MEANING:

International Business refers to the exchange of goods and

services between two parties of different countries.
International Business may be understood as those business
transactions / activities which are conducted across national
boundaries.These activities normally include the transaction
of economic resources such as goods, capital, services
(comprising technology, skilled labour, & transportation, etc.)
& international production.

Production may either involve production of physical goods

or provision of services like banking, finance, insurance,
construction, trading, and so on. Thus, international business
includes not only international trade of goods and services
but also foreign investment, especially foreign direct
investment.
International Business is the process of focusing on the
resources of the globe & objectives
of the organization on the global business opportunities and
threats in order to produce/buy/sell or exchange of goods
and services worldwide.
Thus, it involves not only the international movement of
goods and services, but also of capital, personnel,
technology and intellectual property like patents,
trademarks, knowhow and copyrights etc.
It is of three types:
(i) Export Trade – It is selling of goods and services to foreign
countries.
(ii) Import Trade – It is buying goods and services from other
countries.
(iii) Entreport Trade – It is import of goods and services for
re-export to other countries.
REASONS FOR THE EMERGENCE OF INTERNATIONAL
BUSINESS:
 To achieve higher rate of profits
The basic objective of the business firm is to earn profit. The
domestic markets do not promise a higher rate of profits.
Business firms search for foreign market which hold promise
for higher rate of profits. Thus the objective of profits affects
and motivates the business to expand its
operations to foreign countries.

 Expanding the production capacity

Domestic companies expanded their production capacities
more than the demand for product
in domestic countries. In such cases, these companies are
forced to sell their excessive production in
foreign developed market.
 Severe competition in home country
The countries oriented towards market economies since
1960’s, experience severe competition from other business
firm in the home country. The weak companies which could
not
meet the domestic countries started entering the markets of
developing countries.

 Limited home market

When the size of the home market is limited either due to
the smaller size of the population or due to lower purchasing
power of the people or both, the companies internationalize
their
operations.

 Political Stability v/s Political Instability

operations in politically instable countries. In fact, business
firms shift the operations from politically instable countries
to the politically stable countries.

 Availability of Technology and Managerial Competency

Availability of advanced technology and competent
human resource in some countries acts as pulling factors for
business firms from the home country. The developed
countries due to these reasons attract companies from
developing world. In fact, American and European countries
depend on Indian Companies for software products and
services through their BPO’s.

 High cost of transportation

Initially companies enter foreign countries trough their
marketing operations. At this stage, the companies realize
realize the challenge from the domestic companies. Added
to this, the home companies enjoy higher rate of profit
margins where as the foreign firms suffer from lower profit
margins. The major factor for this situation is the cost of
transportation,
Under such conditions, the foreign companies are inclined to
increase their profit margin by locating their manufacturing
unit in foreign countries where there is enough demand
either in one
country or in a group of neighboring countries.

 Nearness to Raw materials

The source of highly qualitative raw materials and bulk raw
materials is a major factor for attracting the companies from
the various foreign countries. Most of the US based
companies open their manufacturing unit in Middle East
petroleum. These companies, thus, reduces the cost of
transportation.

 Availability of Quality HR at less cost

This is the major factor, in recent times, for software, high
technology and telecommunication companies to locate
their operations in India. India is a major source for high
quality and low cost human resources unlike USA and other
developed countries.

 Liberalization and Globalization

Most of the countries in the globe liberalized their
economies and opened their countries to
the rest of the globe. These changed policies attracted the
multinational companies to extend their
operations to these countries.
Some of the large-scale business firms would like to enhance
their market share in the global market by expanding and
intensifying their operations in various foreign countries.

 To achieve higher rate of economic development

International Business helps the governments to achieve
higher growth rate of the economy, increases the total and
per-capita income , GDP, industrial growth, employment and
income levels.

International Business – Scope

1. International Business is much broader term than that of
International Trade.International business includes:
(a) Export and import of goods.
(b) Export and import of services or intellectual property
(c) Licencing and franchising.
(d) Foreign Investments including both direct investment and
portfolio investments.
2. International Trade refers to only export and import of
merchandise, i.e., goods only. It is also called visible trade.
The goods are tangible, like machinery, gold, silver, electronic
goods etc.
Scope:
(i) International Trade:
International business involves export & import of goods.
(ii) Export and Import of Services:
It is also called invisible trade. Items of invisible trade include
tourism, transportation, communica­tion, banking,
warehousing, distribution and advertising.
(iii) Licensing and Franchising:
Licensing is a contractual agreement in which one firm (the
(the licensor) grants access to its patents, copyrights,
trademarks or technology to another firm in a foreign
country (the licensee) for a fee called royalty. It is under the
licensing system that Pepsi and Coca Cola are produced and
sold all over the world.
Franchising is also similar to licensing, but it is a term used
in connection with the provision of services. For example,
McDonald’s operates fast food restaurants all over the world
through its franchising system.

(iv) Foreign Investments:

It involves investments of funds abroad in exchange for
financial return.
Foreign investments can be of two types:
(a) Foreign Direct Investment (FDI) – Investment in
properties such as plant and machinery in foreign countries
countries with a view to undertaking production and
marketing of goods and services in those countries.
(b) Portfolio Investment – Investments in shares or
debentures of foreign companies with a view to earn income
by way of dividends or interest.

International Business – Benefits: To Nations and To Business

Firms
International business is important to both ‘Nations’ and
‘Business Firms’ and offers them several benefits.
Benefits to Nations:
1. Earning of Foreign Exchange:
It helps a country to earn foreign exchange, which can be
further used to import capital goods, technology, petroleum
products, etc. which are not available domestically.
2. More Efficient Use of Resources:
External trade enables the countries to specialise in
production of those goods for which they possess natural
resources and can produce more economically and
efficiently. The countries export surplus production of such
goods to import those goods in which other countries have
specialisation. It facilitates more efficient and optimum use
of resources.International Business operates on a simple
principle- Produce what your country can produce more
efficiently and trade the surplus production with other
countries, to procure what they can produce more
efficiently.
3. Improving Growth Prospects and Employment Potentials:
International business improves the growth prospects of
many countries, especially the developing ones as firms
can raise their production capacity and export surplus
output to foreign countries. Countries can also import
technical know-how and capital equipments to boost up the
economic growth. External trade also creates employment
both directly and indirectly. It provides direct employment
to those people who are hired by different firms to meet
increased demand for exports. Indirectly, a number of
intermediary firms (like forwarding and clearing agents) are
established to facilitate business of export-oriented
industries.
4. Increased Standard of Living:
External trade enables each country to obtain all types of
goods and services from different foreign countries, which
the country was unable to produce. It improves standard of
living of people, especially of developing and
underdeveloped countries.
Benefits to Business Firms:
1. Prospects for Higher Profits – International business can
be more profitable than the domestic business, especially
when the firms are able to sell their products at higher prices
in foreign countries as compared to home country.
2. Increased Capacity Utilisation – Firms can utilise their
surplus production capacity and improve profitability by
getting engaged in international business. With increase in
production capacity, firm is able to take advantage of
economies of scale, which reduces the production cost and
improves profit margin
3. Prospects for Growth – When demand for the products
starts getting saturated in the domestic market, then
international business enables the firm to enhance its
growth prospects by entering into overseas market.
For your reference: Many MNCs like General Motors, Ford
entered Indian market when they recognised the potential of
demand for cars in India.
4. Way out to Intense Competition in Domestic Market –
When there is intense competition in the domestic market,
then the international business facilitates the firms to grow
and expand by operating in the foreign market.
5. Improved Business Vision – International business enables
the firms to improve their business vision. The vision to
become international comes from the urge to grow, the need
to become more competitive, the need to diversify and to
gain strategic advantages of internationalization.
Features of International Business
1. Large scale operations: In international business, all the
operations are conducted on a very huge scale. Production
and marketing activities are conducted on a large scale. It
first sells its goods in the local market. Then the surplus
goods are exported.

2. Integration of economies: International business

integrates (combines) the economies of many countries. This
is because it uses finance from one country, labour from
another country, and infrastructure from another country. It
designs the product in one country, produces its parts in
many different countries and assembles the product in
another country. It sells the product in many countries, i.e.
in the international market.
3. Dominated by developed countries and MNCs:
International business is dominated by developed countries
and their multinational corporations (MNCs). At present,
MNCs from USA, Europe and Japan dominate (fully control)
foreign trade. This is because they have large financial and
other resources. They also have the best technology and
research and development (R & D). They have highly skilled
employees and managers because they give very high
salaries and other benefits. Therefore, they produce good
quality goods and services
at low prices. This helps them to capture and dominate the
world market.

4. Benefits to participating countries: International business

gives benefits to all participating
countries. However, the developed (rich) countries get the
maximum benefits. The developing
(poor) countries also get benefits. They get foreign capital
and technology. They get rapid industrial development. They
get more employment opportunities. All this results in
economic development of the developing countries.
Therefore, developing countries open up their economies
through liberal economic policies.

5. Keen competition: International business has to face keen

(too much) competition in the
world market. The competition is between unequal partners
i.e. developed and developing countries. In this keen
competition, developed countries and their MNCs are in a
favorable
position because they produce superior quality goods and
services at very low prices.
Developed countries also have many contacts in the world
So, developing countries find it very difficult to face
competition from developed countries.

6. Special role of science and technology: International

business gives a lot of importance to
science and technology. Science and Technology (S & T) help
the business to have large-scale production. Developed
countries use high technologies. Therefore, they dominate
global business. International business helps them to
transfer such top high-end technologies to the
developing countries.

7. International restrictions: International business faces

many restrictions on the inflow and outflow of capital,
technology and goods. Many governments do not allow
international businesses to enter their countries. They have
have many trade blocks, tariff barriers, foreign exchange
restrictions, etc. All this is harmful to international business.

8. Sensitive nature: The international business is very

sensitive in nature. Any changes in the economic policies,
technology, political environment, etc. have a huge impact
on it. Therefore, international business must conduct
marketing research to find out and study these changes.
They must adjust their business activities and adapt
accordingly to survive changes.

Importance/ Opportunities of International business

1. Earn foreign exchange: International business exports its
goods and services all over the world. This helps to earn
valuable foreign exchange. This foreign exchange is
used to pay for imports. Foreign exchange helps to make the
business more profitable and to strengthen the
economy of its country.

2. Optimum utilization of resources: International business

makes optimum utilization of resources. This is because it
produces goods on a very large scale for the international
market. International business utilizes resources from all
over the world. It uses the finance and
technology of rich countries and the raw materials and
labour of the poor countries.

3. Achieve its objectives: International business achieves its

objectives easily and quickly. The
main objective of an international business is to earn high
profits. This objective is achieved easily. This it because it
best technology. It has the best employees and managers. It
produces high-quality goods. It sells these goods all over the
world. All this results in high profits for the international
business.

4. To spread business risks: International business spreads its

business risk. This is because it does business all over the
world. So, a loss in one country can be balanced by a profit
in another country. The surplus goods in one country can be
exported to another country. The surplus resources can also
be transferred to other countries. All this helps to minimise
the business risks.
5. Improve organization’s efficiency: International business
has very high organization efficiency. This is because without
efficiency, they will not be able to face the competition in
the international market.
So, they use all the modern management techniques to
improve their efficiency. They hire the most qualified and
experienced employees and managers. These people are
trained regularly. They are highly motivated with very high
salaries and other benefits such as international transfers,
promotions, etc. All this results in high organizational
efficiency, i.e. low costs and high returns.

6. Get benefits from Government: International business

brings a lot of foreign exchange for the country.Therefore, it
gets many benefits, facilities and concessions from the
government. It gets many financial and tax benefits from the
government.

7. Expand and diversify: International business can expand

and diversify its activities. This is
earns very high profits. It also gets financial help from the
government.

8. Increase competitive capacity: International business

produces high-quality goods at low
cost. It spends a lot of money on advertising all over the
world. It uses superior technology,
management techniques,marketing techniques, etc. All this
makes it more competitive. So, it
can fight competition from foreign companies.

Other Opportunities of International Business include :-

Access to customers in new countries
Learning about customers in new markets
Access to new, cheaper sources of finance
Government incentives to relocate
Access to regional trading agreements/avoidance of trade
barriers
Access to new resources (e.g. cheap of skilled labour, natural
resources)

International Business Issues and Challenges :-

Every country has its own policies, laws, culture, and
regulations. Along with these, the differences in time zone,
currency, languages and more, also present issues and
challenges in international business.
Following are the issues and challenges in doing
international business:
Language Barrier
It is the most significant thing to take into account when
thinking of taking business internationally. The language
barrier doesn’t just mean a problem in communication. But,
one must also consider if the name of the product fits well in
the foreign language or not. For example, Mercedes-Benz
when entering China chose a local name, which was similar
to “Benz”: Bēnsǐ. However, in the local language, it meant
“rush to death.” The automaker then has to change its name
to Bēnchí, meaning ‘run.’
Cultural Differences
Every country has its own traditions and cultures. And, to
achieve success, it is important for a foreign company to
respect those cultures. Culture includes holidays,
food, festivals, social values, and more. For example,
McDonald’s’ doesn’t serve beef or pork in India for religious
reasons. Moreover, the fast-food chain offers a variety of
vegetarian options in India than in any other country.
Managing Global Teams
When you are doing an international business and have
operations in many countries, you will have to deal with
employees of different backgrounds. Managing those
employees is definitely a challenge due to the differences in
language, culture, and time zones. One can, however,
overcome this barrier by frequently communicating with the
global teams. It will help to slowly melt down the
differences.
Currency Exchange and Inflation Rate
The exchange rate is the worth of one nation’s currency
in relation to the other. The currency rate between the two
countries doesn’t remain constant or is always changing. You
must consider the exchange rates when making any financial
decision as it may increase or decrease the final payout
which may affect the business profits.
Along with the exchange rate, one also needs to consider the
inflation rate as well. The inflation rate can vary across
countries and can affect the pricing of the product.
Deciding Company Structure
One requisite of making big at the international stage is to
decide on a company structure that is efficient. Having an
efficient structure, allows a company to take a quick and
better decision.When deciding on the structure, one
important thing to consider is the location of the
headquarters and the number of offices a company would
have.For example, Coca-Cola has one of the most efficient
company structures worldwide. Coca-Cola is divided into
continental groups and each group is headed by a President.
Foreign Politics and Policies
The politics and policies of a country play a crucial part in the
performance of a company. Any new political policy
concerning taxes, labor laws, and more can have a direct
impact on the cost of the company. Thus, it is important for a
company to closely follow the politics and policies of the
country it is operating.For example, suppose the Chinese
government starts giving subsidies to the local automakers.
This would allow local companies to adopt aggressive pricing.
Such policies would be unfair to foreign automakers
operating in China.
International Accounting
It gets very difficult for a company to operate if it lacks
proper accounting. And, in the case of international
business, accounting gains even more relevance. Adhering to
international accounting standards is not an easy job as it
requires a lot of effort to conform to different tax systems. A
company, however, can overcome this challenge by hiring
the right experts to take care of the accounting.
Product Pricing
Setting the product price in the overseas market is a big
challenge. To set the right price, a company must consider
its costs, logistics cost, as well as the price of the same
products from local competitors. Moreover, when pricing
your product, you also need to consider how you plan to
position your product – as a low-cost
product or a luxury brand.
For example, Ikea, which is a low-cost European furniture
dealer, was unable to gain market in China initially. This is
because of the low-cost products from the local dealers. Ikea
then relocated production to China and was able to reduce
the prices of its products.
Supply Chain Risks
Having a short and efficient supply chain is a crucial
requirement for a company’s success in a foreign market.
However, managing those supply chains is not an easy task
because of differences in regions and
regulations.Environmental Concerns
When a company starts operating in a foreign country, it is
very important that it follows the environmental norms.
Moreover, it should take extra efforts to reduce
environmental concerns in the regions it operates.
Any ignorance or avoidance on the part of the company to
take care of such issues could seriously damage its brand
image and will hurt its business. Also, the local social groups
would make it difficult for the company to operate smoothly.
Trends in International Business :-
As the economy grows slowly at home, our business may
have to look at selling internationally to remain profitable.
Before examining foreign markets, we have to be aware of
the major trends in international business so that we can
take advantage of those that might favor our company.
International markets are evolving rapidly, and you can take
advantage of the changing environment to create a niche for
your company.
Growing Emerging Markets
Developing countries will see the highest economic growth
as they come closer to the standards of living of the
developed world. If you want our business to grow rapidly,
consider selling into one of these emerging markets.
Language, financial stability, economic system and local
cultural factors can influence which markets
we should favour.
Demographic Shifts
The population of the industrialized world is aging while
many developing countries still have very youthful
populations. Businesses catering to well-off pensioners can
profit from a focus on developed countries, while those
targeting young families, mothers and children can look in
Latin America, Africa and the Far East for growth.
Speed of Innovation
The pace of innovation is increasing as many new companies
develop new products and improved versions of traditional
items. Western companies no longer can expect to be
automatically at the forefront of technical development, and
this trend will intensify as more businesses in developing
countries acquire the expertise to innovate successfully.
More Informed Buyers
More intense and more rapid communications allow
customers everywhere to purchase products made
anywhere around the globe and to access information about
what to buy. As pricing and quality information become
available across all markets, businesses will lose pricing
power, especially the power to set different prices in
different markets.

Increased Competition
As more businesses enter international markets, Western
companies will see increased competition. Because
companies based in developing markets often have lower
labor costs, the challenge for Western firms is to keep ahead
with faster and more effective innovation as well as a high
degree of automation.
Slower Economic Growth
The motor of rapid growth has been the Western economies
and the largest of the emerging markets, such as China and
Brazil. Western economies are stagnating, and emerging
market growth has slowed, so economic growth over the
next several years will be slower. International businesses
must plan for profitability in the face of more slowly growing
demand.
Emergence of Clean Technology
Environmental factors are already a major influence in the
West and will become more so worldwide.Business must
take into account the environmental impact of their normal
operations. They can try to market environmental friendly
technologies internationally. The advantage of this market is
that it is expected to grow more rapidly than the overall
economy.
What is a Competitive Advantage?

A competitive advantage is an attribute that enables a

company to outperform its competitors. This allows a
company to achieve superior margins compared to its
competition and generates value for the company and its
shareholders. A competitive advantage must be difficult, if
not impossible, to duplicate. If it is easily copied or imitated,
it is not considered a competitive advantage. Competitive
advantage is a set of qualities that give businesses leverage
over their competition. It allows businesses to offer their
target market a product or service with higher value than
industry competitors. In the long term, this boosts the
business' position in their industry and drives a greater
number of sales than competitors.
Examples of Competitive Advantage:-
Access to natural resources that are restricted from
competitors
Highly skilled labor
A unique geographic location
Access to new or proprietary technology
Ability to manufacture products at the lowest cost
Brand image recognition

Constructing a Competitive Advantage :-

Before a competitive advantage can be established, it is
important to know the:
Benefit: A company must be clear about what benefit(s)
their product or service provides. It must offer real value and
generate interest.
Target Market: A company must establish who is
purchasing from the company and how it can cater to its
target market.
Competitors: It is important for a company to understand
other competitors in the competitive landscape.
To construct a competitive advantage, a company must be
able to detail the benefit that they provide to their target
market in ways that other competitors cannot.

Ex:- McDonald’s: McDonald’s main competitive advantage

relies on a cost leadership strategy. The company is able to
utilize economies of scale and produce products at a low
cost and, as a result, offer products at a lower selling price
than that of its competitors.

10am Tuesday 4th april

Importance of Competitive Advantage
A competitive advantage distinguishes a company from its
competitors. It contributes to higher prices, more customers,
and brand loyalty. Establishing such an advantage is one of
the most important goals of any company. In today’s world,
it is essential to business success. Without it, companies will
find it difficult to survive.
Understanding the essential principles of competitive
advantage is important for creating an effective business
strategy, investing successfully, and understanding the
economy on a national and global scale.The more
dependable a business' competitive advantage, the more
likely it is that a business can maintain their profit levels and
keep competitors from overtaking them.
Competitive advantage is what makes an entity's goods or
services superior to all of a customer's other choices.A
competitive advantage may include access to natural
resources, such as high-grade ores or a low-cost power
source, highly skilled labor, geographic location, high entry
barriers, and access to new technology.
Globalization and International Investment

Globalization refers to the way businesses and organizations

develop an international presence or start operating in a
variety of countries.
The rise of globalization has led to more connections among
financial markets and businesses around the world, as well
as increased opportunities.Globalization has resulted in
greater inter-connectedness among markets around the
world and increased communication and awareness of
business opportunities in the far corners of the globe.More
investors can access new investment opportunities and
study new markets at a greater distance than before.
Potential risks and profit opportunities are within easier
reach thanks to improved communications technology.
Countries with positive relations between them are able to
increasingly unify their economies through increased
investment and trade. Products and services previously
available within one country are made more readily
available to new markets, resulting directly in improved
economic opportunities for workers in those economies and
leading to improved household incomes.
For investors, these opportunities present a wider range of
investment options and new ways to profit. Investment in
global markets is possible for the investing public through
stock purchasing, as most brokerage firms are able to access
international stock markets and provide their clients with
the opportunity to purchase shares in companies around the
world.Globalization has influenced international investing,
making it easier than ever before, historically, for market
participants to invest in companies, industries, or other
financial instruments abroad.

Maintaining Competitiveness
As a result, most businesses try to stay competitive with
their counterparts in other parts of the world, broadening
their competitive horizons past their local areas and home
countries. Maintaining competitiveness often requires
sourcing materials and outsourcing labor from other
countries.Competitive companies have increasingly turned to
global markets as a source not only of new customers but
also of production locations and partners for new ventures.
Globalization has facilitated this and made the transition to
global markets easier.
Globalization Increases International Investing
Over time, these practices result in increased cultural
similarities between countries and increasingly connected
economies that have more mutual interests and challenges.
Globalization and international investment are tied together
and lead into one another as companies act internationally
by increasing their international investment out of mutual
interest and the need to stay internationally
competitive.Companies benefit from pricing differences, or
arbitrage, in different markets for labor and supplies.
Globalization compels connected economies to continue to
invest in each other to protect their economic health and
acquire new profits. International investments have
increased as a direct result of globalization and continue to
do so.This is pulling more economies into globalization,
further increasing international investment as this happens.
When countries seek collectively to pursue the opportunities
provided by globalization, the demands of the new
economic activity cause social change that develops these
countries and prepares them to better pursue industrial
activity. The society becomes a developed nation as its
workforce begins to attract the investment activity of
enough companies to cause the social and economic change
necessary to produce a modern industrialized economy. This
process is a result of the international investment that
characterizes globalization.The competitive nature of
globalization, in other words, ultimately has a social and
economic impact that transforms economies in pursuit of
investment and greater economic activity. This knits
economies into each other and results in increased
international investment.
Foreign Direct Investment and Foreign Portfolio Investment
Capital is a vital ingredient for economic growth, but since
most nations cannot meet their total capital requirements
from internal resources alone, they turn to foreign investors.
Foreign direct investment (FDI) and foreign portfolio
investment (FPI) are two of the most common routes for
investors to invest in an overseas economy. FDI implies
investment by foreign investors directly in the productive
assets of another nation.FPI means investing in financial
assets, such as stocks and bonds of entities located in another
country.
Examples of FDI and FPI
Imagine that you are a multi-millionaire based in the U.S. and
are looking for your next investment opportunity. You are
trying to decide between
(a) acquiring a company that makes industrial machinery,
and (b) buying a large stake in a company that makes such
machinery. The former is an example of direct investment,
while the latter is an example of portfolio investment.

Evaluating Attractiveness :
Because capital is always in short supply and is highly
mobile, foreign investors have standard criteria when
evaluating the desirability of an overseas destination for FDI
and FPI, which include:
Economic factors: the strength of the economy, GDP growth
trends, infrastructure, inflation, currency risk, foreign
exchange controls
Political factors: political stability, government’s business
philosophy, track record
Incentives for foreign investors: taxation levels, tax
incentives, property rights
Other factors: education and skills of the labor force,
business opportunities, local competition

Foreign investment, quite simply, is investing in a country

other than your home one. It involves capital flowing from
one country to another and foreigners having an ownership
interest or a say in the business. Foreign investment is
generally seen as a catalyst for economic growth and can be
undertaken by institutions, corporations, and
individuals.Investors interested in foreign investment
generally take one of two paths: foreign portfolio investment
or foreign direct investment.Foreign portfolio investment
(FPI) refers to the purchase of securities
and other financial assets by investors from another country.
Examples of foreign portfolio investments include stocks,
bonds, mutual funds, exchange traded funds, American
depositary receipts (ADRs), and global depositary receipts
(GDRs).
Foreign direct investment (FDI) refers to investments made
by an individual or firm in one country in a business located
in another country. Investors can make foreign direct
investments in a number of ways. Some common ones
include establishing a subsidiary in another country,
acquiring or merging with an existing foreign company, or
starting a joint venture partnership with a foreign
company.Direct investment is seen as a long-term
investment in the country's economy, while portfolio
investment can be viewed as a short-term move to make
money
Foreign Portfolio Investment (FPI)
Foreign portfolio investment (FPI) refers to investing in the
financial assets of a foreign country, such as stocks or bonds
available on an exchange. This type of investment is at times
viewed less favorably than direct investment because
portfolio investments can be sold off quickly and are at times
seen as short-term attempts to make money, rather than a
long-term investment in the economy.
Portfolio investments typically have a shorter time frame for
investment return than direct investments. As with any
equity investment, foreign portfolio investors usually expect
to quickly realize a profit on their investments.As securities
are easily traded, the liquidity of portfolio investments
makes them much easier to sell than direct investments.
Portfolio investments are more accessible for the average
investor than direct investments because they require much
less investment capital and research.
Unlike direct investment, portfolio investment does not offer
the investor control over the business entity in which the
investment is made.

Foreign Direct Investment (FDI)

Foreign direct investment (FDI) involves establishing a direct
business interest in a foreign country, such as buying or
establishing a manufacturing business, building warehouses,
or buying buildings.1
Foreign direct investment tends to involve establishing more
of a substantial, long-term interest in the economy of a
foreign country.Due to the significantly higher level of
investment required, foreign direct
investment is usually undertaken by multinational
companies, large institutions, or venture capital firms.
Foreign direct investment tends to be viewed more favorably
since they are considered long-term investments, as well as
investments in the well-being of the country itself.
At the same time, the nature of direct investment, such as
creating or acquiring a manufacturing facility, makes it much
more difficult to liquidate or pull out of the investment. For
this reason, direct investment is usually undertaken with
essentially the same attitude as establishing a business in
one's own country—with the intention of making the
business profitable and continuing its operation indefinitely.
For the investor, direct investment means having control
over the business invested in and being able to manage it
directly.
It also involves more risk, work, and commitment compared
to foreign portfolio investment.
FDIs are commonly made in countries that have a high
potential for growth and also in countries that have a skilled
workforce.
An FDI can lead to horizontal expansion, vertical expansion
or also a conglomerate. In horizontal investment, the
company invests in companies with similar businesses or
establishes a similar business. While in vertical investment,
the company invests in companies that are complementary
to its business. And in a conglomerate investment, the
company invests in a business that is totally unrelated to its
core business.
The Indian economy opened up in 1991 for the entire world
and since then, it has been attracting foreign investment.
Now, let us explore the ways through which the FDI comes
into India. According to the rules prescribed by the Indian
government, FDI can either come via automatic route or via
government route.
In the automatic route, non-resident or Indian companies do
not need prior permission of RBI or the government for FDI.
It is for the sectors where the FDI is not restricted and
doesn’t need government scrutiny. And the second is the
government route. For this, the company will have to file an
application through Foreign Investment Facilitation Portal,
which facilitates single-window clearance.
Policy and Regulatory framework for FDI in India
The Government has put in place a policy framework on
Foreign Direct Investment. Which is embodied in the Circular
on Consolidated FDI Policy, issued which is updated every six
months, to capture and keep pace with the regulatory
changes.
The Department of Industrial Policy and Promotion (DIPP),
Ministry of Commerce & Industry, Government of India
makes policy pronouncements on FDI through Press Notes/
Press Releases which are notified by the Reserve Bank of
India as amendments to the Foreign Exchange Management
Regulations, 2000.The procedural instructions are issued by
the Reserve Bank of India. Thus, regulatory framework for
FDI consists of Acts, Regulations, Press Notes, Press Releases,
Clarifications, etc.
AUTOMATIC ROUTE
FDI Policy permits FDI up to 100 % from foreign/NRI investor
without prior approval in most of the sectors including the
services sector under automatic route. FDI in
sectors/activities under automatic route does not require any
prior approval either by the Government or the RBI.The
investors are required to notify the concerned Regional office
of RBI of receipt of inward remittances within 30 days of such
receipt and will have to file the required documents with that
office within 30 days after issue of shares to foreign investors.
The present Automatic Route allows Indian companies
engaged in all industries except for certain select
industries/sectors to issue shares to foreign investors up to
100% of their paid up capital in Indian companies.There are
also some areas where though
Automatic Route is available, foreign investors cannot invest
beyond a certain percentage of the paid up capital of the
Indian companies or where investment is subject to some
other conditions.
Foreign investors have to, however, keep in mind that they
may invest freely under the Automatic Route described
above but where such investment does not conform to
policies of Government of India, a specific approval from
Government must be sought. For example, there are
Government guidelines on location of industrial units, or
there are certain items like explosives or liquor that need an
industrial licence. If the Indian company does not conform to
the locational guidelines or needs an Industrial licence then
it cannot issue shares under the Automatic Route.
GOVERNMENT APPROVAL ROUTE
All activities which are not covered under the automatic
route, prior Government approval for FDI/NRI shall be
necessary.FDI up to 100% is allowed under the automatic
route in all activities/sectors except the following which will
require approval of the Government:
Activities/items that require an Industrial License.
All proposals falling outside notified sectoral policy/caps or
under sectors in which FDI is not permitted.
Proposals in which the foreign collaborator has a
previous/existing venture/tie up in India in the same.

Prior Government approval for new proposals would be

required only in cases where the foreign investor has an
existing joint venture, technology transfer, trade mark
agreement in the same field.With the amendment of the
Press Note 18, joint ventures formed with foreign
investment before December 12, 2004 would be considered
as “existing JVs”.The foreign partner in such JV has to obtain
a No Objection Certificate (NOC) from the Indian partner for
starting new venture in India in the “same” field of activity.
However, Government made an exception that even in cases
where the foreign investor has a joint venture or technology
transfer/ trademark agreement in the ‘same’ field prior
approval of the Government will not be required in the
following cases:
Investments to be made by Venture Capital Funds registered
with the Security and Exchange Board of India (SEBI); or
Where in the existing joint-venture investment by either of
the parties is less than 3%; or
Where the existing venture/ collaboration is defunct/sick.
Application for proposals requiring prior Govt’s approval
should be submitted to FIPB in fresh Application . The
application shall be filed online through FIPB portal.The
following information should form part of the proposals
submitted to FIPB: –
a) Whether the applicant has had or has any
previous/existing financial/technical collaboration or trade
mark agreement in India in the same or allied field for which
approval has been sought; and
b) If so, details thereof and the justification for proposing the
new venture/technical collaboration (including trade marks).
c) Applications can also be submitted with Indian Missions
abroad who will forward them to the Department of
Economic Affairs for further processing.
d) Generally foreign investment proposals received in the
DEA (Department of Economic Affairs) are placed before the
Foreign Investment Promotion Board (FIPB) within 15 days
of receipt. The decision of the Government in all cases is
usually conveyed by the DEA within 30 days.

PROHIBITED SECTORS FOR FDI IN INDIA

FDI is not permissible in the following cases
Gambling and Betting, or
Lottery Business, or
Business of chit fund
Nidhi Company
Housing and Real Estate business
Trading in Transferable Development Rights (TDRs)
Retail Trading
Atomic Energy
Agricultural or plantation activities or Agriculture (excluding
Floriculture, Horticulture, Development of Seeds, Animal
Husbandry, Pisciculture and Cultivation of Vegetables,
Mushrooms etc. under controlled conditions and services
related to agro and allied sectors) and Plantations(other
than Tea plantations)
GENERAL PERMISSION OF RBI UNDER FEMA
RBI has granted general permission under Foreign Exchange
Management Act (FEMA) in respect of proposals approved
by the Government. Indian companies getting foreign
investment approval through FIPB route do not require any
further clearance from RBI for the purpose of receiving
inward remittance and issue of shares to the foreign
investors.
FDI IN LIMITED LIABILITY PARTNERSHIPS (LLP’S)
Government of India recently allowed FDI in LLP’s however
LLPs with FDI will not be allowed to operate in
agricultural/plantation activity, print media or real estate
business. FDI in LLP is allowed with the previous approval of
the Government. Further it is allowed with the
Government’s approval only in those sectors in which 100%
FDI is allowed under automatic route under the FDI policy.
Thus those sectors which are not available under automatic
route is not available for FDI in LLP. The followings are some
conditions with respect to FDI in LLP’s :-
LLPs with FDI will not be eligible to make any downstream
investments.
Foreign Capital participation in LLPs will be allowed only by
way of cash consideration.
Investment in LLPs by Foreign Institutional Investors (FIls)
and Foreign Venture Capital Investors (FVCIs) will not be
permitted.
LLP’s are not allowed to raise ECB (external commercial
borrowings)

Industrial Licensing Policy

Industrial Licenses are regulated under the Industries
(Development & Regulation) Act, 1951. The requirements of
Industrial licence has been progressively reduced. At present
industrial licence for manufacturing is required only for the
following:
 Industries retained under compulsory licensing,
 Items reserved for small scale sector; and
 When the proposed location attracts locational
restriction industries requiring Compulsory Licensing
The following industries require compulsory industrial
license:
Distillation and brewing of alcoholic drinks;
Cigars and cigarettes of tobacco and manufactured tobacco
substitutes;
Electronic Aerospace and defence equipment: all types;
Industrial explosives including detonating fuses, safety fuses,
gun powder, nitrocellulose and matches;
Hazardous chemicals;
Prior Government approval required in all cases where
Industrial Licence is required to start the business. i.e. all
sectors requiring industrial license comes under approval
route and requires Government approval.INDUSTRIES
UNDER SMALL-SCALE SECTOR
An industrial undertaking is defined as a small-scale unit if
the capital investment in plant and machinery
does not exceed Rs 10 million. Small-scale units can get
registered with the Directorate of Industries/District
Industries Centre of the State Government. Such units can
manufacture any item, and are also free from locational
restrictions.
FDI IN SSI UNITS
A small scale unit cannot have more than 24 per cent equity
in its paid up capital from any industrial undertaking, either
foreign or domestic. If the equity from another company
(including foreign equity) exceeds 24 per cent, even if the
investment in plant and machinery in the unit does not
exceed Rs 10 million, the unit loses its small-scale status.
ENTRY OPTIONS FOR FOREIGN INVESTORS IN INDIA
A foreign company planning to set up business operations in
India has the following options:
Incorporated Entity :-
By incorporating a company under the Companies Act,1956
through
Joint Ventures; or
Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100%
depending on the requirements of the investor, subject to
equity caps in respect of the area of activities under the
Foreign Direct Investment (FDI) policy.

As an Unincorporated Entity:-
As a foreign Company through
Liaison Office/Representative Office
Project Office
Branch Office
Such offices can undertake activities permitted under the
Foreign Exchange Management Regulations,2000.
Liaison Office/Representative Office :-
The role of the liaison office is limited to collecting
information about possible market opportunities and
providing information about the company and its products
to prospective Indian customers. It can promote
export/import from/to India and also facilitate
technical/financial collaboration between parent company
and companies in India. Liaison office can not undertake any
commercial activity directly or indirectly and can not,
therefore, earn any income in India. Approval for
establishing a liaison office in India is granted by Reserve
Bank of India (RBI).
Project Office :-
Foreign Companies planning to execute specific projects in
India can set up temporary project/site offices in India.
RBI has now granted general permission to foreign entities to
establish Project Offices subject to specified conditions. Such
offices can not undertake or carry on any activity other than
the activity relating and incidental to execution of the
project. Project Offices may remit outside India the surplus
of the project on its completion, general permission for
which has been granted by the RBI
Branch Office :-
Foreign companies engaged in manufacturing and trading
activities abroad are allowed to set up Branch Offices in India
for the following purposes:
Export/Import of goods
Rendering professional or consultancy services
Carrying out research work, in which the parent company is
engaged.
Promoting technical or financial collaborations between
Indian companies and parent or overseas group company.
Rendering services in Information Technology and
development of software in India.
Foreign airline/shipping company.

A branch office is not allowed to carry out manufacturing

activities on its own but is permitted to subcontract these to
an Indian manufacturer. Branch Offices established with the
approval of RBI, may remit outside India profit of the branch,
net of applicable Indian taxes and subject to RBI guidelines
Permission for setting up branch offices is granted by the
Reserve Bank of India (RBI).
International Monetary Fund (IMF): Origin of IMF:
The origin of the IMF goes back to the days of international
chaos of the 1930s. During the Second World War, plans for
the construction of an international institution for the
establishment of monetary order were taken up. At the
Bretton Woods Conference held in July 1944, delegates from
44 non-communist countries negotiated an agreement on
the structure and operation of the international monetary
system.
The Articles of Agreement of the IMF provided the basis of
the international monetary system. The IMF commenced
financial operations on 1 March 1947,though it came into
official existence on 27 December 1945, when 29 countries
signed its Articles ofAgreement. Today the IMF has near-
global membership of 188
member countries. Virtually, the entire world belongs to
IMF. India is one of the
founder- members of the Fund.

Objectives:
Article 1 of the Articles of Agreement spell out 6
purposes for which the IMF was
set up.
These are:
I.To promote international monetary cooperation through a
permanent institution
which provides the machinery for consolation and
collaboration on international
monetary problems.
II. To facilitate the expansion and balanced growth of
international trade, and to contribute thereby to the
promotion & maintenance of high levels of employment &
exchange arrangements among members, and to avoid
competitive exchange depreciation.
IV. To assist in the establishment of a multilateral system of
payments in respect of current transactions between
members and in the elimination of foreign exchange
restrictions which hamper the growth of world trade.
V. To give confidence to members by making the general
resources of the Fund temporarily available to them under
adequate safeguards, thus providing them with the
opportunity to correct maladjustments in their balance of
payments, without resorting to measures destructive of
national or international prosperity.
VI. In accordance with the above, to shorten the duration &
lessen the degree of disequilibrium in the international
balance of payments of members.
Functions of IMF :
The principal function of the IMF is to supervise the
international monetary system.
Several functions are derived from this. These are:
granting of credit to member
countries in the midst of temporary balance of payments
deficits, surveillance over the
monetary and exchange rate policy of member countries,
issuing policy recommendations. It is to be noted that all
these functions of the IMF may be combined into three.
These are: regulatory, financial, and consultative functions:
Regulatory Function:
The Fund functions as the guardian of a code of rules set by
its (AOA— Articles of Agreement).
Financial Function:
It functions as an agency of providing resources to meet
short term and medium term BOP disequilibrium faced
by the member countries.
Consultative Function:
It functions as a centre for international cooperation and a
source of counsel and
technical assistance to its members.
The main function of the IMF is to provide temporary
financial support to its members
so that ‘fundamental’ BOP disequilibrium can be
corrected.The Fund provides financial assistance. It includes
credits & loans to member countries with balance of
payments problems to support policies of adjustment and
reform. It makes its financial resources available to member
countries through a variety of financial facilities. It also
provides concessional assistance under its poverty reduction
and growth facility and debt relief initiatives.In addition,
technical assistance is also given by the Fund. Technical
of expertise and support provided by the IMF to its members
in several broad areas :
the design and implementation of fiscal and monetary
policy; institution-building, the
handling and accounting of transactions with the IMF; the
collection & retirement of
statistical data and training of officials.

Organisation and Management of the IMF:

Like many international organisations, the IMF is run by a
Board of Governors, an Executive Board &an international
staff. Every member country delegates a representative
(usually heads of central banks or ministers of finance) to
the Board of Governors—the top link of the chain of
command. It meets once a year and takes decision on
fundamental matters such as electing new members or
The Executive Board is entrusted to the management of day-
to-day policy decisions.
The Board comprises 24 executive directors who supervise
the implementation of
policies set by the member governments through the Board
of Governors.
The IMF is headed by the Managing Director who is elected
by the Executive Board for
a 5 year term of office.
Rights and obligations, i.e., the balance of Powers in the
Fund is determined by a
system of quotas. Quotas are decided by a vote of the Board
of Governors. Quotas or subscriptions roughly reflect the
importance of members in the world economy. It is the
quota on which payment obligation, credit facilities, &
voting rights of members are determined.
or appointing executive directors to the Executive Board.
Approving quota increases, Special Drawing Right
allocations,Admittance of new members, compulsory
withdrawal of member, Amendments to the Articles of
Agreement and By-Laws. Board of Governors is advised by
two ministerial committees, the International Monetary and
Financial Committee (IMFC) and the Development
Committee.

IMF and India

Post-partition period, India had serious balance of payments
deficits, particularly with the dollar and other hard currency
countries. It was the IMF that came to her rescue. The Fund
granted India loans to meet the financial difficulties arising
out of the Indo–Pak conflict of 1965 and 1971.
India had to borrow from the Fund in the wake of the steep
rise in the prices of its imports, food, fuel and fertilizers.
In 1981, India was given a massive loan of about Rs. 5,000
crores to overcome foreign exchange crisis resulting from
persistent deficit in balance of payments on current account.
India wanted large foreign capital for her various river
projects, land reclamation schemes and for the development
of communications. Since private foreign capital was not
forthcoming, the only practicable method of obtaining the
necessary capital was to borrow from the International Bank
for Reconstruction and Development (i.e. World Bank).
India has availed of the services of specialists of the IMF for
the purpose of assessing the state of the Indian
economy. In this way India has had the benefit of
independent scrutiny and advice.

WORLD BANK
The World Bank was established in December 1945 at the
United Nations Monetary and Financial Conference in
Bretton Woods, New Hampshire. It opened for business in
June 1946 and helped in the reconstruction of nations
devastated by World War II. Since 1960s the World Bank has
shifted its focus from the advanced industrialized nations to
developing third-world countries.World Bank, is an
international financial institution whose purposes include
assisting the development of its member nation’s territories,
promoting and supplementing private foreigninvestment and
promoting long-range balance growth in international trade.
Organizations associated with the World Bank:
The World Bank Group comprises five international
organizations that provide loans to developing countries.
These are:(1) The International Bank for Reconstruction and
Development (IBRD)
(2)The International Development Association (IDA)
(3) The International Finance Corporation (IFC)
(4) The Multilateral Investment Guarantee Agency (MIGA)
(5) The International Centre for Settlement of Investment
Disputes (ICSID).
IBRD and IDA are sometimes jointly referred to as the World
Bank. IBRD has 189 member nations while IDA has 173
member nations.
Organization and Structure:
The organization of the bank consists of the Board of
Governors, the Board of Executive Directors and the
Advisory Committee, the Loan Committee and the president
and other staff members. All the powers of the bank are
vested in the Board of Governors which is the supreme
policy making body of the bank.
The board consists of one Governor and one Alternative
Governor appointed for five years by each member country.
Each Governor has the voting power which is related to the
financial contribution of the Government which he
represents.The Board of Executive Directors consists of 21
members, 6 of them are appointed by the six largest
shareholders, namely the USA, the UK, West Germany,
France, Japan and India. The rest of the 15 members are
elected by the remaining countries.The president of the
bank is pointed by the Board of Executive Directors. He is
the Chief Executive of the Bank and he is responsible for the
conduct of the day-to-
day business of the bank. The Advisory committees
appointed by the Board of Directors consists of 7 members
who are experts in different branches of banking. There is
also another body known as the Loan Committee. This
committee is consulted by the bank before any loan is
extended to a member country.

Objectives:
The following objectives are assigned by the World Bank:
1. To provide long-run capital to member countries for
economic reconstruction and development.K
2. To induce long-run capital investment for assuring Balance
of Payments (BoP) equilibrium and balanced development of
international trade.
3. To provide guarantee for loans granted to small and large
units and other projects of member countries.
4. To ensure the implementation of development projects so
as to bring about a smooth transference from a war-time to
peace economy.
5. To promote capital investment in member countries by
the following ways;(a) To provide guarantee on private loans
or capital investment.
(b) If private capital is not available even after providing
guarantee, then IBRD provides loans for productive activities
on considerate conditions.

Functions:
World Bank is playing main role of providing loans for
development works to member countries, especially to
underdeveloped countries. The World Bank provides long-
term loans for various development projects of 5 to 20 years
duration.
1. World Bank provides various technical services to the
member countries. For this purpose, the Bank has
established “The Economic Development Institute” and a
Staff College in Washington.
2. Bank can grant loans to a member country up to 20% of its
share in the paid-up capital.
3. The quantities of loans, interest rate and terms and
conditions are determined by the Bank itself.
4. Generally, Bank grants loans for a particular project duly
submitted to the Bank by the member country
5. The debtor nation has to repay either in reserve
currencies or in the currency in which the loan was
sanctioned.
6. Bank also provides loan to private investors belonging to
member countries on its own guarantee, but for this loan
private investors have to seek prior permission from
those counties where this amount will be collected.

International Bank of Reconstruction and Development

(IBRD)
The International Bank of Reconstruction & Development
(IBRD) is one of the two major institutions that make up the
World Bank, with the other being the International
Development Association (IDA). The IDA is a financial
institution dedicated to making developmental loans to the
world’s poorest countries. The IBRD was founded in 1944
with the goal of helping war-torn European countries rebuild
their infrastructure and their economies.The International
Bank of Reconstruction & Development is a development
bank administered by the World Bank. The IBRD offers
financial products and policy advice to countries aiming to
reduce poverty and promote
sustainable development. The IBRD is a cooperative owned
by 189 member countries.Following the recovery from World
War II, the IBRD broadened its mandate to increasing global
economic growth and eliminating poverty. Today, the IBRD
focuses its services on middle-income countries or countries
where the per capita income ranges from $1,026 to $12,375
per year. The IBRD adjusts these and other figures yearly to
account for inflation, economic changes within middle-
income countries, and other factors.
The goal of IBRD is to provide financing and economic policy
advice to help the leaders of middle-income countries
navigate the path toward greater prosperity. It will often
help finance infrastructure projects that grow a country’s
economic potential while helping governments manage
public finances and cultivate the confidence of
of foreign investors.

Functions of IBRD
To assist in the reconstruction & development of its member
countries.
To promote private foreign investment.
To promote balanced growth of international trade.
To bring about a smooth transition from a war time
economy to peace time economy.
IBRD aims to reduce poverty in middle-income and credit
worthy poorer countries by promoting sustainable
development through loans, guarantees, risk management
products, &analytical and advisory services.Activities by
IBRD
Basic education and health services
Safety needs
Infrastructure development
Environment protection
Private sector development
Governance and investment climate
Technical assistance

International Finance Corporation (I.F.C.):

The International Finance Corporation was established in
July 1956, with the specific subject of providing finance to
the private sector.Though it is affiliated to the World Bank, it
is a separate legal entity with separate fund and functions.
Members of the World Bank are eligible for its membership.
(IFC) is an international financial institution that offers
investment, advisory, and asset-management services to
encourage private-sector development in less developed
countries. The IFC is a member of the World
Bank Group and is headquartered in Washington, D.C. in the
United States.

Objectives of IFC
IFC provides equity and loan capital for private enterprises in
association with private investors and encourages the
development of local capital markets and stimulates the
international flow of private capital. It supports joint venture
which provides opportunities to combine domestic
knowledge of market and other conditions with the
technical and managerial experience available in the
industrial nations.
The principal objectives of IFC are as follows.
1. It makes investments in productive private enterprises in
association with private investors. It concentrates on areas
where sufficient private capital is not forthcoming
on reasonable terms and conditions.
2. It acts as a clearing house for bringing together investment
opportunities, private capital and the experienced
management.
3. It stimulates the International flow of capital.
4. It assists the development of capital markets in less
developed countries.
5. It encourages private sector activity in developing
countries through three types of activities :
private sector project financing
helping companies in the developing world to mobilize
financing in the international financial markets and
providing guidance and technical assistance to business and
governments.
It provides investment and asset management services to
encourage the development of private enterprise
in nations that might be lacking the necessary infrastructure
or liquidity for businesses to secure financing.To that end, IFC
also ensures that private enterprises in developing nations
have access to markets and financing. Its most recent goals
include the development of sustainable agriculture,
expanding small businesses’ access to microfinance,
infrastructure improvements, as well as climate, health, and
education policies.

International Development Association (IDA)

The International Development Association (IDA) is also a
subsidiary of the World Bank. IDA is also known as the World
Bank’s “Fund for the Poorest.”It was established on 24
September 1960. The International Development Association
is headquartered in Washington.
The number of its member countries is 173. IDA provides
concessional loans to the world’s poorest countries. The
primary Functions of IDA is to reduce poverty by providing
easy loans to the poorest countries.Only those countries can
be a member of IDA who is already the member of the
World Bank. The International Development Association is
governed by the World Bank’s board of governors only.
The Aim of IDA is to help the poorest countries in developing
more quickly and to reduce poverty. The International
Development Association’s aim to provide development
financing whose credit risk is in trouble and the gross
national income and per capita income are the lowest. It’s
the largest loan provider institution for economic and
human development projects in the poorest countries.
The prime developmental area of IDA is infrastructural,
Institutional development and technical support. IDA is also
encouraging the donors to help the developing countries.
IDA has supported more than 110 countries through grants,
interest-free loans, and long-term loans.The main objective
of the establishment of the IDA is to provide credit to semi-
developed and developing countries. The institution
provides loan on easy terms. The purpose of the loan is to
improve the living standard by increasing the economic
growth rate of these countries.IDA provides support for
Health, Education,Infrastructure, Agriculture , Economic and
institutional development to 82 countries (40 of them in
Africa)

Objectives of IDA
To provide development finance on easy terms
to the less developed member countries
To provide assistance for poverty alleviation in the poorest
countries
To provide finance at a concessional interest rates in order to
promote economic development, raise productivity and
living standards in less developed nations
To Provide long term loans at zero interest to the poorest of
the developing countries
To Support efficient and effective programs to reduce
poverty and improve the quality of life in its poorest
member countries
To Help build the human capital, policies, institutions, and
physical infrastructure needed to bring about equitable and
sustainable growth.
IDA’s goal is to reduce the disparities across and within
countries, to bring more people into the mainstream.

International Monetary System: Meaning

International Monetary System (IMS) is a well-designed
system that regulates the valuations and exchange of money
across countries. It is a well-governed system looking after
the cross-border payments, exchange rates, and mobility of
capital. This system has rules and regulations which help in
computing the exchange rate and terms of international
payments.In other words, International Monetary System
mobilizes capital from one nation to another by felicitating
trade.The main purpose of the International Monetary
System today is, to enhance high growth in the world with
stable price levels.
Earlier the scope was only up to exchange rates, now the
system has a broader scope by taking financial stability into
consideration. International Monetary System has
established International Monetary Fund (IMF) and the
World Bank in the year 1944.International Monetary System
is also known as “International Monetary and Financial
System” and also “International Financial Architecture”.
 Gresham's law is an economic principle that states: "if coins
containing metal of different value have the same value as
legal tender, the coins composed of the cheaper metal will
be used for payment, while those made of more expensive
metal will be hoarded or exported and thus tend to
disappear from circulation.”

Classic Gold Standard

In the initial years of the Gold Standard, only a few countries
adopted this standard. Later almost all countries accepted it.
Usually, coins and billions of gold were useful during this
standard. This gold standard gave birth to a fixed exchange
rate system with minimal fluctuations. Because of the most
fixed exchange rate, International trade saw a boost during
this time. Gold Standard also made all countries of the world
abide by
strict monetary policy.This standard was helpful in correcting
trade imbalances in the country.During this period in most
major countries:
• Gold alone was assured of unrestricted coinage
• There was two-way convertibility between gold and
national currencies at a stable ratio.
• Gold could be freely exported or imported. The exchange
rate between two country’s currencies would be determined
by their relative gold contents.
Each country defined the value of its currency in terms of
gold. Exchange rate between any two currencies was
calculated as X currency per ounce of gold/ Y currency per
ounce of gold.
For example, if the dollar is pegged to gold at U.S.$30 = 1
ounce of gold, and the British pound is pegged to gold at £6 =
1 ounce of gold, it must be the case that the
exchange rate is determined by the relative gold contents
$30 = £6 $5 = £1.

Why Classic Gold Standard Collapsed?

After the end of World War 1, the Classic Gold Standard
collapsed. During World War, many countries printed more
money in order to finance their military requirements. As a
result of this, the money in circulation exceeded the gold
reserves of the country and so, those countries have to give
up on Classic Gold Standard.The growth of output and the
growth of gold supplies are closely linked. Volatility in the
supply of gold could cause adverse shocks to the
economy.The only United States of America didn’t give up on
Classic Gold Standards.

Interwar Period
The period between World War 1 and World War 2 is known
as the Interwar Period. This was the next episode of the
International Monetary System from 1915 to 1944. During
this time, Britain was replaced by the United States of
America as the dominant financial powerhouse across the
globe. During this period, all the economies had gone into a
depression with a higher inflation rate. The fixed exchange
rate system collapsed with a higher supply of money. Almost
all countries started focussing on domestic revamping and
not on international trade.The world economy characterized
by tremendous instability and eventually economic
breakdown, what is known as the Great Depression (1930 –
39). Many countries suffered during the Great Depression. –
Major economic harm was done by restrictions on
international trade and payments. – These beggar-thy-
neighbor
policies provoked foreign retaliation and led to the
disintegration of the world economy.

Bretton Woods System: 1945- 1972

 Named for a 1944 meeting of 44 nations at Bretton Woods,
New Hampshire.
 The purpose was to design a postwar international
monetary system.
 The goal was exchange rate stability without the gold
standard.
Resulted in ; The result was the creation of the IMF and the
World Bank 1. IMF: maintain order in monetary system 2.
World Bank: promote general economic development In
discussion
Features of Bretton Woods System :-
 Under the Bretton Woods system, the U.S. dollar was
pegged to gold at $35 per ounce and other currencies were
pegged to the U.S. dollar.
 Each country was responsible for maintaining its exchange
rate fixed : within ±1% of the adopted par value by buying or
selling foreign reserves as necessary.
 The Bretton Woods system was a dollar-based gold
exchange standard.The focus of the Bretton Woods
Agreement was to establish a uniform and liberal
International Financial Architecture, with independence on
domestic policies.
Downfall of the Bretton Woods System :-
Post-World War situation, the supply of US Dollars suddenly
increased in the world economy. As a result of it, many
countries started questioning the quantum of gold reserves
of the US Government with the supply of the US Dollar. By
1973, many countries started losing
confidence in the US Dollar and started searching for some
other reliable source.The dollar was overvalued in the
1960s . Growing increase in the amount of dollars printed
further eroded faith in the system and the dollars role as a
reserve currency. In 1971, the U.S. government “closed the
gold window” by decree of President Nixon.

Smithsonian Agreement An agreement reached by a group

of 10 countries (G10) in 1971 that effectively ended the fixed
exchange rate system established under the Bretton Woods
Agreement. The Smithsonian Agreement reestablished an
international system of fixed exchange rates without the
backing of silver or gold, and allowed for the devaluation of
the U.S. dollar. This agreement was the first time in which
currency exchange rates were negotiated.
The Flexible Exchange Rate Regime
Flexible exchange rates were declared acceptable to the
IMF members.
• Central banks were allowed to intervene in the exchange
rate markets to iron out unwarranted volatilities. Gold was
abandoned as an international reserve asset. The currencies
are no longer backed by gold.
The present-day International Financial Architecture is a
managed float system. All the currencies of all the countries
can freely float against one another in an open market under
the managed float system. The govt intervenes only when
the currency needs to be stabilized.

What is the Financial Market?

The financial market refers to the marketplace where the
activities related to creating
and trading different financial assets such as bonds, shares,
commodities, currencies, derivatives, etc., occur. It provides
the platform for sellers and buyers of financial assets to meet
and trade with each other at a price determined by market
forces.

What are the Functions of Financial Markets?

There are different functions that the financial markets
perform, which includes determination of the prices where
financial markets help in price discovery of various financial
instruments, mobilization of the funds, providing an
opportunity to different investors to buy or sell their
respective financial instrument at the fair value that is
prevailing in the market, providing the various types of
information to traders, and the sharing of the risk, etc.
#1 – Price Determination
The financial market performs the function of price discovery
of the different financial instruments traded
between the buyers and the sellers on the financial market.
The prices at which the financial instruments
trade in the financial market are determined by the market
forces, i.e., demand and supply. So the financial market
provides the vehicle by which the prices are set for both
financial assets which are issued newly and for the existing
stock of the financial assets.
#2 – Funds Mobilization
Along with determining the prices at which the financial
instruments trade in the financial market, the required
return out of the funds invested by the investor is also
determined by participants in the financial market. The
motivation for persons seeking the funds is dependent on
the required rate of return, which the investors
demand.Because of this function of the financial market
only, it is signaled
that funds available from the lenders or the investors of the
funds will get allocated among the persons who need the
funds or raise funds through the means of issuing financial
instruments in the financial market. So, the financial market
helps in the mobilization of the investors’ savings.
#3 – Liquidity
The liquidity function of the financial market provides an
opportunity for the investors to sell their financial
instruments at their fair value prevailing in the market at
any time during the working hours of the market.In case
there is no liquidity function of the financial market. The
investor forcefully have to hold the financial securities or the
financial instrument until the conditions arise in the market
to sell those assets or the issuer of the security is obligated
contractually to pay for the same, i.e., at the
at the time of maturity in debt instrument or at the time of
the liquidation of the company in case of the equity
instrument.Thus, investors can sell their securities
readily & convert them into cash in the financial market,
thereby providing liquidity.
#4 – Risk sharing
The financial market performs the function of risksharing as
the person who is undertaking the investments is different
from the persons who are investing their fund in those
investments.With the help of the financial market, the risk is
transferred from the person who undertakes the
investments to those who provide the funds for making
those investments.
#5 – Easy Access
The industries require the investors to raise funds, and the
investors require the industries to invest their money
and earn the returns from them. So the financial market
platform provides the potential buyer and seller easily,
which helps them save their time and money in finding the
potential buyer and seller.
#6 – Reduction in Transaction Costs and Provision of the
Information
The trader requires various types of information while doing
the transaction of buying and selling the securities. For
obtaining the same time and money is required.
But the financial market helps provide every type of
information to the traders without the requirement of
spending any money by them. In this way, the financial
market reduces the cost of the transactions.
#7 – Capital Formation
Financial markets provide the channel through which the
new investors’ savings flow in the country, which aids in
the country’s capital formation.It plays a crucial role in
allocating the limited resources available in the economy of
any country.

Financial Markets Classification

Financial makets are intermediaries between fund seekers
(generally businesses, government, etc.) and fund providers
(typically investors, households, etc.). It mobilizes funds
between them, helping allocate the country’s limited
resources.
The financial markets can be classified into four categories: –
By Nature of Claim
By Maturity of Claim
By the Timing of Delivery
By Organizational Structure
#1 – By Nature of Claim
Markets are categorized by the type of claim the investors
have on the entity’s assets in which they have made the
investments. There are broadly two kinds of claims, i.e.,
fixed and residual. Based on the nature of the claim, there
A debt market is when debt instruments such as
bonds,debentures, are traded between investors. Such
instruments have fixed claims, i.e., their share in the entity’s
assets is restricted to a certain amount. In addition, these
instruments generally carry a coupon rate, commonly known
as interest, which remains fixed over some time.

Equity Market
In this market, equity instruments are traded. As the name
suggests, equity refers to the owner’s capital in the business.
It thus has a residual claim, implying that whatever is left in
the industry after paying off the fixed liabilities belongs to
the equity shareholders
irrespective of the face value of shares held by them.
#2 – By Maturity of Claim
While investing, time plays an important role as the amount
of investment depends on the time horizon of the
acquisition. The time also affects the risk profile of an
investment. An investment with a lower time carries a lower
risk than an investment with a higher period.
There are two types of market-based on the maturity of
claim: –
The Money market
is for short-term funds, where the investors who intend to
invest for not longer than a year enter into a transaction.
This market deals with Monetary assets
such as treasury bills, commercial paper and certificates of
deposits. The maturity period for all these instruments does
not exceed a year.Since these instruments have a low
maturity period, they carry a lower risk and a reasonable
rate of return for the investors, generally in
interest.

Capital Market
The capital market is when instruments with medium- and
long-term maturity are traded. It is the market where the
maximum interchange of money happens. It helps
companies access money through equity capital,preference
share capital, etc. It also provides investors access to invest
in the company’s equity share capital andbe a party to the
profits earned by the company.
This market has two verticals:
Primary Market – Primary market refers to the market
where the company lists security for the first time or where
the already listed company issues fresh security. It involves
the company and the shareholders transacting with each
other.
Secondary Market – Once a company gets the security listed,
the deposit becomes available to be traded over the
exchange between the investors. The market that facilitates
such trading is the secondary market or the stock market.In
other words, it is an organized market where the trading of
securities takes place between investors.Transactions of the
secondary market do not impact the cash flow position of
the company, as such, as the receipts or payments for such
exchanges are settled amongst investors without the
company being involved.
#3 – By Timing of Delivery
This concept generally prevails in the secondary market or
stock market. Depending on the timing of delivery, there are
two types of market: –
Cash market
In this market, transactions are settled in real-time.
Therefore, it requires the total amount of investment to be
paid by the investors, either through their funds or through
borrowed capital, generally known as margin, which is
allowed on the present holdings in the account.

Futures Market
In this market, the settlement or delivery of security or
commodity occurs later. Therefore, transactions in such
markets are generally cash-settled instead of settled delivery.
For trading in the futures market, the total amount of assets
is not required to be paid. Rather, a margin going up to a
certain percentage of the asset amount is sufficient to trade
in the asset.

#4 – By Organizational Structure
Markets are also categorized based on the market structure,
i.e., how transactions are conducted. There are two types of
market, based on organizational structure: –Exchange-
Traded Market :- An exchange-traded market
is a centralized market that works on pre-established and
standardized procedures. In this market, the buyer and seller
do not know each other. Transactions are entered into with
the help of intermediaries, who are required to ensure the
settlement of the transactions between buyers and sellers.
There are standard products that are traded in such a
market. Therefore, they cannot need specific or customized
products.

Over-the-Counter Market
This decentralized market allows customers to trade in
customized products based on the requirement.
In these cases, buyers and sellers interact with each other.
Generally, over-the-counter market transactions involve
hedging foreign currency exposure, exposure to
commodities, etc. These transactions occur over-the-counter
as different companies have different maturity dates for
debt, which generally does not coincide with the settlement
dates of exchange-traded contracts.Over time, financial
markets have gained importance in fulfilling the capital
requirements for companies and providing investment
avenues to the investors in the country. Financial markets
offer transparent pricing, high liquidity, and investor
protection from frauds and malpractices.
Technological diffusion
It is the process by which the adoption of new technology
spreads widely. Adoption may be by the household or
company. They began to utilize technology in their daily
lives.In a company, technology infusion measures the extent
to which new technology permeates into the organization.
Whereas diffusion measures the extent to which the
technology spreads throughout the organization.
Let’s take the example of new accounting software
technology. Technology infuses an organization when, for
example, all finance department staff use it. It does not
diffuse because not all departments use it. Instead, the
adoption of new Microsoft Office software diffuses the
organization because its use spreads throughout the entire
department, not just the finance department staff.
Factors affecting technology diffusion :-
The four main factors that influence the spread and adoption
of new technology are:
The nature and degree of innovation of new
technologies:This factor is difficult to measure, especially
when technology is truly new. We do not know precisely
how innovative is the major innovative inventions such as
lights and locomotives were of its time.
Communication channel : This factor determines the transfer
of information from one unit to another. Nowadays, the
internet facilitates information and the adoption of new
technologies more quickly. When there is an innovation in a
country, the information can quickly spread to various
countries through the internet.
Time : The new technology takes time to be widely adopted.
Characteristics of human resources : This factor can be
related to demographic variables such as education level or
social system, such as the presence of opinion leaders.
Adopter categories:-
Everett Rogers classifies consumers into five groups based on
their level of adoption of new technologies. They are:
Innovator :They are the most enthusiastic about new
technology and are willing to take risks. They tolerate risk
because they have secure financial resources to absorb risk.
Early adopters :They are generally opinion leaders and do
not necessarily adopt new technology. They are wise in
considering the consequences of utilizing a new technology.
Early majority : This group adopts new technology after
innovators and early adopters used it. They rarely act as
opinion leaders and generally have an average social status.
Late majority : This group will adopt it only if most of the
people have taken it. They tend to be skeptical of the
presence of new technology.
Laggards : They consist of individuals who tend to be stiff to
change. They adopted new technology after almost
everyone used it, and it has become a trend in society.
Technology transfer (TT), also called transfer of technology
(TOT), is the process of transferring (disseminating)
technology from the person or organization that owns or
holds it to another person or organization, in an attempt to
transform inventions and scientific outcomes into new
products and services that benefit society.Technology
transfer is closely related to (and may arguably be
considered a subset of) knowledge transfer.
Recent findings point to technology differences as primary
cause of international inequalities in economic
achievements. To reduce the inequalities, technology
capabilities of the backward nations must be strengthened.
The quickest way to do so is to transfer technology from the
developed to the developing nations.
To obtain new technology, a nation has three alternatives:
1) Produce the technology capability at home
2) Import it from abroad
3) Import goods containing the desired technology
For most Least Developed Countries (LDCs), home
production of technology is often uneconomic. Since much
of what they are seeking already exists in the industrially
advanced areas, they can fill their needs by importation.
Normally, the importation can be effected at savings over
the domestic cost of research and development (R&D). R&D
expenditures devoted to projects duplicating existing know-
how are obviously wasteful.Thus, economic rationale
requires that LDCs concentrate their home production of
new technology on any unusual requirements that cannot
be met from import sources.
The access to technology depends on its ownership.
Non-proprietary technology belongs to the public. It is
there for the taking, but it is not free. The taker must have
the ability to gather it from libraries, public research
institutions, or wherever it may be found.
Proprietary technology is privately owned. It consists,
trademarks, and secret processes. The most efficient and
profitable technology, often also the newest, belong in this
category.

Parties Involved in the Technology Transfer

International technology transfer has both horizontal and a
vertical dimension, each with its own elements. From the
horizontal perspective, the three basic elements in
technology transfer are the home country, the host country
and the transaction. The vertical dimension of technology
transfer refers to the issues specific to the
nation state, or to the industries or firms within the home
and host countries.
In general, the various elements may be categorized as (i)
home country, (ii)host country ,and (iii)the transaction.
1. Home Country’s Reactions to Technology Transfers
Home countries express apprehensions about the export of
their technology, they have reasons to oppose the export of
technology .They argue that the established of production
facilitates by MNCs in subsidiaries abroad decreases their
export potential. Additionally, they claim, because some of
the MNCs imports stem from their subsidiaries, the volume
of imports of the home country tends to increase.Given the
decrease in exports and increase in imports, the balance of
trade tends to be adverse to the home country. Labor
unions in the home country too oppose technology transfer
on the ground
that the jobs generated from the new technology will benefit
the country citizens.

2. Host Country’s Reactions to technology Transfers

More serious are the reactions of the host country to
transfer. The subject of technology transfers is highly
sensitive, often evoking strong reservations against it from
the country citizens. The criticisms against technology
transfer are based on economic and social factors.
Economic Implications: Economic implications include
payment of fee, royalty, dividends, interest and salaries to
technicians and tax concessions resulting in loss to the
national exchequer. All these are payable to the transferring
country and might prove very expensive to the host country.
In addition to the payments just stated,
the technology supplier often succeeds in extracting
payments through various other techniques like over-pricing
and buying intermediates at high prices. There are
malpractices too, for example, tie-up purchase, and
restriction on exports, and charging excessive prices. Many
times, the type of technology transferred by international
business is not appropriate to developing countries. The
technology that is developed is inevitably the one most
suitable for industrial countries which are appropriate to
resources endowment of developed nations. Such
technology are not in the interest of developing countries.
Social Implications: The social and cultural implications of
technology transfer are more serious than the economic
significance. Along with the transfer of technology, there is
the transmission of culture from the
exporting countries. The Indians who work in firms using
such imported technology get influenced and accustomed to
the skills, concepts, policies, practices, thoughts, and beliefs.
Then there are social problems like pollution, urbanization ,
congestion, depleted natural resources, and similar other
evils.

3. Transaction
This element focuses on the nitty-gritties of the transfer. The
issues here relate to the terms and conditions of technology
transfer.

Dissemination & Spillover of technology :-

FDI has been widely recognized as a growth enhancing factor
for host countries; it not only brings capital but also
introduces advanced technology that can enhance
the technological capability of the host country firms such
that it can generate long-term and sustainable economic
growth for the host countries. The technological benefit is not
limited to locally-affiliated firms but it can also spread to non-
affiliated firms. The latter benefit is usually referred as the
technology spillover.Technology has been seen as a major
driving force in output growth and economic integration of
the global economy. Technological progress is often treated
as an exogenous factor. However, the recent research has
treated the technological change in accounting for economic
growth. The endogenous growth model suggests that
innovation relies on knowledge resulting from cumulative
R&D expenditure and at the same time it also contributes to
the growth of knowledge stock of R&D activities
which drives economic growth by the creation of new
products according to the horizontally differentiated input
models; or improvement in the quality of existing ones
according to the vertically differentiated input models. The
non-rival characteristics of technology, which distinguishes it
from other factor inputs make the marginal costs of
technology to the additional firms negligible.Technological
investments not only confer benefits to the investors but
also contribute to the knowledge base which is then publicly
available to the firms/industry. These externalities are called
“technology spillovers”.The technology spillover effect is a
driving force in economic growth and through different
channels the technology diffuses across industries of a host
country. Trade is a crucial conduit for technology
transfer.With the rapid growth of FDI after the 1990s,
an increasing tendency to develop R&D in the host country
affiliated or non-affiliated firms has resulted in FDI which is
seen as an engine of economic growth.Another potential
channel for technology spillover is information technology
(IT), which is well known for improving the efficiency of
production and reduce the cost of communication and
monitoring among the distant firms.Further, with easy
access to modern communications technology, firms in all
globalizing countries are under pressure to improve their
productive efficiency in the face of competition from newly-
emerging domestic firms on one the hand and foreign
competition on the other. The removal of quantitative
restrictions and trade barriers to entry has opened up the
economy to international market forces which coupled with
the rising economic and social aspirations of the
population, has again led to the rapid emergence of a
competitive environment especially in the industrial sector.
International investors are now evaluating the different local
business environment or investment climate (IC),
geographical features, local labor laws, transport facilities
offered by various regional areas, as well as capabilities and
strategies of the local firms, etc. So the technology spillovers
are varied across the firms of an industry located in different
regional areas in India.The technology spillover for the host
country firms has been an important route of the
outsourcing of knowledge, embodied in FDI brought in by
the MNCs. So, the expectation of gaining technology
spillover has persuaded many developing countries to offer
various incentives to attract FDI.From the empirical findings,
it appears that the positive technology spillover from FDI
is not automatic, but it depends on both country-specific
factors and policy environment. An analysis of the
technology spillover impact of FDI on host economies has
typically assumed this impact to occur in two linked steps:
First, MNCs parent to subsidiaries international transfer of
technology that is superior to the prevailing technology in
the host economy; and Second, the subsequent spread of
this technology to domestic firms in technological spillover
effect.

Liberalization & Unification of world economies:-

Liberalisation of countries in emerging markets provides new
opportunities for investors to increase their diversification
and profit.
Economic liberalization refers to a country "opening up" to
the rest of the world with regard to trade, regulations,
taxation, and other areas that generally affect business in
the country. As a general rule, you can determine to what
degree a country is liberalized economically by how easy it is
to invest and do business in that country.Below are five
effects of country liberalization.The underlying goal of
economic liberalization is to have unrestricted capital
flowing into and out of the country, boosting economic
growth and efficiency.
Removal of Barriers to International Investing
Investing in emerging market countries can sometimes be an
impossible task if the country you're investing in has several
barriers to entry. These barriers can include tax laws, foreign
investment restrictions, legal issues, and accounting
regulations, all of which make it difficult
The economic liberalization process begins by relaxing these
barriers and relinquishing some control over the direction of
the economy to the private sector. This often involves some
form of deregulation and privatization of companies.
Unrestricted Flow of Capital
The primary goals of economic liberalization are the free flow
of capital between nations and the efficient allocation of
resources and competitive advantages. This is usually done
by reducing protectionist policies, such as tariffs, trade laws,
and other trade barriers.One of the main effects of this
increased flow of capital into the country is that it makes it
cheaper for companies to access capital from investors. A
lower cost of capital allows companies to undertake
profitable projects they may not have been able to with a
higher cost of capital
Stock Market Appreciation
In general, when a country becomes liberalized, stock
market values also rise. Fund managers and investors are
always on the lookout for new opportunities for profit. The
situation is similar in nature to the anticipation and flow of
money into an initial public offering (IPO).A private company
previously unavailable to investors that suddenly becomes
available typically causes a similar valuation and cash flow
pattern. However, like an IPO, the initial enthusiasm also
eventually dies down, and returns become more normal and
more in line with fundamentals.
Reduced Political Risks
Liberalization reduces the political risk to investors. For the
government to continue to attract more foreign investment,
areas beyond the ones mentioned earlier
have to be strengthened as well. These are areas that
support and foster a willingness to do business in the
country, such as a strong legal foundation to settle disputes,
fair and enforceable contract laws, property laws, and others
that allow businesses and investors to operate with
confidence.As such, government bureaucracy is a common
target to be streamlined and improved in the liberalization
process. All these changes together lower the political risk
for investors, and this lower level of risk is also part of the
reason the stock market in the liberalized country rises once
the barriers are gone.
Diversification for Investors
Investors can benefit by being able to invest a portion of
their portfolio into a diversifying asset class. In general, the
correlation between developed countries
such as the United States and undeveloped or emerging
countries is relatively low. Although the overall risk of the
emerging country by itself may be higher than average,
adding a low correlation asset to your portfolio can reduce
your portfolio's overall risk profile.However, a distinction
should be made that although the correlation may be low
when a country becomes liberalized, the correlation may
actually rise over time. A high degree of integration can also
lead to increased contagion risk, which is the risk that crises
occurring in different countries cause crises in the domestic
country.This is exactly what happened in the financial crisis
that started in 2007-2008. Weaker countries within the EU
(such as Greece) began to develop severe financial problems
that quickly spread to other EU members.In this instance,
investing in several different EU member countries
would not have provided much of a diversification benefit as
the high level of economic integration among the EU
members had increased correlations and contagion risks for
the investor.
Types of Strategies used in Strategic Planning for achieving
global Competitive advantage

The definition of strategy is a long term plan of action

intended to accomplish a specific objective or set of
objectives or goals. Strategy is a general structure that gives
direction to moves to be made
A well organized planned strategy should be used to achieve
global competitive advantage. The competitive advantages
are conditions that permit an organization to produce a good
or service at a lower price or in a more desirable fashion for
customers. These conditions permit the entity to generate
more sales or greater margins than its competition. The
competitive advantages are ascribed to an assortment of
variables, including brand, cost structure, quality of product,
distribution network, and customer support.
3 essential requirements for a more strategic marketing
planning approach :-
1. Make time for Marketing Research and Planning
The most important quality that an organization needs if it
wants to make understanding its customers a key part of its
long term strategic planning is the development of
a deep understanding of those customers real needs.You will
have to get to know these needs so well that your long term
strategies become not just adaptive but also downright
anticipatory of what the people you’re serving will want and
respond to.Following this core process of strategic planning
will put public perception of your company to a level that’s
at least a cut above that of your competitors. Most
fundamentally, achieving this requires asking questions
which will define your long term company goals and then
finding answers to those same questions through careful
study of your customers behavior, effective viewing
mediums (for marketing) and the market dynamic as a whole
in your niche.
2. Know your Customers better than any competitor
Understanding your customers is a continuous process that
your
organization will have to start living and breathing on a daily
basis, as part of its internal culture.Creating quality
marketing research to fully understand customers is
involved.With this grade of in depth research, you will be
much more adept at anticipating your buyers wishes and
emotional trigger much more effectively than your
competition.Here are some of the more useful customer
information metrics you might want to start looking at:
Daily online and even offline habits
Information about your buyers professional, personal and
family lives
Their interests, personal passions, hobbies and assorted
worries
Their communications, social media and online browsing
preferences
Awareness of advertising and different marketing
platforms you might use or want to use
The dynamics of your customers buying, shopping and desire
related habits.
3. Avoid Reactiveness at all Costs
Being purely reactive means playing a game of catch-up, and
when you’re constantly trying to catch up, you’ll have no
time to create any kind of long term strategic plan. This will
make you fall behind your competitors and disappoint your
existing customers eventually.
Different Strategies Used :-
1. Balanced Scorecard
The Balanced Scorecard is a strategy management
framework created by Drs. Robert Kaplan and David Norton.
It takes into account your:
Objectives, which are high-level organizational goals.
Measures, which help you understand if you’re
accomplishing your objective strategically.
Initiatives, which are key action programs that help you
achieve your objectives.There are many ways you can create
a Balanced Scorecard, including using a program like Excel,
Google Sheets, or PowerPoint or using reporting software.
2. Strategy Map
A strategy map is a visual tool designed to clearly
communicate a strategic plan and achieve high-level
business goals. Strategy mapping is a major part of the
Balanced Scorecard (though it isn’t exclusive to the BSC) and
offers an excellent way to communicate the high-level
information across your organization in an easily-digestible
format.A strategy map offers a host of benefits:
It provides a simple, clean, visual representation that is
easily referred back to.
It unifies all goals into a single strategy.
It gives every employee a clear goal to keep in mind while
accomplishing tasks and measures.
It helps identify your key goals.
It allows you to better understand which elements of your
strategy need work.
It helps you see how your objectives affect the others.
3. SWOT Analysis
A SWOT analysis (or SWOT matrix) is a high-level model used
at the beginning of an organization’s strategic planning. It is
an acronym for “strengths, weaknesses, opportunities, and
threats.” Strengths and weaknesses are considered internal
factors, and opportunities and threats are considered
external factors.
Using a SWOT analysis helps an organization identify where
they’re doing well and in what areas they can improve.
4. PEST Model
Like SWOT, PEST is also an acronym—it stands for “political,
economic, sociocultural, and technological.” Each of these
factors is used to look at an industry or business
environment, and determine what could affect an
organization’s health. The PEST model is often used in
conjunction with the external factors of a SWOT analysis.
(diagram on next slide)
5. Gap Planning
Gap planning is also referred to as a “Need-Gap Analysis,”
“Need Assessment,” or “the Strategic-Planning Gap.”It is
used to compare where an organization is now, where it
wants to be, and how to bridge the gap between.
It is primarily used to identify specific internal deficiencies.
6. Blue Ocean Strategy
Blue Ocean Strategy is a strategic planning model that
emerged in a book written by W. Chan Kim and Renée
Mauborgne, professors at the European Institute of Business
Administration (INSEAD).
The idea behind Blue Ocean Strategy is for organizations to
develop in “uncontested market space” (e.g. a blue ocean)
instead of a market space that is either developed or
saturated (e.g. a red ocean).If your organization is able to
create a blue ocean, it can mean a massive value boost for
your company, its buyers, and its employees.
7. Porter’s Five Forces
Porter’s Five Forces is an older strategy execution
framework (created by Michael Porter in 1979) built around
the forces that impact the profitability of an industry or a
market. The five forces it examines are
The threat of entry : Could other companies enter the
marketplace easily, or are there numerous entry barriers
they would have to overcome?
The threat of substitute products or services: Can buyers
easily replace your product with another?
The bargaining power of customers: Could individual buyers
put pressure on your organization to, say, lower costs?
The bargaining power of suppliers: Could large retailers put
pressure on your organization to drive down the cost?
The competitive rivalry among existing firms: Are your
current competitors poised for major growth? If one
launches a new product or files a new patent—could that
impact your company?The amount of pressure on each of
these forces can help you determine how future events will
impact the future of your company.
8. VRIO Framework
The VRIO framework is an acronym for “value, rarity,
imitability, organization.” This framework relates more to
your vision statement than your overall strategy. The
ultimate goal in implementing the VRIO model is that it will
result in a competitive advantage in the marketplace.Value:
Are you able to exploit an opportunity or neutralize an
outside threat using a particular resource?
Rarity: Is there a great deal of competition in your market, or
do only a few companies control the resource referred to
above?
Imitability: Is your organization’s product or service easily
imitated, or would it be difficult for another organization to
do so?
Organization: Is your company organized enough to be able
to exploit your product or resource?
International Organizational Structures/ Structure of Global
organisations
1) Exports Department
Exports are often looked after by a company’s marketing or
sales department in the initial stages when the volume of
exports sales is low. However, with increase in exports
turnover, an independent exports department is often setup
and separated from domestic marketing, as shown in Fig.
17.2.Exports activities are controlled by a company’s home-
based office through a designated head of export
department, i.e. Vice President, Director, or Manager
(Exports).The role of the HR department is primarily confined
to planning and recruiting staff for exports, training and
development, and compensation.Sometimes, some HR
activities, such as recruiting foreign sales or agency
personnel are carried out by the
exports or marketing department with or without
consultation with the HR department.

2) International division structure:

As the foreign operations of a company grow, businesses
often realize the overseas growth opportunities and an
independent international division
is created which handles all of a company’s international
operations (Fig. 17.3). The head of international division,
who directly reports to the chief executive officer,
coordinates and monitors all foreign activities.
The in-charge of subsidiaries reports to the head of the
international division. Some parallel but less formal
reporting also takes place directly to various functional
heads at the corporate headquarters.The corporate human
resource department coordinates and implements staffing,
expatriate management, and training and development at
the corporate level for international assignments. Further, it
also interacts with the HR divisions of individual
subsidiaries.The international structure ensures the
attention of the top management towards developing a
holistic and unified approach to international
operations.Although an international structure provides
much greater autonomy in decision-making, it is often used
during the early stages of internationalization with relatively
low ratio of foreign to domestic sales, and limited foreign
product
and geographic diversity.

3)Global Organizational Structures:

Rise in a company’s overseas operations necessitates
integration of its activities across the world and building up a
worldwide organizational structure.It leads to re-
organization and amalgamation of hitherto fragmented
organizational interests into a globally integrated
organizational structure which may either be based on
functional, geographic, or product divisions. Depending upon
the firm strategy and demands of the external business
environment, it may further be graduated to a global matrix
or trans-national network structure.

4) Global matrix structure:

It is an integrated organizational structure, which super-ses
imposes on each other more than one dimension. The global
matrix structure might consist of product divisions
intersecting with various geographical areas or functional
divisions (Fig. 17.7). Unlike functional, geographical, or
product division structures, the matrix structure shares joint
control over firm’s various functional activities.Such an
integrated organizational structure facilitates greater
interaction and flow of information throughout the
organization. Since the matrix structure has an in-built
concept of interaction between intersecting perspectives, it
tends to balance the MNE’s prospective, taking cross-
functional aspects into consideration.It facilitates ease of
technology transfer to foreign operations and of new
products to different markets leading to higher economies of
scale and better foreign sales performance.
5) Transnational network structure:
Such a globally integrated structure represents the ultimate
form of an organization, which eliminates the meaning of
two or three matrix dimensions. It encompasses elements of
function, product, and geographic designs while relying
upon a network arrangement to link worldwide subsidiaries
(Fig. 17.8).This form of organization is not defined by its
formal structure but by how its processes are linked with
each other, which may be characterized by an overall
integrated system of various inter-related sub-systems.The
trans-national network structure is designed around ‘nodes’,
which are the units responsible for coordinating with
product, functional and geographic aspects of an MNE. Thus,
trans-national network structures build-up multi­dimensional
organizations which are fullynetworked.
The conceptual framework of a trans-national network
structure primarily consists of three components:
Disperse sub-units: These are subsidiaries located anywhere
in the world where they can benefit the organization either
to take advantage of low-factor costs or provide information
on new technologies or market trends
Specialized operations:These are the activities carried out by
sub-units focusing upon particular product lines, research
areas, and marketing areas design to tap specialized
expertise or other resources in the company’s worldwide
subsidiaries.
Inter-dependent relationships: It is used to share
information and resources throughout the dispersed and
specialized subsidiaries.

6) Global geographic structure:

Under the global geographic structure, a firm’s global
operations are organized on the basis of geographic regions,
as depicted in Fig. 17.6. It is generally used by companies
with mature businesses and narrow product lines. It allows
the independent heads of various geographical subsidiaries
to focus on the local market requirements, monitor
environmental changes, and respond quickly and
effectively.The corporate headquarter is responsible for
transferring excess resources from one country to another,
as and when required. The corporate human resource
division also coordinates and provides synergy to achieve
company’s overall strategic goals between various
subsidiaries based in different countries.Such structure is
effective when the product lines are not too diverse and
resources can be shared.Under such organizational structure,
subsidiaries in each country are deeply
embedded with nationalistic biases that prohibit them from
cooperating among each other
Global product structure:
Under global product structure, the corporate product
division, as depicted in Fig. 17.5, is given worldwide
responsibility for the product growth.The heads of product
divisions do receive internal functional support associated
with the product from all other divisions, such as operations,
finance, marketing, and human resources. They also enjoy
considerable autonomy with authority to take important
decisions and operate as profit centres.The global product
structure is effective in managing diversified product
lines.Such a structure is extremely effective in carrying out
product modifications so as to meet rapidly changing
customer needs in diverse marketsIt enables close
coordination between the technological and marketing
aspects of various markets in view of the differences in
product life cycles
in these markets, for instance, in case of consumer
electronics, such as TV, music players, etc.
Global functional division structure:
It aims to focus the attention of key functions of a firm, as
shown in Fig. 17.4, wherein each functional department or
division is responsible for its activities around the world. For
instance, the operations department controls and monitors
all production and operational activities; similarly,
marketing, finance, and human resource divisions co-
ordinate and control their respective activities across the
world.Such an organiza­tional structure takes advantage of
the expertise of each functional division and facili­tates
centralized control.The major advantages of global
functional division structure include:
i. Greater emphasis on functional expertiseii.
ii. Relatively lean managerial staff
iii. High level of centralized control
iv. Higher international orientation of all functional
managers

Financial integration
Financial integration is a phenomenon in which financial
markets in neighboring, regional and/or global economies
are closely linked together.
Various forms of actual financial integration include:
Information sharing among financial institutions; sharing of
best practices among financial institutions; sharing of cutting
edge technologies (through licensing) among financial
institutions; firms borrow and raise funds directly in the
international capital markets; investors directly invest in the
international capital markets; newly engineered financial
products are domestically innovated and originated then
sold and bought in the international capital markets; rapid
adaption/copycat of newly engineered financial products
among financial institutions in different economies; cross-
border capital flows; and foreign participation in the
domestic financial markets.Because of financial market
imperfections, financial integration in neighboring, regional
and/or global economies is therefore imperfect.
For example, the imperfect financial integration can stem
from the inequality of the marginal rate of substitutions of
different agents. In addition to financial market
imperfections, legal restrictions can also hinder financial
integration. Therefore, financial integration can also be
achieved from the elimination of restrictions pertaining to
cross-border financial operations to allow (a) financial
institutions to operate freely, (b) permit businesses to
directly raise funds or borrow and (c) equity and bond
investors to invest across the state line with fewer [or
without imposing any] restrictions.However, it is important
to note that many of the legal restrictions exist because of
the market imperfections that hinder financial integration.
Legal restrictions are sometimes second-best devices for
dealing with the market imperfections that limit financial
integration.
In addition, financial integration of neighboring, regional
and/or global economies can take place through a formal
international treaty which the governing bodies of these
economies agree to cooperate to address regional and/or
global financial disturbances through regulatory and policy
responses.[1] The extent to which financial integration is
measured includes gross capital flows, stocks of foreign
assets and liabilities, degree of co-movement of stock
returns, degree of dispersion of worldwide real interest
rates, and financial openness.Benefits of financial
integration include efficient capital allocation, better
governance, higher investment and growth, and risk-sharing.
Financial integration helps strengthen domestic financial
sector allowing for more efficient capital allocation and
greater investment and growth opportunities.
As a result of financial integration, efficiency gains can also
be generated among domestics firms because they have to
compete directly with foreign rivals; this competition can
lead to better corporate governance.If having access to a
broader base of capital is a major engine for economic
growth, then financial integration is one of the solutions
because it facilitates flows of capital from developed
economies with rich capital to developing economies with
limited capital.Furthermore, financial integration can also
provide great benefits for international risk-sharing.financial
integration can help capital-poor countries diversify away
from their production bases that mostly depend on
agricultural activities or extractions of natural resources; this
diversification should reduce macroeconomic volatility
Financial integration can also have adverse effects. For
example, a higher degree of financial integration can
generate a severe financial contagion in neighboring,
regional and/or global economies. In addition, Boyd and
Smith (1992) argue that capital outflows can journey from
capital-poor countries with weak institutions and policies to
capital-rich countries with higher institutional quality and
sound policies. Consequently, financial integration actually
hurts capital-scarce countries with poor institutional quality
and lousy policies.

Cross border Mergers & Acquisitions

Cross-border mergers and acquisitions involve assets and
operations of firms belonging to two different countries.
Acquisition refer to the purchasing of assets or stocks of part
or all of another firm (or other firms) that result in
operational control of the whole or part of the other firm.
Mergers describe the case where two separate firms are
combined or amalgamated into a single business.A cross
border merger explained in simplistic terms is a merger of
two companies which are located in different countries
resulting in a third company. A cross border merger could
involve an Indian company merging with a foreign company
or vice versa.Cross border merger will result in the transfer
of control and authority in operating the merged or acquired
company. Assets and liabilities of the two companies from
two different countries are combined into a new legal entity
in terms of the merger, While in terms of Coss border
acquisition, there is a transfer process of assets and
liabilities of local
company to foreign company (foreign investor), and
automatically, the local company will be affiliated.Benefits of
Cross Border Mergers & Acquisitions –Expansion of markets
Geographic and industrial diversification
Technology transfer
Avoiding entry barriers & Industry consolidation
Tax planning and benefits
Foreign exchange earnings & Accelerating growth
Utilisation of material and labour at lower costs

Factors to be considered in Cross Border Mergers and

Acquisitions :-
Having said that, it must be remembered that cross border
M&A’s actualize only when there are incentives to do so. In
other words, both the foreign company and the
domestic partner must gain from the deal as otherwise;
eventually the deal would turn sour. Given the fact, that
many domestic firms in many emerging markets overstate
their capabilities in order to attract M&A, the foreign firms
have to do their due diligence when considering an M&A
deal with a domestic firm. This is the reason why many
foreign firms take the help of management consultancies
and investment banks before they venture into an M&A
deal. Apart from this, the foreign firms also consider the risk
factors associated with cross border M&A that is a
combination of political risk, economic risk, social risk, and
general risk associated.The foreign firms evaluate potential
M&A partners and countries by forming a risk matrix
composed of all these elements and depending upon
whether the score is appropriate or not, they decide on
M&A deal. Cross border M&A also needs regulatory
approvals as well as political support because in the absence
of such facilitating factors, the deals cannot go through.
Recent examples of cross border M&A deals, the Jet-Etihad
deal and the Air Asia deal in the aviation sector in India are
good examples of how cross border M&A deals need to be
evaluated.
It involves two countries according to the applicable legal
terminology:-
A.) The state where the origin of the companies that make
an acquisition (the acquiring company) in other countries: –
“Home Country”.
B.) A country where the target company is situated refers to
as the “Host Country”.
Multicultural and diversity management
The concept of multicultural and diversity management
encompasses acceptance and respect, recognition and
valuing of individual differences. Diversity is defined as
differences between people, that can include dimensions of
race, ethnicity, gender, sexual orientation, socioeconomic
status, age, physical abilities, religious beliefs, political
beliefs, or other ideologies.Multiculturalism refers to the
existence of linguistically, culturally and ethnically diverse
segments in an organisation.Ongoing globalization, increasing
scale of migration, demographic changes, emerging markets
and technology evolution lead to continuous change of the
labor environment of contemporary organisations. The
necessity of managing diversity and multiculturalism goes far
beyond human resource
management. Organisations can benefit from it with an
increased level of innovation, improved employee
engagement, better customer relationships and satisfaction,
increases in operating profit and market share, and by
achieving competitive advantage in the market.Diversity
management is defined as, "the strategic alignment of
workforce heterogeneity to include and value each
employee equally on the basis of their diverse
characteristics, and to leverage organisational diversity to
enhance organisational justice and achieve better business
outcomes."This has a strong focus on policies and programs
that allows a company to fit people into an
organisation.Typically, the company that uses multicultural
and diversity management does not focus on minimizing the
challenges within the cultures; rather they attract various
employees and find
methods to assimilate them into the company
culture.Multiculturalism is a belief or policy that endorses
the principle of cultural diversity and supports the right of
different cultural and ethnic groups to retain distinctive
cultural identities.It is the principle that several different
cultures (rather than one national culture) can coexist
peacefully and equitably in a single country.

Bulk of theoretical studies showed numerous advantages of

managing multiculturalism:
1. Multicultural organizations have a benefit to attract and
retain the best available human ability.When organizations
attract, maintain and promote maximum utilization of
people from dissimilar cultural backgrounds, they gain
competitive advantage and sustain the highest qualities of
human resources.
2. Multicultural organizations can understand and enter
broader and enhanced markets. the MCO embrace a diverse
workforce initially as well as it is better suited to serve a
diverse external customers. The diverse organizations have
an increased understanding of the political, social, legal,
economic and cultural environment of different places.
3. Multicultural organizations shows higher creativity and
novelty. Especially in research oriented and high technology
organizations, the range of talents provided by multicultural
personnel becomes invaluable.
4. Multicultural organizations display greater problem
solving ability.Multicultural organizations are better able to
adjust to change and show more organizational flexibility
Managing the Multiculturalism :-
1.Senior management plays a vital role in making the
diversity success. The CEO must exhibit a strong
commitment. Leaders must receive diversity training to
address myths, stereotypes and real cultural differences as
well as organizational barriers that hampers the full
contribution of workers.
2. Multiculturalism must be part of an organization's
strategic business objective. Diversity goals must be linked to
business goals
3. Managers must be held accountable to accomplish
diversity goals. Performance evaluations and rewards should
be tied to a manager's ability to develop and manage diverse
workforce.
4. Prosperous Multicultural organizations must improve its
supply of diverse workers through aggressive recruiting. It
must break the "glass ceiling"
and increase the number of women and minorities in the
higher salary groups through career development, mentoring
and executive appointment. It must empower all of its
employees to use their full capabilities.
5. Diverse workforce requires effective communication.
Leaders must guarantee that there are open opportunities
for personnel to communicate new ideas, grievances, input
and feedback.
Country Risk Analysis is the evaluation of possible risks and
rewards from business experiences in a country. It is used to
survey countries where the firm is engaged in international
business, and avoids countries with excessive risk. With
globalization, country risk analysis has become essential for
the international creditors and investors.Country risk
analysis identifies imbalances that increase the risks in a
cross-border investments. Country risk analysis represents
the potentially adverse impact of a country’s environment
on the multinational corporation’s cash flows and is the
probability of loss due to exposure to the political,
economic, and social upheavals in a foreign country.When
business transactions occur across international borders,
they bring additional risks compared to those in domestic
transactions.
These additional risks are called country risks which include
risks arising from national differences in sociopolitical
institutions, economic structures, policies, currencies, and
geography. The country risk analysis monitors the potential
for these risks to decrease the expected return of a cross-
border investment.
Analysts have categorized country risk into following groups:
Economic risk — This type of risk is the important change in
the economic structure that produces a change in the
expected return of an investment. Risk arises from the
negative changes in fundamental economic policy goals
(fiscal, monetary, international, or wealth distribution or
creation).
Transfer risk — Transfer risk arises from a decision by a
foreign government to restrict
capital movements. It is analyzed as a function of a country’s
ability to earn foreign currency. Therefore, it implies that
effort in earning foreign currency increases the possibility of
capital controls.
Exchange risk — This risk occurs due to an unfavorable
movement in the exchange rate. Exchange risk can be
defined as a form of risk that arises from the change in price
of one currency against another. Whenever investors or
companies have assets or business operations across
national borders, they face currency risk if their positions are
not hedged.
Location risk — This type of risk is also referred to as
neighborhood risk. It includes effects caused by problems in
a region or in countries with similar characteristics.Location
risk includes effects caused bytroubles in a region, in trading
partner of a country, or
in countries with similar perceived characteristics.
Sovereign risk — This risk is based on a government’s
inability to meet its loan obligations. Sovereign risk is closely
linked to transfer risk in which a government may run out of
foreign exchange due to adverse developments in its balance
of payments. It also relates to political risk in which a
government may decide not to honor its commitments for
political reasons.
Political risk — This is the risk of loss that is caused due to
change in the political structure or in the politics of country
where the investment is made. For example, tax laws,
expropriation of assets, tariffs, or restriction in repatriation
of profits, war, corruption and bureaucracy also contribute to
the element of political risk.
Country risk assessment requires analysis of many factors,
including the decision making process in the government,
relationships of various groups in a country and the history
of the country. Country risk is due to unpredicted events in a
foreign country affecting the value of international assets,
investment projects and their cash flows.

Macro Environment Risk Assessment

There are a range of environmental risks that arise from
industrial activities and society in general. These risks must
be viewed in the context of the natural ecological changes
that occur in the environments and the natural variability of
ecosystems.Businesses need to constantly manage risk from
a variety of sources, including financial, technical and safety.
The treatment of environmental risk is a more recent activity
attracting increasingly greater attention from regulatory
agencies, industry and the general public.
In conducting environmental risk assessment it is essential to
correctly formulate the risk assessment problem; to identify
the sources and characteristics of risk, the potentially
vulnerable aspects of the surrounding environment, and the
criteria that will be used to rank significance of effects on the
environment.Macro Environmental risk assessments include
consideration of process engineering, facilities design,
ecological sensitivities and social surroundings.
What is corporate governance?
The purpose of corporate governance is to facilitate effective,
entrepreneurial and prudent management that can deliver
the long-term success of the company.
Corporate governance is the system by which companies are
directed and controlled. Boards of directors are responsible
for the governance of their companies. The shareholders’
role in governance is to appoint the directors and the
auditors and to satisfy themselves that an appropriate
governance structure is in place.The responsibilities of the
board include setting the company’s strategic aims, providing
the leadership to put them into effect, supervising the
management of the business and reporting to shareholders
on their stewardship.Corporate governance is therefore
about what the board of a company does
and how it sets the values of the company, and it is to be
distinguished from the day to day operational management
of the company by full-time executives.Since corporate
governance also provides the framework for attaining a
company's objectives, it encompasses practically every
sphere of management, from action plans and internal
controls to performance measurement and corporate
disclosure.

Principles of Corporate Governance :-

Transparency
The more informed you are, the more certain you are. This is
the mantra that the stakeholders firmly believe in.
Transparency, in the business world, also pays
dividends.Transparency is an essential component at all
levels of operation in a business entity; especially at the top
management level, where major decisions are made and
where major plans are formulated. Keeping the investors and
other stakeholders informed helps build a relationship of
trust and solidarity that results in the rewards of a higher
valuation and easy access to funding.Accountability
Accountability, in essence, means a willingness or an
obligation to accept responsibility for one’s
actions.Accountability gives the shareholders confidence in
the business that, in any case, that leads to an unfavourable
situation in the company, the ones responsible are dealt with
in an appropriate manner. Accountability establishes a
system in place where everyone is held accountable for their
respective work and associated duties. Accountability holds
two main things firmly in place:-Ensures that management is
accountable to the board
Ensures that the Board is accountable to shareholders.
Independence
The ability to make decisions while being free from any sort
of constraint or without any influence is what independence
is. And this is something that has proven to be crucial to the
smooth operation of businesses as well. Independence is –
The ability to stand firm in the face of inappropriate
influences.
The ability to make unadulterated, firm decisions on any
given issue
The ability to adhere to professionalism and do right by the
company
It allows the person to act with integrity and make decisions
and form judgments bearing in mind the best interests of
the stakeholders.
Advantages of Corporate Governance
Good corporate governance can turn a good company into a
great one. The leaders in any industry are at the helm of
their respective industries, mainly because of outstanding
corporate governance practices.

Compliance with laws: With corporate governance in place,

compliance with various laws is taken care of easily, as
corporate governance includes the rules, regulations and
policies that enable a business to stay compliant throughout
and function without any hassle or legal inconveniences
whatsoever.
Lesser fines and penalties: Since the legal compliance aspect
is taken care of credit to the corporate governance practices,
companies are able to save a fortune on
unnecessary fines and compliances and possibly redirect
those funds towards business objectives to achieve greater
heights.
Better management: Since there is a structure in place with
regard to how the entity operates, its day-to-day
functioning, managing the activities and achieving targets
becomes a whole lot easier. The work atmosphere also takes
care of itself under good principles of corporate governance
fostering teamwork, unity, efficiency and a drive for success.
Reputation and relationships: Companies with good
corporate governance are able to attract investors and
external financiers with relative ease, going by their sterling
reputation and brand image. One of the pillars of corporate
governance is transparency, which is the practice of sharing
key internal information with the
stakeholders. This improves the relationship of the entity
with its stakeholders and sows the seeds of trust between
the company and society at large.
Lesser conflicts and frauds: The rules instilled in the
workplace encourage the employees to be morally conscious
in every situation that they encounter, thus eliminating the
possibility of fraud and conflict between employees.
Transnational corporations (TNCs) or multinational
corporations (MNCs) are companies that operate in more
than one country. Unilever, McDonalds and Apple are all
examples of TNCs. TNCs tend to have offices and
headquarters located in the developed world.

SOCIAL RESPONSIBILITY OF TRANSNATIONAL

CORPORATIONS
The assumption of greater social responsibility by TNCs
would be particularly important in light of the economic
and social disruptions that accompany the globalization
process, which — if not tackled — could threaten the very
framework within which firms build their international
production systems.Corporate social responsibility concerns
how business enterprises relate to, and impact upon, a
society’s needs and goals.
All societal groups are expected to perform certain roles and
functions
that can change over time with a society’s own evolution.
Expectations
related to business enterprises, and particularly TNCs, are
undergoing
unusually rapid change due to the expanded role these
enterprises
play in a globalizing society. Discussions relating to TNC
social
responsibility standards and performance therefore
comprise an
important
component of efforts to develop a stable, prosperous
and just global society.TNCs, by definition, operate in
multiple societies around the world, responding to each
national and regional settings in which TNCs operate. At the
same time, TNCs seek to maintain their corporate identity
and the operating procedures of an integrated global
enterprise. The context for the socialresponsibility of TNCs
therefore encompasses a multilayered
environment of societal requirements and
expectations.Many multinational companies such as
Starbucks, the Body Shop, and Microsoft, establish well-
developed code of conduct; they also strive to achieve some
social missions in order to do businesses ethically, minimize
negative environmental impacts, raise public attention on
certain issues, raise funds and donations, increase
employees’ job satisfaction, and more.An MNC has realized
that un-responsible behavior towards environment could
have a “boomerang effect” to it. On the other hand,
responsible behavior of enterprises
towards stakeholders, society, and environment could
contribute to achievement of competitive advantage. For
example, by ensuring good working conditions to
employees, by instigation of non-discrimination, by
respecting of human rights, and by offering a possibility of
advancement, MNC become attractive for new employees,
especially most talented people. By insuring transparency
towards shareholders, and respect of their rights, by
continuous reporting, and risk management, MNC become
attractive for new investments. By offering quality, healthy,
and safe products, and by performing promises about after-
sale services, enterprises become attractive for
consumers.Talented employees, substantial capital, and safe
market are the key conditions for achieving MNC
competitive advantage. Hence, it is obvious that social
responsible behavior of
MNC becomes important factor of their survival and success.

RECENT DEVELOPMENTS IN CORPORATE SOCIAL

RESPONSIBILITY
Recent developments influencing the application ofsocial
responsibility concepts to international business derive from
many different sources that comprise the stakeholders of
TNCs, as well as from the corporations themselves.The major
new development, at least in developed countries, is a
proliferation of groups representing general public or specific
issue interests. to promote an activist view of TNC duties
towards an expanding agenda of social responsibility
objectives.Collective business organizations have adopted a
mixed approach.
Some sectoral groups actively responded to
social responsibility pressures with industry-specific
initiatives,
while most organizations take a more cautionary approach,
with the notable exception of a new statement on
environmental principles.
Governments continue to use international organizations to
promote guidelines or codes of conduct on issues or in
sectors in which international consensus is insufficient to
support more precise legal standards. Only occasionally do
national governments individually endeavour to develop
TNC social responsibility
initiatives.
A. Increased activities by civil society groups
A major development, particularly evident over the past
decade, is the expanding number, range, coordination and
relating to TNC social responsibility. The issues most
prevalent over the past decade involve labour rights and
working conditions, the environment and human rights,
reflecting primarily a developed country perspective
on TNC social responsibility.Some groups choose to focus
principally on one of these areas, such as Greenpeace on the
environment or Amnesty International on human rights.
Others, such as religious organizations or other socially-
directed institutional investors, may be active across a
spectrum of social issues.Where
interests and perspectives are shared, groups may forge ties
internationally through affiliated networks,conferences,
newsletters and an exponential growth in relatively
inexpensive Internet linkages. In fact, the emergence of the
Internet is virtually unparalleled in its impact, both on
increasing international communication among
among
elements of civil society and on facilitating these groups’
outreach
to media channels that can focus instant attention on TNC
activities
worldwide.
Another recent initiative aimed directly at monitoring TNC
performance on social responsibility issues is the Council on
Economic Priorities Accreditation Agency (CEPAA),
established in 1997 by the Council on Economic Priorities
(CEP). An advisory board that
included participants from unions, universities, human rights
groups, corporations and accounting firms helped draft a
Social Accountability standard (SA 8000), conceptually
mirroring the ISO 9000 quality standard that has been widely
accepted within the international
principally, ILO instruments (conventions) recommendations,
the Tripartite Declaration and the Declaration on
Fundamental Principles and Rights at Work.
Several recent labour initiatives adapt the concept of TNC
social responsibility standards to the context of labour-
management bargaining. In 1997, theInternational
Confederation of Free Trade Unions (ICFTU) adopted a list of
minimum labour-practice standards that should be included
in codes of conduct, essentially comprising a model for
developing agreements with corporations
that would cover their practices as well as potentially those
of business partners such as franchisees, licensees, sub-
contractors and principal suppliers.

B.Government actions
The United Nations Conference on Environment and
Development (UNCED) served as a catalyst for action on
environmental principles related to business conduct.The
International Organization for Standardization (ISO),
which is not part of the United Nations family, is a mixed
public-private sector group,this organization developed ISO
14001.Although the standards are voluntary,
a certification of compliance with ISO 14001 can be provided
by outside auditors who review the facilities of signatory
companies to certify that the company has established an
environmental policy and management implementation
system.
A different model is presented by the ILO, a tripartite
organization in which governments, business and labour
have adopted a series of conventions setting out
international labour standards, as well as the 1977
Tripartite Declaration of Principles Concerning Multinational
Enterprises and Social Policy (UNCTAD, 1996). These
Conventions have proven most important in shaping the four
basic principles advocated by the Organization: freedom of
association and the right to bargain collectively; abolition of
forced labour; equal opportunity and treatment in the
workplace; and
elimination of child labour