UNIT 1 : INTRODUCTION

Business Environment: “The sum total of all individuals, institutions and other forces that are outside the control of a
business enterprise but the business still depends upon them as they affect the overall performance and sustainability of
the business.” The environment of any organization is “ the aggregate of all conditions, events and influences that
surround and affect it.” Characteristics:
1. Complex: Environment comprises many factors, events, conditions, and influences arising from different sources.
All these factors are related to each other. Therefore, their individual effect on the business cannot be recognised. This is
perhaps the reason which makes it difficult for the business to face them.
2. Dynamic: That change is the law of nature squarely applied to the environment also. The various influences
operating on an unabated manner make the environment continuously changing. Environment is a mixture of many factors
and changes in some or the other factors continue to take place.
3. Multi-faceted: The environment is perceived differently by different observers.
4. Far- reaching impact: Business enterprise operates within a given environment and gets affected by it. The growth
and profitability of business depends critically on the environment.

Imp of knowing the Business Environment

1. Development of broad strategies to ensure sustainability and success.
2. To foresee the impact of socio-economic changes at the national and international levels on a firm's ability.
3. Analysis of competitor’s strategies and formulation of effective counter measures.
4. To keep oneself dynamic and responsive.
Components of the business Environment

Internal Environment: Controllable factors within an organization that impart strengths or cause weaknesses of strategic nature.
1. Value system
2. Mission and Objectives
3. Management Structure and Nature
4. Human Resources
5. Company Image and Brand Equity
6. Other Factors
7. Physical Assets and Facilities
8. R & D and Technological Capabilities
9. Marketing Resources
10. Financial Resources

External environment
Micro Environment
The micro component of the external environment is also known as the task environment. It comprises of external forces
and factors that are directly related to the business. These include suppliers, market intermediaries, customers, partners,
competitors and the public
1. Suppliers include all the parties which provide resources needed by the organisation.
2. Market intermediaries include parties involved in distributing the product or service of the organisation.
3. Partners are all the separate entities like advertising agencies, market research organisations, banking and
insurance companies, transportation companies, brokers, etc. which conduct business with the organisation.
4. Customers comprise of the target group of the organization.
5. Competitors are the players in the same market who targets similar customers as that of the organisation.
6. Public is made up of any other group that has an actual or potential interest or affects the company’s ability to
serve its customers.

Macro Environment
The macro component of the marketing environment is also known as the broad environment. It constitutes the external
factors and forces which affect the industry as a whole but don’t have a direct effect on the business. The macro
environment can be divided into 6 parts.

Economic Environment
The economic environment constitutes factors which influence customers’ purchasing power and spending patterns. These
factors include the GDP, GNP, interest rates, inflation, income distribution, government funding and subsidies, and other
major economic variables.
1. Economic stages that exists at a given time in a country
2. Economic system that is adopted by a country for example. Capitalistic, Socialistic or Mixed Economy
3. Economic planning means arrangement of resources such as five year plans, budgets…..
4. Economic policies- for example, monetary, industrial and fiscal policies
5. Economic Indices such as National Income, Per Capita Income, Disposable Income, Rate of growth of GNP,
Distribution of Income, Rate of savings, Balance of Payments etc.
6. Economic Problems
7. Functioning of economy

Non Economic Environment

1. Regulatory Environment: ¤Constitutional framework, Policies relating to pricing and foreign investment, Policies
related to the public sector, SSIs, development of backward areas and control of environmental pollution
2. Socio- Cultural Environment: Social Customs & Rituals and practices, Lifestyle patterns, Family structure, Role
& position of men, women, children and aged in family & society. The social-cultural aspect of the macro environment is
made up of the lifestyle, values, culture, prejudice and beliefs of the people. This differs in different regions.
3. Demographic Environment: The demographic environment is made up of the people who constitute the market. It
is characterised as the factual investigation and segregation of the population according to their size, density, location, age,
gender, race, and occupation. Growth of population, Age Composition, Life Expectancy, Sex Ratio, Fertility and Mortality
rates, Inter-state migration
4. Technological Environment: The technological environment constitutes innovation, research and development in
technology, technological alternatives, innovation inducements also technological barriers to smooth operation.
Technology is one of the biggest sources of threats and opportunities for the organisation and it is very dynamic. Sources
of technology, Technological development, Impact of technology
5. Political Environment: The political & Legal environment includes laws and government’s policies prevailing in
the country. It also includes other pressure groups and agencies which influence or limit the working of industry and/or the
business in the society. Political parties in power, Political Philosophy
6. Physical Environment: The physical environment includes the natural environment in which the business
operates. This includes the climatic conditions, environmental change, accessibility to water and raw materials, natural
disasters, pollution etc.

Globalisation
Globalization refers to the shift towards a more integrated and interdependent world economy. Globalization has several
different facets including the globalization of markets and globalization of production.

Global Business Environment: Can be defined as the environment in different sovereign countries, with factors exogenous
to the home environment of the organization, influencing decision making on resource use and capabilities. The term
general environment refers to the overarching environment in which a company operates. This concept includes a broad
range of factors that can influence a business, including geographic location, politics, technology, culture, and the
economic status of the global environment.

Drivers of Globalisation:
1. Declining trade and investment barriers
2. Role of technological change: Telecommunication, www and the internet, transportation technology.

Globalization of Markets
Refers to the merging of historically distinct and separate national markets into one huge global market place. Falling
barriers to cross border trade have made it easier to sell internationally.eg, Coca-Cola, Pepsi, Sony play station.

Globalization of Production
It refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in
the cost and quality of the factors of production such as labor, energy ,land and capital, by doing this companies hope to
lower their overall cost structure.
Global Business Environment and decision making
Political Factors: Can have a significant influence on businesses. In addition, political factors affect consumer confidence
and consumer and business spending. For instance, how stable is the political environment? This is particularly important
for companies entering new markets. Government policies on regulation and taxation can vary from state to state and
across national boundaries. Political considerations also encompass trade treaties, such as NAFTA, ASEAN, and EU.
Such treaties tend to favor trade among the member countries but impose penalties or less favorable trade terms on
nonmembers.

Economic Factors: Near-term and long-term effects on the success of their strategy. Inflation rates, interest rates, tariffs,
the growth of the local and foreign national economies, and exchange rates are critical. Unemployment, availability of
critical labor, and the local cost of labor also have a strong bearing on strategy, particularly as related to the location of
disparate business functions and facilities.

Sociocultural Factors: Vary from country to country. Depending on the type of business, factors such as the local
languages, the dominant religions, the cultural views toward leisure time, and the age and lifespan demographics may be
critical. Local sociocultural characteristics also include attitudes toward consumerism, environmentalism, and the roles of
men and women in society. For example, Coca-Cola and PepsiCo have grown in international markets due to the
increasing level of consumerism outside the United States. Making assumptions about local norms derived from
experiences in your home market is a common cause for early failure when entering new markets. However, even
home-market norms can change over time, often caused by shifting demographics due to immigration or aging
populations.

Technological Factors: New technology may make it possible for products and services to be made more cheaply and to a
better standard of quality. New technology may also provide the opportunity for more innovative products and services,
such as online stock trading and remote working. Such changes have the potential to change the face of the business
landscape.

Environmental Factors: Factor in firm strategy, primarily from the standpoint of access to raw materials. Increasingly, this
factor is best viewed as both a direct and indirect cost for the firm.
Environmental factors are also evaluated on the footprint left by a firm on its respective surroundings. For
consumer-product companies like PepsiCo, for instance, this can encompass the waste-management and organic-farming
practices used in the countries where raw materials are obtained. Similarly, in consumer markets, it may refer to the
degree to which packaging is biodegradable or recyclable.

Legal Factors: Reflect the laws and regulations relevant to the region and the organization. Legal factors can include
whether the rule of law is well established, how easily or quickly laws and regulations may change, and what the costs of
regulatory compliance are. For example, Coca-Cola’s market share in Europe is greater than 50 percent; as a result,
regulators have asked that the company give shelf space in its coolers to competitive products in order to provide greater
consumer choice

PESTEL and Globalization

Factors Favoring Industry Globalization
1. Markets: Homogeneous customer needs, Global customer needs, Global channels, Transferable marketing
approaches
2. Costs: Large-scale and large-scope economies, Learning and experience, Sourcing efficiencies, Favorable
logistics, Arbitrage opportunities, High research-and-development (R&D) costs
3. Governments: Favorable trade policies, Common technological standards, Common manufacturing and marketing
regulations
4. Competition: Interdependent countries
Markets: The more similar markets in different regions are, the greater the pressure for an industry to globalize.
Coca-Cola and PepsiCo, for example, are fairly uniform around the world because the demand for soft drinks is largely
the same in every country. The airframe-manufacturing industry, dominated by Boeing and Airbus, also has a highly
uniform market for its products; airlines all over the world have the same needs when it comes to large commercial jets.

Costs: In both of these industries, costs favor globalization. Coca-Cola and PepsiCo realize economies of scope and scale
because they make such huge investments in marketing and promotion. Since they’re promoting coherent images and
brands, they can leverage their marketing dollars around the world. Similarly, Boeing and Airbus can invest millions in
new-product R&D only because the global market for their products is so large.

Governments and Competition: Obviously, favorable trade policies encourage the globalization of markets and industries.
Governments, however, can also play a critical role in globalization by determining and regulating technological
standards. Railroad gauge—the distance between the two steel tracks—would seem to favor a simple technological
standard. In Spain, however, the gauge is wider than in France. Why? Because back in the 1850s, when Spain and
neighboring France were hostile to one another, the Spanish government decided that making Spanish railways
incompatible with French railways would hinder any French invasion.

Importing as a Stealth Form of Internationalization

Ironically, the drivers of globalization have also given rise to a greater level of imports.Importing involves the sale of
products or services in one country that are sourced in another country. Firms often claim that they have no international
operations and yet—directly or indirectly—base their production or services on inputs obtained from outside their home
country. Firms that engage in importing must learn about customs requirements, informed compliance with customs
regulations, entry of goods, invoices, classification and value, determination and assessment of duty, special requirements,
fraud, marketing, trade finance and insurance, and foreign trade zones. Importing can take many forms—from the
sourcing of components, machinery, and raw materials to the purchase of finished goods for domestic resale and the
outsourcing of production or services to non domestic providers.

Outsourcing occurs when a company contracts with a third party to do some work on its behalf. The outsourcer may do
the work within the same country or may take the work to another country (i.e., offshoring). Offshoring occurs when you
take a function out of your country of residence to be performed in another country, generally at a lower cost. International
outsourcing, or outsourcing work to a nondomestic third party, has become very visible in business and corporate strategy
in recent years. But it’s not a new phenomenon; for decades, Nike has been designing shoes and other apparel that are
manufactured abroad.

In addition to factors of production, information technologies (IT)—such as telecommunications and the widespread
diffusion of the Internet—have provided the impetus for outsourcing services. Business-process outsourcing (BPO) is the
delegation of one or more IT-intensive business processes to an external provider that in turn owns, administers, and
manages the selected process on the basis of defined and measurable performance criteria. The firms in service and
IT-intensive industries—insurance, banking, pharmaceuticals, telecommunications, automotive, and airlines—are among
the early adopters of BPO. Of these, insurance and banking are able to generate the bulk of the savings, purely because of
the large proportion of processes that they can outsource (i.e., the processing of claims and loans and providing service
through call centers). Among those countries housing BPO operations, India experienced the most dramatic growth in
services where language skills and education were important.

ENVIRONMENTAL SCANNING
Possession and utilization of information about occasions, patterns, trends, and relationships within an organization’s
internal and external environment. Helps managers to decide the future path of the organization. Scanning must identify
the threats and opportunities existing in the environment. While strategy formulation, an organization must take advantage
of the opportunities and minimize the threats. A threat for one organization may be an opportunity for another.
Internal analysis of the environment is the first step of environment scanning. Organizations should observe the internal
organizational environment. This includes employee interaction with other employees, employee interaction with
management, manager interaction with other managers, and management interaction with shareholders, access to natural
resources, brand awareness, organizational structure, main staff, operational potential, etc. Also, discussions, interviews,
and surveys can be used to assess the internal environment. Analysis of internal environment helps in identifying strengths
and weaknesses of an organization.

As business becomes more competitive, and there are rapid changes in the external environment, information from
external environment adds crucial elements to the effectiveness of long-term plans. As environment is dynamic, it
becomes essential to identify competitors’ moves and actions. Organizations have also to update the core competencies
and internal environment as per external environment. Environmental factors are infinite, hence, organization should be
agile and vigile to accept and adjust to the environmental changes. For instance - Monitoring might indicate that an
original forecast of the prices of the raw materials that are involved in the product are no more credible, which could
imply the requirement for more focused scanning, forecasting and analysis to create a more trustworthy prediction about
the input costs.

While in external analysis, three correlated environment should be studied and analyzed —
● immediate / industry environment
● national environment
● broader socio-economic environment / macro-environment

STAGES OF ENVIRONMENTAL ANALYSIS

1. Scanning to detect warning signals.
§ Analyzes environment for identifying factors with impact / implications for business.
§ Exploratory in nature
§ Identifies emerging trends.
§ Alerts organization on potentially significant external factors before crystallization.

2. Monitoring trends
Focused & systematic in-depth analysis of relevant environmental trends identified at the scanning stage.
Gather data to determine emerging patterns
Outputs of monitoring :
1. Identification of trends for further monitoring
2. Patterns requiring further scanning.

3. Forecasting future changes.

§ Anticipating trends in future changes
§ Pinpoint critical variables emerging / declining
§ Give more concrete views on threats and opportunities
§ Helps to formulate strategic plans.

4. Assessment: changes for organizational implications.

§ Assess/Evaluate the impact on organization's business.
§ Draws up implications / possible impacts.
§ Assessment involves identifying and evaluating how and why current and projected environmental changes affect or
will affect strategic management of the organization.

Benefits of Environmental Analysis

It helps to identify present and future threats and opportunities.
It contributes in identification of risks.
It helps in formulation of strategies. It keeps the mangers informed, alert and dynamic.
Tools for Environmental Scanning: SWOT, PESTLE, VUCA

PESTEL Analysis

VUCA
The Origins of VUCA
VUCA is an acronym standing for Volatility, Uncertainty, Complexity, and Ambiguity, and is used to describe key
characteristics of the external environment. It is another analytical tool that can be used in issue management.
Some knowledge of VUCA factors is valuable to communicators. Apart from considering these factors in your own
communication plans, you will impress senior management by being knowledgeable about the terms during planning
sessions.

VUCA factors
1. Volatility
Characteristics: Relatively unstable change. The challenge is unexpected and may be of unknown duration, but it is not
necessarily hard to understand; knowledge about it is often available.
Business example: Prices fluctuate after a natural disaster, such as when a fire takes out a supplier.
Business approach: Conduct risk analysis, build in spare capacity and devote resources to preparedness – for instance,
stockpile inventory or overbuy talent. These steps are typically costly and therefore management should only commit
where the cost is justified by the downside.
Communication role: Prepare a crisis management strategy. The communication function should be integrally involved.

2. Uncertainty
Characteristics: Lack of knowledge. Nevertheless, the situation’s basic cause and effect are known.
Business example: A competitor’s expected product launch can change the future of the business and the market.
Business approach: Increase business intelligence activities. Collect, interpret, and share relevant information. Engage in
serious boundary-spanning collaboration.
Communication role: The organization’s communication function is the logical area in which to build these resources,
especially as the role incorporates boundary-spanning.

3. Complexity
Characteristics: Easiest of the 4 factors to understand, but managers can’t know what they don’t know, which
compounds the complexity of the situation. Managers may know the likely outcomes but not the unintended consequences
of complexity factors. For instance, writing new computer code may open up the further complexity of unforeseen
security risks. Some information is available or can be predicted, but the volume or nature of it can be overwhelming.
Business example: The company operates in many countries, each of which has its own regulatory environment, tariffs
and cultural values.
Business approach: Restructure, bring in or develop specialists, and increase resources adequate to address the
complexity.
Communication role: Identify the key stakeholders in each country and initiate a systematic stakeholder relations
management program. Tailor messages for each country and its unique culture. Government relations is crucial.

4. Ambiguity
Characteristics: Causal relationships are unclear. No precedents exist; management faces “unknown unknowns.”
Business example:The company decides to move into developing markets or to launch new types of products that are
outside its previous experience.
Business approach: Companies need to be prepared to take on risk, perhaps initially in trial markets, to evaluate
outcomes. Lessons learnt can be applied progressively over time to other markets.
Communication role: Communicators can support with gathering intelligence about the operating environment including
regulatory parameters, and in preparing broad issue management and crisis communication strategies in advance.

Advantages of Globalisation: Especially for a developing country like India:

(i) Helps to boost the long run average growth rate of the economy of the country through:
(a) Improvement in the allocative efficiency of resources;
(b) Increase in labour productivity; and
(c) Reduction in capital-output ratio.
(ii)Paves the way for removing inefficiency in production system. Prolonged protective scenario in its absense makes the
production system careless about cost effectiveness which can be attained by following the policy of globalisation.
(iii) Attracts entry of foreign capital along with foreign updated technology which improves the quality of production.
(iv) Usually restructure production and trade pattern favouring labour-intensive goods and labour-intensive techniques as
well as expansion of trade in services.
(v) In a globalized scenario, domestic industries of developing country become conscious about price reduction and
quality improvement to their products so as to face foreign competition.
(vi) Discourages uneconomic import substitution and favour cheaper imports of capital goods which reduces
capital-output ratio in manufacturing industries. Cost effectiveness and price reduction of manufactured commodities will
improve the terms of trade in favour of agriculture.
(vii) Facilitates consumer goods industries to expand faster to meet growing demand for these consumer goods which
would result faster expansion of employment opportunities over a period of time. This would result trickle down effect to
reduce the proportion of population living below the poverty line
(viii) Enhances the efficiency of the banking insurance and financial sectors with the opening up to those areas to foreign
capital, foreign banks and insurance companies.

Disadvantages of Globalisation:
(i) Paves the way for redistribution of economic power at the world level leading to domination by economically powerful
nations over the poor nations.
(ii) usually results greater increase in imports than increase in exports leading to growing trade deficit and balance of
payments problem.
(iii) Although globalisation promote the idea that technological change and increase in productivity would lead to more
jobs and higher wages but during the last few years, such technological changes occurring in some developing countries
have resulted more loss of jobs than they have created leading to fall in employment growth rates.
(iv) Alerted the village and small scale industries and sounded death-knell to it as they cannot withstand the competition
arising from well organized MNCs.
(v) Showing process to poverty reduction in some developing and underdeveloped countries of the world and thereby
enhances the problem of inequality.
(vi) Threat to agriculture in developing and underdeveloped countries of the world. As with the WTO trading provisions,
agricultural commodities market of poor and developing countries will be flooded farm goods from countries at a rate
much lower than that indigenous farm products leading to a death-blow to many farmers.
(vii) Implementation of globalisation principle becoming harder in many industrially developed democratic countries to
ask its people to bear the pains and uncertainties of structural adjustment with the hope of getting benefits in future.

Organizational strengths are as follows: Organizational weaknesses are as follows:

1.Abundant financial resources 1.Limited financial resources
2.Established brand name 2.Low R & D Budget
3.Economies of scale 3.Narrow product line
4.Lower production costs 4.Weak supply chain distribution
5.Superior management 5.Higher production costs
6.Excellent marketing skills 6.Obsolete or Out-of-date products/technology
7.Good supply chain distribution 7.Poor market image
8.Great Employee commitment 8.Poor marketing skills
9.Weak management skills
10.Under-trained employees

Organizational opportunities are as follows: Organizational threats as follows:

1.Rapid market growth
2.Self-satisfied rival firms
3.Changing customer needs/tastes
5.Economic boom
6.Government deregulation
7.Decline in demand for a substitute product
1.Entry of foreign competitors
2.Introduction of new substitute products
3.Decline in product life cycle
4.Changing customer needs/tastes
5.New strategies adopted by rival firms
6.Increased government regulation
7.Economic slowdown
UNIT 2: POLITICAL ENVIRONMENT

Political, economic, and legal systems. These systems are interdependent, and interact and influence each other. A
country’s political system has major implications for the practice of international business. Political system: System of
government in a nation. Political systems can be assessed in terms of the degree to which they emphasize collectivism as
opposed to individualism i.e degree to which they are democratic or totalitarian.
Collectivism - stresses the primacy of collective goals over individual goals
Individualism - suggests individuals should have freedom over their economic and political pursuits
Democracy - government is by the people, exercised either directly or through elected representatives
Totalitarianism - one person or political party exercises absolute control over all spheres of human life, and opposing
political parties are prohibited

Economic system: 3 types: the market economy, the command economy, and the mixed economy
Free market system is likely in countries where individual goals are given primacy over collective goals. State-owned
enterprises and restricted markets are common in countries where collective goals are dominant.
Pure market economy: goods-services a country produces, and the quantity in which they are produced is determined by
supply and demand.
Pure command economy: goods-services a country produces, the quantity in which they are produced, and the price at
which they are sold are all planned by Govt..
Mixed economy includes some elements of a market economy and some elements of a command economy

Legal system: rules, or laws, that regulate behavior, along with the processes by which the laws of a country are enforced
and through which redress for grievances is obtained
laws regulate business practice
laws define the manner in which business transactions are to be executed
laws set down the rights and obligations of those involved in business transactions
There are three main types of legal systems:
1. Common law - based on tradition, precedent, and custom found in most of Great Britain’s former colonies,
including the United States
2. Civil law - based on a very detailed set of laws organized into codes found in over 80 countries, including
Germany, France, Japan, and Russia
3. Theocratic law - based on religious teachings, Islamic law is the most widely practiced
Macro-Environmental Uncertainties (Types)

Question: What are the implications of the political economy for international firms?
1. the political, economic, and legal systems of a country raise important ethical issues that have implications for
the practice of international business
2. the political, economic, and legal environment of a country clearly influences the attractiveness of that country as
a market and/or investment site

Doing business in foreign markets involves risk

Political risk - the likelihood that political forces will cause drastic changes in a country's business environment that
adversely affects the profit and other goals of a business enterprise
Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business
environment that adversely affects the profit and other goals of a business enterprise
Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights
Political risk is the likelihood that political forces will cause unexpected and drastic changes in a country’s environment
that significantly affects the opportunities and operations of a business enterprise
Country-Specific: manifested in the mutual hostility between Israel and Syria. One would expect that Israeli companies
would find little support in Syria, and the same would apply for Syrian companies in Israel
Company-Specific: Invokes either a favorable or unfavorable response aimed at a particular company
Project-Specific: Involves special treatment bestowed on a certain type of project
Transfer Risk: Change in the degree of ease or difficulty experienced in making transfers of capital, goods, technology,
and people in and out of a country
Operational Risk: Impact on the operations of a firm caused by changes in Govt.’s policies
Ownership Risk: Involves a change in the proportion of equity owned by a company in a foreign subsidiary

Risks in operating businesses in host countries:

1. Unstable government
2. Frequent, dramatic and unpredictable regime changes,
3. Nationalized, seized or destroyed
4. Normal business operations might be suspended
5. Workforce may go on strike
6. Changes in Management

Staying Safe While Working Overseas

1. Always remain aware of your surroundings and avoid unusual circumstances
2. Walk with authority and purpose while in public areas
3. Call ahead to notify others of your travel plans or appointments
4. Alternate your routes to work on a regular basis
5. Alternate your timing to and from your work location
6. Avoid wearing American or British flag pins or other insignia in public
7. Speak in the native language where you’re working

Authoritarian and Populist Leaders and effect on trade.

Authoritarian Leaders: An authoritarian leadership style is exemplified when a leader dictates policies and procedures,
decides what goals are to be achieved, and directs and controls all activities without any meaningful participation by the
subordinates. Such a leader has full control of the team, leaving low autonomy within the group. The leader has a vision in
mind and must be able to effectively motivate their group to finish the task. The group is expected to complete the tasks
under very close supervision, while unlimited authority is self-bestowed by the leader. Subordinates' responses to the
orders given are either punished or rewarded.

Populist Leaders: Populism is a range of political approaches that deliberately appeal to 'the people', In political science,
populism is the idea that society is separated into two groups at odds with one another - "the pure people" and "the corrupt
elite"Populists typically present "the elite" as comprising the political, economic, cultural, and media establishment,
depicted as a homogeneous entity and accused of placing their own interests, and often the interests of other groups—such
as foreign countries or immigrants—above the interests of "the people".
Populist parties can be anywhere on the political spectrum. In Latin America, there was Venezuela's late President Chávez.
In Spain, there is the Podemos party, and in Greece the label has also been applied to Syriza.
Politicians "like Marine Le Pen in France, Viktor Orbán in Hungary, and Donald Trump in the US, combine populism
with [anti-immigrant] nativism and authoritarianism
Populist politics revolves around a charismatic leader who appeals to and claims to embody the will of the people in order
to consolidate his own power.
Democratic governments in the West are increasingly losing their bearings. From the shift toward illiberalism in Poland
and Hungary to the Brexit vote in the United Kingdom and Donald Trump’s victory in the United States’ presidential
election, a particularly lethal strain of populism is infecting societies – and it is spreading.
The appeal of populism is straightforward. Faced with stagnant wages and a declining quality of life, people feel frustrated
– all the more so when their leaders keep telling them that things are getting better. Then the populist appears and
promises to shake things up, to defend the interests of the “people” (though really only some of them), and offers
something arguably more attractive than feasible solutions: scapegoats.
At the top of the list of scapegoats are the “elites” – established political parties and corporate leaders. Rather than
protecting the “people” from economic pressure and insecurity, this group, the populist declares, thrives on the people’s
pain. By advancing globalization – by forcing ever-more openness down the people’s throat – they have accumulated
massive wealth, which they then protect through tax avoidance, offshoring, and other schemes.
Trump won the US presidency partly because of his pledges to deport millions of undocumented immigrants and ban
Muslims from entering the country. The Brexiteers promised to end free immigration from the European Union. After the
vote, Britain’s Home Secretary Amber Rudd suggested that firms hiring foreigners should be named and shamed.
Today’s populism advances a toxic new xenophobia, one that threatens to fracture our societies. For politicians, it offers
an easy means of quickly transforming people’s fear and powerlessness into an intoxicating mix of anger and authority. It
persuades intimidated (often elderly) voters that, in the parlance of the Brexiteers, they can “take back control” of their
lives and their countries, primarily by rejecting foreigners.
Demography makes the new xenophobia particularly dangerous. In much of the West, societies are becoming increasingly
diverse. Hispanics now account for 17.6% of the US population. One-third of Londoners were born outside the UK. In
France, an estimated 10% of the population is Muslim. And an estimated 20% of Germany’s population have some
immigrant background.

In this context, when politicians campaign for votes by advancing antagonistic and divisive identity politics, they sow the
seeds of animosity, mistrust, and violence within their own societies. When candidates repeatedly call Muslims dangerous,
for example, no one should be surprised by a surge in anti-Muslim hate crimes, as has occurred in the wake of both the
Brexit vote and Trump’s victory. Such divided societies require a rising level of coercion and force to control. But what
does this mean for the international order, which has been built over time on the principles of multilateralism, exchange,
and movement of people and goods across national borders? Oftentimes, the chosen scapegoat of populism is a product of
the international order. The international order has facilitated the spread of ideas, cultures, and religions across continents.
Yet, ethnic and religious minorities, branded as outsiders, have been victims of populist calls for greater demographic
homogeneity as nationalist sentiment rises. The international order has allowed the flourishing of cross-border trade and
economies ties, boosting growth. Yet, populism often points fingers at the political elite for being in cahoots with big
business. Seen as growing their own wealth and conspiring against the working class, this builds a distrust of multilateral
trade arrangements and foreign businesses. The international order has allowed for movement of peoples and
diversification of communities, as people move in search of greener pastures. However, both economic migrants and
refugees - painted by populists as invaders disrupting traditional community values and norms - are used to call for walls
and tighter borders. Populism thus has direct consequences for the international order as it exists today. Whether in
threatening the functioning of multilateral trade regimes like the North American Free Trade Agreement; or the growing
resistance of societies to other races, religions, and belief systems, such as with rising Islamophobia in Europe; or the
negative sentiment towards refugees from countries like Syria and Myanmar.

However, this is not to say that the international order at present is ideal - far from it. As mentioned before, populism taps
into existing communal sentiment, sentiment that must have a source. This sentiment has largely risen from a few issues.
First, states have failed to keep up with the fourth industrial revolution. As labour markets globally are disrupted by the
adoption of new technologies, states have failed to make up for the loss of jobs as a result of automation and declining
industries. Consequently, trade and economic integration have been seen as negative drivers, rather than positive ones that
can raise standards of living. Second, states have not been able to properly distribute the benefits of the international order.
Globalisation has allowed for the distribution of tasks to skilled labour around the world, but that often leads to the
sidelining of those without skills that suit today's needs. In a rapidly-changing economy, this has created widening
inequality that has largely gone unaddressed, fostering resentment within blue collar communities that have received no
assistance to cope. Finally, cultures and values have crossed countries, and as societal fabrics change rapidly, this has
resulted in increasing resistance to the other' - unfamiliar peoples, ideas, and beliefs that challenge pre-existing norms. The
value enshrined by the international order is the belief that countries are stronger when they work together - but this
cannot exist if people are mistrustful of this very order for all these aforementioned reasons.

Trade War between US and China

In the case of the China-U.S. squabble, Trump imposed aluminum and steel tariffs in early March in order to protect those
American industries. He then announced 25% tariffs on $50 billion to $60 billion in Chinese exports to the U.S., including
aerospace, information and communication technology, and machinery. On Monday, China placed fees on a wide range of
U.S. products, including scrap aluminum, sparkling wine and apples. Trump then promised tariffs on about 1,300 Chinese
products. Hours later, China came out with more tariffs, this time taking aim at Boeing planes.

America First: America First refers to a foreign policy in the United States that emphasizes American nationalism and
unilateralism. It first gained prominence in the interwar period and was advocated by the America First Committee, a
non-interventionist pressure group against the American entry into World War II. Since 2016, an identically-named
foreign policy that emphasizes similar objectives has been pursued by the administration of U.S. President Donald Trump.
It is worth emphasizing that a resistance to globalization was arguably the foremost policy theme in Trump’s election
campaign. In the speech announcing his presidential bid, Trump railed against the United States’ existing trade
agreements, threatened to slap taxes on U.S. companies investing overseas, and pledged to build a wall to keep out
migrants. Trump’s plan for his first 100 days in office reaffirms the centrality of this theme, with a commitment to
renegotiate or withdraw from NAFTA, abandon support for the Trans-Pacific Partnership (TPP), label China a currency
manipulator, establish tariffs to discourage companies from off-shoring production and jobs, expel more than two million
migrants, suspend immigration from terror-prone regions, and build the wall.

Future of economic integration: Political events of the past few years have called into question the future of an integrated
international economy. Brexit, the election of Donald Trump, the rise of parties of the Right and Left that are skeptical
about economic integration – whether at the global or European level – have all challenged the previously common
assumption that globalization had become the natural and normal state of international economic affairs. Whether hostility
to international economic integration continues to grow or not, the wheels are already in motion to remake fundamentally
the global economy’s ordering principles. Given the shift in the American government’s orientation, other nations’
governments have incentives to work out alternative arrangements not so 3 reliant upon American leadership. If current
trends persist and the United States continues to abandon its traditional leadership role, the world is likely to be far more
fragmented among regional trading areas. Barriers between these areas and the United States (and its closest trading
partners) are likely to grow. The future of the world economy is likely to be substantially different from its recent past.
The globalization backlash The United States is by far the most important locus of this backlash against globalization,
given America’s size and centrality to international economics and politics. There are certainly other countries in which
similar trends are at work: Brexit in the UK and right-wing populism in Central and Eastern Europe are prominent
examples.
UNIT 3: INTERNATIONAL LEGAL ENVIRONMENT

Dimensions of the legal environment Legal risks in overseas locations

Law is a norm that prescribes what is assumed to be a proper mode of behavior. Prescribes a certain pattern of behavior
and also requires that the prescribed mode be followed. Includes a process approved by society for applying coercive
sanctions against those who do not obey and therefore perform illegal acts. Effective Legal System: The people in the
society must understand and have knowledge of what the society prescribes as legal behaviour. The members of the
society must have agreed that the laws deserve to be obeyed. An effective system for punishing illegal behaviour must be
in place. Govt. duly elected by the people, provides the machinery for an effective legal system. The legislative branch
makes the laws and judicial and executive branches together perform the task of identifying illegal behaviour and
punishing the law breaker.

Functions of Law: Promote law and order with justice. Law communicates to individuals in a society their rights and
duties in their daily interactions with other people in the society. Law helps in controlling and preventing behaviour that
the society considers undesirable. Government use law to promote social and economic welfare of society. Laws of a
society reflect the norms, values, aims and general beliefs of a society.

International Law
International Treaty
Agreement entered into by two or more states under general international law. Like a contract is a legal transaction by
which the contracting parties intend to establish mutual obligations and rights. Countries that have signed the treaty are
legally obliged and entitled to behave as they have declared or else they are exposed to sanctions and punishment.
An international agreement concluded between states in written form and governed by international law.

International Custom
Entails habitual patterns of behaviour that evolve over a number of years to reach the level of obligatory rules ie;
international - law which govern how nations and their subjects inter-acted with one another.
•A rule of customary international law comes into existence when almost all states behave almost exactly the same way
for a long time and feel a legal obligation to do so.

General principles of law

•The list of sources of international law of the International Court of Justice Statute are “general principles of law
recognized by civilized nations” (i.e. general principles of fairness and justice which are applied universally in legal
systems around the world).
•Examples of these general principles of law are good faith, res judicata, and the impartiality of judges. International
tribunals rely on these principles when they cannot find authority in other sources of international law.

General principles of law

•These general principles of law can be found in decisions of international tribunals and national courts; references to
them may also be found in the teachings of the “most highly qualified publicists” (i.e., eminent international law scholars).
•In fact, Article 38 includes judicial decisions (of both international and municipal tribunals) and scholarly writings as
“subsidiary means for the determination of rules of law;” in other words, these are not authorities, rather they are evidence
of the sources of international law.
•In international law, judicial decisions are not generally considered binding on subsequent disputes, but are evidence of
international practice and can assist in the interpretation of treaties and the definition of customary law

ICJ and WTO

Commercial Dispute
Between two countries
Between a country an a company
Between two companies
ICJ adjudicate disputes between two countries only when both governments involved agree to submit to the authority of
the ICJ( International Court of Justice)
WTO – Dispute Settlement System
Treaty : Sources of International Law
Bilateral Treaty – only two states
Multilateral – more than two states are contracting parties

Ethics in International Business

•Ethics - accepted principles of right or wrong that govern the conduct of a person, the members of a profession, or the
actions of an organization. Ethics refers to the accepted principles of right or wrong that govern the conduct of a person,
the members of a profession, or the actions of an organization. Business ethics are the accepted principles of right or
wrong governing the conduct of business people. An ethical strategy then, is a course of action that doesn’t violate these
principles.
•Business ethics are the accepted principles of right or wrong governing the conduct of business and people
•Ethical strategy is a strategy, or course of action, that does not violate these accepted principles

You might remember the situation with Nike in the mid-1990s, when Nike was accused of allowing its suppliers to violate
basic human rights in their factories. While Nike itself wasn’t directly violating human rights, the fact that it was
purchasing its products from suppliers who were, generated considerable negative press for the company. Television host
Kathie Lee Gifford found herself in a similar position when it was revealed in 1996 that clothing made under her label was
made in factories that operated under sweatshop conditions.

Ethical Issues in International Business

1. Employment Practices
Question: When work conditions in a host nations are clearly inferior to those in a multinational’s home nation, what
standards should be applied?
•The standards of the home nation?
•The standards of the host nation?
•Something in between?
•Employment practices are a frequent source of ethical dilemma for companies. Suppose, as we suggested earlier, work
conditions in a host country are inferior to those in the home country. Which standards should you apply--the home
country standards or the host country standards? Is it ok to employ minors to work a 50 hour week if it doesn’t violate
local laws? Do you have to supply safety gear to employees if it’s not required by law?
•Nike, as we mentioned, found itself in the midst of a huge controversy in the mid-1990s when it was reported that the
working conditions at some of its sub-contractors were poor. While neither the subcontractor, nor Nike were actually
breaking the law, there was strong reason to suspect that workers were being exploited. For example, in one factory in
Vietnam, women were paid just 20 cents an hour, well below the living wage of $3 per day, to work with toxic materials
six days a week. Nike was forced by public pressure to establish a code of conduct for all of its subcontractors, and
implement a monitoring system to ensure that the code was followed.
•Remember, while we can say that Nike may have violated basic ethical principles, the company didn’t actually break the
law. So, our question remains, which standards, those of the home country or those of the host country, should be
applied? Levi’s believes that it’s important to maintain standards that preserve the basic rights and dignity of employees.
So, when it discovered that one of its suppliers was forcing women to work more than 70 hours a week in guarded
compounds, the company ended its relationship with the supplier.

2. Human Rights
Question: What is the responsibility of a foreign multinational when operating in a country where basic human rights are
not respected?
•Basic human rights taken for granted in the developed world such as freedom of association, freedom of speech, freedom
of assembly, freedom of movement, and so on, are not universally accepted
•You may not think much about your human rights—things like freedom of association, freedom of speech, freedom of
assembly, and so on are often taken for granted in developed countries. But, it’s important to remember that these
freedoms are not respected in many countries. Think about the apartheid system that denied basic political rights to blacks
in South Africa, for example, or the ongoing situation in the Darfur region of western Sudan where the Sudanese
government has been accused of genocide by the U.S. and other countries.
•Should companies do business in countries with repressive regimes? Some people argue that the presence of
multinational companies actually helps bring change to these countries. Some people believe that change is occurring in
China for example, because investments by multinationals are helping to raise living standards. Others, however, argue
that some countries like Myanmar, which has one of the worst human rights records in the world, are so brutally
repressive that no investment can be justified. In fact, many companies left the country in the mid-1990s because of its
dismal human rights. Even so, some companies, like Unocal, ignore these issues as the Management Focus in your text
outlines.

3. Environmental Pollution
Question: Should a multinational feel free to pollute in a developing nation if doing so does not violate laws?
•When environmental regulations in host nations are far inferior to those in the home nation, ethical issues arise
•The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by
individuals resulting in its degradation
•We hear a lot about the environment today, and in particular, the irreversible damage that manmade pollution is causing.
Many countries are establishing strong environmental regulations to try to limit further damage, forcing companies to
adopt new measures that can be quite costly, to abide by the laws.
•So, new regulations are forcing your company to take costly steps to stay within the law. You know that these regulations
haven’t been imposed in some other countries, particularly those that are lesser developed. Should you shift your
production to another country where the laws don’t exist, or are only loosely enforced?
•BP has been widely criticized for its slow response to the leak at its facilities in the Gulf of Mexico near Louisiana. In
fact, some people have suggested that BP didn’t follow proper safety procedures when it built its pump and that the leak
was a result of that failure. While it’s too soon to know whether BP actually violated any laws, the controversy will surely
impact the company in the future.

4. Corruption
Question: Is it ethical to make payments to government officials to secure business?
•In the United States, the Foreign Corrupt Practices Act outlawed the practice of paying bribes to foreign government
officials in order to gain business
•The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions adopted by the
Organization for Economic Cooperation and Development (OECD) obliges member states to make the bribery of foreign
public officials a criminal offense
•Suppose you are dealing with a corrupt government. Should you still try to act in an ethical manner? Corrupt
governments have always been around, and it’s important for international companies to consider their effect on company
strategies. At what point does “gift giving” become bribery for example?
•Well, from a government perspective, bribery shouldn’t be allowed. In the U.S., the Foreign Corrupt Practices Act,
which was passed in 1977, outlaws the paying of bribes to foreign government officials in order to gain business. The act
does allow for facilitating or grease payments which are basically payments that are made to speed up standard
procedures. The Organization for Cooperation and Development, or OECD, passed a similar measure in 1997, which
obligates member states to make bribery of foreign public officials a criminal offense.
Corruption
•Some economists suggest that the practice of giving bribes might be the price that must be paid to do a greater good
•In countries where preexisting political structures distort or limit the workings of the market mechanism, corruption in
the form of black-marketeering, smuggling, and side payments to government bureaucrats to “speed up” approval for
business investments may actually enhance welfare
•However, other economists have argued that corruption reduces the returns on business investment and leads to low
economic growth. If you do it once, you’re likely to do it again. BP believes this to be true and maintains a strict no
bribery policy, regardless of the implications.

5. Moral Obligations
Question: Do multinationals have a responsibility to give back to the societies that enable them to grow and prosper?
•Social responsibility - the idea that business people should take the social consequences of economic actions into account
when making business decisions, and that there should be a presumption in favor of decisions that have both good
economic and good social consequences
Many people believe that companies need to recognize their noblesse oblige and give something back to the societies that
have made their success possible. BP supports this notion, and has made it company policy to give back to the
community. So, in Algeria for example, the company built two desalination plants to provide drinking water to residents
in Salah. Other companies, however, don’t share this view. As the Management Focus in your text points out, Robert
Murdoch, founder and CEO of News Corporation probably used the power of his company to gain access to the Chinese
market, and acted in an unethical way in doing so. As part of the deal, News Corporation suppressed media content that
was critical of China. Google has been accused of chosing a similar path in China, much to the annoyance of some of its
stakeholders.

Ethical Dilemmas or ethical paradox

Decision-making problem between two possible moral imperatives, neither of which is unambiguously acceptable or
preferable. The complexity arises out of the situational conflict in which obeying one would result in transgressing
another. Sometimes called ethical paradoxes in moral philosophy, ethical dilemmas may be invoked to refute an ethical
system or moral code, or to improve it so as to resolve the paradox.
•Managers often face situations where the appropriate course of action is not clear
•Ethical dilemmas - situations in which none of the available alternatives seems ethically acceptable
•they exist because real world decisions are complex, difficult to frame, and involve various consequences that are
difficult to quantify
•You’ve probably realized by now, that it can very difficult for companies to decide how to behave in some situations.
Managers will be influenced by their personal ethics, and cultural perspective, which may or may not be appropriate in a
given situation. So, while gift giving in many Asian countries is considered proper behavior, some Western countries see
it as a form of bribery. So, should you forgo the practice even if you offend your host? Similarly, while child labor may
violate your corporate policies, it may be acceptable by law in some countries. Does this mean your company should
immediately fire all employees who are minors? Perhaps, but what if the minor is the main bread winner for the family?

The Roots of Unethical Behavior: Managerial behavior is influenced by

1. Organizational culture
2. Unrealistic performance expectations
3. Leadership
4. Personal Ethics: Business ethics reflect personal ethics (the generally accepted principles of right and
wrong governing the conduct of individuals). Expatriates may face pressure to violate their personal
ethics because •they are away from their ordinary social context and supporting culture •they are
psychologically and geographically distant from the parent company
An individual’s personal ethics will influence the decisions she makes on the job. Personal ethics are
derived from parents, from schools, from religion, from the media, and so on. So, when a person has
strong personal ethics, she is likely to have strong business ethics. What happens though, when you take a
manager out of his environment? Expatriate managers, or managers who are working abroad, often face
pressure to violate their personal ethics. Imagine that you’re surrounded with people who hold to a
different set of values. You may be encouraged to adopt a behavior that you otherwise wouldn’t. For
example, if bribery is common, you might feel that in order to meet performance goals, it’s acceptable for
you to use bribery as well, even though you’d never consider bribery at home.
5. Decision Making Processes: Decisions are made based on economic logic, without consideration for
ethics. A moral compass can help determine whether a decision is ethical. •If a manager can answer “yes”
to the following questions, the decision is ethically acceptable •does my decision fall within the accepted
values of standards that typically apply in the organizational environment? •am I willing to see the
decision communicated to all stakeholders affected by it? •would the people with whom I have significant
personal relationships approve of the decision? •Pfizer failed to ask relevant questions when it made the
decision to run experimental drug trials on children in Nigeria. The company was trying to get a new
drug to market, but first needed a large sample of sick children to test it on. When an epidemic hit
Nigeria, Pfizer saw its chance. Only later did it question whether it was right to test an experimental drug
on children whose parents probably didn’t realize what was going on, or who didn’t have alternative
treatment options.
UNIT 4: CULTURAL ENVIRONMENT

Cross-Cultural Literacy: Understanding of how cultural differences across and within nations can affect the way in
which business is practiced. Relationship may exist between culture and the costs of doing business in a country or region

Culture: System of values and norms that are shared among a group of people and that when taken together constitute a
design for living where “values” are abstract ideas about what a group believes to be good, right, and desirable, “norms”
are the social rules and guidelines that prescribe appropriate behavior in particular situations “Society” refers to a group of
people who share a common set of values and norms

What Are Values And Norms?

1. Values provide the context within which a society’s norms are established and justified and form the bedrock of a
culture
2. Folkways are the routine conventions of everyday life like dress codes, social manners, and neighborly behavior
3. Mores are the norms that are central to the functioning of a society and to its social life.
4. Mores may actually become laws.
a. So, for example, we have laws against theft. (in Saudi arabia – drinking alcohol in not allowed)
Hofstede's cultural dimensions theory is a framework for cross-cultural communication, developed by Geert Hofstede.
It describes the effects of a society's culture on the values of its members, and how these values relate to behavior, using a
structure derived from facto analysis. He studied 1,16,000 IBM employees in different countries and arrived at the
dimensions.

1. Power distance index (PDI): Extent to which the less powerful members of organizations and institutions (like the
family) accept and expect that power is distributed unequally.” In this dimension, inequality and power is perceived from
the followers, or the lower level. A higher degree of the Index indicates that hierarchy is clearly established and executed
in society, without doubt or reason. A lower degree of the Index signifies that people question authority and attempt to
distribute power.

2. Individualism vs. collectivism (IDV): Degree to which people in a society are integrated into groups.” Individualistic
societies have loose ties that often only relates an individual to his/her immediate family. They emphasize the “I” versus
the “we.” Its counterpart, collectivism, describes a society in which tightly-integrated relationships tie extended families
and others into in-groups. These in-groups are laced with undoubted loyalty and support each other when a conflict arises
with another in-group.

3. Uncertainty avoidance index (UAI): Society's tolerance for ambiguity,” in which people embrace or avert an event of
something unexpected, unknown, or away from the status quo. Societies that score a high degree in this index opt for stiff
codes of behavior, guidelines, laws, and generally rely on absolute Truth, or the belief that one lone Truth dictates
everything and people know what it is. A lower degree in this index shows more acceptance of differing thoughts/ideas.
Society tends to impose fewer regulations, ambiguity is more accustomed to, and the environment is more free-flowing.

4. Masculinity vs. femininity (MAS): Masculinity is defined as “a preference in society for achievement, heroism,
assertiveness and material rewards for success.” Its counterpart represents “a preference for cooperation, modesty, caring
for the weak and quality of life.” Women in the respective societies tend to display different values. In feminine societies,
they share modest and caring views equally with men. In more masculine societies, women are more emphatic and
competitive, but notably less emphatic than the men. In other words, they still recognize a gap between male and female
values. This dimension is frequently viewed as taboo in highly masculine societies.
5. Long-term orientation vs. short-term orientation (LTO): This dimension associates the connection of the past with
the current and future actions/challenges. A lower degree of this index (short-term) indicates that traditions are honored
and kept, while steadfastness is valued. Societies with a high degree in this index (long-term) views adaptation and
circumstantial, pragmatic problem-solving as a necessity. A poor country that is short-term oriented usually has little to no
economic development, while long-term oriented countries continue to develop to a point.

6. Indulgence vs. restraint (IND): Measure of happiness; whether or not simple joys are fulfilled. Indulgence is defined
as “a society that allows relatively free gratification of basic and natural human desires related to enjoying life and having
fun.” Its counterpart is defined as “a society that controls gratification of needs and regulates it by means of strict social
norms.” Indulgent societies believe themselves to be in control of their own life and emotions; restrained societies believe
other factors dictate their life and emotions.

Applications of the Model:

1. International communication
Cross-cultural communication requires being aware of cultural differences because what may be considered perfectly
acceptable and natural in one country, can be confusing or even offensive in another. All the levels in communication are
affected by cultural dimensions: verbals (words and language itself), non verbals (body language, gestures) and etiquette
do's and don'ts (clothing, gift-giving, dining, customs and protocol).
2. International negotiation
If applied properly, the understanding of cultural dimensions should increase success in negotiations and reduce
frustration and conflicts. For example, in a negotiation between Chinese and Canadian, Canadian negotiators may want to
reach an agreement and sign a contract, whereas Chinese negotiators may want to spend more time for non business
activities, small talks and hospitality with preferences for protocol and form in order to first establish the relationship.
"When negotiating in Western countries, the objective is to work toward a target of mutual understanding and agreement
and 'shake-hands' when that agreement is reached – a cultural signal of the end of negotiations and the start of 'working
together'. In Middle Eastern countries much negotiation takes place leading into the 'agreement', signified by shaking
hands. However, the deal is not complete in the Middle Eastern culture. In fact, it is a cultural sign that 'serious'
negotiations are just beginning."
3. International management
Decisions taken have to be based on the country's customs and values. When working in international companies,
managers may provide training to their employees to make them sensitive to cultural differences, develop nuanced
business practices, with protocols across countries. Hofstede's dimensions offer guidelines for defining culturally
acceptable approaches to corporate organizations.
4. International marketing
If you want to market cars in a country where the uncertainty avoidance is high, you should emphasize on their safety,
whereas in other countries you may base your advertisement on the social image they give you. Cell phone marketing is
another interesting example of the application of Hofstede's model for cultural differences: if you want to advertise cell
phones in China, you may show a collective experience whereas in the United States you may show how an individual
uses it to save time and money. The variety of application of Hofstede's abstract theory is so wide that it has even been
translated in the field of web designing in which you have to adapt to national preferences according to cultures' values.

Limitations of Hofstede's model

Questionable choice of national level
Aside from Hofstede's five cultural dimensions, there are other factors on which culture can be analyzed. There are other
levels for assessing culture.
How do different cultures approach decision making?

In autocratic cultures like those of Latin America, France or the Arab world, decisions tend to come from the top, while in
countries with flatter management styles, like the Netherlands, Australia or Israel, consensus is important. On the other
hand, some of the most apparently egalitarian cultures can have a surprisingly top-down style when it comes to making a
decision. In other situations, the corporate culture may override any local cultural traits. There will always be variations on
cultural stereotypes, but here are a few general examples of decision making style around the world.
● The USA is a culture of very flat management structures – until it comes to decision making. The culture is
egalitarian in that individuals are free to challenge authority, but often surprisingly top-down in that the priority is usually
speed and to get things moving along, a manager may make a snap decision. Once this has been made, it won’t be
questioned. This obsession with speed can be the downfall of Americans doing business with other cultures, where
decision making can take a long time and trying to rush the other side puts you in a position of weakness.
● German companies tend to have steeper hierarchies. In general, the boss in the workplace is deferred to and there
is a degree of formality. Yet German managers usually include their co-workers and subordinates in the decision making
process, where the input of technical experts is valued. Structure, process and productivity are all important drivers in
German decision making. Because German culture is individualistic, managers are prepared to take responsibility for the
choices they make.
● Scandinavian cultures are more likely to base decision making on social factors; what will benefit the group, as
opposed to the individual. In Sweden, decisions are made by consensus and as such, may take a long time. Once a
decision is made, it won’t change, generally because so much discussion has gone into making it in the first place. By the
time a conclusion is reached, everybody is on board.
● Japan is not dissimilar in the end goal, although culturally, it differs greatly from Sweden. What the two have in
common, though, is the desire to maintain harmony and the wellbeing of the group, which matters more than individual
choice. The traditional way of reaching consensus in Japan is via ‘ringi-sho’, in which an individual presents a ringi, a
written document stating their case, and circulates it to everybody involved in the process. Each person stamps the
document with their hanko, or personal seal. Those who disagree will either not participate or place their hanko upside
down, but either way, this lengthy process avoids open conflict at a meeting, which would cause people to lose face. In
any one organisation, several ringi may be in circulation at once.
● China, like Japan, is a collectivist culture. Confucianism teaches that individuals should maintain their place in the
hierarchy to avoid chaos. Decision making is slow and deliberate; rushing things is the sign of a fool. Chinese
management culture tends to be risk-averse, with a desire to get things right, hence the slow process. Decisions are
 influenced by the social structure and the concept of the good of the group. Age is associated with wisdom and experience
and decisions are therefore usually made by the most senior members of a company, who tend to hold the power.
● Arab cultures are also, generally speaking, risk averse and hierarchical. Decisions are made from the top, often
following discussion with other stakeholders of equal seniority. Once a decision is made, is it not questioned. Honor,
reputation and relationships are more important than speed or risk. Nepotism, or personal connections, play a strong role
in decision making as Arabs tend to do business with friends and family, not strangers.
(Please refer to the ppt shared for Examples of Business in Japan, Saudi Arabia and Germany, negotiation and negotiation
process)

Understanding Negotiation Styles

Effect of culture on Business

Cultural Imperatives: Refers To Those Business Customs And Expectations That Must Be Met And Conformed To Or
Avoided If Relationships Are To Be Successful. For Example, In Japan Prolonged Eye Contact Is Considered Offensive And
It Is Imperative That It Must Be Avoided. However With The Arab And Latin American Executives, It Is Important To Make
Strong Eye Contact Or You Run The Risk Of Being Seen As Evasive And Untrustworthy.

Cultural Electives: Customs That You May Conform To, But You Don’t Have To. This Adaptation Could Be Helpful For
Business. Danes Love And Adore Their National Flag. If You Bring A Homemade Cake With The Danish Flag, They Will Be
Overwhelmed. Proud Of Their Language. If You Say Just A Short Sentence In Danish Like “ How Are You? ( Hvordan Har
Du Det?) , They Would Be More Than Happy. In The Czech Republic, Liquor Is Offered At The Start Of Business Meetings,
Even If It Is 8 Am In The Morning. It Is To Build Friendship And Trust, So Politely Accept And Take A Ceremonial Sip.
Arabs Will Offer Coffee As A Way To Signal Friendship, So You Should Also Accept It Even If You Don’t Intend To Drink
It
Negotiation
Management’s Ability To Negotiate Productively Effects Their Ability To Implement Strategies. Negotiation Is The Process
Of Discussion By Which Two Or More Parties Aim To Reach A Mutually Acceptable Agreement. Across more Complex
Because Of The higher Number Of Stakeholders Involved. The Negotiation Process:
1. Preparation
2. Relationship Building
3. Exchange Of Task Related Information
4. Persuasion
5. Concessions And Agreement

Stage 1 – Preparation
• The Entire Context And Background Of Their Counterparts
• To The Specific Subjects To Be Negotiated
• Differences In Culture, Language, And Environment.
• Managers Must Have An Understanding Of Their Own Negotiating Style
• The Kinds Of Demands That Might Be Made
• The Composition Of The Opposing Team and Develop A Profile Of Their Counterparts.
• The Relative Authority That The Members Possess.

Stage 2 - Relationship Building –

Taking Time To Build Mutual Trust Before Starting Business Discussions. May require middlemen. Be Prepared To Wait For
The Other Party To Start Business Negotiations

Stage 3 - Exchanging Task Related Information

Each Side Makes A Presentation And States Its Position, Normally Followed By A Question-And-Answer Session. Role
Reversal: Showing An Understanding Of The Other Party’s Viewpoint And Needs

Stage 4 - Persuasion
Both Parties Try To Persuade The Other To Accept More Of Their Position While Giving Up Some Of Their Own; There Are
Recognizable Tactics For This Stage Stressful Tactics

Stage 5 - Concessions And Agreements

Each Side Will Make Various Concessions So That An Agreement Can Be Reached And Signed

Situational Leadership
1. Directive/ Task Behaviour:Clearly telling people What Where When How to do it and then closely
supervising their performance
2. Supportive/Relationship Behaviour: Listening to people, Providing support and encouraging their efforts,
Facilitating their involvement in Problem solving and decision making
3. Charismatic Leader: An enthusiastic, self-confident transformational leader able to clearly communicate his
vision of how good things could be. Being excited and clearly communicating excitement to subordinates.
Openly sharing information with employees so that everyone is aware of problems and the need for change.
Empowering workers to help with solutions. Engaging in the development of employees by working hard to
help them build skills.

Types Of Leadership Style

European Managers Tend To Be More People-Oriented Than American Or Japanese Managers. Japanese Managers Are
Group-Oriented, While US Managers Focuses More On Profitability.

Autocratic:
• Leader Makes Decisions Without Reference To Anyone Else
• High Degree Of Dependency On The Leader
• Can Create De-Motivation And Alienation Of Staff
• May Be Valuable In Some Types Of Business Where Decisions Need To Be Made Quickly And Decisively

Democratic:
• Encourages Decision Making From Different Perspectives – Leadership May Be Emphasised Throughout The
Organisation
• Consultative: Process Of Consultation Before Decisions Are Taken
• Persuasive: Leader Takes Decision And Seeks To Persuade Others That The Decision Is Correct
• May Help Motivation And Involvement
• Workers Feel Ownership Of The Firm And Its Ideas
• Improves The Sharing Of Ideas And Experiences Within The Business
• Can Delay Decision Making

Laissez-Faire:
• ‘let It Be’ – The Leadership Responsibilities Are Shared By All
• Can Be Very Useful In Businesses Where Creative Ideas Are Important
• Can Be Highly Motivational, As People Have Control Over Their Working Life
• Can Make Coordination And Decision Making Time-Consuming And Lacking In Overall Direction
• Relies On Good Team Work
• Relies On Good Interpersonal Relations

Paternalistic:
• Leader Acts As A ‘father Figure’
• Paternalistic Leader Makes Decision But May Consult
• Believes In The Need To Support Staff

Motivation In Organizations
• Motivation Is Defined Simply As What Causes People To Behave As They Do.
• There Is A Lack Of A Single Commonly Accepted Meaning Of Motivation And Organizational Development—
• However There Are Some Areas Of Consensus
• Motivated Behavior Is Goal-Directed Behavior
• Motivation Is Limited And Directed By Situations And Environments In Which People Find Themselves

Theories And Perspectives On Motivation

1. Maslow's Hierarchy Of Needs

• A Basic Assumption Of This Model Is That Humans Are Perpetually Wanting For More.
• The Level Does Not Need To Be Fully Satisfied Only That It Must Be Partially Or Adequately Satisfied

2. Mcgregor (1957) Theory X And Theory Y

Theory X Assumptions:
• People Are Naturally Lazy And Work As Little As Possible
• Workers Lack Ambition, Avoid Responsibility And Preferred To Be Led
• Employees Are Interested Only In Their Own Needs And Not The Needs Of The Organization
• People Are Resistant To Change
• Workers Are Basically Gullible And Not Very Bright
Theory Y Assumptions:
• People Are Not Passive By Nature And Are Capable Of Self- Control And Self-Direction
• Work Is Natural And Pleasurable
• Workers Are Not Resistant To Change And Will Work Towards Organizational Goals
• People Seek And Accept Responsibility
• Delegation, Job Enlargement And Participative Management Are Consistent With Theory Y Assumptions

3. Herzberg (1968) Two-Factor Or Motivation-Hygiene Theory

• Factors That Produce Job Satisfaction Or Motivation Are Different Than Factors That Lead To Dissatisfaction
• Motivating Or Intrinsic Factors Are Those Associated With The Nature Of The Work Itself –
• Achievement, Recognition, Challenging Work, Responsibility And Growth
• Low-Level Needs, Called Hygiene Or Extrinsic Factors Do Not Lead To Motivation, They Only Lead To Dissatisfaction
• Hygiene Factors Such As Pay Or Working Conditions, Supervision, Interpersonal Relations, Status And Security Can
Cause Dissatisfaction
• Satisfying These Needs However Will Not Lead To Motivation
• Skill Variety -- -- The Job Requires Wearing Skills, Activities, Tasks, And Talents
• Task Identity -- -- The Job Allows Completion Of A Whole And Identifiable Piece Of Work Or Work Product
• Task Significance -- -- The Work Is Important And Has A Positive Impact Or Others In And Outside Of The Organization
• Autonomy -- -- The Workers Have A Degree Of Discretion And Control Over Their Work
• Feedback -- -- The Work Provides Directing Clear Information On The Effectiveness Of Performance

4. Participation As A Motivator
• A Participative Approach Is Positively Related To Employee Motivation And Performance
• This Can Be Seen As A Continuum From Authoritarian To Democratic
• Democratic Systems Management Has Complete Confidence In Trust And Workers
• Workers Are Motivated By Participating In Goal Setting, Development Of Reward, Improving Methods And Evaluating
Goal Attainment

UNIT 5: TECHNOLOGY AND KNOWLEDGE ENVIRONMENT

Technology comprises a systematically developed set of information, skills, and processes that are needed to create ,
develop and innovate products and services. Technology transfer is the movement of technology from one person to
another, one unit to another, or from one company to another. Technology competence important not only for sustaining
international competitiveness, but also for emerging economies.

Sophistic technologies are transferred to these countries when prevailing economic conditions are appropriate. Transfer of
technology also has to meet local objectives and priorities such as government regulations, export requirements and
licensing agreements. One of the key factors that influence technology is the extent of capital participation and payments
of technology as agreed upon by the two countries

Global corporations emphasize technology transfer among subsidiaries

International and global companies compete fiercely to launch new technologies today. Concentrate on 3 types:

1. Product-embodied technologies are transferred by transferring the physical product itself.

•Example: Japan transfers heavy earth-tilling machinery and related products, such as bulldozers, to a country such as
Kuwait or Argentina.
•Global corporations from industrialized countries as well as those in emerging economies such as India, Brazil, and
China transfer technologies to countries that are less developed and are able to pay for such technologies.

2. Process-embodied technology: Transferring blueprints or patent rights of the actual scientific processes
and engineering details from the developer to another.
•Example: transfer of chemical technology for the manufacture of synthetic fabrics and offshore oil exploration
technology. Texaco transfers oil drilling technology to its subsidiaries in Saudi Arabia or Nigeria using internet or by
trained technical personnel who physically carry the manuals and procedures with them

3. Person-embodied technology: Transferring through continuous dialogue between the supplier and the
recipient organizations pertaining to the nature, diffusion and utilization of scientific details that are hard
to articulate in the form of either process or product. Series of exchanges may be needed for a global
company.
•Example: Bechtel in San Francisco transferred its technology for creating Nuclear Power plants to a company located in
Bombay, India or Seoul, South Korea.

Factors Causing Difficulty in Technology Transfer

1. Differences in strategic thinking
2. Characteristics of the technology involved
3. Differences in organizational and corporate cultures
4. Differences in societal cultures

Rate of Innovation and New Technology Creation

Knowledge
“Fluid mix of experience, values, contextual information, and expert insight that provides a framework for evaluating and
incorporating new experiences and information”

Features of Knowledge (summarized by Nonaka and Takeuchi)

First, knowledge, unlike information, is about beliefs and commitment. Knowledge is a function of a particular stance,
perspective, or intention. Second, knowledge, unlike information, is about action. It is always knowledge ‘to some end.’
And third, knowledge, like information, is about meaning. It is context-specific and relational.

Intellectual Capital of a global corporation is the sum total of its stock of knowledge, which is described in procedures
and manuals as well as systematically embedded in its unique culture and in the individuals of the organization. Human,
Structural, Relational
Tacit knowledge: Highly personal, difficult to communicate, and highly specialized. It is hard to process and transfer
because it is a part of the historical and cultural context in which the organization exists.
Explicit knowledge: Can be written and transmitted. It is discrete or digital, stored in repositories such as libraries and
databases.

Spiral of Knowledge Creation

Knowledge Management Life Cycle

Knowledge has a life cycle. New knowledge is born as uncertainty thing, and it form into shape as it is tested, matures
through implementation in reality, is diffused to a growing user, and finally becomes broadly understood and recognize as
common practice.
1. Creation: People cannot define or understand completely the idea or emerging knowledge, even for the person who
proposes it due to the perplexing nature of knowledge creation. Knowledge creation with respect to its commercial
viability can be tested at the early stage of the life-cycle. A nurturing business environment that is open to new ideas and
adaptable to changes is necessitated for creativity and experimentation. In order to create that culture, adjustments must be
made in the following areas:
A. Informal Knowledge System: Management must grant level of access, rewards and options to grant the
employees the privileges and responsibilities to experiment, and open access to training programs and
conferences in order to develop knowledge effectively.
B. Information Technology Systems: Collaboration tools and knowledge base library to be accessed,
utilized via Intranet, Extranet, Internet, Cloud and portable computing must be provided to technology
driven workforce – who have an interest in sharing the new idea at the highly specialized forums – rather
than to codify and store emerging knowledge which have little value.
C. Human Resources: HR department should hire people willing to adopt the knowledge management
system and its application.
D. External Relationship: Contacts with the customers or external suppliers can be the stimulants for
development of new ideas in synergistic partnership.

2. Mobilization: Continuous knowledge improvement will lead to further value extraction for the organization. Firms
must mobilize knowledge internally and protect its Intellectual property’s. The approaches are detailed as following:
A. Informal Knowledge System: Internal company networks must be created so that the employees can
transfer the knowledge through experience.
B. Information Technology Systems: The IT department will implement and maintain a collaboration
resource such that meet the needs of users’ base to create, share, access, and commenting on subjects of
interest as easily and securely as possible.
C. Human Resources: Thinkers, doers, mavericks and pragmatists are needed in order to fully transform
new ideas into valuable knowledge.
D. External Relationships: Evolving interaction fostered by close relationship with customers and partners
will be as vital.
3. Diffusion: Actualization and commercialization of the ideas and knowledge accumulated and improved upon earlier. So
there will be a diffusion of the knowledge out of the firms to paying customers who place a value toward the attainment of
the knowledge in question. Again, managers should be aware of following facets:
A. Informal Knowledge Systems: Standardized knowledge can be more easily transferred and adopted.
Thus firms must emphasize on employees training and knowledge application.
B. Information Technology Systems: During this state, the extensive knowledge databases will be very
helpful for the companies through the diffusion and commoditization stages. Ease of access to
information will enhance the firms’ competitive advantages.
C. Human Resources: Knowledge workers must realize the importance of application of knowledge base to
solving customer’s problems and concerns.
D. External Relationship: Great businesses derive maximum profit while satisfying the needs of increasing
customer base in a sustaining economic sector. Firms must increase their goodwill via PR campaign to
leverage brand image and product & services’ values.

4. Commoditization: Basic knowledge is already diffused completely and the firm must manage to maintain it efficiently.
There are various chances to extract value from current knowledge that has reached commodity status. Extraction
techniques are
A. Informal Knowledge Systems: In this state, higher grading is credited to formal knowledge systems. The
organizations must concentrate on supplying best practices that can add more value to well-developed
processes. Moreover, the company’s systems are necessary to encourage new ways of commercializing
existing knowledge.
 B. Information Technology Systems: Effort is dedicated to the development of querying and retrieval
techniques of existing databases. The efficient of the system is as effective to the filtering of irrelevant
data which have accrued overtime.
C. Human Resources: Demand for knowledge and experience is lessened at this stage, thus contract
employees can be quickly trained to perform application built upon the knowledge base where human
interaction is a necessity(ie. Out-call center, support and sales department).

Laws of the fifth discipline

Peter Senge propounded five disciplines to create a Learning Organization. The fifth Discipline, System Thinking, is the
one discipline that binds the other four and therefore the discipline where the focus of Change Management should be.
1. SYSTEMS THINKING: Business and other human endeavors are also systems. They are bound by interrelated
actions. As humans are a part of the network, it is difficult to see the whole pattern of change instead we tend to focus on
snapshots of isolated parts of the system. Conceptual framework, a body of knowledge and tool's that has been developed
over a period of time to make the full patterns clearer and to help us see how to change them effectively.
2. PERSONAL MASTERY: Special level of proficiency. people with a high level of personal mastery consistently
realize the results that matter most deeply to them. Personal Mastery is the discipline of continually clarifying and
deepening our personal vision, of focusing our energies, of developing patience and of seeing reality objectively.
3. MENTAL MODELS: Deeply ingrained assumptions generalizations or even pictures, images that influence how we
understand the world and how we take action. The discipline of working with mental models starts with turning the mirror
inward, learning to unearth our internal pictures of the world. Includes the ability to carry on meaningful conversations
where people expose their own thinking effectively.
4. BUILDING SHARED VISION: One idea about leadership that has inspired organizations for thousands of years is
the capacity to hold a shared picture of the future we seek to create. Some Organizations like IBM had service, Polaroid
had instant photography, Ford had public transportation for the masses and Apple had Computers for us. Though radically
different in content and kind, all these organizations managed to bind people together around a common identity.
5. TEAM LEARNING:Group Effectiveness> Individual position

Learning Organization and its Characteristics

An organization which facilitates the learning of its employees so that the organization can continuously transforms itself.
Learning organization develops as a result of the pressures which are being faced by the organizations these days for
enabling them to remain competitive in the present day business environment. The learning organization encourages to a
more interconnected way of thinking. Such organization becomes more like a community for which employees feel a
commitment to. Employees work harder for the organization since they are committed to it. The concept of the learning
organization is commonly used for organizational success in a dynamic global economy. The concept of learning
organization is increasingly relevant given the increasing complexity and uncertainty of the organizational environment.
In the words of Senge: “The rate at which organizations learn may become the only sustainable source of competitive
advantage”.

An organization needs to learn to survive and prosper in changing and uncertain environment. It needs its managers to
make right decisions through skill and sound judgment. Successful decision-making requires the organization to improve
its capability of learning new behaviours over a period of time. This learning in the organization is a fighting process in
the face of swift pace of change. In this battle managers are responsible for increasing the awareness and the ability of the
organizational employees to comprehend and manage the organization and its environment. In this way they can make
decisions that continuously secure the organization to reach its goals.

However, most managers know how to ensure the organizational learning, but fail to understand how to make their
organization a learning organization. Individuals and groups learn, and when conditions and systems are well designed. In
a learning organization, their learning can be shared across the organization and incorporated into its practices, beliefs,
policies, structure and culture. The role of a leader in the learning organization is that of a designer, teacher, and steward
who can build shared vision and challenge prevailing mental models. He is responsible for building in which the
employees are continually expanding their capabilities to shape their future — that is, leaders are responsible for learning.
The basic rationale for a learning organization is that in situations of rapid change only those that are flexible, adaptive
and productive will excel. For this to happen, it is argued, the organization needs to ‘discover how to tap employee’s
commitment and capacity to learn at all levels’. The learning organization aims to bring new ideas, debate issues,
introduce innovative methods and offer case studies to others. Over time, the notion of “learning organization” as an
idealized and apolitical ‘end-state’ rather than as a process, has increasingly gained uncritical acceptance. he key
ingredient of the learning organization is in how the organization processes its managerial experiences. A learning
organization learns from the experiences rather than being bound by its past experiences. In the learning organization, the
ability of the organization and its managers is not measured by what it knows (that is the product of learning), but rather
by how it learns — the process of learning. Management practices encourage, recognize, and reward with openness,
systemic thinking, creativity, a sense of efficacy, and empathy. While all the employees have the capacity to learn, the
structures in which they have to function are often not conducive to reflection and engagement. Furthermore, the
employees may lack the tools and guiding ideas to make sense of the situations they face. Hence the learning organization
which is always aspiring for success in its operation is to create a future that requires a fundamental shift of mind among
its employees. The dimension that distinguishes a learning organization from more traditional organizations is the mastery
of certain basic disciplines or ‘component technologies’.

Advancements in technology
Technology is evolving rapidly. Artificial intelligence, geotargeting, automation, and other advancements in information
technology specifically set the stage for more technological evolution. Robotics are becoming smarter, and even our
thermostats and refrigerators can be connected to the internet.
UNIT 6: GLOBAL MACROECONOMIC ENVIRONMENT
3 global organizations that play a major role in international economic relations are:
1. The International Monetary Fund (IMF)
2. The World Bank
3. WTO (WTO)
The common goals of international financial institutions are:
1. To reduce global poverty and improve peoples living standards and conditions
2. To support sustainable economic social and institutional development
3. To promote regional cooperation and integration

The International Monetary Fund (IMF)

•Founded by 29 nations (1945) at the Bretton Woods meetings between the Allies in July 1944
•The 184 member (2006) IMF is the central monetary institution in today’s international economy
•Funding for the IMF comes from its membership fee, or quota (the price of membership)
–depends on the member’s size and status
–determines the member’s voting weight
Functions of the IMF:
-Prevents crisis in a financial system by promoting sound macroeconomic policy, which includes
-Balanced expansion of trade
-Stable exchange rates
-Avoidance of competitive devaluations
-Orderly corrections of Balance of Payments problems
A Financial crisis occurs when a country runs out of foreign exchange reserves, which are a major currency or gold that
can be used to pay for imports and international borrowings
In the event of a financial crisis,
Members borrow against IMF quotas
IMF conditionality: Requirement for the borrowing member to carry out economic reforms in exchange for a loan

The World Bank

•Founded in 1944 as the International Bank for Reconstruction and Development (IBRD)
•IBRD and International Development Association (IDA) comprise World Bank
•Has same membership and similar structure to IMF
•Member’s voting rights are proportional to number of shares owned
•Original purpose: To provide financing mechanisms to rebuild Europe after World War II
•Main function today: Assisting development in non-industrial economies

General Agreement on Tariffs and Trade (GATT)

•Began with 23 nations in 1946 when the International Trade Organization (ITO) was established
•The General Agreement on Trade and Tariffs (GATT) followed in 1950 based on the following principles:
- National treatment: Imports must be given similar treatment on the domestic market as
domestically produced goods
- Nondiscrimination: Enshrined in the concept of most favored nation (MFN); every WTO
member must treat every other member as it treats its most favored trading partner
•The GATT functioned through trade rounds: Times when countries periodically negotiate a set of incremental tariff
reductions
• other issues included:
- Problems with dumping
- Subsidies to industry
- Nontariff barriers to trade

From GATT to World Trade Organization (WTO)

•The Uruguay Round established the WTO (1994)
–WTO members meet every two years to set WTO policy objectives
–Has a more effective dispute settlement mechanism
–Monitors national trade practices more consistently
–Members : 164 members since 29 July 2016 .

World Trade Organization (WTO): Replaced GATT in 1995

•The Doha Round/Doha Development Agenda (2001-2006)
–Focused on trade issues of importance to developing countries
–Key issues of Doha Development Agenda:
-Farm subsidies in high income countries of Europe, US, and Japan
-Greater market access by developing countries and strong farm sector high income
countries
-Trade in services
-Problems poor countries face in implementation
•Formation : 1 January 1995; 27 years ago
•Type: International trade organization
•Purpose Regulate international trade
•Headquarters: Centre William Rappard, Geneva, Switzerland
•Region served: Worldwide
•Membership: 164 member states
•Official language: English, French, Spanish
•Director-General: Roberto Azevêdo

Economic Integration :has been one of the main economic developments affecting international trade in the last years.
Countries have wanted to engage in economic cooperation to use their respective resources more effectively and to
provide large markets for member-countries of the resulting integrated areas. It has been a predominant feature of the
contemporary global economy. The econ integration brings together countries based on collaboration, flexibility, risk and
cost, shared interest and objectives. It has led to a relocation of resources across sectors and space.

Three levels of Economic Integration

1. Global: Trade liberalization by GATT or WTO
The General Agreement on Tariffs and Trade (GATT) was first signed in 1947. This agreement was designed to provide
an international forum that encouraged free trade between member states by regulating and reducing tariffs on traded
goods and by providing a common mechanism for resolving trade disputes.
WTO (WTO) came into being in 1995. It is the successor to the GATT. Now it is the only global international organization
dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of
the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters,
and importers conduct their business.
Location-Geneva, Switzerland
Members—153 countries
Regional: preferential treatment of member countries in the group (NAFTA)
Bilateral: preferential treatment between two countries

2. Four types of economic integration

Groups or countries are coming together all over the world with the idea of defending themselves economically against
the incursions of other blocks in the area.
a) FTA (free trade area)—
• is the least restrictive and loosest form of economic integration among nations.
• In a free trade area all barriers to trade among members countries are removed.
• Each member country maintains its own trade barriers.
• free and open trade among members
• no internal tariffs among members, but each country imposes its own external tariffs to the third country.
–NAFTA (North America Free Trade Agreement)
• 1994; free trade area among the US, Canada and Mexico.
–AFTA (ASEAN-(Association of South east Asian Nations) Free Trade Area)
• Signed in 1992 Singapore; originally 6 countries
–EFTA (European Free Trade Area)
• 1960, Austria, Denmark, Norway, Sweden, Portugal, Switzerland and UK

b) Customs union :
• is one step further in the economic integration process.
• In addition to free trade, customs union establishes a common trade policy with respect to non-members.
• Typically this takes the form of a common external tariff, whereby imports from non-member are subject to the
same tariff when sold to any member country.
• no internal tariffs and common external tariffs
Mercosur (Southern Common Market) Formed in 1991 by Brazil, Argentina, Paraguay and Uruguay
CACM (Central American Common Market) 1960, Guatemala, El Salvador, Honduras, Nicaragua
CARICOM (Caribbean Community and Common Market) 1973, 15 members

c) Common market
• The common market has the same features as a customs union, but, in addition, factors of production (labour,
capital and technology) are mobile among members.
• Restrictions on immigration and cross-border investment are abolished.
• free movement of products and factors (resources), which is customs union plus factor mobility
EU (European Union – previously Euro Econ Community)

d) Economic union
• it is the last step in an economic integration process.
• In addition to free movement of goods, services and production factors, it also requires integration of economic
policies, both monetary and fiscal.
• Under an economic union members harmonize monetary policies, taxation and government spending.
• In addition, a common currency is used by members and this could involve a system of fixed exchange rates.
• common market plus common currency
• coordination of fiscal and monetary policy
EMU (Economic and Monetary Union)

3. Economic effects of economic integration

Econ integration brings significant benefits, more efficient allocation of resources
• Static effects: Short-term effects
– Better use of existing resources
– Trade creation: production shifts to more efficient member countries from inefficient domestic or outside countries.
• Specialization, comparative advantage
• Dynamic effects: Long-term effects
– Cost reduction due to economies of scale
– Cost reduction due to increased competition.
– Both producers and consumers benefit from more efficient allocation of resources as a result of integration

The World Bank is an international financial institution that provides loans and grants to Govt.s of low- and
middle-income countries for the purpose of pursuing capital projects. The World Bank provides loans to developing
countries to help tackle poverty and more recently inequality (which for some reason it calls “shared prosperity”). They
have two aims for the global economy by 2030: to end extreme poverty and foster growth in the incomes of the bottom
40% for every country. The World Bank is not really a bank - it's more a way for the countries of the world to borrow
money as cheaply as possible, so that developing countries can take out cheap loans to help tackle poverty and
inequality. It gets its money from borrowing on international capital markets. The 188 countries that are members of the
World Bank each declare a certain amount of money that they are willing to pay into the Bank. This gives the bank the
money and security to basically borrow as cheaply as possible from international credit markets. If you are an investor,
you know that the World Bank is a pretty safe place to lend your money, as it is backed up by all the world’s richest
countries. As the World Bank can borrow very cheaply, it means it can lend out loans to developing countries at a very
low interest. So in short, it's a way for developing countries to access cheap loans, which they would never be able to do in
the normal credit markets, as they would be seen as too risky borrowers. Consists of 5 organizations:

1. The International Bank for Reconstruction and Development: lends to governments of middle-income and
creditworthy low-income countries.
2. The International Development Association: provides interest-free loans called credits and grants to governments of
the poorest countries. Together, IBRD and IDA make up the World Bank.
3. The International Finance Corporation: largest global development institution focused exclusively on the private
sector. We help developing countries achieve sustainable growth by financing investment, mobilizing capital in
international financial markets, and providing advisory services to businesses and governments.
4. The Multilateral Investment Guarantee Agency: (MIGA) created in 1988 to promote foreign direct investment into
developing countries to support economic growth, reduce poverty, and improve people’s lives. MIGA fulfills this mandate
by offering political risk insurance (guarantees) to investors and lenders.
5. The International Centre for Settlement of Investment Disputes: (ICSID) provides international facilities for
conciliation and arbitration of investment disputes.

How the World Bank Group is helping countries address COVID-19 (coronavirus)
As countries around the world work to contain the spread and impact of COVID-19, the World Bank Group has
mounted the largest crisis response in its history to help developing countries strengthen their pandemic response.
With the pandemic’s rapid spread into developing countries, the World Bank Group is working hard to deliver support to
clients. Since the start of the COVID-19 crisis, the Bank Group has committed over $157 billion to fight the impacts of
the pandemic. Provided from April 2020 to June 2021, it includes over $50 billion of IDA resources on grant and highly
concessional terms. Our support is tailored to the health, economic, and social shocks that countries are facing.

The Bank Group’s support is helping over 100 developing countries save lives and detect, prevent, and respond to
COVID-19. The financing is also helping address the health emergency, strengthen health systems, protect the poor and
vulnerable, support businesses, create jobs and jump start a green, resilient, and inclusive recovery. The World Bank is
making $20 billion available to help developing countries finance the purchase and distribution of COVID-19 vaccines.
In addition, the Bank has partnered with COVAX on a new financing mechanism that will let COVAX make advance
purchases – beyond the fully subsidized doses they are receiving from donors – to help speed up the vaccine supply.

We are also partnering with the Africa Union to provide desperately needed vaccines: our support to the Africa Vaccine
Acquisition Task Team (AVATT) initiative will help countries purchase and deploy vaccines for up to 400 million people.

IFC is providing $4 billion through its Global Health Platform to increase the supply and local production of vaccines and
personal protective equipment in developing countries. IFC is supporting COVID-19 vaccine manufacturing in low- and
middle-income countries, especially in Africa. It has partnered with French, German, and U.S. development finance
institutions on a €600 million investment in South Africa’s Aspen Pharmacare, which is playing a major role producing
COVID-19 treatments, therapies, and vaccines on the African continent.

In addition to ongoing support for health systems, our operations emphasize social protection, especially through cash
transfers, as well as poverty alleviation and policy-based financing. The World Bank is also working to restructure,
redeploy, and reallocate existing resources in projects it finances.
The World Bank Group’s crisis response comprises three stages – relief, restructuring, and resilient recovery. It
focuses on four main areas:
Saving lives – We are helping countries stop transmission, deliver health services, ensure vulnerable households’ access
to medical care, and build readiness for future pandemics. Low-and middle-income countries need fair and equitable
access to vaccines, and the Bank Group is helping make sure they don’t get left behind. We have vaccination programs
amounting

to $7.5 billion approved for 67 countries. The Bank, along with the World Health Organization, helped Yemen establish 37
isolation units and supply medicines and medical equipment. It also supported training and deployment of rapid response
teams to 84 high priority districts, where they are helping detect and respond to COVID-19.

Protecting poor and vulnerable people – We are supporting income and food supplies for the most vulnerable as well as
employment for poorer households, informal businesses, and microenterprises. We are helping communities and local
governments cope with crisis impacts, improve and expand services, and build resilience for future shocks. The Bank is
supporting Ecuador’s efforts to meet the challenges of the pandemic by creating additional fiscal space, increasing labor
flexibility, and protecting migrants using targeted social programs. The first phase of the emergency transfer program
delivered two monthly installments of $60 to 400,000 vulnerable households that were not already benefiting from social
assistance programs; another 422,000 households received a $120 one-time payment in May–June 2020.

Ensuring sustainable business growth and job creation – We are providing policy advice and financial assistance to
businesses and financial institutions, to help preserve jobs and ensure that companies, especially small and medium
enterprises, can weather the crisis and return to growth. We are working with Central African Republic to support its
largest cash-for-work program, which has produced 10 million masks while generating livelihood opportunities for about
18,000 people and 300 local firms.

Strengthening policies, institutions, and investments – With an emphasis on governance and institutions, we are
helping countries prepare for a resilient recovery. Working closely with the IMF, we are helping countries manage public
debt better, make key reforms in financial management, and identify opportunities for green growth and low-carbon
development as their economies recover. The Bank is helping Bangladesh expand its electronic procurement to all
government procurement activities. To respond to the pandemic and any other future emergencies, the financing will
enable key upgrades, including international bidding, direct contracting, framework agreement, electronic contract
management and payment, procurement data analytics, and geo-tagging.

IFC is deploying $8 billion in fast-track financing, with the goal of sustaining businesses, preserving jobs, and helping
the private sector contribute to an inclusive, sustainable, and resilient recovery. Much of this funding has helped micro,
small, and medium businesses, which are a major source of job creation in developing countries, as well as women
entrepreneurs.

MIGA has launched a $6.5 billion facility to support private sector investors and lenders in tackling the pandemic. It
redirects MIGA’s capacity toward the urgent purchase of medical equipment, working capital for small and medium
enterprises, and support for governments’ short-term funding needs.

Since the 2000s, India has made remarkable progress in reducing absolute poverty. Between 2011 and 2015, more
than 90 million people were lifted out of extreme poverty. However, the COVID-19 pandemic led India’s economy into a
contraction of 7.3%in FY21, despite well-crafted fiscal and monetary policy support. Following the deadly ‘second wave,’
growth in FY22 is expected to be nearer to the lower bound of the range of 7.5 to 12.5%– still putting India among the
fastest growing economies in the world. The pace of vaccination, which is increasing, will determine economic prospects
this year and beyond. Successful implementation of agriculture and labor reforms would boost medium-term growth,
while weakened household and corporate balance sheets may constrain it. The economic slowdown triggered by the
outbreak is believed to have had a significant impact especially on poor and vulnerable households. Recent projections of
GDP per capita growth, taking into account the impact of the pandemic, suggest that poverty rates in 2020 have likely
reverted to estimated levels in 2016.

The informal sector, where the vast majority of India’s labor force is employed, has been particularly affected. As in most
countries, the pandemic has exacerbated vulnerabilities for traditionally excluded groups, such as youth, women, and
migrants. Labor market indicators suggest that urban households are now more vulnerable to fall into poverty than they
were before the onset of the pandemic.

The response of Govt. to the COVID-19 outbreak has been swift and comprehensive. A national lockdown to contain the
health emergency was complemented by a comprehensive policy package to mitigate the impact on the poorest
households (through various social protection measures) as well as on small and medium enterprises (through enhanced
liquidity and financial support).

To build back better, it will be essential for India to stay focused on reducing inequality, even as it implements
growth-oriented reforms to get the economy back on track. The World Bank is partnering with Govt. in this effort by
helping strengthen policies, institutions, and investments to create a better future for the country and the people through
green, resilient an inclusive development.

Economic Outlook: After growing at very high rates for years, India’s economy had already begun to slow down before
the onset of the COVID-19 pandemic. Between FY17 and FY20, growth decelerated from 8.3%to 4.0 percent, with
weaknesses in the financial sector compounded by a decline in the growth of private consumption. In FY21, the economy
contracted by 7.3 percent. In response to the COVID-19 shock, Govt. and the Reserve Bank of India took several
monetary and fiscal policy measures to support vulnerable firms and households, expand service delivery (with increased
spending on health and social protection) and cushion the impact of the crisis on the economy. Thanks in part to these
proactive measures, the economy is expected to rebound - with a strong base effect materializing in FY22 - and growth is
expected to stabilize at around 7%thereafter.

International Monetary Fund (IMF)

The formation of the IMF was initiated in 1944 at the Bretton Woods Conference. IMF came into operation on 27th
December 1945 and is today an international organization that consists of 189 member countries. Headquartered in
Washington, D.C., IMF focuses on fostering global monetary cooperation, securing financial stability, facilitating and
promoting international trade, employment, and economic growth around the world. The IMF is a specialized agency of
the UN

Formation of IMF
The breakdown of international monetary cooperation during the Great Depression led to the development of the IMF,
which aimed at improving economic growth and reducing poverty around the world. The International Monetary Fund
(IMF) was initially formed at the Bretton Woods Conference in 1944. 45 government representatives were present at the
Conference to discuss a framework for postwar international economic cooperation. The IMF became operational on 27th
December 1945 with 29 member countries that agreed to bound to this treaty. It began its financial operations on 1st
March 1947. Currently, the IMF consists of 189 member countries. The IMF is regarded as a key organisation in the
international economic system which focuses on rebuilding the international capital along with maximizing the national
economic sovereignty and human welfare.

Organizational Structure of International Monetary Fund (IMF)

The UN is the parent organization that handles the proper functioning and administration of the IMF. The IMF is headed
by a Managing Director who is elected by the Executive Board for a 5-year term of office. The International Monetary
Fund (IMF) consists of the Board of Governors, Ministerial Committees, and the Executive Board.

Objectives of the IMF

To improve and promote global monetary cooperation of the world.
To secure financial stability by eliminating or minimizing the exchange rate stability.
To facilitate a balanced international trade.
To promote high employment through economic assistance and sustainable economic growth.
To reduce poverty around the world.

Functions of the IMF

IMF mainly focuses on supervising the international monetary system along with providing credits to the member
countries. The functions of the International Monetary Fund can be categorized into three types: Regulatory functions:
IMF functions as a regulatory body and as per the rules of the Articles of Agreement, it also focuses on administering a
code of conduct for exchange rate policies and restrictions on payments for current account transactions.
Financial functions: IMF provides financial support and resources to the member countries to meet short term and
medium term. Balance of Payments (BOP) disequilibrium.
Consultative functions: IMF is a centre for international cooperation for the member countries. It also acts as a source of
counsel and technical assistance.

India & IMF

India is a founder member of the IMF. India’s Union Finance Minister is the Ex Officio Governor on the IMF’s Board of
Governors.. RBI Governor is alternate governor at the IMF. Executive Director Dr. Rakesh Mohan, represent India at IMF.
He also represent three other countries - Bangladesh, Sri Lanka and Bhutan. Each member country also has an alternate
governor. The alternate governor for India is the Governor of the RBI. There is also an Executive Director for India who
represents the country at the IMF. Dr. Rakesh Mohan

Finance Minister is the ex-officio Governor on the Board of Governors of the IMF. RBI Governor is the Alternate
Governor at the IMF. India is represented at the IMF by an Executive Director, currently Dr. Rakesh Mohan, who also
represents three other countries as well, viz. Bangladesh, Sri Lanka and Bhutan.
Why one should read about the IMF?

The international organizations like the International Monetary Fund recur in then news. As of February 2021, the IMF
has been in the news for the following:
Projected the growth rate of India for 2021 to be at 11.5%predicting India to be the fastest-growing economy
IMF is important from the perspective of the GS 3 (Economy) preparation. It is published bi-annually. Understanding
Group of 3 (G3) The Group of 3 was among several free trade agreements that Govt. of Mexico entered into, the largest of
which was the North American Free Trade Agreement (NAFTA). Group of 3 refers to a ten-year free trade agreement
between Mexico, Colombia and Venezuela that began in 1995 and lasted until 2005. The pact covered numerous issues
including intellectual property rights, public-sector investments and the easing of trade restrictions.

IMF and COVID-19 Hub

Emergency Financing – IMF has responded by doubling the countries’ access to its Rapid Credit Facility (RCF) and
Rapid Transfer Financing (RFI) The IMF has two facilities—

Rapid Credit Facility (RCF) created in 2009 and Rapid Financing Instrument (RFI) set up in 2011— that provide
emergency financial assistance to member countries without the need to have a full-fledged program in place. The Rapid
Financing Instrument (RFI) provides rapid financial assistance, which is available to all member countries facing an
urgent balance of payments need. The RFI was created as part of a broader reform to make the IMF’s financial support
more flexible to address the diverse needs of member countries. The RFI replaced the IMF’s previous emergency
assistance policy and can be used in a wide range of circumstances. The Rapid Credit Facility (RCF) provides rapid
concessional financial assistance with limited conditionality to low-income countries (LICs) facing an urgent balance of
payments need. The RCF was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform
to make the Fund’s financial support more flexible and better tailored to the diverse needs of LICs, including in times of
crisis. The RCF places emphasis on the country’s poverty reduction and growth objectives.
Grants for Debt Relief – With this initiative, IMF has reached out to the 29 of its poorest and most vulnerable countries
through its Catastrophe Containment and Relief Trust (CCRT). In March 2020, the IMF adopted a set of reforms to the
CCRT to enable the Fund to provide immediate debt service relief for its poorest and most vulnerable members affected
by the current COVID-19 pandemic and any future pandemics. COVID-19 has dealt a major blow to world’s poorest
countries, causing a recession that could push more than 100 million people into extreme poverty. That is why the World
Bank and the International Monetary Fund urged G20 countries to establish the Debt Service Suspension Initiative. The
DSSI is helping countries concentrate their resources on fighting the pandemic and safeguarding the lives and livelihoods
of millions of the most vulnerable people. Since it took effect on May 1, 2020, the initiative has delivered more than $10.3
billion in relief to more than 40 eligible countries.

Calls for Bilateral Debt Relief – IMF asked the bilateral creditors to suspend debt service payments from the low-income
countries, using its Debt Service Suspension Initiative (DSSI). A key DSSI objective is to provide financial resources to
help eligible countries battle the COVID-19 pandemic. Accordingly, a requirement to participate in the initiative is that the
beneficiary country commits to use these resources to safeguard social, health or economic spending in response to the
crisis. The Debt Service Suspension Initiative (DSSI) means that bilateral official creditors are, during a limited period,
suspending debt service payments from the poorest countries (73 low- and lower middle-income countries) that request
the suspension.

Enhancing Liquidity – For the global financial safety, the International Monetary Organization approved the
establishment of Short-term Liquidity Line (SLL). s demand for liquidity has grown, and global uncertainty has increased,
the IMF has established a new Short-term Liquidity Line (SLL) as part of its COVID-19 response. The SLL aims to
minimize the risk of shocks evolving into deeper crises and spilling over to other countries.

The Short-term Liquidity Line is designed to be a liquidity backstop for members with very strong policy frameworks
and fundamentals, who face potential, moderate, short-term liquidity needs because of external shocks that generate
balance of payment difficulties. This liquidity backstop complements the IMF’s lending toolkit and other elements of the
global financial safety net.

Adjusting existing lending arrangements – The IMF’s focus is also on to adjust its lending arrangements for new needs
rising amid the pandemic.

Policy Advice – Catering to the need for policy advice to the countries to boost the economy in the time of the pandemic.

Capacity Development – The organization has reached out to 160 countries to address urgent issues such as cash
management, financial supervision, cybersecurity and economic governance. The IMF provides technical assistance and
training to help countries build effective economic institutions that can implement the right policies. These capacity
development efforts help countries achieve their growth and development objectives and contribute strongly to their
progress toward their Sustainable Development Goals (SDGs). Capacity development is one of the three core functions of
the IMF and accounts for around a third of its spending.

General Agreement on Tariffs and Trade (GATT) was negotiated in 1947 and first entered into force in 1948. Over the
years, it was modified and amended, but the first major overhaul was the result of the 1986–94 Uruguay Round of trade
negotiations.. The Uruguay Round also changed GATT’s status. Before the round, it was the only multilateral trade
agreement; and it only covered trade in goods. The Uruguay Round expanded the coverage of the multilateral rules to
include services and intellectual property. GATT now stands alongside the General Agreement on Trade in Services
(GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS Agreement) as one of
the agreements of WTO (WTO) which was established on 1 January 1995. From 1947 to 1994, GATT also served another
role — it was a de facto international organization for negotiating and administering the multilateral trade rules. That role
has now formally been taken over by the WTO.
 World Trade Organization (WTO), international organization established to supervise and liberalize world trade. The
WTO is the successor to the (GATT), which was created in 1947 in the expectation that it would soon be replaced by a
specialized agency of the (UN) to be called the International Trade Organization (ITO). Although the ITO never
materialized, the GATT proved remarkably successful in liberalizing world trade over the next five decades. By the late
1980s there were calls for a stronger multilateral organization to monitor trade and resolve trade disputes. Following the
completion of the Uruguay Round (1986–94) of multilateral trade negotiations, the WTO began operations on January 1,
1995.

Functions of World Trade Organization (WTO)WTO is the only organization at the international level that regulates
and monitors trade among participating countries. It sets the rules and regulations for world trade. In the post-globalization
era, with an increase in global trade, the need for a non -biased trade regulating body at the international level was sought.
Established on January 1, 1995, under the Marrakesh Agreement, WTO fulfilled that need.

Why WTO replaced GATT?

GATT was replaced by WTO in 1995. Some of the important reasons were:
1. Driven by rules and multilateral agreements, GATT lacked the institutional structure
2. Trade of services and IPR (Intellectual Property Rights) were not governed by GATT rules and regulations.
3. Dispute settlement mechanism offered by GATT was not robust enough to deal with disputes.

Functions of WTO
1. Operating under the principle of non-discrimination, WTO lowers the trade barriers across countries to
regulate trade through negotiations. It results in lower cost of production which leads to lower cost of
finished goods thereby reducing the cost of living.
2. Functions as a negotiator between countries by making rules that are acceptable to all. Further, it also
provides a dispute resolution channel between countries.
3. Cuts cost of doing business internationally; and also stimulates economic growth and development.
4. Encourages good governance by encouraging transparency in trade transactions.
5. Helps developing countries foster their economies by providing a level playing field for developing trade
relations across countries.

The WTO Agreements are a series of linked agreements dealing with different aspects of trade policy. The centrepiece of
the WTO agreements is an updated version of the original General Agreement on Tariffs and Trade (GATT) from 1948.
This deals with tariffs and other issues relevant to trade in goods. Alongside the GATT sits GATS, the General Agreement
on Trade in Services, which sets out the obligations of WTO members relating to trade in services. Various other sectoral
agreements, such as the Agreement on Agriculture, were negotiated as part of the Uruguay Round of trade talks
(1986–94). The Doha Round, which was supposed to follow the Uruguay Round, did not lead to a comprehensive new
WTO agreement, but some smaller agreements (such as the Trade Facilitation Agreement) were reached.
The WTO is run by its members, of which there are currently 164. Most of them are sovereign states, but some are not:
for example, Hong Kong has been a member separately from both the UK (before 1997) and China (since 1997) because it
has always operated a separate customs regime. The European Union (EU) is a WTO member, as are all of its 27 member
states individually. Unlike the EU, the WTO does not have a commission to enforce the rules. It has a small secretariat to
provide administrative support and advise the membership on technicalities. In addition, the

Issues Related to WTO

1. China’s State Capitalism: The nature of China’s economic system, combined with the size and growth of its economy,
has created tensions in the global trading system. China’s state-owned enterprises present a major challenge to the
free-market global trading system. However, a critical part of the problem is that the rulebook of the WTO is inadequate
for addressing the challenges that China presents in respect of intellectual property, state-owned enterprises and industrial
subsidies. It is due to this US-China are engaged in Trade war.
2. Institutional Issues: The Appellate Body’s operations have effectively been suspended since December 2019, as the
US’s blocking of appointments has left the body without a quorum of adjudicators needed to hear appeals. The crisis with
the dispute settlement function of the WTO is closely linked to the breakdown in its negotiation function.

3. Lack of Transparency: There is a problem in WTO negotiations as there is no agreed definition of what constitutes a
developed or developing country at the WTO. Members can currently self-designate as developing countries to receive
‘special and differential treatment’ – a practice that is the subject of much contention.

4. E-commerce & Digital Trade: While the global trade landscape has changed significantly over the past 25 years,
WTO rules have not kept pace. In 1998, realizing that e-commerce would play a growing role in the global economy,
WTO members established a WTO e-commerce moratorium to examine all trade-related issues relating to global
electronic commerce. Recently, however, the moratorium has been called into question by developing countries because
of its implications for collecting revenue. Moreover, as the Covid-19 pandemic accelerates the shift to e-commerce, rules
to regulate online trade will be more important than ever. But in contrast to trade in goods and services, few international
rules govern cross-border e-commerce.

5. Agriculture and Development: The WTO Agreement on Agriculture, which came into force in 1995, was an
important milestone. Agreement on Agriculture targets reform of subsidies and high trade barriers, which distort
agricultural trade. However, agreement on agriculture is facing issues due to food security and development requirements
for developing countries like India.

Way Forward: New Set of Rules: Modernizing the WTO will necessitate the development of a new set of rules for dealing
with digital trade and e-commerce. WTO members will also have to deal more effectively with China’s trade policies and
practices, including how to better handle state-owned enterprises and industrial subsidies. Environmental Sustainability:
Given the pressing issues around climate change, increased efforts to align trade and environmental sustainability could
help to both tackle climate change and reinvigorate the WTO. Trade and the WTO have key roles to play in efforts to
achieve the UN Sustainable Development Goals (SDGs) and the Paris Agreement climate goals. Also, the WTO can
play a role in reforming fossil fuel subsidies. Eg. the Buenos Aires Ministerial Conference in 2017, a coalition of 12 WTO
members led by New Zealand called on the WTO ‘to achieve ambitious and effective disciplines on inefficient fossil fuel
subsidies that encourage wasteful consumption’.

Conclusion: In future, WTO members will have to strike a balance between moving forward with negotiations on
21st-century issues and keeping sight of the unresolved ‘old trade issues’ such as agriculture and development. WTO
(WTO) is an international organisation that deals with the rules of trade between countries. It was founded in 1995 as a
successor to the General Agreement on Tariffs and Trade (GATT), which came into force in 1948. The WTO describes its
principal function as being to provide a forum for its members to negotiate on trade issues. It operates a body of rules in
the form of the WTO agreements. Finally, it provides a dispute settlement mechanism (DSM) to resolve disagreements
over the rules between members.