concessional tax regime. Such companies cannot avail of any
other income tax exemption/ incentive under the Income-tax Act.
4. A company that does not opt for the above concessional tax regime and avails any tax
exemption/ incentive, shall continue to pay tax at pre-amended rates. However, the option of
availing of the lower tax regime of 22% can be opted for after the expiry of tax during the
holiday/ exemption period. Once the same has opted for it cannot be subsequently
withdrawn by the taxpayer. MAT rate for companies availing exemptions/ incentives
reduced from 18.5% to 15%.
5. Robust IT infrastructure of online return filing for Indian taxpayers.
6. The Goods and Service Tax came into effect on 01 July 2017. It subsumes eight taxes at the
Central and nine taxes at the State level.

40
7. The Employee State Insurance Corporation (ESIC) has developed a fully online module for
electronic return filing with online payment. This has substantially reduced the time to
prepare and file returns.
8. With the introduction of the e-verification system, there remains no physical touchpoint for
document submission to income tax authorities.
9. Instead of filing 3 GST returns, the taxpayer has to now file only 2 returns.

Measures Underway

1. Resolving Insolvency: Increased usage of Fast-track Corporate Insolvency Resolution

Process (CIRP) as more insolvent companies opt for reorganization plans instead of
liquidation.
2. Enforcing Contracts: The faster resolution of commercial disputes through dedicated
commercial courts.
3. Registering Property: Digitization of land records and maps will bring transparency on
encumbrances and ease the process of registering property.
4. Generating Electricity: GoI has initiated a campaign to improve regulatory and process
framework in the power sector. It is working towards a reduction in entry barriers in the
distribution industry and making it license-free.
5. Starting a business: The new companies registered through the Agile platform of MCA are
also facilitated to register under ESI Act, through the common transaction.
6. Dealing with Construction permits: Central Public work department (CPWD) has introduced
49 new & emerging technologies to enhance the speed of work. ERP is under
implementation and is expected to be completed by 2021. It will ensure transparency and
increase efficiency.

State Reforms

1. DPIIT has launched the latest Business Reform Action Plan for the year 2020 (BRAP
2019-20). It consists of 301 reform points across 15 areas. The highlights of State Reforms
Action Plan 2020 are
• ‘Investment enablers’ - To incorporate reforms related to ‘Access to information and
transparency, ‘Online Single Window System and more.
• Single Window system- To enable the single window system including online submission
of application, payment of application fee and many more
• Sectoral reforms pertaining to sectors like Tourism, Telecom, Hospitality, Trade License,
Healthcare, Legal Metrology, Cinema Halls and Movie shooting.
• Public procurement has been introduced first time by the Industries department in this
year’s Action Plan.
• Reforms related to ‘elimination of the requirements of renewals of certificates/ approvals/
licenses’ and ‘implementation of computerized central random inspection system’.

2. For BRAP 2018-19, DPIIT has proposed to undertake a 100% feedback based
assessment. The reform areas included.

41
 Access to Information and Transparency Enabler
 Single window system
 Land administration and Transfer of Land and Property
 Land availability and allotment
 Environment Registration Enablers
 Construction Permit Enablers
 Labour Regulation-Enablers
 Obtaining Utility Permits
 Paying Taxes
 Inspection Enablers
 Contract Enforcement
 Sector Specific: Healthcare and Miscellaneous

3. BRAP 2017-18 was updated to 372 action points. It included new sectors such as
Healthcare and Hospitality, Central Inspection system, Trade License, Registration under
Legal Metrology, and Registration of Partnership Firms & Societies. Assessment for BRAP
2017-18 included feedback score which was sought on 78 reform points from actual users.

4. In 2016, DPIIT released a 340-point BRAP. It included recommendations on 58

regulatory processes and policies spread across ten reform areas spanning the lifecycle of a
typical business.

5. Department for Promotion of Industry and Internal Trade (DPIIT) launched Business
Reforms Action Plan (BRAP) and its assessment report in September 2015, capturing the
findings of reforms implemented by States/Union Territories.

6. The Action Plan is spread across 24 reform areas and seeks to promote a sector-specific
approach so as to create an enabling business environment across various sectors in the
country. The various sectors include Trade License, Healthcare, Legal Metrology, Fire
License/NOC, Cinema Halls, Hospitality, Telecom, Movie Shooting and Tourism.

World Bank report Doing Business 2019

This topic measures the paid-in minimum capital requirement, number of procedures, time and
cost for a small- to medium-sized limited liability company to start up and formally operate in
economy’s largest business city. Doing Business records all procedures officially required, or
commonly done in practice, for an entrepreneur to start up and formally operate an industrial or
commercial business, as well as the time and cost to complete these procedures and the paid-in
minimum capital requirement.

(DISTANCE TO FRONTIER: The distance to frontier score captures the gap between an
economy's performance and a measure of best practice across the entire sample of 41
indicators for 10 Doing Business topic).

In terms of ease of doing business for starting a business the most proficient destination for
starting a business among the BRICS nations is Russian federation followed by South Africa
and China. Poor rankings of Brazil and India indicates the presence of more obstacles and entry
42
barriers for staring business in these countries. The good performance of Russian federation is
mainly due to less number of procedures for starting a business and lower cost of labor. Poor
performance of Brazil and India is attributed to more time taken for starting business and more
number of procedural requirements for starting a business. DTF score of above 80 in case of
Russia, China and South Africa indicates that these countries are improving tremendously in
terms of their regulatory requirements for starting a business and are little away from the frontier
constructed from the best performances across all economies and across time. Whereas in case
of India and Brazil DTF score of less than 75 indicates that these countries are much lagging
behind the frontier constructed from the best performances across all economies and across time.

The distance to frontier score helps assess the absolute level of regulatory performance over
time. It measures the distance of each economy to the “frontier,” which represents the best
performance observed on each of the indicators across all economies in the Doing Business
sample since 2005. One can both see the gap between a particular economy’s performance and
the best performance at any point in time and assess the absolute change in the economy’s
regulatory environment over time as measured by Doing Business. An economy’s distance to
frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100
represents the frontier. For example, a score of 75 in 2016 means an economy was 25 percentage
points away from the frontier constructed from the best performances across all economies and
across time. A score of 80 in 2017 would indicate the economy is improving.
Performance of BRICS nations in terms of starting a business as measured by DTF score over
the study period indicates that Russia has improved substantially over the period of time.
Progress made by Russia is mainly due to reforms major introduced by Russia like reduction in
the number of days required to open a corporate bank account, elimination of the requirement to
deposit the charter capital before company registration etc. Also India and China made
remarkable improvement from 2014 and 2015 onwards. It seems that reforms made by Brazil
and South Africa have not contributed much in improving the performance of these economies.
India made momentous improvement in 2016 by eliminating the minimum capital requirement
and the need to obtain a certificate to commence business operations.

Parameter – 2: Dealing with construction permits

Good construction regulation matters for public safety. It also matters for the health of the
building sector and the economy as a whole. Sound regulation of construction helps protect the
43
public from faulty building practices. Besides enhancing public safety, well-functioning building
permitting and inspection systems can also strengthen property rights and contribute to the
process of capital formation. But if procedures are too complicated or costly, builders tend to
proceed without a permit.

Dealing with construction permits ranks for BRICS nations indicate that procedural
requirements for dealing with construction permits are most convenient in South Africa followed
by followed by Russia. The performance of other nations is very poor with India being the worst
market among the BRICS nations for dealing construction permits. Credit for the South Africa’s
superior performance goes to the factors like lower time required for dealing with construction
permits and lower cost. Poor performance of India is mainly due to more number of procedures,
more time required and higher cost. DTF score of less than 70 for all BRICS nations indicate
that all BRICS nations are much away from the frontier constructed from the best performances
across all economies and across time.

Russian federation has made noteworthy progress in 2013, 2014 and 2015 by eliminating several
requirements for project approvals from government agencies and by reducing the time required
to register a new building and by removing the requirement to obtain permission to fence the
construction site. China also improved substantially from 2013 to 2015 by simplifying the
process of obtaining a construction permit by streamlining and centralizing preconstruction
approvals. Brazil and South Africa badly failed to improvise their performance mainly due to
lack of major reforms undertaken by them in this area.
Parameter – 3: Getting electricity
This topic tracks the procedures, time and cost required for a business to obtain a permanent
electricity connection for a newly constructed warehouse. In addition to assessing efficiency of
connection process, Reliability of supply and transparency of tariff index measures reliability of
power supply and transparency of tariffs and the price of electricity.

In terms of getting electricity the best performance among the BRICS nations is of India
followed by Russia and Brazil. Compared to other BRICS nations credited with lower time
required for getting electricity connection, lower cost and high reliability of electricity supply.
44
 Due to unreliable electricity supply and higher cost South Africa is much lagging behind the
other BRICS nations in terms of its rank for getting electricity. The cost of electricity is much
lower in India and Brazil compared to other BRCIS nations. Further in terms of time required
for getting electricity India and Brazil fare much better than other BRICS nations. DTF score of
more than 80 in case of India, Brazil and Russia indicates that these countries are improving
enormously in terms of their regulatory requirements for getting electricity and are little away
from the frontier constructed from the best performances across all economies and across time.

In terms of registering property Russia is on 9th rank among 189 countries of the world. The scintillating
performance of Russian federation in terms of registering property is mainly due to very few procedures,
less number of days required for registering property and lowest cost of registering property among the
BRICS nations. China is also faring well compared to Brazil, India and South Africa. Compared to other
BRICS nations registering property is most difficult in India. The poor performance of India mainly
because of more number of procedures, more time required for registering property and higher cost.
Russia’s DTF score of 90.55 indicates that Russia is only little away from the frontier constructed from
the best performances across all economies and across time. Whereas the poor DTF score of India and
Brazil indicate that these countries need to cover very long distance to reach the frontier set for the best
performance.

45
Parameter – 5: Getting credit
This topic explores two sets of issues—the strength of credit reporting systems and the effectiveness of
collateral and bankruptcy laws in facilitating lending. Doing Business measures 2 types of institutions
and systems that
In terms of getting credit India and Russia are scoring the same points among the BRICS countries.
Compared to other BRICS countries getting credit is most difficult in Brazil. Poor performance of Brazil
is mainly due to lower strength of legal rights index. In terms of DTF score all the BRICS nations are
much lagging behind the other nations of the world and requires significant reforms to improvise their
performance.

Though all the BRICS nations have undertaken handful of reforms to make getting credit easy and efficient
not significant improvement has been witnessed in their DTF scores year on year. This indicate that reforms
made by BRICS nations have not remained much effective and did not contribute well in improving their
DTF score.

46
Parameter – 6: Protecting minority investors
One of the most important issues in corporate governance is self-dealing—the use of corporate assets by
company insiders for personal gain. Related-party transactions are the most common example. High
ownership concentration and informal business relations can create the perfect environment for such
transactions, which allow controlling shareholders to profit at the expense of the company’s financial
health—whether because company assets are sold at an excessively low price, assets are purchased at an
inflated price or loans are given by the company to controlling shareholders on terms far better than the
market offers.
Protecting minority investors: Major Indicators for BRICS nations 2016

Minority rights of investors are highly protected in India, South Africa and Brazil. These countries are faring very
well on the three indices developed for measuring the extent of protection of minority rights.

DTF scores of BRICS nations over the study period indicate that India, Brazil and Russia have geared up
their performance in 2015 whereas China and South Africa did not make notable progress in this area. :
India strengthened minority investor protections by requiring greater disclosure of conflicts of interest by
board members, increasing the remedies available in case of prejudicial related-party transactions and
introducing additional safeguards for shareholders of privately held companies.
Parameter – 7: Paying taxes
This topic records the taxes and mandatory contributions that a medium-size company must pay or withhold
in a given year, as well as measures the administrative burden in paying taxes and contributions. Oliver
Wendell Holmes, a former U.S. supreme court justice, said, “Taxes are what we pay for a civilized society.”
Governments need sustainable funding for social programs and public investments to promote economic
growth and development. Programs providing health, education, infrastructure and other amenities are
important to achieve a common goal of a prosperous, functional and orderly society. And they require that
governments raise revenues. This is so even in low-income economies that often receive large amounts of
external assistance to help meet their needs. Taxation not only pays for public goods and services; it is a key
ingredient of the social contract between citizens and the economy and thus key to building an effective
government.

47
Doing business ranks of BRICS nations with respect to paying taxes indicate that tax system of Russian
Federation and South Africa are very efficient compared to other BRICS nations. Performance of Indian and
Brazil is very poor compared to other BRICS nations however tax system of India is expected improve
significantly after the introduction of Goods and Service Tax (GST). India had highest number of tax
payments compared to other BRICS nations which are expected to decline significantly after the introduction
of GST. DTF score of above 80 in case of South Africa and Russia indicate that that these countries are
improving enormously in terms of their regulatory requirements for paying taxes and are little away from the
frontier constructed from the best performances across all economies and across time.

Through constant tax reforms Russian federation has consistently improved its tax system year on year over
the study period. Few major reforms made by Russia for improving its tax system include making paying taxes
less costly for companies by excluding movable property from the corporate property tax base, easing the
administrative burden of taxes for firms by simplifying compliance procedures for value added tax and by
promoting the use of tax accounting software and electronic services and by making payment of axes less
costly for companies by reducing the corporate income tax rate. India improved its performance on this
parameter in 2012 by easing the administrative burden of paying taxes for firms by introducing mandatory
electronic filing and payment for value added tax and further in 2017 by introducing GST which combined all
indirect taxes and simplified the tax system in India. In spite of host of reforms made by China and South
Africa in their tax system no significant improvement is observed in their DTF score for paying taxes over the
study period.
Parameter – 8: Trading across borders
In the past 10 years international trade patterns have been defined by the rise of developing economies, the
expansion of global value chains, the increase in commodity prices (and the growing importance of commodity
exports) and the increasingly global nature of macroeconomic shocks. Each of these trends has reshaped the
role of trade in facilitating development.
Among the BRICS nations China has most efficient regulations for export and import of goods and services.
Whereas the performance of other BRICS nations on the parameter of trading across borders is almost similar.
Due to complexity of Import export procedures and regulatory requirements time to export is highest in India
followed by South Africa. Whereas in case of China time required for regulatory compliances is lowest among
the BRICS nations. Export cost is highest in Russian Federation followed by Brazil and China. Time required
for import compliances is lowest in Brazil followed by China and Russia.
48
DTF scores of BRICS nations for trading across boarders for the study period indicate that Russian
federation has consistently improved due to reforms made by Russia. In 2012 Russia made trading across
borders easier by reducing the number of documents needed for each export or import transaction and
lowering the associated cost and in 2014 implemented an electronic system for submitting export and import
documents and by reducing the number of physical inspections. Other BRICS nations have not made
remarkable progress in this area over the study period.
Parameter – 9: Enforcing contracts
Efficient contract enforcement is essential to economic development and sustained growth. Economies with a
more efficient judiciary, in which courts can effectively enforce contractual obligations, have more
developed credit markets and a higher level of development overall.
Among the BRICS nations China is most efficient in enforcing contracts followed by Russia and Brazil.
Whereas India and South Africa are very poor in terms of enforcement of contracts. Among the BRICS nations
India requires longest time (1420 days) for enforcing the contracts whereas the time required is least in case of
Russian Federation. Cost of enforcing contracts is lowest in China and South Africa and highest in India
compared to other BRICS nations. DTF score of more than 70 in case of Russia and China that these countries
are improving in terms of their regulatory requirements for enforcing contracts and are little away from the
frontier constructed from the best performances across all economies and across time.

49
In spite of many reforms made by BRICS nations over the study period none of them could significantly
improve their performance in terms of enforcing contracts.

Parameter – 10: Resolving insolvency

Keeping viable businesses operating is among the most important goals of bankruptcy systems. A good
insolvency regime should inhibit premature liquidation of sustainable businesses. It should also discourage
lenders from issuing high-risk loans—and managers and shareholders from taking imprudent loans and
making other reckless financial decisions. A firm suffering from bad management choices or a temporary
economic downturn may still be turned around. When it is, all stakeholders benefit. Creditors can recover a
larger part of their investment, more employees keep their jobs, and the network of suppliers and customers is
preserved. This topic identifies weaknesses in existing insolvency law and the main procedural and
administrative bottlenecks in the insolvency process. Doing Business studies the time, cost and outcome of
insolvency proceedings involving domestic entities as well as the strength of the legal framework applicable
to liquidation and reorganization proceedings.

Among the BRICS nations the mechanism for resolving insolvency is most efficient in South Africa, Russia
and China whereas very lethargic India. Recovery rate is lowest in India and highest in China. Average time
span for resolving insolvency is lowest in South Africa and Russia and highest in India.

In terms of DTF score for resolving insolvency performance of all the nations has improved in the year 2014.
The best performance is of Russia and worst performance is of India. During 2010 to 2013 the worst
performance was of Brazil but Brazil improved significantly in 2014 and surpassed India.

50
UNIT 3

51
 Trade Theories

Theories of International Trade

Theories of International trade explain the reasons for trade amongst countries. Resources are
widely spread across the nations, some of the countries are rich in aluminium, some are rich in
agriculture resources, and some countries have oil reserves whereas others are having scarcity or
deficit of resources. Thus, due to unequal distribution of resources across the globe, is one of the
reasons for trade. Moreover, some economies are capital intensive like USA and Japan and thus
focus on capital goods. On the other hand, some countries are labor intensive thus favouring labor
intensive products like India and China. Therefore, the countries trade to specialize in the
production and exports of those goods in which they have absolute or comparative advantage
which shall be dealt in detail. However, the focus of trade theories can be understood as follows:
 Trade theory considers the cost factor and the terms of trade.
 Trade theory considers the gains from trade along with the distribution of gain across the
trading economies.
 Due consideration is given for the type of products exported and imported.

Mercantilism Theory

The theory of mercantilism which has been largely focused on nationalism existed in 17 th
century. The theory supports that the country should export more of goods and less of imports
in order to have positive balance of trade. During this period, the settlements were made in gold.
Thus, the prominent way to become rich for a nation was to acquire more of precious metals
particularly gold. Exports were supported due to the reason that they help in earning gold
besides imports were discouraged due to loss of wealth.

Absolute advantage

The theory of absolute advantage has been proposed by Adam smith in the year 1776. The
theory is based on exchange of goods between countries wherein two commodities and two
countries are considered. The theory is based on factors of production which can be understood
through labour factor (number of units) to produce a unit. Moreover, the theory uses economic
principle to find out the product possibility curve (PPC) that is how much commodity can be
produced using given resources. The theory postulates that a nation with an absolute advantage
can produce more output of goods with that of other nations.

Based on the above facts, the assumptions of theory can be explained as follows:
Assumptions of absolute advantage theory:
 Theory is based on 2 x 2 models that are two commodities and two countries.

52
  Transportation cost between the two countries is not considered.
 Labour is the factor of production, which is considered.
 The trade does not assume any duty and therefore free trade between the countries is
assumed.
 There is no mobility of factor across the nations.

The theory can be explained with the help of an example.

We assume two countries here that is India and Sri Lanka. The commodities considered in this
example are Rice and Tea. Considering the factor of production to be labour, we assume that both
India and Sri Lanka are having 100 resources.
The table below shows the production of one ton of rice and one tone of tea with the given
resources.
Resources required to produce 1 Ton of Rice and 1 ton of tea
Country/commodity Rice Tea
India 10 20
Sri Lanka 20 10

Production and consumption without trade between countries (50 Resources for rice and 50 for
tea)
Country/commodity Rice Tea
India 5 2.5
Sri Lanka 2.5 5
Total Production 7.5 7.5

Production with specialization (India produces Rice and Sri Lanka Tea with 100 resources)
Country/commodity Rice Tea
India 10 0
Sri Lanka 0 10
Total Production 10 10

Comparative advantage

The theory of comparative advantage has been proposed by David Ricardo, which has been a
step ahead that of absolute advantage theory. As per the theory proposed by Ricardo, a country
must specialize in the production of goods for which it produces most efficiently and to buy
goods which it produces less efficiently. This can be elaborated with few examples as well.
Suppose, a country X is producing two goods, and when compared with country Y, requires
53
 fewer resources to produce good A than B. whereas, country Y, requires fewer resources to
produce good B than A. The explanation is simple that is country X should specialize in the
production of A and country Y should specialize in the production of good B.

But, if a country X is using more resources to produce one unit of good A and good B in
comparison to country Y. What should country X do now? Which product should country X
focus for specialization? The answer to this question is explained by comparative advantage
theory. Moreover, the country Y is better in the production of good A as well as B, which good
should be specialized by country Y.
Assumptions of the theory

 The theory assumes two countries and two commodities.

 The theory assumes free movement of resources between the countries.
 Transportation cost is not considered across the countries. However, in reality this will
vary based on geographical distance between the countries.
 The theory has assumed that there is no difference in price of resources across the
countries.
 The theory does not consider the effect of exchange rates, tariffs and non-tariff barriers
across the nations.

Resources required to produce 1 Ton of Rice and Tea *** To revise

Country/commodity Rice Tea

India 8 12.5
Sri Lanka 20 8

*** To revise
Production and consumption without trade between countries (50 Resources for rice and 50 for
tea)
Country/commodity Rice Tea
India 6.25 4
Sri Lanka 2.5 6.25
Total Production 8.75 10.25

Product lifecycle theory

Raymond Vernon has proposed the theory of product life cycle. The theory has stressed on
economies of scale and not on cost. The theory elaborated on three distinct phases which are
new product stage, maturity stage and the standardized product stage.
54
 New Product Stage – Initially, the identification of new product is done in the domestic market.
The product is manufactured and marketed in domestic market. The product is not exported due
to limited production.

Maturity stage -

Porters Diamond Model

• A competitive firm can choose from a number of trade, contractual, and investment modes of
foreign market entry
• Why can a particular firm in a particular home country develop and maintain its
competitiveness as it moves through the trade, contractual, and investment modes of
globalization?

• Porter introduced a diagram—the Porter diamond—that has become very well known

– Focuses on four central aspects of the home base, which Porter views as the
determinants of competitive advantage

• Factor conditions

• Demand conditions

• Related and supporting industries

• Firm strategy, structure, and rivalry

– Main argument: “Nations are most likely to succeed in industries or

industry segments where the national ‘diamond’ is most favorable”

1. Firm strategy, structure, and rivalry – the presence of strong competitors at home serves
as a national competitive advantage

2. Factor conditions – labor, natural resources, capital, technology, entrepreneurship, and

know how

3. Demand conditions at home – the strengths and sophistication of customer demand

4. Related and supporting industries – availability of clusters of suppliers and

complementary firms with distinctive competences

55
 • Factor conditions

– Porter considers labor, land, natural resources, and physical capital to be

basic factors that are largely inherited.

– More important from Porter’s point of view are advanced factors that are
created which include

• Sophisticated infrastructure

• Labor educated and trained in very specific ways

• Focused research institutions

– Porter also makes a distinction between

• Generalized factors—can be used in a number of different industries

• Specialized factors—tailored for use in specific industries

– Stresses three aspects in the home base
Demand composition
• Sophisticated, demanding, and anticipatory (anticipates trends
in global demand) home demand contributes to firms’ success

• Demand size and pattern of growth

• Large, rapidly-growing, and early home demand are positive

aspects of the home base

• Degree of internationalization

• The more home demand is synchronized with international

demand trends, the more it contributes to firms’
competitiveness

• Related and supporting industries

– Supplying industries in the home base has several advantages in downstream

industries

• Efficient, early, rapid, and sometimes preferential access to the most cost-
effective inputs

• Ongoing coordination
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 • Innovation and upgrading

– A competitive domestic supplier industry is better than relying on well-qualified

foreign suppliers

• Firm strategy, structure, and rivalry

– One country differs from another with regard to managerial systems and
philosophies and with regard to capital markets
– Institutional environments that allow firms to take a long-term view contribute
positively to competitiveness

– Presence of a large number of competing firms or rivals in the domestic industry

• Competition among firms is necessary for allocative efficiency in a market

system, but domestic rivalry contributes to dynamic, technological
efficiency

• Most important Interactions—all related to rivalry

– Domestic rivals—particularly when clustered in a geographic region—contribute

to the creation of factors

• Especially specialized, advanced factors

– A group of domestic rivals contribute to the presence of specialized and

sophisticated suppliers

– Rivalry among domestic firms producing differentiated products enlarges home

demand and makes it more sophisticated

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 International Trade Classification and Harmonized System (HS)

The Harmonized Commodity Description and Coding System generally referred to as "Harmonized System" or
simply "HS" is a multipurpose international product nomenclature developed by the World Customs Organization
(WCO).
It comprises more than 5,000 commodity groups; each identified by a six digit code, arranged in a legal and
logical structure and is supported by well-defined rules to achieve uniform classification.
The system is used by more than 200 countries and economies as a basis for their Customs tariffs and for the
collection of international trade statistics. Over 98 % of the merchandise in international trade is classified in
terms of the HS.
The HS contributes to the harmonization of Customs and trade procedures, and the non-documentary trade data
interchange in connection with such procedures, thus reducing the costs related to international trade.
It is also extensively used by governments, international organizations and the private sector for many other
purposes such as internal taxes, trade policies, monitoring of controlled goods, rules of origin, freight tariffs,
transport statistics, price monitoring, quota controls, compilation of national accounts, and economic research and
analysis. The HS is thus a universal economic language and code for goods, and an indispensable tool for
international trade.
The Harmonized System is governed by "The International Convention on the Harmonized Commodity
Description and Coding System".
The maintenance of the HS is a WCO priority. This activity includes measures to secure uniform interpretation of
the HS and its periodic updating in light of developments in technology and changes in trade patterns. The WCO
manages this process through the Harmonized System Committee (representing the Contracting Parties to the HS
Convention), which examines policy matters, takes decisions on classification questions, settles disputes and
prepares amendments to the Explanatory Notes. The HS Committee also prepares amendments updating the HS
every 5 – 6 years.

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Foreign Trade Policy 2015-2020 https://www.dgft.gov.in/CP/?opt=ft-policy

FTP 2015-2020
The policy is formulated by DGFT (Director General of Foreign Trade).
Duration –The policy is Valid till 31st March 2020.
Amendment –The Policy can be amended u/s 5 of FTDR (Foreign Trade & Development
Regulation) Act 1992.
Objective of FTP
 Trade facilitation is a main concern of the Government for cutting down the transaction
cost and time, thereby rendering Indian exports more competitive. The various provisions
of FTP and measures taken by the Government in the direction of trade facilitation are
consolidated for the benefit of stakeholders of import and export trade.
 Increase country’s exports to USD 900 billion by 2019-20, from USD 466 billion in
2013-14
 Toelevate India's share in global exports from 2 percent to 3.5 percent by 2020.

Highlights of FTP 2015-20

1. Digital India -e-IEC, e-BRC
2. Custom - 24X7, Self Assessment
3. Status Holders
4. MEIS
5. SEIS
6. Ease of Doing Business in India
7. Make in India
8. EPCG
9. Mandatory Documents –Reduced to 3 for Exports
10. Mandatory Documents –Reduced to 3 for Imports
11. Non-Realisation of Export Proceeds
12. Interpretation of Policy

Explanation

1. Digital India -e-IEC, e-BRC

One of the major objectives of new FTP is to move towards paperless working in 24x7
environments.An IEC is a 10-digit number allotted to a person that is mandatory for
undertaking any export/import activities. Now the facility for IEC in electronic form or e-
IEC has also been operationalised.

59
 • e-IEC - For issuance of e-IEC an application can be made online on DGFT website
(http//:dgft.gov.in). Applicants can upload the documents and pay the required fee (Rs
500/-)through Net banking. Application for issue of e-IEC can also be eBiz platform
(https://www.ebiz.gov.in).
Details of the entity seeking the IEC:
(1) PAN of the business entity in whose name
Import/Export would be done (Applicant individual in case of Proprietorship firms).
(2) Address Proof of the applicant entity.
(3) LLPIN /CIN/ Registration Certification Number (whichever is applicable).
(4) Bank account details of the entity. Cancelled Cheque bearing entity’s preprinted
name or Bank certificate in prescribed format ANF2A(I).
Details of the signatory applicant:
(1) Identity proof
(2) PAN
(3) Digital photograph
Moreover, the facility to submit the application in online mode is available for those having
digital signatures wherein the documents required are uploaded online and there is no need to
submit the documents in physical form. But, in the absence of digital signature, the applicant
filing the online application are required to submit the print out of application duly signed to
the respective jurisdictional regional authority by post or in person.

No Export/Import without IEC:

(i) No export or import shall be made by any person without obtaining an IEC number unless
specifically exempted.
(ii) Exempt categories
• Importer & exporter covered under Foreign trade ( exemption rules)
 Ministries/ Departments of the central or state government
 Persons importing or exporting goods for personal use not connected with trade or
manufacture or agriculture
 Importing / exporting goods from/ to Nepal, Myanmar through Indo- Myanmar border
areas and china.
 Permissible goods as notified from time to time, from China provide CIF value of a single
consignment does not exceed Rs 25000

2. Custom - 24X7, Self Assessment

24 X 7 Customs clearance

(a) The facility of 24 X 7 Customs clearance for specified import viz. Goods covered by
60
‘facilitated’ Bills of Entry and specified exports viz. Factory stuffed containers and goods exported
under free Shipping Bills has been made available, at the 18 sea ports at : Chennai, Cochin, Ennore,
Gopalpur, JNPT, Kakinada, Kandla, Kolkata, Mumbai, New Mangalore, Marmagoa, Mundra,
Okha, Paradeep, Pipavav, Sikka, Tuticorin, Vishakapatnam.

(b) The facility of 24 X 7 Customs clearance for specified imports viz. Goods covered by
‘facilitated’ Bills of Entry and all exports viz. Goods covered by all Shipping Bills has also been
made available at the 17 air cargo complexes at: Ahmedabad, Amritsar, Bangalore,Chennai,
Coimbatore, Cochin, Calicut, Delhi, Goa, Hyderabad, Indore, Jaipur, Kolkata, Mumbai, Nashik,
Thiruvananthapuram, Vishakhapatnam.

Self-Assessment of Customs Duty

The policy has further provided self-assessment of custom duty by exporters and importers which
is basically a trust based system. The aim of this policy is to expedite the trade process and is based
on risk management system (RMS).
Single Window in Customs

To smooth the progress of trade, the importer and exporter would submit their clearance documents
at a single point only. Required permission if any, from other regulatory agencies would be
obtained online without the trader having to approach these agencies. This would reduce interface
with Governmental agencies, dwell time and cost of doing business.

3. Status Holders –Trade policy has given special attention to those exporters who have
substantial contribution to generate foreign exchange and have been recognised as status
holder. These status holders have been given special benefits based on the amount of
foreign exchange generated as mentioned below.

Status Holders Exports –FOB ($ Mn)

One Star 3
Two Star 25
Three 100
Four 500
Five 2000

 Moreover, the policy has provided an additional facility for the manufacturers who are
status holders in terms of self-certifying of their manufactured goods. The facility is
basically for origin of good in India, which is primarily used to avail benefit when the
country is having bilateral agreements with other nations to claim preferential treatments.

61
 This ‘Approved Exporter System’ will help manufacturer exporters considerably in getting
fast access to international markets.

4. MEIS - Merchandise Exports from India Scheme has replaced 5 different schemes of
earlier FTP (Focus Product Scheme, Market Linked Focus Product Scheme, Focus Market
Scheme, Agri. Infrastructure Incentive Scrip, VKGUY) for rewarding merchandise exports
which had varying conditions (sector specific or actual user only) attached to their use.

Country Groups:
Category A: Traditional Markets (30) - European Union (28), USA, Canada.
Category B: Emerging & Focus Markets (139), Africa (55), Latin America and Mexico
(45), CIS countries (12), Turkey and West Asian countries (13), ASEAN countries (10),
Japan, South Korea, China, Taiwan,
Category C: Other Markets (70).
Products supported under MEIS Level of Support: Higher rewards have been granted for

Agricultural and Village industry products, presently covered under VKGUY.

-friendly and green products that create wealth out of waste from agricultural and
other waste products that generate additional income for the farmers, while improving the
environment.

number of producers and /or exporters.

-tech products with high export earning potential.

The Duty Credit Scrips and goods imported / domestically procured against them shall
be freely transferable. The Duty Credit Scrips can be used for :
(i) Payment of Customs Duties for import of inputs or goods, except items listed in
Appendix 3A.
(ii) Payment of excise duties on domestic procurement of inputs or goods,
including capital goods as per DoR notification.
(iii)Payment of service tax on procurement of services as per DoR notification.
(iv) Payment of Customs Duty

5. SEIS -SEIS provides for rewards to all Service providers of notified services, who are
providing services from India, regardless of the constitution or profile of the service
provider. The scheme states that an Individual service provider is expected to have
minimum foreign exchange earnings of 10000 USD per year whereas the other category of

62
 service provider that is organisation must have foreign exchange earnings of 15000 USD.
The service organisations are earning required foreign exchange shall be eligible for duty
scripts.

The rate of reward under SEIS would be based on net foreign exchange earned. The reward
issued as duty credit scrip, would no longer be with actual user condition and will no longer
be restricted to usage for specified types of goods but be freely transferable and usable for
all types of goods and service tax debits on procurement of services/goods. Debits would
be eligible for CENVAT credit or drawback. The present rates of reward are 3% and 5%.

6. Ease of Doing Business in India

7. Make in India
8. EPCG
9. Mandatory Documents –Reduced to 3 for Exports

Mandatory documents required for export ofgoods

from India:
1. Bill of Lading/Airway Bill
2. Commercial Invoice cum Packing List*
3. Shipping Bill/Bill of Export

10. Mandatory Documents –Reduced to 3 for Imports

Mandatory documents required for import of goods into India

1. Bill of Lading/Airway Bill

2. Commercial Invoice cum Packing List*
3. Bill of Entry

11. Non-Realisation of Export Proceeds

Trade policy states that an exporter must recover the amount of exported goods in due course of
time otherwise the exporter shall not be given the benefit of incentives or any other benefits
received from the government. The policy further states that if an exporter has availed any benefits
and the export proceeds are not received that the exporter shall be required to return all benefits to
the government.
AN exporter is expected to realize the proceeds of exports in due course of time failing which the
exporter is required to return all benefits like incentives etc. received from the government. In case
an Exporter is unable to realise the export proceeds for reasons beyond his control (force-majeure),
he may approach RBI for writing off the unrealised amount as per procedure.
12. Interpretation of Policy – Foreign trade policy need to clarified and explained in case of

63
 issues related to interpretation and therefore the final version shall be of DGFT and binding
to all.

Revealed Comparative Advantage

• The revealed comparative advantage of a nation is measured by the relative

weight of a percentage of total export of commodity’s in a nation over the
percentage of world export in that commodity.
• Balassa (1965)
• K is an industrial index while j is a country index, X is export

Trade Intensity Index

The trade intensity index (TII) is used to determine whether the value of trade between two
countries is greater or smaller than would be expected on the basis of their importance in world
trade. It is defined as the share of one country’s exports going to a partner divided by the share of
world exports going to the same partner. It is calculated as:

64
where xij is the value of country i’s exports to country j, xwj is the value of world exports to
country j, Xit is country i’s total exports and Xwt is total world exports. In this formula, xwj and
Xwt will also include xij and Xit. The formula given at (1) above may be slightly modified using
Rest of the World’s (RoW) exports instead of world exports as shown below (RoW is defined as
World excluding the country ‘i’):

wt = Rest of the World’ s exports = Xwt - Xit wj = Rest of the World’ s exports to country j =
xwj- xij and X where x

ij will remain almost same. The difference may be significant for countries with a significant share
in world exports. ij as modified TII. For countries with insignificant share in world exports, values
of Tij and T We define T

ij) will be one for an expected bilateral trade flow. Share of one country’s exports to its partner
should be at least equal to the share of world exports to the same partner for an expected bilateral
trade flow. Otherwise, it means that the country fails to exploit the market in its partner country
and there is scope for expansion of its exports trade in the partner country. An index of more (less)
than one indicates a bilateral trade flow that is larger (smaller) than expected, given the partner
country’s importance in world trade Value of the index (Tij or T)

Fig. shows trade intensity index of India, USA & China with EU

65
66
UNIT 4

67
 Concept of Balance of Payment

Balance of Payment of a nation is one of the pertinent indicators for international trade, which
affect the economic policies of a government considerably. As each country would like to have a
favourable and preferential balance of payments, the trends in, and the position of, the balance of
payments will significantly persuade and induce the nature and different types of regulation of
export and import business particularly. Balance of Payments can be termed as the systematic
record of a country’s economic and financial transactions with the rest of the world over a given
period of time. In a nut shell, balance of payment comprises of
 Transactions connected to goods and services and income amongst an economy and the
rest of the world.
 Changes in that country’s monetary gold, special drawing rights, and claims on liabilities
to the rest of the world.

Balance of Trade and Balance of Payments

The transactions making part of the exports and imports of the visible terms are taken into
consideration by the balance of trade; it does not take into account the exchange of invisible terms
such as the services rendered by shipping, banking and insurance; payment of dividend as well as
interest and the expenditure incurred by tourists.

BOT = X –M where X = Exports and M = Imports

On the other hand, the balance of payments takes into consideration the exchange of both the
visible and invisible terms. BOP is a much wider concept when compared to balance of trade.
Therefore, the balance of payments illustrates a concise and complete scenario of a nation’s
economic and financial transactions with the rest of the economies when compared to the balance
of trade.

Nature of Balance of Payments Accounting

The transactions that fall under the category of Balance of Payments are documented in the
standard double-entry book-keeping form, under which each worldwide transaction undertaken by
the country leads to a credit entry and a debit entry of equal size, Since the international
transactions are recorded in the double-entry book-keeping form, the balance of payments must
always balance, i.e., the total amount of debits need to be equal to the total amount of credits. At
times, the balancing item, error and omissions, need to be added to balance the balance of
payments.

68
 Components of Balance of Payment

The requisite components under which the balance of payments can be grouped are:
i) Current Account
ii) Capital Account
iii) Unilateral Payments Account
iv) Official Settlement Account.

Current Account

“The transactions which give rise to or use up national income come under the group of the current
account”
The two major items of the current account can be stated as,
i) Merchandise exports and imports, and
ii) Invisible exports and imports.

Merchandise exports, i.e., the sale of goods abroad, are credit entries. This is since all transactions
giving rise to monetary claims on foreigners signify credits. Merchandise imports, i.e., purchase
of goods from abroad, are debit entries. This is since all transactions giving rise to foreign money
claims on the home country denotes debits.
Merchandise exports and imports form the basis of the utmost essential international transaction
of most of the nations. Invisible exports, i.e., sales of services, are credit entries and invisible
imports, i.e. purchases of services, are debit entries. Some pertinent invisible exports consist of the
sale abroad of such services as transport, insurance, etc., foreign tourist expenditure abroad and
income paid on loans and investments (by foreigners) in the home country form the important
invisible entries on the debit side.

Capital Account

All the short- terms and long term transactions come under the Capital Account. A capital outflow
indicates a debit and a capital inflow signifies a credit. For example, if an American firm is
investing Rs.100 million in India, this transaction would be depicted as a debit in the US balance
of payments and a credit in the balance of payments of India. Since the payment of interest on
loans and dividend payments are actually the payments for the services of capital, hence they are
recorded in the Current account. As it is already specified above that the interest paid on loans
given by non-nationals of dividend on foreign investments in the home country are debits for the
home country, while, on the other hand, the interest received on loans given abroad and dividends
on investments abroad are credits.

69
 Unilateral Transfers Account

Unilateral transfers is just another term used for gifts. Private remittances, government grants,
disaster relief, etc. consist of unilateral transfers. Unilateral payments made abroad are debits and
those received from abroad are credits.

Official Settlement Accounts

Official reserves showcase the holdings by the government or official agencies of the means of
payment that are generally accepted for the settlement of all the international claims.

Balance of Payments Items

Credits Debits

Current Account Current Account

1. Merchandise Exports 1.Merchandise Imports
(Sale of Goods) (Purchaseof Goods)
2. Invisible Exports 2.Invisible Imports
(Sale of Services) (Purchase of Services)
(a) Transport Services sold abroad (a) Transport Services purchased from abroad
(b) Insurance services sold abroad (b) Insurance Services purchased from abroad
(c) Foreign tourist (c) Tourist Expenditure
(d) Other services sold from abroad (d) Other services purchased from abroad
(e) Incomes received on loans (e)Income paid on loans and
Capital Account Capital Account
3. Foreign long-term 3. Long-term investments abroad.
investments in the home
(a) Direct investments in (a) Direct investments country.
abroad the home
(b) Foreign investments (b)Investments in
securities in domestic foreign securities.
(c) Other investments (c) Other investments abroad
of foreigners abroad.
(d) Foreign Government’s (d)Government to foreign country
loans to the loans to foreign
4. Foreign short-term 4. Short-term investments abroad
in home country.
Unilateral Transfers Account Unilateral Transfers Account
5. Private remittances 5. Private remittances abroad
70
 received from abroad
6. Pension Payments 6. Pension payments abroad.
received from abroad.
7. Government grants 7. Government grants abroad
Received from abroad

Official Settlements Accounts Official Settlements Account

8. Official sales of foreign currencies 8. Official purchases of foreign currencies
or other reserve or other services abroad

Total Credits Total Debits

Convertibility – Current and Capital account

Rupee Convertibility

The term convertibility of a currency means that it can be freely converted into any other currency.
It supports in the removal of quantitative restrictions on the trade. After the announcement of
economic liberalization in July 1991, Govt. of India declared partial convertibility of Rupee from
March 1, 1992. Under this partial convertibility, 40% of the current account transactions were
convertible in rupee at the officially determined exchange rate and the remaining 60% at the
market-determined exchange rate.
The Govt. of India, in March 1993, introduced a fully unified market-determined exchange rate
system. Thus the unification of exchange rate and floating rupee was in full swing in 1993-94. The
final step has been the declaration of full convertibility of the rupee on current account in August
1994 by accepting the obligation under article VII of the IMF.

Currency
Convertibility

Current Capital
Account Account
Convertibility Convertibility
Current Account Convertibility

71
  Convertibility on current account is defined as, “the freedom to buy or sell foreign
exchange for the following international transactions”.
 All payments due in connection with foreign trade, other current business including
services and normal short-term banking and credit facilities.
 Current account includes tourism as well as pursuing higher education abroad.
 Moderate remittances for family living expenses.

Implications

 As per new regulations the authorized dealers are permitted to issue exchange without
prior approval of Reserve Bank of India.
 Exporters find it easy to transact the business.
 Numerous bureaucratic hurdles are removed in the process of obtaining foreign exchange
for imports.
 More than 100 countries in the world permitted full convertibility of their currencies on
capital account.

Capital Account Convertibility

Capital Account Convertibility (CAC) is the freedom to convert local financial assets into
foreign financial assets at market-determined exchange rates.

Where does India stand now?

India currently has full convertibility of the rupee in current accounts such as for exports and
imports. However, India's capital account convertibility is not full. There are ceilings on
government and corporate debt, external commercial borrowings, and equity.

Balance of Payments Disequilibrium

When the demand for foreign exchange is precisely equivalent to the supply of it, then the balance
of payments of a country is said to be in equilibrium. When there is either a surplus or a deficit in
the balance of payments, then the balance of payments of a country is said to be in disequilibrium.
The demand for foreign exchange exceeds the demand for it in case of a deficit in the balance of
payments.

72
There are various factors responsible for the disequilibrium in the balance of payments. These
various causes fall majorly into three categories:
(i) Economic factors;
(ii) Political factors; and
(iii) Sociological factors.

Economic Factors

The disequilibrium in the balance of payments may be caused by a number of economic factors.
These are:

Development Disequilibrium

Large-scale development expenditures lead to increase the purchasing power, aggregate demand
and prices which results in substantially large imports. In developing countries, the development
disequilibrium is very common since the above factors, and large-scale capital goods imports
needed for carrying out the numerous development programmes, give rise to a deficit in the balance
of payments.

Capital Disequilibrium
Balance of payments disequilibrium is normally caused by the cyclical fluctuations in typical
business activities. As Lawrance W. Towle points out, depression always carries about a drastic
shrinkage in world trade, while prosperity arouses it. A nation enjoying a boom all by itself usually
experiences more speedy growth in its imports than its exports, while the opposite is true of other
nations. But as a result of the increased exports to the boom country, the production in the other
countries will be activated.

Secular Disequilibrium
At times, the balance of payments disequilibrium continues for a long time because of certain
secular trends in the economy. For example, the disposable income is normally very high and,
therefore, the aggregate demand, too, is very high in a developed country. Concurrently, the
production costs are extremely high because of the higher wages. Consequently, it leads to higher
prices. High aggregate demand and higher domestic prices are the two major factors that may
result in the imports being much higher than the exports. This could be counted as one of the
reasons for the persistent balance of payments deficits of the USA.

Structural Disequilibrium
Balance of payments disequilibrium is also initiated by structural changes in the economy.
Development of alternative sources of supply, the development of better substitutes, the exhaustion
73
of productive resources, the changes in transport routes and costs, etc. consist of such structural
changes.
Political Factors

Balance of payments disequilibrium is caused by certain political factors. For example, a country
which is political unstable may experience large capital outflows, inadequacy of domestic
investment and production, etc. These factors may, at times, cause disequilibrium in the balance
of payments. Balance of payments problems are further produced by factors such as war, changes
in world trade routes, etc.
Social Factors
The balance of payments is influenced by certain social factors. Changes in tastes, preferences,
fashions, etc. are some instances that may affect imports and exports and thereby affect the balance
of payments.

5.1.1 Correction Of Disequilibrium

Every country strives to remove, or at least to reduce, a balance of payments deficit but a country
may not be bothered about a surplus in the balance of payments. There are various measures which
are available for correcting the balance of payments disequilibrium. We present some essential
measures below for correcting the disequilibrium caused by a deficit in the balance of payments.

5.1.1.1 Automatic Corrections

The Paper Currency Standard automatically corrects the balance of payment disequilibrium. The
theory of automatic correction states that if the market forces of demand and supply are allowed
to have free play, the equilibrium will automatically be restored in the course of time. For instance,
let us assume that there is a deficit in the balance of payments. When there is a deficit, the demand
for foreign exchange exceeds its supply which consequently results in an increase in the exchange
rate and a fall in the external value of the domestic currency. As a result the exports of the country
become inexpensive and its imports become dearer than before. This results in the increase in
exports and the fall in imports will restore the balance of payments equilibrium.

Deliberate Measures
This measure is employed in every aspect today.
The several deliberate measures may be broadly grouped into;
(a) Monetary measures
(b) Trade measures
(c) Miscellaneous.
(d) Monetary Measures

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The essential monetary measures are outlined below; Monetary contraction; the level of aggregate
domestic demand, the domestic price level and the demand for imports and exports may be
influenced by a contraction or expansion in money supply and correct the balance of payments
disequilibrium. The measure required is a contraction in money supply. A contraction in money
supply tends to reduce the purchasing power and thereby the aggregate demand. A fall in domestic
prices is also likely to be seen. The fall in the domestic aggregate demand and domestic prices
bring reduction in imports. Also the exports are likely to increase with the fall in the domestic
aggregate demand and domestic prices. Hence, the fall in imports and the rise in exports would
definitely result in the balancing of disequilibrium.

Devaluation: The reduction in the official rate at which one currency is exchanged for another
currency is termed as devaluation. A country with a necessary disequilibrium in the balance of
payments may devalue its currency in order to stimulate its exports and discourage imports to
correct the disequilibrium. This can be further understood with the support of an example of the
devaluation of the Indian Rupee in 1966. Just before the devaluation of the Rupees with effect
from 6th June 1966, the exchange rate was $ I= Rs. 4.76. The devaluation of the Rupee by 36.5
per cent changed the exchange rate to $ I = Rs. 7.50. Before the devaluation, the price of an
imported commodity, which cost $ I abroad, was Rs. 4.76 (assuming a costless free trade). But
after devaluation, the same commodity, which cost $ I abroad, cost Rs. 7.50 when imported.
Therefore, devaluation makes international goods more costly in terms of the domestic currency,
and subsequently this results in discouraging the imports. On the hand, devaluation makes exports
(from the country that has devalued the currency) cheaper in the foreign markets. For instance,
before the devaluation, a commodity which cost Rs. 4.76 in India could be sold abroad at $ I
(assuming a costless free trade); but after devaluation, the landed cost abroad of the same
commodity was only $ 0.64. This comparative cheapness of the Indian goods in the foreign
markets was expected to stimulate demand for Indian exports. The number of factors, such as the
price elasticity of demand for exports and imports influemce the success of devaluation.
Exchange Control: This is one of the standard method which is employed to influence the balance
of payments position of a country. The government or central bank undertakes complete control
of the foreign exchange reserves and earnings of the country under the exchange control method.
The recipients of foreign exchange such as exporters are required to surrender foreign exchange
to the government/central bank in exchange for domestic currency. By the virtue of its control over
the use of foreign exchange, the government can control the imports.

Trade Measures

Export promotion measures and measures to reduce imports form the basis of trade measures.

Export Promotion

Export promotion helps in managing the disequilibrium through various ways which further

75
includes reduction of duties, offering export subsidy, proving incentives for exports and export
marketing.
Import Control: By way of increase of import duties, restricting imports through import non-tariff
barriers like quotas and licensing, and even by prohibiting altogether the import of certain
inessential items, the imports can be controlled considerably.
Miscellaneous Measures

There are a number of other measures that can help make the Balance of Payments position more
favourable apart from the measures mentioned above. These are: obtaining foreign loans,
encouraging foreign investment in the home country, development of tourism to attract foreign
tourists, providing incentives to enhance inward remittances, developing import substituting
industries, etc.
Purchasing Power Parity

One of the significant theory used for clarifying the determination of exchange rates is PPP that is
purchasing power parity. The theory has been formulated by Gaustav Cassel and states that in the
long run the determination of exchange rates between the two countries shall be based on the
purchasing powers considering that the exchange rates freely fluctuate. Though the exchange rates
are determined by demand and supply but in the long run the application of purchasing power
parity shall be used to explain the determination of exchange rates.
The theory can be explained with the help of an example wherein purchasing powers are
considered. Assuming an example that in India the cost of 1 water bottle is 60 Rs and on the other
hand the cost of one water bottle in USA is 1$. Therefore, it can be said that the cost of one water
bottle = 45 Rs (India) = 1 USD (United States Dollar) or
1 unit = 45 INR = 1 USD

Country Risk Analysis

Country Risk -it is a new concept introduced by Milton Friedman in 1975 when Citibank grant
a credit to a foreign government;
• it was initially connected with the capacity of a government to repay a loan

• today we use this concept in different decisions related to international business:

• international finance (private and public debt)

• FDI’s

• portfolio investments (bond valuation, stock valuation)

• cash flows projections – discounted rate

• we make now a distinction between country risk assessment in case of international

financing and international investment
76
Role of Country risk assessment

To locate the credit / business (risk map);

- To take the decision to be involved on international markets (“go / no go decision”);
- To establish the level of your involvement;
- To develop strategies for your company (ex. strategies to fight against your competitors);
- To adapt your further decision related to an international credit or investment in
accordance with the latest evolutions on a foreign market.
Different types of country risk
International credits International Business

Late payments Confiscation

Debt service default;
External debt repudiation
Renegotiation of external debt
Rescheduling external debt service
External debt moratorium;
Temporary default caused by chronic
deficit in BP, budgetary deficit, shortfall in
exportation incomes, major disturbances
on foreign exchange markets, social and
internal/external political disturbances ;
Nationalization;
Expropriation ;
Indigenization;
Limitations/restrictions on capital
repatriation
Total/partial destruction of foreign
investment caused by political and social
events (strikes, social riots, military
conflicts, elections)
Profit losses caused by economic crises,
shortfall of internal market, legislative
instability, corruption etc.

Country risk determinants

Country risk – international credit
Current account balance, external debt, BP deficit, economic structure, economic development,
the level of export concentration, the import dependency, the convertibility of national currency,
GDP, international reserves, inflation, internal capital accumulation, political stability, corruption,
credibility and independence of Central Bank, government orientation etc.
Country risk – international investment
Educational level of labor force, wages, internal market dimension, internal competition,
infrastructure, country accessibility, market accessibility, interest rate, investment facilities,
property and transfer regulations, taxation.

77
 Key Provisions of FEMA Act 1999

The Government of India formulated FEMA or Foreign Exchange Management Act to encourage
external payments and across the border trades in India. It was formulated in the year 1999 while it
replaced FERA (Foreign Exchange Regulation Act). This was meant to close all the loopholes and
drawbacks of FERA and hence major economic reforms were introduced under this act. It was
primarily formulated to de-regularize and have a liberal Indian economy.

Objectives of FEMA:

The main objective of FEMA was to help facilitate external trade and payments in India. It was also
meant to help orderly development and maintenance of the foreign exchange market in India. It
defines the procedures, formalities, dealings of all foreign exchange transactions in India. These
transactions are mainly classified under two categories — Current Account Transactions and Capital
Account Transactions. FEMA is applicable to all parts of India and was primarily formulated to
utilize foreign exchange resources inefficient manner.

It is also equally applicable to the offices and agencies which are located outside India however are
managed or owned by an Indian Citizen. FEMA head office is known as Enforcement Directorate
and is situated in heart of the city of Delhi.

Applicability of FEMA Act 1999:

 exports of any foods and services from India to outside, foreign currency, that is any currency other
than Indian currency,
 foreign exchange,
 foreign security,
 Imports of goods and services from outside India to India,
 securities as defined in Public Debt Act 1994,
 banking, financial and insurance services,
 sale, purchase, and exchange of any kind (i.e. Transfer),
 any overseas company that is owned 60% or more by an NRI (Non Resident Indian) and
 any citizen of India, residing in the country or outside (NRI)

Major Provisions of FEMA Act 1999:

 Free transactions on current accounts subject to reasonable restrictions that may be imposed.
 RBI controls capital account transactions.
 Control over the realization of export proceeds.
 Dealing in foreign exchange through authorized persons like an authorized dealer or money changer
etc.
 Appeal provision including Special Director (Appeals)
 Directorate of enforcement
 Any person can sell or withdraw foreign exchange, without any prior permission from RBI and then
can inform RBI later.
 Enforcement Directorate will be more investigative in nature
 FEMA recognized the possibility of Capital Account convertibility.
 The violation of FEMA is a civil offence.
 FEMA is more concerned with the management rather than regulations or control.
 FEMA is a regulatory mechanism that enables RBI and the Central Government to pass regulations
and rules relating to foreign exchange in tune with the foreign trade policy of India.

78
As per Section 3 of FEMA, all the current account transactions are free; however central government at
any time could impose reasonable instructions by issuing special rules. As per Section 6 of FEMA,
Capital Account Transactions are permitted only to the extent as specified by RBI in its issued
regulations. As per Section 10 of FEMA, RBI have controlling role in its management however RBI
cannot directly handle foreign exchange transaction and must authorize a person to deal with it as per
directions set by RBI. FEMA also have provisions of various enforcement, penalties, adjudication
and appeals in this area.

Difference between FERA and FEMA

About FERA

Foreign Exchange Regulation Act, shortly known as FERA, was introduced in the year 1973. The act
came into force, to regulate foreign payments, securities, currency import and export and purchase of
fixed assets by foreigners. The act was promulgated in India when the position of foreign reserves
wasn’t satisfactory. It aimed at conserving foreign exchange and its optimum utilisation in the
development of the economy.

The act applies to the whole country. Therefore, all the citizens of the country, inside or outside India are
covered under this act. The act extends to branches and agencies of the Indian multinationals
operating outside the country, which is owned or controlled by the person who is the resident of
India.

Key Differences between FERA and FEMA

The primary differences between FERA and FEMA are explained in the following points:

1. FERA is an act which is enacted to regulate payments and foreign exchange in India, is FERA.
FEMA an act initiated to facilitate external trade and payments and to promote orderly management
of the forex market in the country.
2. FEMA came out as an extension of the earlier foreign exchange act FERA.
3. FERA is lengthier than FEMA, regarding sections.
4. FERA came into force when the foreign exchange reserve position in the country wasn’t good while
at the time of introduction of FEMA, the forex reserve position was satisfactory.
5. The approach of FERA, towards forex transaction, is quite conservative and restrictive, but in the
case of FEMA, the approach is flexible.
6. Violation of FERA is a non-compoundable offence in the eyes of law. In contrast violation of FEMA
is a compoundable offence and the charges can be removed.
7. Citizenship of a person is the basis for determining residential status of a person in FERA, whereas
in FEMA the person’s stay in India should not be less than six months.
8. Contravening the provision of FERA may result in imprisonment. Conversely, the punishment for
violating the provisions of FEMA is a monetary penalty, which may turn into imprisonment if the
fine is not paid on time.

The Asian “Economic Miracle” Bubble & the 1997 Asian Financial Crisis

Introduction

In 1997 the Asian Financial Crisis took place. It was a period of instability in the Asian
world which adversely affected a few major countries that had recently enjoyed economic
progress. It began to raise many fears around the idea of an international economic crisis.
79
Pre-bubble boom

The history of growth in the Asian market began after the Second World War.
Reconstruction in Asia was assisted by the American army. Japan was democratized and
war criminals were punished. Japan proved to be cooperative and even adopted a
constitution in 1946 while renouncing militarism and began introducing Western style
democratic government policies. This eventually paved the way for Japan to recover
economically.

In China things were not progressing as well. There had been a bitter civil war between the
communists and the Nationalists. The United States had supported Chiang Kai-shek while
the communists eventually gained victory under Mao Zedong in 1949. Nationalist China
collapsed, signaling a depressing defeat for the United States and the Western Allies. While
Nixon is largely known for resigning from office, his foreign relations and diplomacy
policies cannot be undercounted. At the time, anti-communism raged within the United
States and any attempts toward making peace with either China or the Soviet Union would
have been viewed with a tremendous amount of suspicion by Americans. Given Nixon’s
previous reputation as a strict anti-communist during the earlier part of his career, his
motives certainly could not be questioned. As a result, the overtures he made toward China
and the USSR were largely accepted by the American public. The Cold War certainly did
not come to an end, but as a result of the efforts of Kissinger and Nixon, it did begin to
thaw.

In the fall of 1949 it became known that the Soviets had detonated an atomic bomb. In an
effort to outpace the Soviets, President Truman ordered work to begin toward the
development of the hydrogen bomb, which would be more deadly than the atomic bomb. In
1952, the Americans completed work on the bomb, with the Soviets exploding their first H-
bomb in 1953. These terrifying events signaled a race for nuclear superiority and an attempt
to gain peace through mutual terror.

Bubble mania

Prior to 1997, Asia had begun to attract nearly half of the total capital inflow from
developing countries. The economies of the region experienced high interest rates which
foreign investors found attractive in terms of the high rate of return. This resulted in a large
inflow of money and an increase in asset prices. Simultaneously, the economics of South
Korea, Malaysia, Singapore, Thailand, and Indonesia experienced high GDP growth rates
between eight and twelve percent. This was done thanks to funding from the Asian
economic miracle and the World Bank and IMF. While the Asian economic miracle was
beneficial for local Asian economies, many did not take notice of the total factor
productivity and its marginal increase. Capital investment was responsible for the short term
growth but only total factor productivity would result in long term growth.

Bubble Burst

The crisis began in Thailand. The financial collapse was a result of the Thai government
being forced to float their currency, the baht because foreign currency was unable to support

80
the fixed exchange rate. They were also forced to cut their peg to the dollar in spite of
exhaustive efforts to try and rally support in the face of a financial bust. This bust was
mostly driven by real estate and a financial overextension. Thailand inherited the burden of
foreign debt which had made the country essentially bankrupt long before its currency
collapsed. This financial burden extended beyond Thailand and began to affect other regions
of Southeast Asia. Japan, for instance, watched their currency fall alongside their asset
prices and stock markets.

While it started in Thailand, the economic bubble and financial crisis extended into
Indonesia and South Korea and soon after, Hong Kong, the Philippines, and Malaysia and
Laos were affected. Vietnam, Singapore, The People’s Republic of China, Pakistan, Taiwan,
and India remained less affected by it but did suffer a reduction in demand and confidence in
the general Southeast Asian area.

During this time the foreign debt to GDP ratios increased from one hundred percent to one
hundred and sixty seven percent within four of the economies from the Association of
Southeast Asian Nations. This was between 1993 and 1996. At the height of the crisis in
1997, these ratios reached one hundred and eighty percent. In places such as South Korea
the ratios increased from thirteen to twenty one percent and then reached a climax of forty
percent.

Because the crisis was so severe, the notion of colonialism was discussed. The countries
which were adversely affected were falling apart and were also some of the richest not just
in their region but in the world. This meant that hundreds of billions were at stake and
therefore the international community should get involved. Instead, the International
Monetary Fund did. They created a series of rescue packages for the countries that were
most affected in order to ensure they nation did not default. These rescue packages were
conditional and given only in exchange for a series of severe economic reforms. This was
done under the theory that it would help to restore confidence in the solvency of the nations
which were affected while penalizing insolvent companies and then protecting the currency
values.

The effects this bailout had remains controversial as do their results. The countries who
agreed to the help were forced to reconstruct most of their financial framework and suffered
from permanent devaluation. They also faced high unemployment rates, social unrest, and
real estate busts.

Conclusion

After the government of Thailand faced a widespread financial crisis as a result of incurred
debt, much of Southeast Asia was adversely affected by the bubble burst in 1997. While
many of the governments throughout Asia had sound fiscal policies a forty billion dollars
program was instigated by the International Monetary Fund to stabilize South Korea,
Thailand, and Indonesia, those countries which were hit the hardest by the crisis. The
domestic situation throughout Indonesia was not settled by global efforts and as a result of
this bubble burst, the president was forced to step down. The effects continued to linger
through 1998 when the Philippines watched their growth drop to nothing. Taiwan and

81
Singapore were two countries insulated from the bubble burst but still suffered hits because
of size and location.

KEY LESSONS LEARNED

Here are five of the most important economic and financial lessons whose relevance extends
well beyond Asia:

No. 1. Self-insurance, although expensive, is the best way to secure resilience

Heading into the crisis, the combination of low international reserves, high debt and
currency/maturity mismatches made Asia’s particularly vulnerable, not just directly but also
by increasing exposure to domestic capital flight and sudden outflows of foreign funds.
Asian countries had no choice subsequently but to build and rely on a big foreign reserve
cushion. They also embarked on more prudent debt management, reducing the overall stock,
lengthening maturities and lowering foreign-exchange exposure.

Despite the passage of time, it hasn’t been easy to wean some Asian economies from this
defensive approach. As such, their international reserves have remained well above what
would be warranted by traditional precautionary metrics. To offset the so-called negative
carry that results — that is, earning less on the foreign reserves than the cost of associated
domestic liabilities — a few took the additional step of segmenting their holdings into two
distinct categories: reserves and wealth management. This helps Asia lessen the cost of
maintaining a high level of financial resilience.

No. 2. Currency floats aren’t perfect, but they are better than the alternatives

As Indonesia, Malaysia and Thailand discovered during the crisis, a fixed exchange rate
makes countries even more exposed to the disruptive effects of capital outflows. Yet such
flexible currency arrangements, as important as they are, are no panacea. They need to be
managed well, and accompanied by supportive policies. Otherwise, they can become a
problem in themselves.

With high reserves and better debt management, Asian economies became less exposed to
the collateral damage of fluctuating exchange rates — specifically, the extent to which a
currency depreciation fuels inflation and raises the domestic cost of servicing foreign
denominated debt. As such, the transition to a flexible exchange rate regime became a lot
more effective in helping to navigate both domestic and foreign economic cycles. With that,
the region became less vulnerable to the sudden stops in trade and commerce that are
associated with dramatic adverse changes in international capital markets (such as the 2008
global financial crisis).

No. 3. Liberalise carefully while tweaking economic and financial management

It’s critical to take a measured approach to liberalizing the capital account of the balance of
payments, something the “Washington consensus” that prevailed at the time had pressed
hard on emerging nations. Rather than an end in itself, the careful and nuanced pursuit of

82
capital liberalization became part of the redefinition of the region’s approach to managing
the middle-income transition, one of the most difficult stages of the economic development
process.

Asia came to understand well that foreign capital flows — and, especially, short-term
portfolio inflows as opposed to longer-term foreign direct investment — constitute a double-
edged sword. Yes, they help relieve financial constraints on the balance of payments and
even the budget; and yes, they can be associated with the transfer of human capital. But they
can also turn around suddenly, undermining the financial system and sucking valuable
oxygen out of the economy. All of which speaks to the importance of getting the right mix
and having contingency plans for sudden outflows.

No. 4. Interact with others, but also build regional institutional backups

A shift toward a stronger regional construct became another element of this redefinition. But
it was a change that initially faced enormous external opposition and took considerable time
to overcome.

In the midst of the crisis, several Asian governments felt that the conditional financing
available to them from western-dominated institutions took insufficient account of local
circumstances. But their attempt to compensate by building regional institutions — back
then, centred on a new Asian Monetary Fund — was quashed by western countries.
Although Asia did secure better central bank swap lines, the institutional construct remained
heavily western dominated and oriented.

Fast-forward 20 years, and the situation has evolved. The west is less able and willing to
block the Asian regional initiatives spearheaded by a more confident and assertive China.
Witness the creation of the Asian Infrastructure Investment Bank (AIIB) and the “one belt,
one road” project.

These regional arrangements can help Asia navigate the more fluid global economy. But
there is nothing automatic about this. It requires careful design and implementation,
minimizing political interference and maximizing operational autonomy and technical
competency.

No. 5. Your greatest strength can also become your most glaring weakness

It was easy for Asian nations to believe they were exceptional; that they were immune from
certain laws of finance and economics; and that nothing could derail their impressive
economic development. But as problems emerged, they were initially either ignored or
papered over with measures that involved their own dangers.

The same closed-mindset phenomenon made many advanced countries dismissive of what
they can learn from others. In a strange way, the Asian crisis — as painful and as damaging
as it was in the short run — saw the region emerge stronger, smarter, humbler and more
flexible.

83
UNIT 5

84
Role of GATT and WTO

General Agreement of Trade and Tariffs (GATT) was formed in the year 1948 and has been a
temporary organization due to lack of its own secretariat. GATT has certain drawbacks like it only
dealt in goods and there were no provisions for TRIPS and TRIMS. Moreover, the dispute
settlement system was weak due to consensus to agree by all members. Therefore, in the final
Uruguay round that is 1986-1994, the discussion on formation of WTO was held.
Finally, the WTO (World trade organization) has been formed in the year 1995. Roberto Azevedo
is the director general of WTO.WTO is the supreme trade organization dealing with the global
rules of trade between nations. WTO also assists in ensuring the smooth movement of trade and
freely as far as possible consequently resulting in a more prosperous, peaceful and accountable
economic world. The WTO Agreements recognize the link between trade and development. More
than sixty percent of the WTO members come from developing nations.

Role and Functions of WTO

1. WTO has the key role of administering the various trade agreements.
2. WTO is the supreme body and acts as a forum for trade negotiations.
3. WTO has a major role of settling trade disputes and reviews the trade policies of nations.

4. WTO assists developing countries in trade policy issues, through technical assistance and
training programs.
5. WTO has a very wide coverage, merchandise, services, TRIPS, TRIMS etc. and also
cooperates with supranational organizations like IMF, World Bank etc.
6. WTO manages the future trade regulation through tariffs only. WTO aims to convert all
non-tariff barriers into tariffs which are transparent and measurable ensuring predictable
and secured market access.
7. WTO has one of the important roles of treating the tradable goods as national treatment
and is promoting the trade through continued liberalization.
8. One of the key functions of WTO is to trade without discrimination.

85
Drawbacks of WTO
1. Developing countries often criticize WTO on account of negotiation & decision making
being dominated by the developed countries.

2. A lot of developing countries do not have the financial & knowledge resources to
successfully participate in the WTO discussions.

3. Many of the policy liberalizations are done without considering the vulnerability of the
developing countries & the possible adverse effect on them.

WT
O

Ministerial
Conference

General Council Meeting General Council Meeting

at General as
DSB Council trade policy review
body

Committees on Trade
and Committee for Trade
Committee for in Council for trade in
environment IPR goods
services
Trade and
Development

Rules of
Origin
Market
Access
Agriculture
Antidumping

Fig-1 Structure of WTO

Dispute Resolution by WTO

Process
If a member believes their rights under the agreements are being infringed, it should bring the case
to the WTO—instead of acting unilaterally. Initially, governments try to settle their differences
through consultation. If the case is not settled during the consultation period, a stage-by-stage
86
procedure is initiated. A panel of independent experts, judging each case based on interpretations
of the agreements and individual countries’ commitments, makes the final ruling. Governments
can appeal after the final ruling.
1. Member country complains about violation of trade rule

2. Panel of 3 judges chosen

3. Judicial-type hearing at WTO

4. Finding

5. Appeal and final ruling

6. Implementation (in reasonable time) or penalties/compensation

Time period for Dispute Settlement

 60 Days -Consultation/Mediation

 45 Days - Panel set up

 6 Months -Final report to parties

 3 weeks - Final panel report to WTO members

 60 Days - DSB adopts report

= 1Year

 60-90 days -Appeal report

 30 Days - DSB adopts appeals report

 Total – 15 Months

Difference between GATT and WTO

Table – 3.1 Difference between GATT and WTO
GATT
GATT is set of rules and has been a
temporary organization.
Formed in 1947-48 and has contracting
parties.
GATT has been limited to merchandise
goods.
WTO
WTO is permanent organization and has its
own secretariat.
WTO has been formed in 1995 and has its
member countries.
WTO comprises of set of rules for goods,
services and includes TRIPS and TRIMS.

87
 Dispute settlement has been slow and not Dispute settlement under WTO has been
automatic. faster and automatic.
Stress of GATT has been on Non-tariff Focus has been on tariffs.
barriers.

IMF - The International Monetary Fund (IMF) is an organization of 188 countries, working to
cultivate global monetary cooperation and promote global trade.
Objectives of IMF are as follows:

a. IMF aims to encourage international monetary cooperation.

b. IMF aims to facilitate the opening out of international trade.

c. IMF intends to uphold exchange stability and a multilateral system of payments.

d. IMF provides temporary financial resources available to members under “adequate

safeguards”.
e. IMF helps to reduce the duration and degree of international payments imbalances.

Functions of IMF -The work of the IMF is of three main types.

1. Surveillance - Surveillance involves the observing of economic and financial

developments, and the provision of policy advice, intended especially at crisis-
prevention.
2. Lending function - The IMF also advances to countries with balance of payments
difficulties, to provide provisional financing and to support policies aimed at correcting
the underlying problems; loans to low-income countries are also aimed especially at
poverty reduction.

88
 Fig- 3.1 Purchase-Repurchase Mechanism of IMF
3. Technical Assistance -Third, the IMF provides countries with technical assistance and
training in its areas of expertise. Supporting all three of these activities is IMF work in
economic research and statistics.

World Bank

The World Bank is an international financial institution that provides financial and technical
assistance to developing countries for development programs (e.g. bridges, roads, schools, etc.)
with the stated goal of reducing poverty. Initially, the World Bank was known by IBRD that is
International Bank for Reconstruction and Development.
President -Jim Yong Kim
Two main countries which shaped the negotiations were United States and Britain.

Objectives and Functions

 World Bank provides assistance to developing and transition economies.

 World Bank helps in the economic development of the world's poorer countries.
 Developing countries are financed through World Bank with a condition of having GNP
than $865 a year. Thus, special financial assistance through the International
Development Association (IDA) is given to those nations.

89
Components of World Bank Group

Components of World Bank

IBRD

Major decision-making body is its Board of Governors

 Each member appoints Governor and Alternate Governor

Executive Board conducts the day-to-day business of the Bank

President chairs the Executive Board and is ultimately subject to its control

 Traditionally, President is US citizen appointed by the executive branch of US

government
Executive Director of IMF has traditionally been European

90
  Major Bretton Woods players ensured their subsequent control of the Bretton
Woods institutions
Administrative Structure of World Bank

IFC

Created in 1956

 Purpose is to encourage productive private enterprise in less developed countries

 Has its own staff, although some of these individuals also hold positions in the
Bank
 Initially encountered difficulties because it was excluded from equity investments

▪ Later relaxed with an equity ceiling of 25 percent

IDA
Created in 1960

“Soft loan” version of the IBRD

Share staff and officers with IBRD

 Together comprise what has come to be known as the World Bank

▪ Really a special fund or “window” of the World Bank

Official purpose is to promote economic development and raise living standards

91
  By providing loans on terms that are significantly more flexible than the IBRD

▪ No-interest loans for long time periods (35-40 years) with significant
grace periods (10 years)
Primarily dependent on contributions from high-income member countries
International centre for settlement of International disputes

Provides arbitration between foreign investors and host country governments

Bank officials thought that the presence and operation of the ICSID would support the
flow of FDI into developing countries

MIGA

Purpose is to encourage the flow of FDI to developing countries

Engages in three kinds of activities

 Issues guarantees against non-commercial risks in recipient member countries

▪ Insures against transfer restriction, expropriation, breach of contract, and

war and civil disturbance
 Engages in investment marketing through capacity building, information
dissemination, and investment facilitation
 Provides a host of legal services to World Bank member countries to support FDI

MEANING OF REGIONAL INTEGRATION:

Regional Integration is a process in which neighboring states enter into an agreement in order to
upgrade cooperation through common institutions and rules. The objectives of the agreement could
range from economic to political to environmental, although it has typically taken the form of a
political
economy initiative where commercial interests are the focus for achieving broader socio-political and
security objectives, as defined by national governments.
Regional integration has been organized either via supranational institutional structures or through
intergovernmental decision-making, or a combination of both.
Past efforts at regional integration have often focused on removing barriers to free trade in the region,
increasing the free movement of people, labor, goods,
and capital across national borders, reducing the possibility of regional armed conflict (for example,
through Confidence and Security-Building Measures), and adopting cohesive regional stances on
policy issues, such as the environment, climate change and migration.
Intra-regional trade refers to trade which focuses on economic exchange primarily between countries
of the same region or economic zone. In recent years countries within economic-trade regimes such
as ASEAN in Southeast Asia for example have increased the level of trade and commodity exchange
between themselves which reduces the inflation and tariff barriers associated with
foreign markets resulting in growing prosperity.
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 FUNCTION OF REGIONAL INTEGRATION INITIATIVES:

 The strengthening of trade integration in the region

 The creation of an appropriate enabling environment for private sector development
 The development of infrastructure programmers in support of economic growth and regional
integration
 The development of strong public sector institutions and good governance;
 The reduction of social exclusion and the development of an inclusive civil society
 Contribution to peace and security in the region
 The building of environment programmes at the regional level
 The strengthening of the region’s interaction with other regions of the world.
REGIONAL ECONOMIC INTEGRATION:
Regional economic integration refers to efforts to promote free and fair trade on a regional basis. Free
trade area is the most basic form of economic cooperation.
Member countries remove all barriers to trade between themselves, but are free to independently
determine trade policies with nonmember nations.

Regional economic integration has enabled countries to focus on issues that are relevant to their stage
of development as well as encourage trade between neighbors.

Regional economic groups eliminate or reduce trade tariffs (and other trade barriers) among the
Partner States while maintaining tariffs or barriers for the rest of the world (non-member countries)
Regional Economic Integration offers many benefits to the participating member countries.

FOUR MAIN TYPES OF REGIONAL ECONOMIC INTEGRATION:

1. Free trade area: This is the most basic form of economic cooperation. Member countries remove all
barriers to trade between themselves but are free to independently determine trade policies with
nonmember nations. An example is the North American Free Trade Agreement (NAFTA).

2. Customs union: This type provides for economic cooperation as in a free- trade zone. Barriers to
trade are removed between member countries. The primary difference from the free trade area is that
members agree to treat trade with nonmember countries in a similar manner. The Gulf Cooperation
Council (GCC) Cooperation Council for the Arab States of the Gulf website accessed April 30, 2011,
http://www.gcc-sg.org/eng/index.html. Is an example.
3. Common market: This type allows for the creation of economically integrated markets between
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 member countries. Trade barriers are removed, as are any restrictions on the movement of labor and
capital between member countries. Like customs unions, there is a common trade policy for trade
with nonmember nations. The primary advantage to workers is that they no longer need a visa or
work permit to work in another member country of a common market. An example is the Common
Market for Eastern and Southern Africa (COMESA).Common Market for Eastern and Southern
Africa website, accessed April 30, 2011, http://www.comesa.int.
4. Economic union: This type is created when countries enter into an economic agreement to remove
barriers to trade and adopt common economic policies. An example is the European Union
(EU).Europe, the Official Website of the European Union, accessed April 30,
2011, http://europa.eu.

In the past decade, there has been an increase in these trading blocs with more than one hundred
agreements in place and more in discussion. A trade bloc is basically a free-trade zone, or near-free-
trade zone, formed by one or more tax, tariff, and trade agreements between two or more countries.
Some trading blocs have resulted in agreements that have been more substantive than others in
creating economic cooperation. Of course, there are pros and cons for creating regional agreements.
PROS:
The pros of creating regional agreements include the following:

 Trade creation. These agreements create more opportunities for countries to trade with one another
by removing the barriers to trade and investment. Due to a reduction or removal of tariffs,
cooperation results in cheaper prices for consumers in the bloc countries. Studies indicate that
regional economic integration significantly contributes to the relatively high growth rates in the less-
developed countries.
 Employment opportunities. By removing restrictions on labor movement, economic integration can
help expand job opportunities.

 Consensus and cooperation. Member nations may find it easier to agree with smaller numbers of
countries. Regional understanding and similarities may also facilitate closer political cooperation.

CONS:
The cons involved in creating regional agreements include the following:

 Trade diversion. The flip side to trade creation is trade diversion. Member countries may trade more
with each other than with nonmember nations. This may mean increased trade with a less efficient or
more expensive producer because it is in a member country. In this sense, weaker companies can be

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 protected inadvertently with the bloc agreement acting as a trade barrier. In essence, regional
agreements have formed new trade barriers with countries outside of the trading bloc.
 Employment shifts and reductions. Countries may move production to cheaper labor markets in
member countries. Similarly, workers may move to gain access to better jobs and wages. Sudden
shifts in employment can tax the resources of member countries.
 Loss of national sovereignty. With each new round of discussions and agreements within a regional
bloc, nations may find that they have to give up more of their political and economic rights. In the
opening case study, you learned how the economic crisis in Greece is threatening not only the EU in
general but also the rights of Greece and other member nations to determine their own domestic
economic policies.

ECONOMIC INTEGRATION CAN BE CLASSIFIED INTO FIVE ADDITIVE LEVELS:

 Free trade: Tariffs (a tax imposed on imported goods) between member countries are significantly
reduced, some abolished altogether. Each member country keeps its own tariffs in regard to third
countries. The general goal of free trade agreements is to develop economies of scale and
comparative advantages, which promotes economic efficiency.
 Custom union: Sets common external tariffs among member countries, implying that the same
tariffs are applied to third countries; a common trade regime is achieved. Custom unions are
particularly useful to level the competitive playing field and address the problem of re-exports (using
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 preferential tariffs in one country to enter another country).
 Common market: Services and capital are free to move within member countries, expanding scale
economies and comparative advantages. However, each national market has its own regulations such
as product standards.
 Economic union (single market): All tariffs are removed for trade between member countries,
creating a uniform (single) market. There are also free movements of labor, enabling workers in a
member country is able to move and work in another member country. Monetary and fiscal policies
between member countries are harmonized, which implies a level of political integration. A further
step concerns a monetary union where a common currency is used, such as with the European Union
(Euro).
 Political union: Represents the potentially most advanced form of integration with a common
government and were the sovereignty of a member country is significantly reduced. Only found
within nation-states, such as federations where there are a central government and regions having a
level of autonomy.

As the level of economic integration increases, so does the complexity. This involves a set of
numerous regulations, enforcement, and arbitration mechanisms. The complexity comes at a cost that
may undermine the competitiveness of the areas under economic integration since it allows for less
flexibility for national policies. The devolution of economic integration could occur if the complexity
and restrictions it creates are no longer judged to be acceptable by its members.

OBJECTIVE OF REGIONAL ECONOMIC INTEGRATION:

A primary economic objective of integration is to raise:

(i) Real output& income of the participants, and

(ii) Rate of growth by increasing specialization and competition by facilitating desirable

structural change.

At the most basic level, economic integration is an agreement between countries, which aims to
reduce costs for both producers and consumers. Its end goal is to remove barriers to the free flow of
goods and services so that member countries can share a common market and harmonize their fiscal
policies.
ADVANTAGES AND DISADVANTAGES OF REGIONAL ECONOMIC INTEGRATION:

ADVANTAGES DISADVANTAGES

 Trade creation  Trade diversion

 Protection  Retaliation
 Increased economies of  Decreased investment
sale
 Increased investment
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 What Is the North American Free Trade Agreement (NAFTA)?

NAFTA was the world’s largest free trade agreement when it was established on Jan. 1, 1994.1
NAFTA was the first time two developed nations signed a trade agreement with an emerging market
country.

Through NAFTA, the three signatories agreed to remove trade barriers between them. By eliminating
tariffs, NAFTA increased investment opportunities.

 Acronym: NAFTA

How the North American Free Trade Agreement (NAFTA) Worked

NAFTA accomplished six things for the participating countries. First, NAFTA granted most-
favored-nation status to all co-signers.2 That means each country treated the other two fairly and
couldn't give better treatment to domestic investors than foreign ones. They also couldn't offer a
better deal to investors from non-NAFTA countries and they had to offer federal contracts to
businesses in all three NAFTA countries.3

Second, NAFTA eliminated many tariffs on imports and exports between the three countries.4 Tariffs
are taxes used to make foreign goods more expensive. NAFTA created specific rules to regulate trade
in farm products, automobiles, and clothing.

Third, exporters were required to get Certificates of Origin to waive tariffs.5 That meant the export
had to originate in the United States, Canada, or Mexico. A product made in Peru but shipped from
Mexico would still pay a duty when it entered the United States or Canada.

Fourth, NAFTA established procedures to resolve trade disputes.6 Parties would start with a formal
discussion, followed by a discussion at a Free Trade Commission meeting if needed. If the
disagreement wasn't resolved, a panel reviewed the dispute. The process helped all parties avoid
costly lawsuits in local courts and helped them interpret NAFTA’s complex rules and procedures.
These trade dispute protections applied to investors as well.

Fifth, all NAFTA countries were required to respect patents, trademarks, and copyrights.4 At the
same time, the agreement ensured that these intellectual property rights didn't interfere with trade.

Sixth, the agreement allowed business travelers easy access throughout all three countries

EUROPEAN UNION
The European Union is a unified trade and monetary body of 27 member countries. It eliminates all
border controls between members. The open border allows the free flow of goods and people. There
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 may be police checks, based on police information and experience, that are not equivalent to border
checks.

Any product manufactured in one EU country can be sold to any other member without tariffs or
duties.3 Practitioners of most services, such as law, medicine, tourism, banking, and insurance, can
operate a business in all member countries.4

Purpose

The EU's purpose is to be more competitive in the global marketplace. At the same time, it must
balance the needs of its independent fiscal and political members.

Its 27 member countries are Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark,
Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg,
Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden.1

How It Is Governed

Three bodies run the EU. The EU Council represents national governments. The Parliament is
elected by the people. The European Commission is the EU staff. They make sure all members
act consistently in regional, agricultural, and social policies. Contributions of 120 billion euros a
year from member states fund the EU.

Here's how the three bodies uphold the laws governing the EU. These are spelled out in a series
of treaties and supporting regulations:5

1. The European Commission proposes new legislation. The commissioners serve a five-
year term.6
2. The European Parliament gets the first read of all laws the Commission proposes. Its
members are elected every five years.7
3. The European Council gets the second read on all laws and can accept the Parliament’s
position, thus adopting the law. The council is made up of the Union’s 27 heads of state,
plus a president.8

Currency

The euro is the common currency for the EU area. It is the second most commonly held currency
in the world, after the U.S. dollar. It replaced the Italian lira, the French franc, and the German
Deutschmark, among others.9

The value of the euro is free-floating instead of a fixed exchange rate.10 As a result, foreign

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exchange traders determine its value each day. The most widely-watched value is how much
the euro's value is compared to the U.S. dollar.11 The dollar is the unofficial world
currency.The Difference Between the Eurozone and the EU

The eurozone consists of all countries that use the euro. All EU members pledge to convert to the
euro, but only 19 have so far. They are Austria, Belgium, Cyprus, Estonia, Finland, France,
Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal,
Slovakia, Slovenia, and Spain.13

The European Central Bank is the EU's central bank. It sets monetary policy and manages bank
lending rates and foreign exchange reserves. Its target inflation rate is less than 2%.14

The Schengen Area

The Schengen Area guarantees free movement to those legally residing within its boundaries.
Residents and visitors can cross borders without getting visas or showing their passports.2

In total, there are 26 members of the Schengen Area. They are Austria, Belgium, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia,
Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia,
Slovenia, Spain, Sweden, and Switzerland.

South Asian Association for Regional Cooperation (SAARC)

The South Asian Association for Regional Cooperation (SAARC) was established with the signing
of the SAARC Charter in Dhaka on 8 December 1985.

 The idea of regional cooperation in South Asia was first raised in November 1980. After
consultations, the foreign secretaries of the seven founding countries—Bangladesh, Bhutan,
India, Maldives, Nepal, Pakistan, and Sri Lanka—met for the first time in Colombo in
April 1981.
 Afghanistan became the newest member of SAARC at the 13th annual summit in
2005.
 The Headquarters and Secretariat of the Association are at Kathmandu, Nepal.
Principles
 Cooperation within the framework of the SAARC shall be based on:
o Respect for the principles of sovereign equality, territorial integrity, political
independence, non-interference in the internal affairs of other States and mutual
benefit.
o Such cooperation shall not be a substitute for bilateral and multilateral cooperation but

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 shall complement them.
o Such cooperation shall not be inconsistent with bilateral and multilateral obligations.
Members of SAARC

 SAARC comprises of eight member States:

o Afghanistan
o Bangladesh
o Bhutan
o India
o Maldives
o Nepal
o Pakistan
o Sri Lanka
 There are currently nine Observers to SAARC, namely: (i) Australia; (ii) China; (iii) the
European Union; (iv) Iran; (v) Japan; (vi) the Republic of Korea; (vii) Mauritius; (viii)
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 Myanmar; and (ix) the United States of America.
Areas of Cooperation

 Human Resource Development and Tourism

 Agriculture and Rural Development
 Environment, Natural Disasters and Biotechnology
 Economic, Trade and Finance
 Social Affairs
 Information and Poverty Alleviation
 Energy, Transport, Science and Technology
 Education, Security and Culture and Others
The Objectives of the SAARC
 To promote the welfare of the people of South Asia and to improve their quality of life.
 To accelerate economic growth, social progress and cultural development in the region and
to provide all individuals the opportunity to live in dignity and to realize their full potentials.
 To promote and strengthen collective self-reliance among the countries of South Asia.
 To contribute to mutual trust, understanding and appreciation of one another’s problems..
 To promote active collaboration and mutual assistance in the economic, social, cultural,
technical and scientific fields.
 To strengthen cooperation with other developing countries.
 To strengthen cooperation among themselves in international forums on matters of
common interests; and
 To cooperate with international and regional organizations with similar aims and purposes.
Principal Organs
 Meeting of Heads of State or Government

o Meetings are held at the Summit level, usually on an annual basis.

 Standing Committee of Foreign Secretaries

o The Committee provides overall monitoring and coordination, determines priorities,

mobilizes resources, and approves projects and financing.
 Secretariat

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 o The SAARC Secretariat was established in Kathmandu on 16 January 1987. Its role is to
coordinate and monitor the implementation of SAARC activities, service the meetings of
the association and serve as a channel of communication between SAARC and other
international organizations.
o The Secretariat comprises the secretary-general, seven directors, and the general services
staff. The secretary-general is appointed by the Council of Ministers on the principle of
rotation, for a non-renewable tenure of three years.
SAARC Specialized Bodies

 SAARC Development Fund (SDF): Its primary objective is funding of project-based

collaboration in social sectors such as poverty alleviation, development, etc.

o SDF is governed by a Board consisting of representatives from the Ministry of Finance

of the Member States. The Governing Council of SDF (Finance Ministers of MSs)
oversees the functioning of the Board.
 South Asian University

o South Asian University (SAU) is an international university, located in India. Degrees

and Certificates awarded by the SAU are at par with the respective Degrees and
Certificates awarded by the National Universities/ Institutions.
 South Asian Regional Standards Organization

o South Asian Regional Standards Organization (SARSO) has its Secretariat at Dhaka,
Bangladesh.
o It was established to achieve and enhance coordination and cooperation among
SAARC member states in the fields of standardization and conformity assessment and
is aimed to develop harmonized Standards for the region to facilitate intra- regional trade
and to have access in the global market.
 SAARC Arbitration Council
o It is an inter-governmental body having its office in Pakistan is mandated to provide a
legal framework/forum within the region for fair and efficient settlement of commercial,
industrial, trade, banking, investment and such other disputes, as may be referred to it by
the member states and their people.
SAARC and its Importance

 SAARC comprises 3% of the world's area, 21% of the world's

population and 3.8% (US$2.9 trillion) of the global economy.
 Creating synergies: It is the world’s most densely populated region and one of the most
fertile areas. SAARC countries have common tradition, dress, food and culture and political
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 aspects thereby synergizing their actions.
 Common solutions: All the SAARC countries have common problems and issues like
poverty, illiteracy, malnutrition, natural disasters, internal conflicts, industrial and
technological backwardness, low GDP and poor socio-economic condition and uplift their
living standards thereby creating common areas of development and progress having
common solutions.
SAARC Achievements

 Free Trade Area (FTA): SAARC is comparatively a new organization in the global arena.
The member countries have established a Free Trade Area (FTA) which will increase their
internal trade and lessen the trade gap of some states considerably.
 SAPTA: South Asia Preferential Trading Agreement for promoting trade amongst the
member countries came into effect in 1995.
 SAFTA: A Free Trade Agreement confined to goods, but excluding all services like
information technology. Agreement was signed to reduce customs duties of all traded goods
to zero by the year 2016.
 SAARC Agreement on Trade in Services (SATIS): SATIS is following the GATS-plus
'positive list' approach for trade in services liberalization.
 SAARC University: Establish a SAARC university in India, a food bank and also an energy
reserve in Pakistan.
Significance for India

 Neighbourhood first: Primacy to the country’s immediate neighbours.

 Geostrategic significance: Can counter China (OBOR initiative) through engaging Nepal,
Bhutan, the Maldives and Sri Lanka in development process and economic cooperation.
 Regional stability: SAARC can help in creation of mutual trust and peace within the region.
 Global leadership role: It offers India a platform to showcase its leadership in the region by
taking up extra responsibilities.
 Game changer for India’s Act East Policy: by linking South Asian economies with South
East asian will bring further economic integration and prosperity to India mainly in the
Services Sector.
Challenges

 Low frequency of meetings: More engagement is required by the member states and
instead of meeting biennial meetings should be held annually.
 Broad area of cooperation leads to diversion of energy and resources.
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 Limitation in SAFTA: The implementation of SAFTA has not been satisfactory a Free
Trade Agreement confined to goods, excluding all services like information technology.
 Indo-Pak Relations: Escalated tension and conflict between India and Pakistan have
severely hampered the prospects of SAARC.

BRICS Nations

BRICS nations has been formed through group of Brazil, Russia, India, China and South Africa.
BRICS economies formed as a group having similar characteristics such as more population, high
growth rate and are coined as emerging economies of the world. Though, the BRICS are rising
powers of the world but the interests of the developing world are underrepresented in the
international order. Moreover, the economies claim to have greater representation in global
institutions that is the supranational organisations like IMF, World Bank, WTO etc. Though these
economies are at diverse stages of integration with the world economy and have followed varied
trajectories for progress, they have all become gradually more important in shaping the location,
organization, and distribution of global production. Specifically , the economies of Brazil, Russia,
India and China or the BRICs, a term first coined by Goldman Sachs in 2001, have received the
most concentration given their significance in terms of critical dimensions such as territorial size,
population, potential as consumer markets, and strategic role and influence within their respective
home regions. Off late, in 2010 with the entry of South Africa into this club, the group has been
re-named BRICS, further expanding its geopolitical influence and giving it a four continent reach.
These countries have been connected with one another to boost cooperation in various economic
and financial domains. Nevertheless, these budding economies have an assortment of similarities
as well as dissimilarities due to their relevant demographics, prospects and strengths. As one report
speaks, “China is the workshop of the world, Russia is regarded as a petrol station, India is the
Office, Brazil and South Africa provides raw materials.” However, the big question is that how
integrated are these economies in the world and therefore the research is intended to find out the
degree of integration of BRIC economies.

Here are a few facts about the BRICS.

 The BRICS countries make up 23 percent of global GDP. They have increased their share
of global GDP threefold in the past 15 years.

 The BRICS are home to 41 percent of the world's population.

 The BRICS countries have combined foreign reserves of an estimated $4.4 trillion.

 Intra-BRICS trade flows reached $282 billion in 2012 and are estimated to reach $550
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 billion by 2016. In 2002, it was $27.3 billion.

 IMF estimates of GDP per member in 2012, China $8.25 trillion, Brazil $2.43 trillion,
Russia and India at $1.95 trillion each, South Africa $390.9 billion.

 Per capita GDP for 2012 was estimated at, China $6,094, Brazil $12,340, Russia $13,765,
India $1,592, South Africa $7,636

The sustained GDP growth of BRICS members has the potential of these countries collectively
acting as the drivers of the global economy. However, for this potential to be realized it is necessary
that the global financial and economic architecture is supportive of their aspirations. It may also
be in the BRICS interest to identify and aim for the development of the youth through its policies
concerning generation of employment opportunities as finding employment for such an
unprecedented number of young people is becoming a global challenge.

Criticism of BRICs

While a lot has been made about the enormous potential growth of the BRIC nations, O’Neils
thesis has been challenged over the years as the economic and geopolitical climate has shifted. A
couple fundamental criticisms of the the investment concept include the idea perceived by some
as implicit in the argument for continuous growth by raw material providers that natural resources
are limitless. Those critiquing the model of growth say that it ignores the finite nature of fossil
fuel, uranium, and other resources.

It’s been argued by Deutsche Bank Research and editorials written in Foreign Policy Magazine
that China outstrips the other BRIC members economies by a huge amount, making up 70% GDP
growth of the group countries, putting the country in a seemingly different category than other
members of BRIC.

Still others have cited human rights issues in China and Russia, as well as Russia’s annexation of
Crimea and direct or indirect support of Russian separatist fighters in Ukraine as reason to doubt
a fundamental tenants of the BRIC thesis.

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UNIT 6

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Foreign Exchange Rate and Market

Foreign Exchange Market

world’s largest foreign-exchange markets are located in New York and London17.
Moreover, the role is of vital importance in the system of international payments.

Participants in foreign exchange market

Foreign exchange dealers play a major role in the foreign exchange market.

Individuals and firms also participate in the foreign exchange market.

Exporters, importers, international portfolio investors, MNC’s, tourists and others who use
foreign exchange market to facilitate the execution of commercial or investment transaction
Speculators and arbitragers take part in foreign exchange transactions.

Central Bank and Treasuries

Foreign exchange brokers

Banks and other financial institutions are the foremost participants. They earn profits by
buying and selling currencies from and to each other. Moreover two-thirds of all foreign
exchange transactions engage banks dealing directly with each other.
Brokers act as mediators between banks. Dealers call them to find out where they can get
the best price for currencies. Such arrangements are beneficial since they afford anonymity
to the buyer/seller. Brokers earn profit by charging a commission on the transactions they
arrange.
Customers,mostly large companies, require foreign currency in the course of doing
business or making investments. Another type of customers are individuals who buy
foreign exchange to travel abroad or make purchase in foreign countries.
Central banks, which act on behalf of their governments, at times participate in the foreign
exchange market to influence the value of their currencies. The foreign exchange market is
an inter-connected market that is connected through telecommunication and network of financial
institutions globally. There is no corporal place which can be called a foreign market. In nut shell
foreign exchange market is network of information through various participants. The foreign
exchange market helps in understanding the composition of currency and the trade of various currency
pairs in foreign exchange market. Foreign exchange
The major foreign exchange markets that exist are:

a) Spot markets

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 b) Forward markets

c) Derivative Market (Future, Options and swaps)

Spot Market refers to the transactions involving sale and purchase of currencies for instant
delivery. Normally, it may take one or two days to settle transactions. Spot transactions in the
foreign exchange market are increasing in volume. These transactions are largely in forms of
buying/selling of currency notes, encashment of traveller’scheques and transfers through banking
channels. The banking channels accounts for the bulk of transactions. It is estimated that about
90 per cent of the spot transactions are carried out solely for banks.

Participants in the spot market-

Major participants in the spot exchange market are:

Commercial Banks

Central Banks

Dealers, brokers and speculators.

Forward market transactions are destined to be settled on a future date as specified in the
contract. Though forward rates are quoted just like spot rates, but actual delivery of currencies
takes place much later, on a date in future. Forward market is not located at any specific place.
This market fixes the rates at which currencies will be exchanged on a future date. Forward rates
are quoted with reference to spot rates as they are always traded at a premium or discount in the
inter-bank market. Major participants in the forward market are banks, dealers, speculators,
arbitrageurs, exchange brokers and hedgers.

Future Market
Currency futures were launched in 1972 on the International money market (IMM) at Chicago. It
is a localized exchange where derivative instruments called ‘futures’ are traded. Currency futures
are somewhat similar to forward, yet distinctly different. The volume traded on the future market
is much smaller than that of forward market. However, it holds a very significant position in
USA and UK and is developing at a fast rate.

A currency future contract is a commitment to deliver or take delivery of a given amount of

currencies on a specific future date at a price fixed on the date of the contract. Like a forward
contract, a future contract is also executed at a later stage but is different in many respects. There
is difference in forward and future contract with respect to the clearing, standardization, market
to market as well as organized exchanges.

Fixed Exchange Rate SystemA fixed exchange rate pegs one country's currency to another
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country’s currency

 The government of a country doesn’t allow the exchange rate change in accordance with the demand
and supply for the currency

 The rationale of a fixed rate system is to maintain a country’s currency value within a very narrow
band.

Table - Countries with Fixed Exchange Rate

Country Currency Peg Rate Peg

Currency
Bermuda Bermuda Dollar 1 USD
(BMD)
UAE Dirham 3.673 USD

Denmark Danish Krone 7.46 EUR

Nepal Rupee 1.6 INR

Latvia Lats (LtfL) 0.7028 EUR

 Benefits of Fixed Exchange Rate

 Promote International Trade
 Helpful for Small Nations
 Restricts Speculation
 Fixed tfs Floating Exchange Rate

Fixed Exchange Rate System Flexible Exchange Rate System

The government fixes the foreign Determination of exchange rate is through

exchange rate by buying and selling of demand for and supply of foreign currency.
foreign exchange.

Under fixed exchange rate system Depreciation or appreciation of a currency

devaluation or revaluation of a currency is is determined by the market forces under
determined by the government. flexible exchange rate system.

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 Speculation occur when there is rumor Speculation in foreign exchange market is
about the change in government policy. frequent in flexible exchange rate system.

Self-adjusting mechanism operates to Self-adjusting mechanism operates

eliminate external disequilibrium by through the change in money supply,
change in foreign exchange rate. domestic interest rate and domestic price.

Floating Exchange Rate System

Floating exchange rate system is that in which the exchange rate is determined by the demand and
supply of currency and the equilibrium point of demand and supply is understood to be the
exchange rate18. America follows the pure float exchange rate system which is in operation since
1973 when Nixon has decided to do so. Although, it was not known to anyone by floating USD, it
will become the supremacy for USA and a want for many countries.
Pure Float Exchange rate system
Under the pure floating rate arrangement, the exchange rate of the currency of a country is
determined entirely by market consideration such as demand and supply. The system is followed
in USA and there is no intervention of Government in the determination of the exchange rate of
the currency. Thus, the rate of exchange rate is freely decided on the market by the equilibrium
stage of demand and the supply.
Managed Float Exchange rate (Dirty Exchange Rate System)
Managed float exchange rate system which is followed in India is different from than that of
America in the sense that central bank can intervene in the exchange rate determination. Normally,
the demand and supply determines the exchange rate but if the supply of USD is more in the
country then the situation of rupee appreciation can arise and is beneficial for the importer but not
the exporter.
Central bank can intervene in this situation by buying dollar from the market in turn raising the
demand for dollar. On the other hand when the rupee depreciation takes place due to more demand
of dollar in the country than supply. Central bank can intervene by selling more USD in the market
thus correcting the equilibrium and providing relief to the importer.

Factors affecting Foreign Exchange Rate

Exchange rates are determined by several characteristics. Whenevertwo countries trade, they also have an
association with various factors. Exchange rates are relative, so pertaining to that they are expressed as a
comparison of the currencies of two countries. Some of the main causes of the exchange rate between two
countries are as follows:

1. Role of differential in Inflation

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When a country’s purchasing power increases relative to other currencieswith a somewhat lower
inflation ratetypically it shows anincreasing currency value. Japan, Germany and Switzerland were
the countries to have achieved low inflation during the second half of the 20th century.But the
countries like U.S. and Canada achieved low inflation only later. However, thenation’s having
higher inflation observe depreciation in their currency in relation to the currencies of their trading
partners. Often, it is augmented by higher interest rates.

2. Differentials in Interest Rates

Exchange rates, inflation and the Interest rates have a high correlation. By controlling interest
rates, central banks exercise power over both inflation and exchange rates, and changing interest
rates effect inflation and currency values. More interest rates offer financiers in an economy a
larger return relative to other countries. Hence, higher interest rates attract foreign capital and as a
result the exchange rate rises. The influence of higher interest rates is reduced, however, if inflation
in the country is much higher than in others, or if additional factors serve to drive the currency
down. The reverse relationship exists for decreasing interest rates – that is, lower interest rates lead
to decrease in exchange rates.

3. Current Account Deficits

The current account is the balance of trade between a country and its trading partners, reflecting
all payments between countries for goods, services, interest and dividends. A deficit in the current
account denotes that the country is spending more on external trade than it is receiving, and that
the country becomes a borrower from the rest of the world. Thus, an economy needs more
international currency than it receives through sales of exports, and more of its own currency is
supplied than what the foreigners demand for its products. When there is additional demand for
foreign currency, it lowers the country's exchange rate until domestic goods and services are
economical enough for foreigners, and foreign assets are too expensive to generate sales for
domestic interests.

4. Public Debt
Economiespractice large-scale deficit financing to pay for public sector projects and governmental
funding. Whilesuch activity is healthy for the national economy, nations with huge public debts
and deficits are less attractive to international investors. A large debt leads to inflation, and if
inflation is high, the debt will be examined and ultimately paid off with inexpensive real dollars in
the future.

5. Terms of Trade
The ratio of export prices to import prices is the terms of trade and is related to current accounts
and the balance of payments. If the price of a country's exports rises by a considerably larger
amount than that of its imports, its terms of trade have positively improved. Increasing terms of
trade exhibitthat the economies exports have a great demand. Due to this the revenues from exports
are increased, and so demand for the country's currency increases (and an increase in the currency's
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value). Likewise, if the price of exports rises by a smaller rate than that of its imports, the currency's
value will decrease in relation to its trading partners.

6. Political Stability and Economic Performance

One of the important criteria set by foreign investors to invest in the global markets is the stability
of the country.An economy with positive macro-economic indicators and stabilitywill
gain investment funds and draw them away from other countries perceived to have added political
risk. Moreover, different credit rating agencies like standard and poor’s also announce the rating
of countries for eg. AAA, AA+ and so on.
Nostro and Vostro Account
An account opened by an Indian bank with a foreign bank in their currency for the purpose of
remittances and withdrawals is known as a nostro account. In other words, nostro account means a
bank’s account with his correspondent banker abroad, ordinarily in the home currency of that country.
E.g. An Indian bank having a Swiss franc account with a bank in Switzerland or in any other
international financial Centre.
Vostro account: A rupee account opened by a foreign bank with an Indian bank for the purpose
of remittances and withdrawals is known as a vostro account. The vostro account is basically the
local currency account of a foreign bank/branch. E.g. Indian rupee account maintained by a bank
in London with a bank in India.

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Case Studies

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 Case1

Wal-Mart failed to grasp the consumer and retail environment in Japan. With a population of 127
million, the highest per capita income and the second largest economy in the world, Japan is a
very attractive market for retailers. The opportunity exists, but there is much more research and
planning that needed to be done before expansion began. Instead of adapting business operations
to the Japanese culture, the company essentially assumed the Japanese would readily adapt to
Wal-Mart’s. This was not the case. For example, in Japan there is a much larger need for local
store customization. Consumer buyer behavior is much different than in the United States, with
purchasing patterns and product selection varying greatly between regions. They have a tendency
to buy smaller quantities in regular intervals rather than the more American idea of “stocking up.”

Similarly, the concept of large retail stores is foreign. Retailers with the highest growth rate are
small specialty stores; quite the opposite of Wal-Mart. The culture tends to buy more fresh
produce than pre-packaged goods as well (something Wal-Mart does not usually specialize in).
Lastly, the Japanese view high price as equaling high quality. This mentality causes them to
purchase 40% of the world’s luxury goods annually. Packaging and appearance of goods play a
huge role in their purchasing decisions. When looking at Wal-Marts product selection, it is
obvious they do not usually cater to luxury-brand customers. All of these cultural
misunderstandings lead Wal-Mart away from success in Japan. Perhaps more research into their
cultural values and patterns could have helped avoid some of these mishaps.

Given the above facts, it is obvious that the idea of “Every Day Low Prices” does not appeal to
the Japanese market in the same way it does in the American, Mexican and Canadian markets.
This is a very different culture and population to cater to. Wal-Mart’s low cost marketing strategy
may not be as effective globally as it is domestically. They earn their profits through high volume
sales over differentiation, and this approach is just not as successful in Japan.

In Japan there are strong and close-knit supplier webs that provide retailers with their goods. This
country puts a higher value on close, local relationships, making it very difficult for foreign firms
to enter the industry. With so many changes in products due to local store specifications, it forces
firms to deal with many different suppliers. This is not favorable to large retailers, as they don’t
have the time or national presence to make the necessary relationships to do business. Wal-Mart
is not used to this high level of supplier power. Their value usually comes from cutting costs with
suppliers enough to pass onto their customers while using synergy to increase efficiencies.
Difficulties managing their supply chain are another substantial reason Wal-Mart is struggling in
Japan.

The types of competition in Japan include both domestic and international players. It’s biggest
Japanese competitors are 7-Eleven Japan Co. Ltd., Aeon Co. Ltd., and Ito-Yokado Co. Ltd. As of
2008, all of these companies drastically outperformed Seiyu Ltd. (Wal-Mart). Although all of
these companies have different strategies, much of their success can be credited to their
experience in understanding how their country buyers and sellers interact. Two main international
competitors are Carrefour from France and Tesco from the United Kingdom. These firms had
similar challenges to Wal-Mart with their international expansions, but each faced them
differently. While Carrefour had complications so complex that it exited the market in 2004,
Tesco was able to gradually expand and prosper. Tesco made large investments in market

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research that allowed them to build stores that better met the Japanese consumer’s needs. Their
cautious expansion and well thought out plans have helped them succeed in the Japanese retail
industry. It is imperative for Seiyu and Wal-Mart to recognize their competition’s advantages and
formulate better ways to respond.

Lastly, it is necessary to examine Seiyu’s business situation before Wal-Mart took over the
company. Formed in 1956, Seiyu was successful until the 1990’s when Japan experienced an
economic recession. During this time the company acquired a large amount of debt that totaled
$7.46 billion at the start of the millennium. Although the company was in trouble, they did not
receive assistance from its larger owner, Saison Group, because they too were experiencing the
financial crisis. This situation is important to consider when evaluating Wal-Mart’s performance.
Although it was predicted that Wal-Mart could save the Japanese retailer, their debt and economic
troubles may have been too much to reverse. Looking back, Seiyu may not have been the best
company for Wal-Mart to begin their expansion with.

Questions: ATTEMPT ALL QUESTIONS. MAX. MARKS-10

Q.1 How would you describe Walmart’s global management approach? what challenges did
Walmart face in Japan? (6 MARKS)
Q.2 Describe the importance of culture in International business taking example of above case. (4
MARKS)

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 Case 2

The Thai baht's peg and the Asian financial crisis

Arguably, the most infamous example of a recent fixed-exchange rate is the Thai baht, given
that the government's decision to de-peg it from the dollar precipitated the Asian financial
crisis in the late 1990s.
Thailand was a star performer from the mid-1980s to 1996. The economy grew within a
range of 8.1% and 13.3% from 1987 to 1995, according to data from the World Bank .
But things started to slow down around 1996, which then put some pressure on the
government to devalue the currency. It resisted for some time, but when investors started
betting that the currency would lose value in 1997, this prompted the Bank of Thailand to
spend billions of dollars of its limited foreign reserves defending its currency.
Eventually, the BoT had to abandon the peg on July 2, 1997.
Employees of suspended finance companies during a rally outside the Bank of Thailand
in Bangkok on November 12. Hundreds of disgruntled employees who were either laid
off or about to lose their jobs urged the central bank to take responsibility for their
plight.
The baht ended up falling by as much as 60% against the dollar by October 24 of that
year, according to data cited by the Federal Reserve Bank of San Francisco . Operations in 58
of the country's 91 finance companies were suspended.
The depreciation of the baht was followed by a chain reaction of people speculating against
other Southeast Asian currencies, including the Malaysian ringgit, the Philippine peso, and
the Indonesian rupiah. By fall 1997, the turbulence then spread to South Korea, Hong Kong,
and China. And then, in 1998, it spilled into Russia and Brazil.
"It is apparent in hindsight that this dilemma could have been avoided by allowing the
currency to appreciate during the earlier period of capital inflows, when there was no threat
of a sudden loss in value in the currency," argued Ramon Moreno , at the Federal Reserve
Bank of San Francisco.
Argentina's use of the peg to combat hyperinflation
Economy Minister Domingo Cavallo during a news conference, where he presented
Argentina's 1994 economic balance.
In 1989, prices in Argentina were rising so quickly that supermarkets didn't even bother to
update price tags. Instead, they just read out the prices over intercoms, according to Reuters .
That's how insane Argentina's hyperinflation was from in the late 1980s to the early 1990s. In
fact, a New York Times report from June 1989 estimated the annual rate at 12,000%.
Argentines took to the streets to protest the soaring prices.
In Buenos Aires, "bands of angry youths, armed with sticks, steel bars and in some cases
firearms, roamed poor neighborhoods burning tires, battling the police and looting food
stores," reported James Brooke in The New York Times on May 31, 1989 .

Domingo Cavallo was the guy who had to try to solve this. As minister of the economy in
1991, he came up with a plan known as "Covertibilidad" - or "convertibility." It pegged the
Argentine austral - now called the peso - at 10,000 to the dollar.
Over the short-run, the strategy worked and helped bring inflation from2,314% per year in
1990 to 4% by 1994 . But, eventually, Argentina ended up running into the negative effects
of having a fixed-exchange rate.
Unemployed Argentines demand food at the gate of a supermarket on the outskirts of
Buenos Aires on December 19, 2001. Police in riot gear fired tear gas and rubber bullets
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to disperse looters who ransacked shops and supermarkets in the capital and northern
part of the country, in some of the worst rioting in more than a decade.
This was evident when the Asian financial crisis bled into Brazil, and the Brazilian
real plunged. The peso, still linked to the dollar, did not. This left Argentine exports
significantly more expensive relative to those of Brazil, taking a toll on Argentina's economy
and making it harder for the government to repay its debts.
"Lower export takings have limited the country's ability to earn the foreign currency needed
to repay dollar-denominated debts," reported the BBC . And "a decline in world prices for
farm product, and the global economic slowdown of recent months, only worsened
Argentina's problems."

Argentine riot police watch thousands who took to the streets to demand the resignation
of President Fernando de la Rua, in Buenos Aires on December 20, 2001.
Although one might think that devaluing the currency would solve the export problem,
Argentina's other issues made this a difficult choice. As The Economist explained in June
2001 :
"The obvious solution, a devaluation, is a non-starter. Less than a tenth of the government's
debt is denominated in pesos, so devaluation would bring financial ruin to it as well as to
private-sector borrowers. A big refinancing early this month of $29 billion-worth of
commercial debt, through a swap for longer-dated bonds, bought a respite. But the shadow of
a potentially catastrophic default still hangs over Argentina."
And so, things got worse. Eventually, the government enacted the "corralito " in November
2001, which froze bank accounts and allowed withdrawals of only $250 per week .
Riots escalated across the country in response in December 2001.

Argentine demonstrators place tires to block a main avenue to protest unpopular new
banking curbs, soaring unemployment, and economic austerity measures in Buenos
Aires on December 14, 2001.
Ultimately, the government was left with no choice but to de-peg its currency from the dollar
in January 2002.
By February 2003, the peso had fallen by about 70% against the dollar, according to figures
cited by a BBC report from that month . Inflation rose again after the currency was de-
pegged, although, on the positive side, it didn't skyrocket to the levels of the late 1980s.
"The currency board [which managed the peg], although it initially played an essential role in
achieving disinflation, was an inherently risky enterprise; it changed over time from being a
confidence-enhancing to becoming a confidence-damaging factor, as the policy orientation
shifted from a 'money-dominant' to a 'fiscal-dominant' regime," the International Monetary
Fund noted.

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 CASE 3

When McDonald’s first arrived in Vietnam in 2014, it was received with a warm welcome. The
locals waited in long queues to tantalize their taste buds with a new breed of burgers. A
whopping 400,000 customers happily spent their money on this new sensation in the first month
itself. It seemed like McDonald’s was going to be a big thing in this East Asian country. However,
in business, the reality is often different than predictions. As of now, McDonald’s only has around
22 outlets in the entire country. Let’s take a look at why the company stagnated and failed to
expand in Vietnam.

In Vietnam, the concept of fast-food has existed for a long time. Whether it’s pho or a banh
mi sandwich, the customer had local options that they could have on-the-go. Pho is a Vietnamese
noodle soup that the local vendors can prepare in seconds. Generally, all they need to do is put the
solid ingredients in a bowl followed by hot water and other liquid ingredients, such as broth. Banh
mi is a type of sandwich on a baguette, and it doesn’t take long for locals to cut a baguette and put
the good stuff inside.So McDonald’s unique selling point — that is, offering fast service — didn’t
even matter because the locals could get faster service from traditional Vietnamese food outlets.

As of 2018, there were around 540,000 food outlets in Vietnam — almost 430,000 out of which
were local vendors. For decades, there has been a flourishing street-food culture in this country.
Food is readily available, whether it's on land or water. Yes, you can even buy food from vendors
who run their business from a boat (as shown in the picture above). Compare this with
McDonald’s — a fast-food restaurant that has a menu mostly comprised of burgers and drinks. The
locals didn’t want to settle for a limited range of items because they had a lot of options — a lot of
‘cheaper’ and ‘traditional’ options.

The Vietnam War was one of the most devasting chapters of mankind’s recent history. Many
passed away, and some of the people who survived lived with physical injuries or post-traumatic
stress disorder. The severe bitterness between the U.S. and Vietnam closed trade for many years.
But in 1995, the leaders of both nations decided to bury the hatchet and re-open their doors for
commerce.

In 1997, KFC’s opening marked America’s re-entry into Vietnam. This time, it wasn’t for war, but
to share some delicious American food. However, there was a problem. During all these years
when Vietnam didn’t allow American businesses to enter their country, the gap in the market for
food outlets was filled by local business owners. For this reason, American franchises struggle
when entering a jam-packed Vietnamese market to this day.

As of today, a Big Mac in Vietnam costs $2.82. It seems reasonable if you’re living in the West
and earning a Western income. However, for the local customers, this is a premium price and
something they’d only spend every once in a while. According to Numbeo, a meal at a local
Vietnamese restaurant costs around VND 50,000 ($2.16), whereas a meal at a McDonald’s outlet
can range up to twice as much, which is VND 100,000 ($4.32).

The idea of paying double for a burger, a glass of Coke, and some fries didn’t appeal to the
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Vietnamese customers. Even though there are local adaptations in the menu, such as chicken rice
and grilled pork rice with egg, the vast majority of customers weren’t financially prepared to visit
McDonald’s frequently. Although the locals like a quick pho from time to time, that’s not what
they always eat. In the Vietnamese tradition, it’s not uncommon for the whole family (or a bunch
of friends) to sit together and share their food with each other.

First of all, burgers can’t be shared unless someone’s OK with teeth marks on the bun. In short, no,
burgers are not the type of food that most people would want to share. Secondly, the ‘eat fast and
make room for new customers’ type of culture that fast-food chains have doesn’t really match with
the ‘sit back, relax, and share your food’ culture of Vietnam.

QUESTIONS: (5 marks each)

Q.1 What challenges did McDonald face in Vietnam?

Q.2 What do you suggest to the company to convert the challenges into opportunities?

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MCQ’s

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When did the government remove the barriers for investment in India
A. 1990
B. 1991
C. 1992
D. 1993

ANSWER: B

Which of the following is not a purportedly beneficial outcome of the globalization process
A. The redistribution of wealth, addressing disparities in economic and resource allocation across
the globe through a sense of greater interconnectedness
B. The growing sense of global community, resulting in super-national identities that result from
populations feeling closer to one another
C. The sharing of ideas, technologies and resources that can directly benefit human security, such
as medical advancements
D. A global market that has demonstrated the ability, if left unchecked, to reduce poverty and
make substantial economic gains

ANSWER: A

Which of the following statements best describes our understanding of the term 'globalization
A. Globalization refers to the process by which shared hegemonic values pervade societies across
the globe, drawing them into an ideological community
B. Best described as intensification of worldwide social relations and increasing interdependence,
globalization is the result of the compression of space and time through the development of new
technologies
C. Globalization is best described as the 'shrinking' of the global community, drawing people into
closer contact with one another primarily at the economic and technical levels
D. Globalization has occurred since the 1980s, originating in Western Europe as a centre of
political power and technological advancement

ANSWER: B

The globalization of…………..refers to the sourcing of goods & services from locations around
the globe to take advantages of national differences in the cost and quality of factors of production
A. Information technology
B. Process design
C. Markets
D. Production

ANSWER: D

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Which factors has globalization been facilitated by
A. Rapid improvements in technology
B. Liberalisation of trade and investment policies
C. Pressures from international organisations
D. All of the given options

ANSWER: D

Which of the following is a criticism of globalization

A. Going into someone’s country uninvited
B. Different climates in other countries get in the way
C. Terrorist opportunities
D. Threat to national sovereignty

ANSWER: D

………….is a peculiar form of international trade that encompasses more than an exchange of
goods services or idea for money
A. Turnkey contract
B. Licensing
C. Counter Trade
D. Buy back

ANSWER: C

Your foreign country exchanges its surplus wheat for copper. What type of countertrade is it
utilizing
A. Direct offset
B. Indirect offset
C. Barter
D. Switch trade

ANSWER: C

Your company obtains a foreign country's approval of an agreement to sell three jumbo jets in the
foreign country so long as it uses electronic components purchased in the foreign country in the
construction of the jets. What form of countertrade is this
A. Direct offset
B. Indirect offset

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C. Switch trading
D. Counter purchase

ANSWER: A

Which one of the following is the best explanation of countertrade

A. Trade between developed and developing countries
B. Trading that involves barter
C. Trading that uses foreign currency
D. Trade involving the direct or indirect exchange of goods for other goods instead of currency

ANSWER: D

…………occurs when a firm agrees to purchase a certain amount of materials in future back from
a country to which a sale is made
A. Counter purchase
B. Direct offset
C. Switch trading
D. Barter

ANSWER: A

Which is the right sequence of stages of Internationalization?

A. Domestic, Transnational, Global, International, Multinational
B. Domestic, International, Multinational, Global, Transnational
C. Domestic, Multinational, International, Transnational, Global
D. Domestic, International, Transnational, Multinational, Global

ANSWER: B

Subsidiaries consider the regional environment for policy / Strategy formulation is known as
______
A. Polycentric Approach
B. Regiocentric Approach
C. Ethnocentric Approach
D. Geocentric Approach

ANSWER: B

Disney sells the rights for an investment company to run a Disneyland theme park in Tokyo. The
investment company gains most of the profits from the enterprise while paying Disney a

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percentage in royalties. This is an example of:
A. Joint venture
B. Exporting
C. Licensing
D. Capital-intensive manufacturing

ANSWER: C

Which method of entering the global marketplace involves the manufacturing firm itself
distributing its product offering to foreign markets, direct to customers?
A. Indirect exporting
B. Licensing
C. Joint ventures
D. Direct exporting

ANSWER: D

In 2005, Norwich Union (now Aviva) relocated customer calls for insurance claims back to the
UK following a sequence of misunderstandings about flooding from immersion heaters. Local
operators in India struggled to understand the claim as they didn't understand the heating systems.
The _____ environment had the greatest influence on this situation.
A. Demographic
B. Economic
C. Cultural
D. Technological

ANSWER: C

______ is the application of knowledge which redefines the boundaries of global business
A. Cultural Values
B. Society
C. Technology
D. Economy

ANSWER: C

Capitalistic, communistic and Mixed are the types of ______

A. Economic System
B. Social System
C. Cultural Attitudes
D. Political System

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ANSWER: A

______ is not an Indian Multinational Company

A. Unilever
B. Asian Paints
C. Piramal
D. Wipro

ANSWER: A

Which of the following is an important cultural factor that should be considered by marketers
seeking international development?
A. Competitive synergy
B. Language
C. Natural resources
D. Technological sensitivity

ANSWER: B

Key controllable factors in global marketing are ______

A. Government policy and legislation
B. Social and technical changes
C. Marketing activities and plans
D. All of the given options

ANSWER: D

Select an example of Indian Multinational Company

A. Hindusthan Unilever
B. Videocon
C. Cargill
D. Tesco

ANSWER: B

Multinational Corporations are________ corporation produces in the home country or in a single

country and focuses on marketing these products globally or vice a versa.
A. Global
B. International
C. Transnational

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D. None of the options

ANSWER: A

KFC has some 15,000-plus KFC restaurants in over 109 countries worldwide and more than 2,870
KFC restaurants in more than 650 cities in China alone. Which method of entering the global
marketplace does KFC use?
A. Export buyer
B. License agent
C. Import agent
D. Franchising

ANSWER: D

________ is the first step in the internationalization process.

A. License
B. Foreign Investment
C. Sales
D. Export

ANSWER: D

A foreign direct investment occurs when a company in country A invests in a company located in
country B and thereby gives the investing company control over the management of the company
receiving its investment. Hence, A company does not have to be the sole investor in the foreign
company
A. True
B. False

ANSWER: A

When an international firm follows a strategy of choosing only from the nationals of Parent
country, it is called
A. Polycentric
B. Ethnocentric
C. Geocentric
D. Regiocentric

ANSWER: B

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The company that manages and staffs employees on a global basis.
A. Polycentric
B. Ethnocentric
C. Geocentric
D. Regiocentric

ANSWER: C

Polycentric approach is also known as

A. Host country approach
B. Home country approach
C. Global approach
D. Hybrid approach (both home and host)

ANSWER: A
___________ is consists of the totality of all factors within or outside the control of individual
business firms.
A. Business
B. Environment
C. Business environment
D. Organization

ANSWER: C

Environment is always changing constraining and ____________

A. Competing
B. Uncertain
C. Dynamic
D. Specific

ANSWER: B

The following factor does not differentiate the international business from domestic market.
A. Different currency
B. Product quality
C. Product mobility
D. Trade policies

ANSWER: B

Uneven distribution of natural resources…

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A. Is not the cause for international business
B. Is one of the major causes for international business
C. Is the major factor for international business
D. Is a cause for international business

ANSWER: B

international business does not result in the following

A. Innovation is encouraged
B. International cooperation is encouraged
C. Imports are rendered cheap
D. Consumption is minimised

ANSWER: D

Free international trade maximises world output through

A. Countries specialising in the production of goods they are best suited for
B. Reduction in taxes
C. Increased factor income
D. Encouraging competition

ANSWER: A

By entering into international business, a firm expects an improvement in

A. Marketing
B. Finance only
C. All spheres of finance, marketing and operation simultaneously
D. Any or all spheres of finance, marketing and operations

ANSWER: D

The following is not a component of culture

A. Attitude
B. Belief
C. Education
D. Life expectancy

ANSWER: D

International trade forces domestic firms to become more competitive in terms of

A. The introduction of new products

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B. Product design and quality
C. Product price
D. All of the given options

ANSWER: D

The movement to free international trade is most likely to generate short-term unemployment in
which industries
A. Industries in which there are neither imports nor exports
B. Import-competing industries.
C. Industries that sell to domestic and foreign buyers
D. Industries that sell to only foreign buyers

ANSWER: B

Increased foreign competition tend to

A. Intensify inflationary pressure at home
B. Induce falling output per worker-hour for domestic workers
C. Place constraints on the wages of domestic workers
D. Increase profits of domestic import-competing industries

ANSWER: C

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Internal and External papers

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Checklist for Course packs
Title page should be standardized bearing title of subject, course, course code, semester, year of batch
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Forwarding by HOD bearing his/her signature for approval by Director Sir

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After each unit 20 MCQs have been added (MCQs are not copied from internet)
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I, Dr.Nancy Goel , Teaching Environmental Science subject in BBA-II have incorporated all the necessary pages/ sections/ question papers mentioned in this
check list above.

(Signature of faculty)

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