International Business
MODULE 1 Stages of internationalisation
• International companies are importers and exporters, they have no
investment outside of their home country.
• Multinational Corporations or Multinational Companies are corporate
organizations that operate in more than one country other than home
country. Multinational Companies (MNCs) have their central head
office in the home country and secondary offices, facilities, factories,
industries, and other such assets in other countries. They have
investment in other countries
• Global companies have invested and are present in many countries.
They market their products through the use of the same coordinated
image/brand in all markets. Generally one corporate office that is
responsible for global strategy. Emphasis on volume, cost
management and efficiency.
• eg Coca cola, McDonalds
• Transnational companies are much more complex organizations. They
have invested in foreign operations, do not have a centralized
management system
• They don't have a central headquarters in one country but give
decision-making, R&D and marketing powers to each individual
foreign market.
• Apple, Microsoft, Nestlé, Shell, Nike, Amazon, Walmart,Sony
Domestic and International Business
Differences can also be the challenges and risks
• Culture
• Political landscape
• Economic environment – govt policies, inflation, interest rates,
economic growth, etc
• Legal environment
• Currency exchange rates
• Mode of transportation
• Documentation
• Regulations
• Customs duty
• Coca-Cola
• Coca-Cola was created by pharmacist John Pemberton in 1886 at a soda
fountain in Atlanta, Georgia.
• It was used as a tonic for common ailments due, in part, to the addition of
cocaine and caffeine derived from the kola nut, which was a major
ingredient at the time. (This was later removed from the recipe in 1903.)
• Although popular at its inception, Coca-Cola became the company it is
today because of the marketing and business leadership of Asa Griggs
Candler and future investors, who dramatically increased sales and
expanded syrup factory production into Canada.
• Eventually, an independent bottle company licensed the rights to Coca-
Cola’s syrup production and distribution, streamlining production and
generating massive profits.
• Coca-Cola later remarketed for Germany, China, and India, and it’s now
sold everywhere except Cuba and North Korea.
• Coca-Cola currently has over 900 bottling and manufacturing facilities
worldwide, many of which are in North America, Asia, and Africa.
From domestic to international
• McDonald’s
• Two brothers, Maurice and Richard McDonald, converted their drive-through
barbecue restaurant in San Bernardino, California, into a burger and milkshake
restaurant—now known as McDonald’s—in 1948.
• The McDonald brothers focused on creating a better business system geared
toward self-service and efficient and repeatable processes that relied on
heating lamps instead of waiters. This model, known as “Speedee,” led to lower
costs, cheaper products, and faster growth. It became the epitome of “fast
food.”
• Soon after, Ray Croc took McDonald’s a step further by bringing in franchisees
and suppliers, leading to the creation of restaurants across the United States.
McDonald’s model continued to expand, and, in 1967, the company opened
locations in Canada and Puerto Rico.
• McDonald’s has been internationally successful, thanks in large part to the
consistency its business model allows. The fact that a Big Mac tastes the same
regardless of which country you order it in is a testament to the company’s
long history. Today, there are 38,000 restaurants in more than 120 countries.
• https://online.hbs.edu/blog/post/international-business-examples
• Apple
• Apple Inc., founded by Steve Jobs, Steve Wozniak, and Ronald Wayne in
the 1970s
• Headquartered in the United States, Apple designs, develops, and sells
electronics, software, streaming, and online services worldwide.
• Apple opened its first international location in Tokyo, Japan, in 2003
after saturating the American market.
• Under Jobs, Apple touted ease-of-use, innovative design, and customer
loyalty with the marketing slogan, “Think Different,”
• Apple not only sells products internationally but has supply chains from
43 countries that ship supplies to China for final production and
assembly.
• By keeping a tight-knit and strong relationship with suppliers, strategic
inventory, and a focus on sustainability, Apple stands as one of the
world’s most successful companies.
Political Risks
• Forced divestiture: forced divestiture another type of country risk in which
an international firm is forced to divest its business operation
• An example of forced divestiture is the Indonesian subsidiary of French
retail giant Carrefour which has been ordered to sell the 75% stake it
acquired in smaller rival Alfa Retailindo in January 2008.
• Expropriation means a quick action of government to seize the assets of
foreign entity - Coca-Cola launched its plant in cuba in 1906, two years
later, in 1962, the Cuban Revolution started and the production of Coca-
Cola was stopped. Castro's government seized the assets of foreign
companies, so production of Coca-Cola was banned, since then Coca-Cola
has ceased trade with Cuba
• Confiscation - the seizing of a company's assets without payment--General
Motors became the latest U.S. corporation to have a factory seized by the
government of Venezuela
• Nationalisation
• Saudi Arabia paid compensation to the American oil companies that
were shareholders of Saudi Aramco during its gradual nationalisation
in the 1970s.
• In 2017 the Tanzanian government banned the export of certain raw
materials including gold and copper concentrates. International gold
mining company Acacia Mining, which operates three of the largest
mines in Tanzania, late last year said it was considering suing the
Tanzanian government after it had been prevented from exporting for
some 20 months. Acacia also has been faced with fines and
accusations of unethical behaviour which it alleges are unfounded.
The dispute between the mining company and the government
continues.

• https://youtu.be/qK9YtJLOggI - Samsung
• https://youtu.be/18gV8n_c-O8 - Indian MNC s and CEO s What is Globalisation
• Korean white-goods-maker LG and automobile giant Hyundai, and
Japanese automotive giant Suzuki - don't enjoy market leadership in their
very own home countries
• The annual revenues of companies such as Apple, Microsoft, and Walmart
Globalization is defined as the
are so huge in 2017 Walmart earned more than the whole of Belgium.
• Countries with a smaller GDP than Walmart’s annual turnover
increase in the flow of goods,
• Austria, South Africa, Venezuela, Colombia, Thailand, United Arab
Emirates, Denmark, Malaysia, Singapore, Nigeria, Chile, Hong Kong, services, capital, people, and ideas
Egypt, Philippines, Finland, Greece, Israel, Pakistan, Portugal, Iraq, Ireland
• Malta's GDP value in 2016 was $11,278 million. Netflix's revenues in
2017 were $11,693 million.
across international boundaries
• Mauritania's GDP in 2016 was $4,755 million. Spotify's total revenue in
2017 came to $4,794 million.
Drivers of globalisation
1.Technological drivers – ICT - This has reduced the costs of
transporting goods, services, and factors of production and of
communicating economically useful knowledge and technology.
2.Political Drivers
• Regional Integration- Trade Blocs – ASEAN,BRICS
• Government policies – EXIM, FDI, SEZ, EOUs - promote free trade,
foreign investment, and economic liberalization. DGFT website
• Reduced Trade Barriers – WTO, Bilateral agreements
Pros
1. Economic Growth
• Access to labor
• Access to jobs
• Access to resources: Smartphones, for example, are dependent on
rare earth metals found in limited areas around the world.
2. Increased Global Cooperation
3. Increased Cross-Border Investment -Foreign investment also often
comes with, or in the form of, technology, know-how, or access to
distribution channels that can help the recipient nations
3. Economic Drivers
• Economic liberalization – India in 1991, other countries…
• Globalization of financial markets – ADRs, GDRs, international bonds,
multicurrency loans…
4. Market drivers
• Changing consumer preferences
• Access to new markets – Export Promotion Councils – MAI,
Exhibitions, trade fairs - focus product-focus country approach
5. Competitive Drivers
• Increased competition
• Growth of Multinational Companies (MNCs)
Cons
1.Increased Competition - Protectionism often takes the form of tariffs,
quotas, or non-tariff barriers, such as quality or sanitation requirements that
make it more difficult for a competing nation or business to justify doing
business in the country.
Scientific phyto-sanitary requirements: Importing countries set the standards
that potential trade partners must meet in order to protect human health or
prevent the spread of pests and diseases
For instance, Japanese imports of US apples are limited to Red and Golden
Delicious apples from Washington and Oregon.
The Japanese, who are mainly concerned with the spread of fire blight,
impose rigorous and costly import requirements on the US apple shippers.
The apples must be subjected to a cold treatment and fumigation with
methyl bromide before shipment to Japan, and three inspections of US apple
orchards during the production stage.
 2. Disproportionate Growth -
• Increasing immigration. Macroeconomically, immigration increases gross
domestic product (GDP), which can be an economic boon to the recipient
nation.
• Immigration may, however, reduce GDP per capita in the short run if
immigrants’ income is lower than the average income of those already
living in the country.
• impose costs on people who may want their government to restrict
immigration to protect them from those costs.
• racism and xenophobia.
• India and IT jobs
3. Environmental concerns –
• Deforestation and loss of biodiversity caused by economic specialization
and infrastructure development
• Greenhouse gas emissions and other forms of pollution caused by
increased transportation of goods
• Political economy is a term that reflects the
interaction between the economic system and
the political system
• India- Democracy- Mixed economy
• US- Democracy – capitalist economy / market
economy
Political • Australia has a mixed economic system -
economy constitutional monarchy with a representative
democracy—Australians vote for members of
parliament to make laws on their behalf
• UK – Constitutional Monarchy- market economy
• North Korea - Totalitarian - Planned economy/
Command Economy

Changing landscape
• Socialist and Communist - Hybrid
• Socialism mixed with democracy- democratic socialist
countries
• The Chinese government and the Chinese Communist Party
Changing (CCP) state that China is democratic
• Democratic socialists - do not think the government should
landscape immediately take control of all aspects of the economy.
• Democratic socialism focuses more on providing basic needs
to all people, such as health care and education.
• Russia moving towards market economy from command
economy
• China- Communist - mixed economy
• Cuba – Communist - mixed command economy
• Laos – Communist -Mixed economy
• Vietnam- a developing mixed socialist-oriented market
economy
 • Socialism and Communism How free are countries Politically ?
• Individuals contribute to society based on their ability to do so.
• Both concepts have the government playing a larger role in
economic planning, investment
• Both also remove private business as a producer of goods and
services
• Individuals under a proper communist system would not
have money and would be given what the government thinks
you need in terms of food, clothing, housing, etc.
• The people would not need to work harder to receive the
same amount as anyone else.
• Under socialism, individuals are compensated based on their
individual contribution; therefore, those who work harder
would receive more.
• Communism views all property as public property, while
socialism allows individuals to still have their own private
property.
• Communism abolishes class distinctions while socialism
allows class distinctions

How free are countries Economically ?

Implications
of changing
political
economy
 Module 2 Cultural Environment Culture in international Business
Interesting Social Customs Around the World
1. Malaysia: Using Their Thumb as a Pointing Finger - using your index
finger to point can be considered rude behavior, Malaysia and Indonesia,
people think that the gesture is incredibly offensive.
2. Greece: Spitting on the Bride – to ward off evil
3. Philippines: Pointing with Their Lips
4. Nigeria: Kneeling When Greeting
5. Denmark: Hanging out in Cemeteries
6. Iceland: Gifting Books for Christmas
7. Japan: Slurping Noodles – in western countries, it is rude to consume
food noisily. However, if you’re in Japan, it is widely encouraged to make
slurping sounds while eating noodles. Many people consider it as a
compliment to how the food tastes.
8. United States: Tipping - it is mandatory to tip at most restaurants.
Servers expect patrons to leave around 10-20% of their total bill.
9. Switzerland: Honesty Stores - milk, cheese, honey, bread, and butter.

Religions and sentiments across the globe

• Christianity, Islam, Hinduism, Buddhism, and Judaism are always
included in the list, being known as the "Big Five".
• other world religions, Sikhism, Taoism, the Baháʼí Faith, Jainism,
Confucianism, Shinto and Zoroastrianism.
• Religious sentiments…. – Anil Ambani consults astrologer
Vijay Mallya visits Tirupati with his new jets
• No Alcohol in Muslim countries
• Islamic banking system is different- No interest - given a share in their
profit
• Hindus- cow is considered sacred- No beef
• Islam and Judaism – prohibits pork

STARBUCKS failure in Australia – case study
• Starbucks since its opening in 1971 has grown to become one of the
largest coffee chains in the world. From Seattle to having franchises
all over the world, the coffee giant has made its name synonymous
with coffee.
• From chilling with friends to working seriously to grabbing your coffee
fix and rushing out, the company has successfully penetrated in other
countries out of the American market.
• However, there was one country where initially Starbucks failed and is
now slowly finding its grip back. – AUSTRALIA
• In 2008, Starbucks had to close down around 70% of its stores down
under - leaving only 23 open.
Ethical Issues in international business
• HP – started operations in India –in 1980s –
• Credo ‘Respect and Trust People” – but had railings in front of the
gate to frisk workers
• Chief - a Singaporean national was shocked to know the reason….
• Starbucks introduction in Australia
• From starting in 2000, Starbucks grew rapidly in the country opening 87
stores from 2000 to2008.
• While the brand was expanding its business, the Aussie’s were finding it
particularly difficult to adapt to the American style of drinking coffee.
• Australians are very specific with their coffee, and prefer either a Flat
White or Australia Macchiato. The Starbucks espresso didn’t quite fit well
with people.
• Starbucks brought with it the American culture of grabbing your coffee and
being out of the door, or sitting in the cafe and working on your laptop for
hours.
• For Australians, coffee is serious and they prefer to enjoy their coffee as
they have it. It’s meeting with friends and enjoying it. The Australian coffee
culture is more about socializing and probably less about coffee.
• Why didn't it work in Australia?
• Scarcity increases value - but Starbucks wasn’t scarce at all and had too
many outlets. But why?
• The reason maybe the company’s decision-makers thought, “Hey, everyone
loves coffee, right? Who’s not going to drink coffee? Let’s open 90 cafes in
an unknown continent in the Southern hemisphere. It’ll be all good.”
• What lacked was the understanding on how the demographics like their
coffee fix and how serious they are about it.
• With any brand starting new in a different country, it is essential to take
into consideration the cultural differences and preferences of the same.
• Products were not customized for the local audience - the menu was too
sweet for Aussies, So they held on to their usual cafes and baristas.
• What works for the people in your country, may not work for the one you
are planning to launch in.
• https://youtu.be/dD5ac-e2SO8- McDonalds in China
• https://taylorwells.com.au/pricing-strategy-of-mcdonalds-in-india/ -
McDonalds in India
• What did Starbucks do to overcome this?
• Even though Starbucks didn’t accept this defeat, it bounced in the
market by changing their target audience from the locals to the
tourists and international students in the country.
• After shutting down the local stores, they opened up in malls and
tourist places in cities like Sdyney and Melbourne, and near major
universities and colleges.
Nike sweatshops case study – Ethical issues
• Nike's made use of factories in South Korea, Mainland China, and Taiwan.
• As their economies developed, the labor cost in these countries rose, leading Nike to open
additional factories in less developed countries such as Indonesia and Vietnam.
• Nike experienced rapid growth after they moved their primary branches of production overseas.
• Record-breaking profits were reported and the number of factories increased to fulfill the
consumers’ demand for Nike products.
• It sub-contracted factories without reviewing the conditions, based on the lowest bid.
• It was not until 1991, when a report by Jeff Ballinger was published detailing their insufficient
payment of workers and the poor conditions in the Indonesian factories, that these sweatshops
came under the media and human rights scrutiny
• In 1996, Life magazine ran a reportage on child labor that included a shocking photo of a 12-year-
old Pakistani boy sewing a Nike football
• In 2003, MicroRevolt was founded by Cat Mazza, a textile artist who engages in Craftivism as part
of an anti-sweatshop movement.
• MicroRevolt created a Nike Blanket Petition. The textile artwork is a 15-foot wide handmade
blanket of the Nike swoosh with 4 x 4-inch squares that made up the Nike logo, which acted as a
signature for fair labor policies for Nike garment workers.
• "Over the five-year period, "anti-sweatshop" squares were stitched into the quilt representing
people petitioning from over 30 countries.
Nike Blanket Petition
• Beginning in 2002, Nike began auditing its factories for occupational
health and safety
• Between 2002 and 2004, Nike audited its factories approximately 600
times, giving each factory a score on a scale of 1 to 100, which is then
associated with a letter grade.
• Most factories received a "B", indicating some problems, or a "C",
indicating that serious problems are not being resolved quickly
enough.
• If a factory receives a "D", Nike threatened to stop producing in that
factory unless the conditions are rapidly improved.
• The company had since allowed human rights groups and
organizations to come into factories and inspect the working
conditions, and wages and speak personally with the workers.
• Nike’s response
• Nike strongly denied the claims in the past, suggesting the company has little control over sub-
contracted factories.
• The backlash and its public relations impact forced the company to change methods, improve
conditions, and implement social
• Later, Nike director Todd McKean stated in an interview admitted the company engaged in
irresponsible practices and could have done more to address the issue before
• Nike began to monitor working conditions in factories that produce their products.
• During the 1990s, Nike installed a code of conduct for their factories. This code is called SHAPE:
Safety, Health, Attitude, People, and Environment.
• The company spends around $10 million a year to follow the code, adhering to regulations for fire
safety, air quality, minimum wage, and overtime limits.
• In 1998, Nike introduced a program to replace its petroleum-based solvents with less dangerous
water-based solvents
• In 1998, Nike attempts to rebrand themselves - Phil Knight (the CEO then) made a statement
during a said "I truly believe the American consumer doesn't want to buy products made under
abusive conditions."
• Nike created a non-governmental organization called the Global Alliance for Workers and
Communities that became aligned with several other groups, including the International Youth
Foundation.
• The organization releases reports about the corporation and its plans to improve current
conditions.
• During covid…
• Since March 2021, a coalition of over 200 unions and labour rights
organizations called upon brands to negotiate directly with unions in
the sector on an enforceable agreement on wage assurance,, and
basic labour rights to fill the pandemic-era wage gap, ensure workers
who are terminated receive their full severance, support stronger
social protections for all workers, and to ensure basic labour rights
are respected.
• Nike has participated into this right!
• Ethical issues at Tirupur ….
 Organisation culture
• Articles
• Comparably.com
• https://youtu.be/jYZPOnsEvvY - MNC Culture
• Google’s corporate culture -
https://www.mbaknol.com/management-case-studies/case-study-
analysis-of-organizational-culture-at-google/
• How do MNCs see Indian employees-
• American Business culture – very Punctual, business cards, firm hand
shaking, women in top positions, secretary not for personal work,
travel a lot, very direct – ‘I do not know’ is appreciated
IKEA – Organisation culture
• KEA is the world-leading design-sell and ready-to-assemble furniture,
applicants and accessories retailer
• Established in Sweden in 1948 and grown since then
• have 433 stores, 211,000 co-workers in 50 countries.
• IKEA was 39th world top brand with $15.3 B value (Forbes, 2019).
• IKEA adopts Franchising that gives the company the ability to grow
internationally
• IKEA has rich and unique pillars of culture, rewards and motivation
management that were built to achieve and maintain additional
success and better performance while still caring for people and
planet.

IKEA’S RICH SWEDISH CULTURE

• IKEA corporate brand, name, colors IKEA rewards

and product range are attached with
its origins management-
• IKEA was named after the initials of its Applying
founder, the farm where he grew up
and the nearby village consequently: Maslow’s
Ingvar Kamprad, Elmtaryd, and
Agunnaryd. hierarchy of
• IKEA logo and employees’ uniforms needs to IKEA
contains blue and yellow colors, the
exact colors of the Swedish flag
IKEA was named Best Employers for four years in a
row and was ranked 72th in the best 100 to work
with in 2017
Cultural and Ethical Issues- IKEA
• IIKEA faced issues contradictory to their claimed culture and to their
ethical and sustainable business which show underestimation and
poor enforcement of cultural differences
• Age discrimination - training and development programs
intentionally discriminate against employees age forty (40) and over
• Law suit filed for promoting young employees
• Violation of the right to unionize- A 2018 Reuters article accused IKEA
of undermining the right to unionise in the US, Ireland and Portugal.
• Involved in scandals of gathering and storing employees’ data
• Additionally, BBC (2017) reported low incomes and bad working
conditions for IKEA lorry drivers.
• In 2019 the IKEA Franchisor website showed the company had operations
in several countries considered by Ethical Consumer to be oppressive
regimes. These were Jordan, Saudi Arabia, China, Thailand, Russia and
Israel.
• The company also failed to have an adequate policy on the sourcing of
conflict minerals
• IKEA is the largest buyer of wood on the planet consuming 21 million cubic
metres of wood in 2019. In June 2020 the non-profit organisation
Earthsight published a report stating that IKEA was selling products made
from wood illegally felled in the forests of the Ukrain which is home to
endangered lynx and bear.
• Inter IKEA’s Sustainability Report FY18 stated that the company retailed
animal and meat products including sourced from cows, pigs, chicken and
fish, No policy was found stating that meat was organic or free range. and
so the company lost a whole mark under Animal Rights.
• Approach to tax - IKEA used the taxation rules in the EU to its benefit. IKEA
managed to avoid an estimated sum of €1 billion over the course of 6 years.
• By meticulously setting up a corporate web of organisations, utilizing
complicated structures, sister companies, monetary transfers and secret
beneficiaries, IKEA dodged taxes by paying royalties, interest, or other charges
to its sister companies and subsidiaries
• The main countries they use for these kind of transfers are Holland,
Lichtenstein, Luxembourg and Belgium
• The worst part is that IKEA isn’t actually doing anything illegal. it’s clear that
the Anti-Tax Avoidance Directive, which was published in January 2016 is
insufficient.
• IKEA spent $40,000 on lobbying in 2018.
• It was also a member of Eurocommerce, WBCSD, and the World Economic
Forum. These were international corporate lobby groups that Ethical Consumer
considered to exert undue corporate influence on policy-makers in favour of
market solutions that were potentially detrimental to the environment and
human rights.
• IKEA also faced issues related to their marketing
• examples are the China advertisement against single women - The
commercial by the Swedish furniture chain shows a mother scolding
her daughter for not "bringing home a boyfriend" to meet her
parents. It attracted accusations of insensitivity towards single
women.
• offending women in Saudi catalogue - IKEA’s Women-free Catalogue
in Saudi Arabia Failed to Protect Company Values and Reputation
• the catastrophic Thai translation of products – An article revealed that
in 2012 Ikea’s team in Thailand found some of the product names had
very inappropriate meanings in the Thai language.
• Products that were named in Swedish had completely different
connotations in Thai. For example, “Redalen” was a bed named after
a Norwegian town, had a very ackward meaning in Thai
• Published a homosexual advertisement in Russia which was rejected
there
 Models of National culture - Single dimension models
High and Low Context Cultures
• People from high context cultures obtain information from personal
information networks.
• People from low context cultures seek information about decisions and deals
from a research base.
Monochronic and Polychronic Cultures
• Monochronic - concentrating on one thing at a time within a set time scale.
Germans, the Finns, and some North Americans are monochronic.
• Polychronic cultures are flexible and unconstrained by concerns with time.
Poly chronic people do many things at once, often in an unplanned or
Opportunistic sequence - Indians, Latin Americans, and Arabs are
polychronic
Multiple Dimension Models
• Hofstede’s Model- National culture could be categorised on the basis
of six variables – how they affect work environment and management
https://youtu.be/mxQ6lCe3jpg
Low trust and high trust societies
• Fukuyama comments that ‘a high trust society can organise its work
place on a more flexible and group- oriented basis, with more
responsibility delegated to lower levels of the organization.
• Low- trust societies, by contrast, must fence in and isolate their workers
with a series of bureaucratic rules.
• Societies that have strong families but weak bonds of trust among
people unrelated to one another will tend to be dominated by family-
owned and family managed businesses
• Countries that have strongly developed high trust societies develop
strong private economic and business in situations that go beyond the
family. - USA and Japan
Module 3 – International trade theories
• Mercantilism
• Mercantilism defines an economic policy or trade practice that countries adopt to
grow their wealth and power by maintaining a favorable balance in trade through
increased exports and decreased imports.
• During the 16th and the 18th centuries, European nations like Great Britain and
France used this policy to import cheaper raw materials from their colonies and
export finished products to them in exchange for gold and silver coins.
• Maintaining a favorable balance in trade
• indicates a zero-sum situation where one country’s loss is necessary for
another’s gain.
• In mercantilistic trading, merchants and the government worked together to
accumulate wealth by restricting imports of foreign-made goods.
 Absolute Advantage
• Adam Smith in his book ---------------- attacked mercantilist theory
• Absolute advantage means more efficient than another country in
producing a product
• Countries must concentrate in products of absolute advantage and
• Gold and silver were the currencies of trade then trade for the other
• English mercantilist writer Thomas Mun • POSITIVE SUM GAME where all participants can benefit
The ordinary means therefore to increase our
wealth and treasure is by foreign trade wherein
we must ever observe this rule: to sell more to
strangers yearly than we consume of theirs in
value

• The principle of absolute advantage refers to

the ability of a party (an individual, or firm, or
country) to produce a greater quantity of a • Comparative Advantage - In his book Principles of Political Economy –
good, product, or service than competitors,
using the same amount of resources. David Ricard took Smith one step further and argued
• Assumptions
• What If a country has absolute advantage in the production of all goods
• Trade between the two countries.
• He took into consideration a two-country and • In that case, according to the theory of absolute advantage, no trade
two-commodity framework for his analysis.
will occur with that other country.
• There is no transportation cost.
• Smith assumed that the costs of the • Comparative advantage - refers to the ability to produce specific goods
commodities were computed by the relative
amounts of labour required in their respective at a lower opportunity cost
production processes.
• He assumed that labour was mobile within a
country but immobile between countries.
• He implicitly assumed that any trade between
the two countries considered would take place if
each of the two countries has an absolutely
lower cost in the production of one of the
commodities.

Calculate how many units of cloth and wine can be produced going by Absolute
Advantage ? Ans 2.25 units of cloth and 2.33 units of wine
 • The opportunity cost of a given option is equal to the forfeited benefits Competitive Advantage – Michael Porter’s Diamond Model
that could have been achieved by choosing an available alternative in
The Porter Diamond Factor Endowments Basic factors of production
comparison. Model explains the
• In the given example factors that can provide Advanced factors of production
a competitive advantage
for one national market
or economy over
another.

•
Firm strategy,
In England structure and
Demand Conditions in the
• The opportunity cost of producing 1 unit of cloth is .80 units of wine Rivalry
home market

• The opportunity cost of producing 1 unit of Wine is 1.25 units of cloth

• In Portugal
• The opportunity cost of producing 1 unit of cloth is .75 units of wine
• The opportunity cost of producing 1 unit of Wine is 1.33 units of cloth
Related and supporting
• England has absolute advantage in both, But will choose the one in which it industries
has lower opportunity cost ……. Wine

1.Factor Endowments 2. Demand Conditions in the home market

• Factor conditions are those elements that Porter believes a country's economy • indicates how the increase in demand for an item among local
can create for itself, such as a large pool of skilled labor, technological innovation,
infrastructure, and capital. customer boosts the growth of a brand or business.
•Basic factors of production – Natural resources, climate, geographical location • When customers want a product, businesses strive to improve the
•Advanced factors of production - Infrastructure, technology, skilled experts, and quality and live up to their expectations. High demand conditions
capital prompt an organization to constantly improve its product lineup and
• India – Natural Resources innovate to be able to gain a competitive edge.
• coal - (4th largest reserves in the world),
• Sophisticated local customers enhance competitiveness
• iron ore, manganese ore (7th largest reserve in the world as in 2013),
• lithium ore (6th largest reserve in the world as in 2023), • Eg – French demand high quality wine… wineries had to produce it
• mica, bauxite (5th largest reserve in the world as in 2013) • - Italians have a taste for high quality leather products
• chromite, natural gas, diamonds, limestone and thorium.
• India's oil reserves, found in Maharashtra, Gujarat, Rajasthan and in eastern
Assam meet 25% of the country's demand
• A nation develops a real competitive advantage with the development of
advanced elements
 3.Related and Supporting Industries
Presence of internationally competitive suppliers – same Italy eg
Companies are often dependent on alliances and partnerships with
other companies in order to create additional value for customers and
become more competitive.
Eg – India’s Silicon Valley – Bangalore
All kinds of tech-giants and tech-start-ups are clustered in order to
share ideas and stimulate innovation.
As a result – it is the nation's leading software exporter as well as a
major semiconductor hub.
4. Firm Strategy, Structure and Rivalry
• How companies are created, organized and managed- their strategy
and how they structure themselves. – Engineers in top management-
Japan and Germany , India --- MBAs in top management
• Government policies paly a role in firm structure – MSMEs in India
• domestic rivalry forces companies to develop unique and sustainable
strengths and capabilities.
• The more intense domestic rivalry is, the more companies are being
pushed to innovate and improve in order to maintain their
competitive advantage.
• A good example for this is the Japanese automobile industry with
intense rivalry between players such as Nissan, Honda, Toyota, Suzuki,
Mitsubishi and Subaru.
• Because of their own fierce domestic competition, they have become
able to more easily compete in foreign markets as well.

Japan – a good example for competitive

advantage How did Japan achieve this ?
• Investment into R&D – High yield varieties
• Farmland is scarce in Japan (only 12 • More than 8ton/ha grain yields have been achieved by several high
percent of total area).
yielding varieties such as Mochidawara, Hokuriku 193 and Momiroman.
• Some 7,640 tons of Japanese rice were
exported in 2015, and that number has • Their yields are up to 38 percent higher than ordinary rice varieties
grown to 17,381 tons in 2019.
• About 70% of the land in Japan is covered with mountains or hills, rice
• More recently, Japan's rice exports have
grown further, reaching 13,556 tons for farmers also take advantage of small, terraced paddies built into the
the period from January to September inclines of mountains., grown in a plastic greenhouse, they are
in 2020, a 15% increase over the same transplanted to the muddy soil of the paddy.
period the previous year, according to
MAFF. (https://www.gov- • https://youtu.be/70GA6vDrj3g - Japan’s rice farming technology
online.go.jp/pdf/hlj/20201101/22-
23.pdf) • Must read – MADE IN JAPAN by AKIO MORITA
• As of July 2022, the export value of rice
from Japan amounted to around 3.8
billion Japanese yen.
Heckscher Ohlin theorem
• It was developed by Swedish economist Eli Heckscher and his student
Berlin Ohlin. Later, economist Paul Samuelson made a few additions.
• The Hecksher-Ohlin model, also known as the H-O model or 2x2x2
model, is a theory in international trade that suggests that nations
export goods which they have in plenty or can produce skillfully.
• It is called the 2x2x2 model because it comprises two countries, two
goods trading and two factors of production – labour and capital
• India – more labour…… will produce and export labour intensive
products – textiles, leather products
• US – more capital …… will produce and export capital intensive
products – machinery and equipments
Leontief Paradox
• Wassily Leontief was a Russian-American economist who made several contributions
to the world of economics.
• Leontief won the Nobel Prize in 1973 for his research on input-output analysis.
• Leontief was also credited with the Leontief Paradox and the Composite Commodity
Theorem.
• In the early 1950s, he studied the US economy closely and noted that the United
States was abundant in capital and, therefore, should export more capital-intensive
goods.
• However, his research using actual data showed the opposite: the United States was
importing more capital-intensive and exporting labor-intensive commodities.
• The Leontief Paradox, as it came to be known, led many economists to question the
Heckscher-Ohlin Theorem
• Leontief's Paradox does not account for human capital and the resulting difference
between skilled and unskilled labor.
• Later researchers showed that U.S. exports were skilled-labor-intensive—resolving
the Leontief Paradox
Assumptions
• The Heckscher-Ohlin model assumptions that one must be aware of
include the following:
• There are two countries in the picture,
• There are two factors: capital and labor.
• Countries have similar production technology.
• Prices are the same everywhere.
• The tastes in the two countries are identical,
• Perfect competition - There is free entry and free exit of firms in the
market in response to profit
• There are no transport costs and no hindrances in trade.
• There are no trade restrictions between the two countries
Product Life Cycle Theory
• Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the
1960s.
• The theory, stated that a product life cycle has three distinct stages: (1) new product (2) maturing
product, and (3) standardized product.
• The theory assumed that production of the new product will occur completely in the home country of
its innovation.
• In the 1960s this was a useful theory to explain the manufacturing success of the United States. US
manufacturing was globally dominant in many industries after World War II.
• It has also been used to describe how the personal computer (PC) went through its product cycle.
• The PC was a new product in the 1970s and developed into a mature product during the 1980s and
1990s.
• Today, the PC is in the standardized product stage, and the majority of manufacturing and production
process is done in low-cost countries in Asia and Mexico.
• The product life cycle theory has been less able to explain current trade patterns where innovation
and manufacturing occur around the world.
• For example, global companies even conduct research and development in developing markets where
highly skilled labor and facilities are usually cheaper.
• Even though research and development is typically associated with the first or new product stage and
therefore completed in the home country, these developing or emerging-market countries, such as
India and China, offer both highly skilled labor and new research facilities at a substantial cost
advantage for global firms.
 Tariff and Non – Tariff Barriers
Tariff – duty/ cess /tax……… levied on imports and exports
Specific and Ad valorem
eg – Rs 5 Per Kg for Black pepper
28% GST on luxury cars
Non Tariff
• Subsidies – Agriculture subsidies is the highest in the world – Japan – 62%
beginning of 21st Century
• Import quotas – value or volume- Textile was under that upto 1995
• Voluntary Export Restraints ( VER) – Between US and Japan – Japan restricted
exports to 1.85 million vehicles per year in 1985
• Local Content Requirement (LCR) - Specific fraction of goods that must be
produced locally – by value or units
Make in India -The local content requirement to categorise a supplier as Class I
local supplier is minimum 50%. For Class II local supplier, the local content
requirement is minimum 20%. Less than 20% non local supplier
• Anti dumping policies – Selling in a foreign market at
below cost of production or their fair market value
• Can be done to unload excess production , capture
markets
• Countervailing duties will be levied
• LG Semicon and Hyundai Electronics accused of selling
Dynamic Random Access Memory chips below their
cost in US market
• 9% and 4% countervailing duties were imposed
• Administrative Policies- Japanese are master in it
Netherlands exports Tulip bulbs to almost every country
except Japan
Reason – Japanese customs inspectors insist on cutting
every tulip bulb
Federal Express – Japan Insisted on opening a large
proportion of express packages to check for pornography
France insisted all imported video tape recorders to pass
through small customs entry point
GATT and WTO
• In the years following World War II, many countries were looking for
ways to promote economic growth and to reduce the barriers to
trade that had emerged during the war.
• In 1947, 23 countries signed the General Agreement on Tariffs and
Trade (GATT) with the goal of reducing tariffs and other trade
restrictions in order to increase trade flows and promote economic
growth.
• GATT was originally designed as a provisional agreement, but it
evolved over time to become a permanent agreement in 1994,
when it was replaced by the World Trade Organization (WTO).
• One of the most famous GATT rounds was the Kennedy Round,
which was held from 1964-1967 and resulted in an average tariff
reduction of 35%.
 • Rules-Based System: GATT established a rules-based multilateral
trading system that provided a framework for international trade and
investment. This system helped to promote stability and predictability
in the global economy, making it easier for businesses and
governments to plan for the future.
• Dispute Settlement Mechanism: GATT also introduced a dispute
settlement mechanism that allowed member countries to resolve
trade disputes peacefully and through a rules-based system. This was
a significant achievement, as it prevented trade disputes from
escalating into full-blown trade wars.
• Support for Developing Countries: GATT also provided a platform for
developing countries to participate in the global trading system and
to benefit from increased trade flows. This was particularly important
for countries that were working to build their economies and to
reduce poverty.
IPRs - the rights given to persons over the creations of their minds. They
usually give the creator an exclusive right over the use of his/her creation
for a certain period of time.
• Patents: A patent is a legal right granted to an inventor that allows them
to control the use and exploitation of their invention for a specified
period of time.
• Trademarks: A trademark is a distinctive symbol, word, or phrase that
identifies a particular brand or company and distinguishes it from others.
• Copyrights: A copyright is a legal right granted to creators of original
works, such as books, music, and software, to control the use and
distribution of their work.
• Industrial designs: An industrial design is a visual representation of a
product, such as its shape or appearance, that is protected by law.
• Trade secrets: A trade secret is a confidential and proprietary
information, such as a formula, recipe, or process, that is used in a
business and kept secret to maintain its competitive advantage.
• Reduction of Tariffs: One of the main objectives of GATT was to
reduce barriers to trade and promote economic growth through the
reduction of tariffs. GATT was successful in achieving this goal
through several negotiating rounds, including the Kennedy Round,
which reduced average tariffs by 35%.
• Increased Trade Flows: The reductions in tariffs and other trade
barriers under GATT led to increased trade flows and economic
growth. This was particularly true in the post-World War II period,
when the global economy was expanding and the demand for goods
and services was high.
• Despite its many successes, GATT also faced criticism for its inability
to address non-tariff barriers to trade and its limited coverage of
trade in services and intellectual property rights.
Drawbacks of GATT
• Lack of enforcement mechanism: GATT had no enforcement
mechanism, and disputes between member countries were often
resolved through negotiations rather than a formal dispute resolution
process. This made it difficult for countries to enforce their rights and
for trade rules to be consistently applied.
• Lack of coverage: GATT only covered trade in goods and did not
include services, intellectual property rights, and other areas that are
increasingly important in the global economy.
• Lack of transparency: GATT did not have a clear and transparent
process for negotiating and implementing trade agreements, which
made it difficult for countries to understand the rules and regulations
governing trade.
• Inadequate support for small and medium-sized enterprises: GATT did
not provide much support for small and medium-sized enterprises,
which are often at a disadvantage in the global trading system.
Formation of WTO – 1995
• The Uruguay Round of negotiations was successful in reducing
barriers to trade, particularly in the areas of agriculture, services, and
intellectual property rights.
• The average tariff reduction was 36%, and the agreement established
the World Trade Organization (WTO) to oversee and regulate world
trade.
• The Uruguay Round was also significant because it represented the
first time that trade in services and intellectual property rights was
addressed through a multilateral agreement.
• The establishment of the WTO provided a framework for the
resolution of trade disputes and helped to promote stability and
predictability in the global trading system.
• Monitoring and Surveillance: The WTO monitors and surveys its
member countries to ensure that they are complying with the rules
and regulations of the organization.
• The WTO also provides technical assistance and capacity building
support to help developing countries participate more effectively in
the global trading system.
• Negotiations: The WTO holds regular negotiations among its member
countries, with the goal of further liberalizing and strengthening the
rules-based trading system. These negotiations help to keep the
trading system up-to-date and relevant in a rapidly changing global
economy.
• Transparency: The WTO operates with a high degree of transparency,
with regular reports and updates on its activities and negotiations.
This helps to ensure that the public and the business community are
informed and engaged in the process.
• Membership: The WTO has 164 members and 26 observer countries,
making it one of the largest international organizations in the world.
• Rule-based Trading System: The WTO operates a rule-based
multilateral trading system, which provides a framework for fair and
transparent trade practices and helps to ensure that trade flows
smoothly and predictably.
• Agreements: Trade-Related Aspects of Intellectual Property Rights
(TRIPS). Trade Related Investment Measures(TRIMs)These
agreements provide the rules and regulations that govern
international trade.
• Dispute Settlement: The mechanism is designed to be fair and
transparent, and is based on a panel of experts that makes decisions
based on the WTO agreements.
TRIMS
The TRIMs Agreement aims to ensure that investment policies do not
act as barriers to trade by requiring WTO members to ensure that their
investment measures are consistent with the provisions of the General
Agreement on Tariffs and Trade (GATT 1994) and the WTO Agreement
on the Trade-Related Aspects of Intellectual Property Rights (TRIPS).
• The TRIMs Agreement sets out certain investment measures that are
considered inconsistent with WTO rules, including measures that:
• Require foreign investors to purchase specified levels or types of
products from domestic producers.
• Require foreign investors to locate their production facilities in
specified regions or locations within the country.
• Require foreign investors to hire a certain percentage of workers from
the host country.
• Discriminate against foreign investors by requiring them to provide
local content in their production processes.
• Impose restrictions on the transfer of funds between the host country
and the foreign investor's home country.
• India-USA WTO dispute on cotton subsidies:
• In 2002, the United States challenged India's cotton subsidies under
the World Trade Organization (WTO).
• The US argued that India's subsidies were distorting global cotton
prices and harming US cotton producers.
• India countered that the subsidies were necessary to support the
livelihoods of its cotton farmers, who were facing significant
economic challenges.
• In 2004, the WTO ruled in favor of the US, stating that India's cotton
subsidies were trade-distorting and in violation of WTO rules.
• India was required to remove the subsidies and to ensure that its
policies did not distort trade.
• India-USA WTO dispute on domestic content requirements in solar power:
• In 2013, the United States challenged India's domestic content
requirements for solar power under the World Trade Organization (WTO).
• The US argued that India's policy of requiring a certain percentage of the
components used in solar power projects to be manufactured locally
violated WTO rules.
• India countered that the domestic content requirements were aimed at
promoting the development of its solar energy sector and were necessary
to ensure energy security.
• In 2016, the WTO ruled in favor of the US, stating that India's domestic
content requirements were discriminatory and violated WTO rules.
• India was required to remove the discriminatory provisions and to ensure
that its policies did not act as barriers to trade.
• The US – Agricultural Subsidies (2002) dispute under the World Trade Organization
(WTO) dealt with the agricultural subsidies provided by the United States to its
farmers.
• India challenged the US agricultural subsidies, arguing that they distorted
international trade and harmed the livelihoods of farmers in developing countries,
including India.
• India claimed that the US subsidies artificially lowered the price of agricultural
products in the world market, making it difficult for farmers in developing countries
to compete.
• This, in turn, had a negative impact on the livelihoods of farmers in countries like
India, who relied heavily on agricultural exports.
• In its ruling, the WTO agreed with India and found that the US agricultural subsidies
were inconsistent with WTO rules, as they distorted international trade and caused
harm to the interests of other WTO members.
• The WTO ordered the US to reform its agricultural subsidies in a manner that would
bring them into compliance with WTO rules.
 • US-European Union Beef Hormones Dispute:
• In the late 1980s, the US and the European Union (EU) engaged in a long-
standing dispute over the EU's ban on the import of beef that had been
treated with hormones.
• The US argued that the ban was unjustified and violated WTO rules, while
the EU maintained that the ban was necessary to protect public health and
the environment.
• In 1997, the WTO ruled in favor of the US, finding that the EU's ban was
unjustified and discriminatory.
• The EU was required to remove the ban and to compensate the US for the
harm caused to its beef producers.
• As the EU refused to comply with the ruling, the US imposed economic
sanctions in the form of 100% tariffs on a range of EU exports, including
luxury goods such as Roquefort cheese, truffles, and leather goods.
• The sanctions resulted in significant economic harm to the EU and
eventually led to a resolution of the dispute.
• The US – Shrimp (1998) case was a dispute between the United States and several
other countries, including India, Malaysia, Pakistan, and Thailand, over a US ban on
the import of shrimp harvested in ways that were harmful to sea turtles.
• The ban required that shrimp imported into the US be harvested using specific
turtle excluder devices (TEDs) to minimize the incidental taking of sea turtles in
shrimp fishing operations.
• The countries challenging the US ban argued that it violated the General
Agreement on Tariffs and Trade (GATT) as it was not based on scientific evidence
and was discriminatory against certain WTO members.
• The US argued that the ban was necessary to protect sea turtles, which are an
endangered species, and was consistent with its obligations under international
environmental agreements.
• The WTO ultimately ruled in favor of the countries challenging the US ban and
found that the US ban violated the MFN principle and the GATT by treating exports
from the challenging countries less favorably than similar exports from other
countries.
• The WTO also found that the ban was not based on sufficient scientific evidence
and was not necessary to protect sea turtles, as alternative measures could have
been used that were less trade-restrictive.
• Russia-Ukraine WTO dispute over pig exports:
• In 2014, Russia imposed a ban on the import of live pigs, pork, and pig-
derived products from Ukraine in response to concerns about the spread of
African swine fever.
• Ukraine argued that the ban was unjustified and discriminatory, as other
countries were not subject to similar restrictions.
• In 2016, the WTO ruled in favor of Ukraine, finding that Russia's ban was
unjustified and discriminatory.
• Russia was required to remove the ban and to compensate Ukraine for the
harm caused to its pig exports.
• As Russia refused to comply with the ruling, Ukraine imposed economic
sanctions in the form of tariffs on a range of Russian exports, including
steel, coal, and petroleum products.
• The sanctions resulted in significant economic harm to Russia and helped
to resolve the dispute.
• This case was significant because it demonstrated the intersection of
trade and environmental policies and the importance of ensuring that
trade restrictions are based on scientific evidence and are not
discriminatory.
• The outcome of the case also had a broader impact on the way in
which countries approach the development and implementation of
environmental measures, as it emphasized the need to balance
environmental protection with the principles of free and fair trade.
• The India – Patents (1999) dispute under the World Trade Organization (WTO) dealt with India's Module 5 Levels of regional economic integration
patent laws and their compatibility with the WTO's Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS).
• The case was brought by the United States, who challenged India's patent laws on • A Preferential Trade Area (also preferential trade agreement, PTA) is a
pharmaceutical products.
trading bloc that gives preferential access to certain products from
• At the time, India did not provide full product patent protection for pharmaceuticals, which
meant that domestic companies could produce and sell generic versions of patented drugs the participating countries. – ASEAN
without infringing on the patent holder's rights. This practice was seen as a significant threat to
the interests of pharmaceutical companies in the US and other countries. • A Free Trade Area(FTA) is a grouping of countries within which tariffs
• The US argued that India's patent laws violated the TRIPS agreement and did not provide and non-tariff trade barriers between the members are generally
adequate protection for intellectual property rights. The US claimed that the lack of patent
protection would lead to widespread infringement of pharmaceutical patents and negatively abolished but with no common trade policy toward non-members.
impact the competitiveness of US companies in the Indian market. The North American Free Trade Area (NAFTA) and the European Free
• In its ruling, the WTO agreed with the US and found that India's patent laws were inconsistent Trade Association (EFTA) are examples of free trade areas.
with the TRIPS agreement. The WTO ordered India to bring its laws into compliance with TRIPS,
which resulted in significant changes to India's patent laws, including the introduction of full
product patent protection for pharmaceuticals.
• The India – Patents (1999) case has had a significant impact on the development of India's
intellectual property laws and has helped to strengthen the protection of pharmaceutical patents
in the country. The case also highlights the importance of the WTO dispute settlement process in
resolving trade disputes and promoting a rules-based trading system.

• A Customs Union(CU) is generally defined as a type of trade bloc which is
composed of a free trade area with a common external tariff. The
European Union (EU) is an example of a customs union. Goods move
between EU member countries without tariffs (duty-free). In addition, all
EU members charge non-member countries the same tariffs for imported
goods.
• A Common Market is economic integration in which each member
countries apply uniform external tariffs and eliminate trade barriers for
goods, services, and factors of production between them. It is a more
advanced economic integration stage after the free trade area and the
customs union
• European Economic Community (EEC) is a well-known example and
was formed in 1958. Its purpose was to provide for the free
movement of goods, capital, services, and labor within the European
Union.
• Initially, the EEC consisted of Belgium, Germany, France, Italy,
Luxembourg, and the Netherlands. Later, 22 other members joined.
• Comprehensive Economic Cooperation Agreement (CECA) and
Comprehensive Economic Partnership Agreement (CEPA)
• Agreements which consist of an integrated package on goods,
services and investment, as well as trade facilitation
• The India Korea CEPA is one such example and it covers a broad range
of other areas such trade facilitation, customs cooperation,
investment, competition, intellectual property rights etc.
• CECA/CEPAs are more comprehensive and ambitious than FTAs in
terms of coverage of areas and the type of commitments.
• While a traditional FTA focuses mainly on goods, a CECA/CEPA
provides holistic coverage of many areas like services, investment,
competition, government procurement, disputes etc.
• Further, a CECA/CEPA looks deeper into the regulatory aspects of
trade than an FTA. It covers regulatory regimes of the partners.
10 major regional trade blocs across the world.
• MERCOSUR is a trading bloc in Latin America comprising Brazil,
• ASEAN
Argentina, Uruguay and Paraguay.
• APEC
• MERCOSUR was formed in 1991 with the objective of facilitating the
• BRICS free movement of goods, services, capital and people among the four
• EU member countries.
• NAFTA • It is the third largest integrated market after the European Union
(EU), North American Free Trade Agreement (NAFTA).
• CIS
• Mercado Común del Sur - Spanish
• COMESA
• SAARC
• MERCOSUR
• IOR-ARC

• https://youtu.be/gp7Wv4B3qw8 - Trade Blocs Exchange rate systems across the world

• https://www.exportgenius.in/blog/10-major-regional-trading-blocs-of-
• Currency Peg - Fixed – Hard peg - government /Central bank will fix the rate
the-world-236.php against another currency or basket of currencies - Saudi Riyal which has been
pegged to the US dollar at a rate of 3.75 since 1986
• https://commerce.gov.in/international-trade/trade-agreements/ -
• Basket Peg: the currency is fixed to the value of a basket of currencies rather
Ministry of Commerce and industry than just one, like the Kuwaiti dinar, which has an undisclosed basket - Kuwaiti
dinar
• Floating – Free float – market determined
• Managed float -Soft Peg: the currency is allowed to float, usually within a band;
the central bank or government intervenes less frequently
• Crawling peg -a peg that allows for managed appreciation or depreciation of
the currency over time through periodic rate adjustments
• Currency boards - the management of the exchange rate and money supply are
given to a monetary authority. Often, this monetary authority has direct
instructions to back all units of domestic currency in circulation with foreign
currency. When all domestic currency is backed with foreign currency, it is
called a 100% reserve requirement -Hong Kong
How currencies are quoted
Direct Quote:
• The quote is direct when the price of one unit of foreign currency is
expressed in terms of the domestic currency.
• The unit of foreign currency is kept constant against variable home
currency
1$ = Rs 80
Indirect Quote
• The quote is indirect when the price of one unit of domestic currency is
expressed in terms of Foreign currency. Theunit of domestic currency is
kept constant against variable foreign currency
1 re = .0125 $
• Inverse of a Direct Quote will be an Indirect Quote.
Foreign Exchange rates -----Spot and Forward
Spot market– Spot transactions ---- delivery of currencies on the spot
• Delivery will take place within TWO BUSINESS days----SPOT DEAL
• If concluded on Friday delivery will happen only on Tuesday if
Saturday and Sunday are bank holidays
• If delivery happens on same day --- CASH DEAL
• If next day ----- TOM DEAL
• Any thing beyond 2 days will come under FORWARD transaction
Two way quotes
• Bid rate- The bid price is what the dealer is willing to pay for a currency
• Ask rate - The ask price is the rate at which a dealer will sell the same
currency. Also called offer rate
One currency’s bid rate is another currency’s ask rate
One currency is taken as the base currency ( foreign currency)to AVOID
CONFUSION
if an Indian MNC is asking for a quote of $ against RS - $ is the base
If a US bank is asking for quote of GBP against $ , then, GBP is the base
currency
Example for a currency pair is $/Rs
1 $ = Rs 81.25 /83.32
The price of $ is quoted in terms of Rs
Spread = difference between bid price and ask price of currency
pair
Factors affecting spot rates
• Economic data and events: Interest rates, GDP, inflation, and other
economic indicators can all have a significant impact on currency values.
• Political and geopolitical developments: Political stability, elections, and
international conflicts can all affect currency prices.
• Central bank policy: Central banks can influence currency values through
monetary policy decisions such as interest rate changes
• Supply and demand: The supply and demand for a particular currency can
also affect its value.
• Speculation and market sentiment: The market's overall sentiment and the
actions of speculators can also affect currency prices.
• Technical analysis: The technical analysis of past market data, such as
historical prices and trading volumes, can also provide insight into future
market movements.
• Natural Disaster: Natural disasters like flood, cyclone, tsunami etc can also
affect spot market in forex.
 Forward Market
• Contracting today for the future sale or purchase of foreign exchange
• Forward price may be SPOT RATE, or may be higher( premium) or lower
(discount)
• Quoted on major currencies for different maturity periods- 1,3,6, 9, 12
months are readily available
• Value dates – counted taking SPOT value date
eg – For a I month forward transaction entered on June 20 would be
Aug 22 and not Aug 20
If it falls on Saturday or Sunday then it will be the next working day
BUT WHILE SHIFTING, IT SHOULD NOT ENTER INTO NEXT MONTH
Eg – I month forward entered on June 28, If July 30 th happens to be Saturday ,
it should be rolled back to 29 th July
How forward rates are determined
• The risk in forward contract is the waiting time involved in the delivery
of currencies----- this is VERY important in determining the spread in
forward contracts
• The rates are quoted in SWAP points , For eg – 15/16 or 15/14
• if RHS is > LHS , it is premium and vice versa
• 15/16 denotes premium , If spot rate $ and Rs = 83.80/.90
• Then forward rate would be 83.80 +.15 and 83.90 + .16
= 83.95/84.06
For discount – 15/14
83.80 -.15 and 83.90 -.14
43.65/ 43.76
Par /Premium and Discounts in forward markets
• Spot rate = forward rate = PAR
• If a currency becomes costlier in future compared to spot = PREMIUM
• If it becomes cheaper = DISCOUNT
Purchase Power Parity
Parity conditions
• Purchasing Power Parity (PPP) is a theory that states that the exchange
rate between two currencies should be equal to the ratio of the prices
of a basket of goods and services in each country. In other words, the
theory states that a unit of currency should have the same purchasing
power in different countries.
• For example, if a basket of goods costs $5 in the US and Rs50 in India,
then the PPP exchange rate would be $1= Rs10. If the actual exchange
rate is higher or lower than this, it is considered to be misaligned and
could lead to price differences between the two countries.
• In the real world, PPP is not always accurate due to factors such as
transportation costs, trade restrictions, and inflation. However, it
provides a useful benchmark for understanding the relative buying
power of different currencies and can help investors and businesses
make informed decisions about international trade and investment.
https://www.investopedia.com/updates/purchasing-power- https://www.investopedia.com/articles/fundamental-
parity-ppp/ analysis/ppp-big-mac.asp
Interest Rate Parity • In the real world, IRP is not always accurate due to factors such as
• Interest rate parity (IRP) is an economic theory that states that the interest transaction costs, currency risk, and government intervention.
rate differential between two countries should be equal to the difference in However, it provides a useful benchmark for understanding the
the forward exchange rate and the spot exchange rate.
relative interest rate differential between countries and can help
• IRP is based on the idea that, in the absence of transaction costs and currency
risk, investors should receive the same return on their investments regardless investors and businesses make informed decisions about
of the currency they invest in. international trade and investment.
• For example, if the current spot exchange rate between the US dollar (USD)
and the British pound (GBP) is 1.30 (1 USD = 1.30 GBP). The interest rate in the
US is 2% per annum, while the interest rate in the UK is 4% per annum.
• To calculate the forward rate, we must take into account the difference in
interest rates between the two currencies. In this case, the forward rate would
be determined as follows:
F = St * (1+ia) / (1+ib) a – home country, b –
foreign country
F = 1.30 * (1 + 0.04) / (1 + 0.02) = 1.325
• This means that for every USD invested for one year, the investor would
receive 1.33 GBP. This is the forward rate for the USD/GBP pair.

Entry modes • Sun Pharma and AstraZeneca entered into License Agreement for
Novel Oncology products in China in 2019
• Exporting
• Sun Pharma licenses AstraZeneca to sell its oncology drugs in China
• Licensing
• As per the terms of the agreement, Sun Pharma will be responsible
• Franchising for development, regulatory filings and manufacturing the products
• Joint Ventures /Strategic Alliances covered in the agreement, while AstraZeneca will exclusively promote
• Mergers and acquisitions and distribute these products in China, Sun Pharma said.
• Wholly Owned Subsidiaries (WOS) --- Greenfield • License to use Disney characters
Mergers and Acquisitions(if 100%stakeholding - WOS)
• Hero MotoCorp and Honda Motor Co. Ltd formed a joint venture in 1984 to
manufacture and sell motorcycles and scooters in India. The joint venture, called
Hero Honda Motors Limited, was one of the largest and most successful two-
wheeler companies in India, with a significant market share in the country.
• Under the joint venture, Hero held a 26% stake, while Honda held a 74% stake.
The joint venture was known for producing popular models such as the Hero
Splendor, Hero Passion, and Hero Glamour, which became household names in
India.
• In 2010, Hero and Honda decided to dissolve the joint venture, with Hero
acquiring the entire stake held by Honda. This marked the end of a successful
partnership that had lasted over 25 years.
• Since the dissolution of the joint venture, Hero MotoCorp has continued to
operate as an independent company, manufacturing and selling two-wheelers
under its own brand. The company has expanded its operations and product
portfolio, and has established itself as one of the leading two-wheeler
manufacturers in India. The Hero Honda joint venture remains one of the most
successful FDI joint ventures in the Indian automotive sector.
• Jet Airways, a former Indian airline, faced several financial problems in the years leading
up to its suspension of operations in 2019. Some of the key financial challenges faced by
Jet Airways include:
• High Debt: Jet Airways had accumulated a large amount of debt over the years, which put
significant financial strain on the company. This made it difficult for the airline to meet its
debt obligations and finance its operations.
• Rising Fuel Costs: The airline was heavily impacted by rising fuel costs, which made it
difficult for Jet Airways to maintain profitability. The high cost of fuel was a major
contributor to the company's financial difficulties.
• Intense Competition: The Indian aviation market was highly competitive, and Jet Airways
faced intense competition from other airlines. This put additional pressure on the
company's finances, making it difficult for Jet Airways to maintain profitability.
• Lack of Capital: The company struggled to raise capital to fund its operations and address
its financial difficulties. This made it difficult for Jet Airways to invest in new aircraft and
upgrade its operations.
• Mismanagement: There were also reports of mismanagement and financial irregularities
at Jet Airways, which contributed to the company's financial problems.
• Jet Airways and Etihad Airways formed a joint venture in 2013 to jointly
operate flights between India and the United Arab Emirates (UAE), as well as to
other destinations in the Middle East, Europe, and North America.
• Under the joint venture, Etihad acquired a 24% stake in Jet Airways and the
two airlines began to share on each other's flights. This helped both airlines to
expand their reach and offer more travel options to passengers.
• However, the joint venture faced challenges due to financial difficulties at Jet
Airways and changes in the aviation industry. Eventually, Jet Airways was forced
to suspend operations in 2019 due to financial stress, and the joint venture
was dissolved.
• Despite the challenges faced by the Jet Airways and Etihad Airways joint
venture, it remains an example of a successful FDI joint venture in the Indian
aviation sector. The partnership helped both airlines to expand their operations
and improve their competitiveness in the market.
• Strategic Alliances : MNCs may form strategic alliances This strategy
helps reduce risks, overcome entry barriers, and gain a competitive
edge in new markets.
• With a joint venture, two or more companies create a single legal
entity in which each owns a share. By contrast, with a strategic
alliance, each company works together but no new legal entity is
created.
• For instance, Starbucks formed a strategic alliance with Tata Group in
India to navigate the complexities of the local market.
 M&A • WOS
In India, the rules and regulations for FDI through M&As are regulated by the
Foreign Exchange Management Act (FEMA) and the Reserve Bank of India • https://en.wikipedia.org/wiki/Category:Indian_subsidiaries_of_foreig
(RBI). n_companies
• Walmart-Flipkart: In 2018, Walmart acquired a 77% stake in Indian e-
commerce company Flipkart for $16 billion. This was one of the largest M&A
deals in India and marked Walmart's entry into the Indian e-commerce
market.
• Amazon-More: In 2020, Amazon acquired a 49% stake in Indian grocery
chain More for $660 million. This deal marked Amazon's entry into the
Indian grocery market and marked a significant step in the company's
efforts to expand its presence in India.
• Facebook's acquisition of Instagram and WhatsApp to strengthen its social
media dominance.

• Contract Manufacturing: In contract manufacturing, a foreign company
contracts a local Indian company to produce goods on its behalf. The foreign
company retains ownership of the intellectual property rights and technology
and provides the local Indian company with technical know-how and other
inputs. This type of FDI allows foreign companies to take advantage of lower
production costs in India while retaining control over their products and
technology.
• Management Contracts: In a management contract, a foreign company
provides management services to an Indian company. This type of FDI allows
foreign companies to transfer their expertise and technology to Indian
companies while retaining control over their operations and processes.
Management contracts are commonly used in sectors such as hospitality,
retail, and healthcare, where the foreign company provides management
services to the local Indian company.
• Both contract manufacturing and management contracts are subject to
regulations and restrictions under the Foreign Exchange Management Act
(FEMA) and the Reserve Bank of India (RBI).
• Apple Inc. - Wistron and Foxconn: Apple Inc. contracts two of the
largest electronics manufacturers in the world, Wistron and Foxconn,
to manufacture its iPhone models in India.
• Dell Inc. - Flextronics: Dell Inc. contracts Flextronics, a leading
electronics manufacturer, to manufacture its computer products in
India.
• Nike Inc. - VF Corporation: Nike Inc. contracts VF Corporation, a
leading apparel manufacturer, to manufacture its sportswear
products in India.
• Samsung Electronics - Dixon Technologies: Samsung Electronics
contracts Dixon Technologies, an Indian electronics manufacturer, to
manufacture its LED televisions in India.
• Asus - Compact Telecommunication: Asus contracts Compact
Telecommunication, an Indian electronics manufacturer, to
manufacture its smartphone models in India.
• Some examples of foreign companies that have entered into management
contracts in India:
• McDonald's India - In 1995, McDonald's entered into a management
contract with Connaught Plaza Restaurants Private Ltd to establish and
operate McDonald's restaurants in India.
• Hilton Hotels & Resorts - In 2005, Hilton Hotels & Resorts entered into a
management contract with Cycas Hospitality to manage the Hilton Garden
Inn hotel in New Delhi, India.
• IKEA - In 2018, IKEA entered into a management contract with India-based
hotel chain Lemon Tree Hotels to manage its budget hotel chain, Red Fox.
• Starbucks - In 2012, Starbucks entered into a management contract with
Tata Coffee to establish and operate Starbucks cafes in India.
• KFC - In 1995, KFC entered into a management contract with Devyani
International to establish and operate KFC restaurants in India.
Categories
• Civil construction projects: Civil construction projects involve civil
works, steel structural work, and erection of utility equipment, and
include projects for building dams, bridges, airports, railway lines, roads
and bridges, apartments, office complexes, hospitals, hotels, and
desalination plants.
• Turnkey projects: Turnkey projects involve supply of equipment along
with related services, and cover activities from the conception stage to
the commissioning of a project. Typical examples of turnkey projects
are: supply, erection and commissioning of boilers, power plants,
transmission lines, substations, plants for manufacture of cement,
sugar, textiles and chemicals.
Project Exports
Export of engineering goods on deferred payment terms and
execution of turnkey projects and civil construction contracts
abroad are collectively referred to as 'Project Exports’.
Benefits
• Project exports are indicative of technical maturity and industrial
capabilities of a country.
• cross-country transfer of new technology, generation of project revenues,
training of personnel and a resultant high-skilled employment generation
in the economy.
• Since the realizations from overseas projects are spread over a longer term
period, project exports help fluctuations in foreign exchange by providing
regular inflowof foreign exchange.
• Further, project exports help companies in establishing strategic presence
across different regions
• Consultancy services: Services contracts, involving provision of
knowhow, skills, personnel and training are categorised as
consultancy projects.
Typical examples of services contracts are: project implementation
services, management contracts for industrial plants, hospitals, hotels,
oil exploration, charter hire of rigs and locomotives, supervision of
erection of plants, CAD/ CAM solutions in software exports, finance
and accounting systems.
• Supply contracts: Supply contracts primarily involve export of capital
goods and industrial manufactures.
Typical examples of supply contracts are: supply of stainless steel slabs
and ferro-chrome manufacturing equipment, diesel generators,
pumps and compressors.
 Global Business Strategies
• Multi-domestic
• A firm using a multi-domestic strategy does not focus on cost or
efficiency but emphasizes responsiveness to local requirements
within each of its markets. Rather than trying to force all of its
American-made shows on viewers around the globe, Netflix
customizes the programming that is shown on its channels within
dozens of countries, including New Zealand, Portugal, Pakistan, and
India. Similarly, food company H. J. Heinz adapts its products to match
local preferences. Because some Indians will not eat garlic and onion,
for example, Heinz offers them a version of its signature ketchup that
does not include these two ingredients. Outback Steakhouse uses the
multi-domestic strategy in the multiple countries where it operates,
adapting to local eating preferences but not lowering prices
significantly.
• International
• Firms pursuing an international strategy are neither concerned about
costs nor adapting to the local cultural conditions. They attempt to
sell their products internationally with little to no change. When
Harley Davidson sells motorcycles abroad, they do not need to lower
their prices or adapt the bike to local motorcycle standards. People in
other countries buy a Harley particularly because it is different from
the local motorcycles. Buyers want the American look and the sound
and power of a Harley, and will pay for that differentiation. Belgium
chocolate exporters do not lower their price when exporting to the
American market to compete with Hershey’s, nor do they adapt their
product to American tastes. They use an international strategy.
Starbucks and Rolex watches are other examples of firms pursuing the
international strategy.
• Global
• A firm using a global strategy sacrifices responsiveness to local
requirements within each of its markets in favor of emphasizing lower costs
and better efficiency. This strategy is the complete opposite of a multi-
domestic strategy. Some minor modifications to products and services may
be made in various markets, but a global strategy stresses the need to gain
low costs and economies of scale by offering essentially the same products
or services in each market.
• Microsoft, for example, offers the same software programs around the
world but adjusts the programs to match local languages. Similarly,
consumer goods maker Procter & Gamble attempts to gain efficiency by
creating global brands whenever possible. Global strategies also can be
very effective for firms whose product or service is largely hidden from the
customer’s view, such as silicon chip maker Intel. Lenovo also uses this
strategy. For such firms, variance in local preferences is not very important,
but pricing is.
• Transnational
• A firm using a transnational strategy seeks a middle ground between
a multi-domestic strategy and a global strategy. Such a firm tries to • https://youtu.be/83rBbT5Qq_E
balance the desire for lower costs and efficiency with the need to
adjust to local preferences within various countries. For example,
large fast-food chains such as McDonald’s and Kentucky Fried Chicken
(KFC) rely on the same brand names and the same core menu items
around the world. These firms make some concessions to local tastes
too. In France, for example, wine can be purchased at McDonald’s.
This approach makes sense for McDonald’s because wine is a central
element of French diets. In Saudi Arabia, McDonalds serves a
McArabia Chicken sandwich, and its breakfast menu features no pork
products like ham, bacon, or sausage.