Global Business Environment

Unit – 3
Political and Legal System

Political systems

“By political system we mean the system of government in a nation.”

Hill

 Political systems can be assessed according to two dimensions. The first is the degree to
which they emphasize collectivism as opposed to individualism. The second is the degree
to which they are democratic or totalitarian.
 These dimensions are interrelated; systems that emphasize collectivism tend toward
totalitarian, whereas those that place a high value on individualism tend to be democratic.
1. Collectivism vs Individualism

Collectivism
 Collectivism refers to a political system that stresses the primacy of collective goals over
individual goals.
 When collectivism is emphasized, the needs of society as a whole are generally viewed as
being more important than individual freedoms. Advocacy of collectivism can be traced to
the ancient Greek philosopher Plato, who in The Republic argued that individual rights
should be sacrificed for the good of the majority and that property should be owned in
common.
 In modern times, collectivism mantle has been picked up by socialists.
Contd..

Socialism
 Karl Marx and Plato were the founders of socialism. Max advocated state ownership of the
basic means of production, distribution & Exchange (including business). The state can
ensure that workers are fully compensated for their labor.
 In the early 20the century, the socialist ideology split into 2 broad camps. The communist
believed that socialism could be achieved only through violent revolution & totalitarian
dictatorship, while the social democracy committed to themselves to achieving socialism
by democratic means & tuned their backs on violent revolution & dictatorship.
Contd..

Individualism
 Individualism involves economic freedom and political freedom.
 Aristotle: Discipline of Aristotle favored individual ownership as being more productive
as they receive more personal care.
 When perusing one’s own interest, one is undeliberate contributing to the good of the
society more than he really intends to promote it.
Democracy vs Totalitarianism

Democracy
“Democracy refers to a political system in which government is by the people, exercised either
directly or through elected representatives.”
 Political parties, i.e. existence of multiparty political system.
 Regular election, universal adult suffrage
 Limited terms of elected officials
 Independent court system
 Free media
 Non-political/professional state bureaucracy and defense infrastructure
 Individual’s right to freedom of expression & organization
Contd..

 The degree of political democracy depends upon the degree of political rights (i.e. fair
election, freedom to organize into political parties, right of minorities)and civil liberties
(i.e. freedom of opinion/expression, freedom of press and, personal social freedom) that the
citizens of the country enjoy.
 The trends of democracies may be classified-
Decentralized democracy Vs Centralized democracy
 Decentralized democracy, (e.g. in Canada, USA), where provinces are given significant
political power (in the USA, different states have different tax systems, though Federal
Government is stronger than that in Canada) vs. centralized democracy (i.e. in France
and Japan called socialist democracy)
 Hence companies often find it easier in centralized democracy where more consistency
across states exists.
Contd..

Parliamentary vs. Presidential democracy

 Parliamentary democracy is the capitalist democracy which can be conservative or
liberal; based on multiparty system and periodic elections; can take the form of
constitutional monarchy where the king/queen is the head of state and Prime Minister is
the head of government, i.e. UK, Israel.
 Presidential democracy is found in federal system of government, i.e. president is the head
of state and government; directly elected by people and enjoys full executive power, i.e. in
the USA.
Contd..

Social democracy vs. capitalist democracy

 Social democracy is radical democracy tilted toward socialism, e.g. social welfare and
social security are given more concerns, e.g. Scandinavian countries. As opposed to
communism, social democracy is committed themselves to achieving socialism by
democratic means & tuned their backs on violent revolution & dictatorship. Social
democracy has influenced a no. of democratic nations including Australia, Great Britain,
France, Norway, Sweden, Spain, India, Brazil, etc where social democratic parties have
from time to time held political power. Social democracy is not committed to greater
private ownership.
 Capitalist Democracy is committed to greater private ownership.
Contd..

Totalitarianism

 Under totalitarian state, a single party, individual or group of individuals monopolizes political power
and neither recognizes nor permits opposition. Only a few individuals participate in decision-making.
All countries considered not free and many considered partly free are totalitarian.
 It denies individual’s right to freedom of expression & organization.
 No free media exist.
 No regular election is held.
Contd..

Followings are the variations in totalitarianism

Theocratic totalitarianism
 It is that political system where religious leaders are also the political leaders; where political power
is monopolized by a party, group, or individual that governs according to religious principles (i.e., by
Islamic principles in Islamic countries like Iran, Saudi arabia. Taliban Party in Afghanistan); where
political power is monopolized by a government, party, group or individual according to religious
principles.

Secular totalitarianism
 It is that political system where government exerts control through military power (i.e. in
Cambodia; in Afghanistan before the overthrow of the Taliban regime in 2001; in Iraq under the
rule of Saddam Hussein; communism in Soviet Union, Cuba, and to a lesser and lesseer degree,
China). (Doctrine that rejects religion and religious considerations)
Contd..

Tribal totalitarianism
 It has arisen from time to time in African countries such as Zimbabwe, Tanzania, Uganda, and
Kenya. Under it, political party represents the interests of a particular tribe.
Fascism
 Under fascism, state is all in all and outside state no one or nothing has value. It desires to control
people’s minds and souls and to convert them into its own faith (E.g. Germany under Hitler, Italy
under Mussolini).
Authoritarian
 Authoritarian simply desires to rule people (E.g. South Africa prior to the end of apartheid and
initiation of black rule).
 One person or a small group has absolute control over all others.
Contd..

Communism totalitarianism
 Communism advocates that socialism can be achieved only through violent revolution and
totalitarian dictatorship. Communism is a form of secular totalitarianism (i.e. a version of
collectivism) in which political & economic systems are virtually inseparable (i.e. combines them
into sociopolitical agenda i.e., North Korea) and believes in the equal distribution of wealth. It
entails total government ownership and control of resources. It has failed in most parts of the
world.
 The communists’ peak period was in the 70’s (i.e. former Soviet Union, Czechoslovakia, Hungary,
North Korea, Cambodia, Angola, Mozambique, Cuba, Nicaragua).
 With few exceptions (North Korea, Cuba), most totalitarian governments have been opening up
and liberalizing into democratic states since 1989. The governments of China, Vietnam, and Laos
are communist in name only since those nations now adhere to market-based economic reforms.
LEGAL SYSTEMS

 The legal system of a country refers to the rules, or laws, that regulate behavior along with
the processes by which the laws are enforced and through which redress for grievances is
obtained. There are three main types of legal systems.
 common law,
 civil law, and
 theocratic law
Common law

 The common law system evolved in England over hundreds of years. It is now found in
most of Great Britain's former colonies, including the United States.
 Common law is based on tradition, precedent, and custom. Hence common law has
flexibility. Judges in a common law system have the power to interpret the law. As new
precedents arise, laws may be altered, clarified, or amended to deal with new situations.
 Common law is more confrontational, because plaintiffs and defendants, through their
lawyers, must argue and help judges to favorably interpret the law largely based on
precedents.
Civil Law

 A civil law system is based on a detailed set of laws organized into codes. When law
courts interpret civil law, they do so with regard to these codes.
 More than 80 countries, including Germany, France, Japan, and Russia, operate with a civil
law system.
 A civil law system tends to be less adversarial than a common law system, since the judges
rely upon detailed legal codes rather than interpreting tradition, precedent, and custom.
Judges under a civil law system have less flexibility than those under a common law
system.
 Judges in a common law system have the power to interpret the law, whereas judges in a
civil law system have the power only to apply the law.
Theocratic Law

 A theocratic law system is one in which the law is based on religious teachings. Islamic law is the most
widely practiced and surviving theocratic legal system in the modem world, although usage of both
Hindu and Jewish law persisted into the twentieth century (not now).
 Islamic law is primarily a moral rather than a commercial law and is intended to govern all aspects of
life. The foundation for Islamic law is the holy book of Islam, the Koran, along with the Sunnah, or
decisions and sayings of the Prophet Muhammad, and the writings of Islamic scholars who have derived
rules by analogy from the principles established in the Koran and the Sunnah.
 Because the Koran and Sunnah are holy documents, the basic foundations of Islamic law cannot be
changed. However, in practice Islamic jurists and scholars are constantly debating the application of
Islamic law to the modem world. -In reality, many Muslim countries have legal systems that are a blend
of Islamic law and a common or civil law system.
 Although Islamic law is primarily concerned with moral behavior, it has been extended to cover certain
commercial activities. An example is the payment or receipt of interest, which is considered usury and
outlawed by the Koran.
 ACTORS IN POLITICAL AND LEGAL
SYSTEMS
Five types of participants are active in transforming political and legal systems.
(1) Government
 The government, or the public sector, is the most important actor, operating at national,
state, and local levels. Governments have the power to enact and enforce laws. They
strongly influence how firms enter host countries and how they conduct business there.
 Governments regulate international business activity through a complex system of
institutions, agencies, and public officials, e.g. the Ministry of Foreign Affairs, the Ministry
of Finance, and the Export and Import Controls, etc.
Contd..

(2) International Organizations

 Supranational agencies such as the World Trade Organization, the
United Nations, and the World Bank strongly influence international business.
 For example, the United Nations Conference on Trade
and Development (UNCTAD) helps oversee international trade and
development in the areas of investment, finance, technology, and enterprise development.
Such organizations facilitate free and fair trade by providing administrative guidance,
governing frameworks, and, occasionally, financial support.
Contd..

(3) Regional Economic Blocs

 Regional trade organizations, such as the European Union (EU), the North American Free
Trade Agreement (NAFTA), and the Association of Southeast Asian Nations (ASEAN),
aim to advance the economic and political interests of their members.
 The EU is especially well developed, with its own executive, legislative, and bureaucratic
bodies. It enacts and enforces laws and regulations that directly affect business.
Contd..

(4) Special Interest Groups

 Special interest groups serve the interests of particular countries, industries, or causes. For example, the
Organization for Economic Co-operation and Development (OECD) supports the economic developmental
and business goals of advanced economies.
 The Organization of Petroleum Exporting Countries (OPEC) is a powerful cartel that controls global oil
prices, which, in turn, affect consumer prices and everyone’s cost of doing business (for oil-producing
countries, including Saudi Arabia, Iran, Venezuela, Nigeria, and Indonesia.)
 Special interest groups engage in political activity to advance specific causes, ranging from labor rights to
environmental protection. They often influence national political processes and produce outcomes with far-
reaching consequences for business.
 E.g. labor unions (oppose imported goods & global outsourcing), competing business (dislike competing
foreign firms), customers (favoring national products), conservationist (against overexploitation of resources
by foreign companies).
Contd..

(5) Competing Firms

 Rival domestic firms with a strong presence in the host country naturally have an interest
in opposing the entry of foreign firms into the local market and may lobby their
government for protection.
 Asterix, a French theme park, opposed French government support for the U.S.-based
Disney when the latter established Disneyland Paris.
 Similarly, U.S. automakers in Detroit opposed BMW’s construction of a factory in South
Carolina. However, the state government of South Carolina supported the BMW facility on
the grounds that it would
generate jobs and increase tax revenues.
POLITICAL RISKS

 Political risk is the possibility of business loss due to political environment prevailing in a
country.
 “Political risk is the risk that political decisions or events in a country negatively affect the
profitability or sustainability of an investment.”
 Although political risk exists in both democratic & totalitarian political regimes, it tends to
be greater in the later one.
 Political risk may take various forms-
 General political risk
 Government intervention in the economy and firms
Types of General Political Risks

 Government takeovers of property with or without compensation (Expropriation- government

confiscation of property without proper reimbursement/compensation; and Domestication- transfer of
control of foreign investment to national ownership.)

 Operational restriction (environment pollution policy, plant location policy),

 Political agitation, War, Armed conflict, and Violence that disrupts sales or causes damage to
property/personnel,

 Blockage of funds Money generated by a company's foreign operations that cannot be move
from one country to another because of one or more regulations in the country in which the money was g
enerated. For example, a government may place a
limit on the maximum amount that may be moved out of a country over a given period of time.
Contd..

 Embargoes and sanctions Both sanctions and embargoes mean the prohibition or
restriction of an activity. An embargo is the complete ban or prohibition of trade by one
country with other. Under embargoes, no goods or services can be imported or exported
from or to the embargoed nation. For example, the U.S. currently has a trade embargo with
Cuba. Sanctions are the trade prohibition on certain type of products, services or
technology to another country due to various reasons, including nuclear non-proliferation
and humanitarian purposes.

 Terrorism the unlawful use of violence or threats to intimidate or coerce a civilian

population or government, with the goal of furthering political, social, or ideological
objective.
Government Intervention in Economic Activities and Firms

Two ideological paradigms or models on the role of government in the business-

 Individualistic paradigm – minimal government intervention in the economic activities in
the country.
 Communitarian paradigm – government’s intervention in business, government defines
needs and priorities, and partners with business.
Micro and macro political risks

 Micro political risk entails risk in the host country to investments of particular home
country only. For example, after US bombing of Afghanistan in October 2001, anti-
American protesters in Pakistan burned a KFC (Kentucky Food Chain) restaurant, a
McDonald’s restaurant, and a Shell gas station. When Mozambique gained independence
from the colony of Portugal in 1988, Portuguese investors were forced to abandon their
investments and asked to leave the country (though later, the government there invited
back many of the former Portuguese investors in an effort to rebuild the economy).
 Macro political risk entails risk in the host country to all foreign investments. For
example, after the communist revolution in Cuba, there was a takeover of all companies
irrespective of industry & nationality. Macro political risk was higher in the 60’s, not now
as countries realize now that they need FDI in order to grow.
GOVERNMENT INTERVENTIONS AND
INVESTMENT BARRIERS

 Government intervention to import barrier; government intervention to promote export for

benefiting domestic producers, or for human right reason or for environment protection purpose.
Government’s instruments of trade control(Barriers of trade)
 Government may exercise tariff barriers and non-tariff barriers to trade.
 Governments use instruments of trade control for various reasons like, to prevent unemployment in
home country due to excessive import, to protect infant industries (i.e. protectionism)in the home
country, export promotion, to promote FDI (leading to industrialization etc.) by import restriction,
to protect national industries from foreign dumping, to improve unfavorable balance of payment, to
control price of monopolized resources by restricting exports, to allow domestic use of products that
are in short supply by restricting exports, to deal with unfriendly countries by export & import
restriction.
A) Tariff barriers of trade

 Tariff/(also called duty) is the most common type of trade control and is a tax that
government levies on a good shipped internationally, i.e. on goods entering (i.e. import
tariff), leaving (i.e. export tariff) or passing through a country (i.e. transit tariffs) (i.e.
official boundary) or a group/block of countries (i.e. EU)
Types of tariff barriers
(1) import tariff
(2) export tariff
(3) transit tariff
(4) specific duty
(5) ad valorem duty
(6) compound duty (i.e. 4+5)
(7) countervailing duty
Contd..

 Import Tariff - Tariff collected by the importing country is called an import tariff (i.e.
customs duty) which is by far the most common.

 Export Tariff - Tariff collected by the exporting country is called an export tariff.

 Specific Duty - Government may levy tariff on a per unit basis, called specific duty.

 Ad Valorem Duty - it may asses as tariff as a percent of the value of the item (i.e. value
basis), called. ad valorem duty.
Contd..

 Compound Duty - the government may assess both a specific duty and an ad valorem duty
on the same product; the combination is called compound duty.

 Countervailing duty is a permanent surcharge imposed on certain imported products that

are subsidized by foreign governments. Countervailing duty is imposed with a view to
offsetting/compensating for the special advantage/subsidy the imported products enjoy or
against dumping policy of exporter.
 Antidumping policies are designed to punish foreign firms that engage in dumping.
(B) Non-tariff barriers of trade

Non-tariff barriers may affect either (a) price or (b) quantity directly.
(a) Non-tariff barriers: Direct Price Influences
(1) Subsidies
 Countries sometimes make direct subsidies to the national industries, so they can sell at
cheaper or competitive prices abroad. Besides, this will increase home country
employment.
 Hence, most countries offer indirect subsidies to potential exporters in the form of many
business development services, e.g. market information, trade expositions, and foreign
contracts free of cost, though they cost to the government.
Contd..

(2) Aid and loans

 Governments grant aid & loans to other countries. Then the recipient government is bound
and required to spend the amount in the donor country by means of purchasing the donor
country equipment or using donor country suppliers/consultants, it is called tied aid or tied
loans. This is breeding growing skepticism as this slows the development of local suppliers
in developing countries.
 Keeping this thing in mind, the OECD member countries (Organization for Economic
Cooperation & Development) are beginning to untie/free the recipient government to use
the vendors/equipment at their free will.
Contd..

(3) Customs valuation

 Exporter & importers tend to undervalue the goods exported & imported to pay lower ad
valorem tariff; customs authorities are required to revalue these goods.
 In general, custom authorities should use the declared invoice price. But if they doubt its
authenticity, then they should assess on the basis for similar goods arriving in. But
sometimes, such similar goods are not available at that time; then they should use their
discretion. But using discretion may sometimes result in extreme overvaluation or
undervaluation. Overvaluation discourages import making products expensive & vice
versa.
(b) Non-tariff barriers: Quantity Control (imports or
exports)

(1)Quotas
 An import quota limits the quantity of a product that can be imported in a given period, e.g. year. An
export quota limits the quantity of a product that can be exported in a given year to assure domestic
consumers of a sufficient supply of goods at a low price, to prevent depletion of natural resources, or to
attempt to raise export prices by restricting supply in foreign markets e.g. in case of coffee and
petroleum products.
 Government may set quotas for 1) the total amount to be traded 2) allocate amounts by country based
on political or market conditions.
 Trade embargo is a special type of quota imposed by a country or group of countries against another in
which any forms of imports from or export to this country will be prohibited, which is the economic
means to achieving political goals.
 Voluntary Export Restraint (VER) is an export quota maintained by a country on the request of
another country. For example, Japan responded with VER of limiting its automobiles exports on request
from USA in the 80’s.This increased the price of the imported products in the USA
Contd..

(2) “Buy local” legislation

 “Buy local” legislation requires government procurement agencies to prefer purchasing
domestically produced goods e.g. Buy American Act (51%). Alternatively, the government
may prescribe a minimum percentage of domestic content in the product as a pre-
requirement for government purchase.
 Or at the extreme, the government may prescribe a minimum percentage of local content
requirement/domestic content in the product (value or volume based) as the pre-
requirement for importing. For example, Japanese automakers have American product
contents sometimes as equal as General Motors and Ford
Contd..

(3) Standards (arbitrary standards)

 Countries prescribe stringent standards for goods to be imported.

(4) Specific permission/licensing requirements

 The government can make it mandatory for importers or exporters to obtain specific
permission e.g. import license or export license, before it can do so. Foreign trade is
impeded as some importers/exporters are denied the license, denied the renewal of license,
or their licenses are cancelled too.
 One typical example is foreign-exchange control, i.e. importers are required to apply for
foreign currency required in international trade.
Contd..

(5) Administrative delays

 Intentional administrative delays, say in customs office/checks and clearance, may impede
international trade.
 But such policies will not work permanently because of competitive pressure and availability of
advanced electronic communication system. Administrative trade policies are bureaucratic rules
designed to make it difficult for imports to enter a country. It has been argued that the Japanese are
the masters of this trade barrier.

(6) Reciprocal requirements /counter trade/offsets

 Government sometimes requires exporters/importers to make actual payments in goods not in cash,
i.e. barter/reciprocal buying/counter trade/offsets. Since this policy saves foreign currency reserves,
it is usually adopted by countries having less foreign currency reserves. For example, Russia’s
commercial airline, Aeroflot, has exchanged Russian crude oil for Airbus aircrafts.
Contd..

(7) Restrictions on rendering services products

-Countries may restrict foreign sale of certain services like transportation, insurance, consulting and
banking due to 3 reasons, i.e. essentiality, standards, immigration.

 Essentiality
Government believes that such services are essential for the citizens and no other but the domestic
companies can perform them better with this nationality motive. Hence, the government closes doors
for foreign companies for such services, e.g. media, utilities, banking, communication, insurance, etc.
Contd..

 Standards
The home country government sometimes limits (e.g. by requirement of licensing,
certification, etc.) foreign entry into many service professions (e.g. accountants, architects,
engineers, lawyers, physicians, teachers etc.) to ensure standard practices by qualified
personnel.

 Immigration:
Even if foreign meets the required standards to provide its services, immigration into the
country may be a deterrent due to rejecting visa to the foreign entrepreneurs.
INTELLECTUAL PROPERTY RIGHTS

“Intellectual property rights refer to the right to control and derive the benefits from writing
(copyright), inventions (patents), processes (trade secrets), and identifiers(trademarks).”

Intellectual property (ideas, which are protected by patents, copyrights, and trademarks)
Intellectual property refers to property that is the product of intellectual activity, such as
computer software, a screenplay, a music score, or the chemical formula for a new drug.
Patents, copyrights, and trademarks establish ownership rights over intellectual property.
Contd..

A patent grants the inventor of a new product or process exclusive rights for a defined period
to the manufacture, use, or sale of that invention.
Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and
publishers to publish and disperse their work as they see fit.
Trademarks are designs and names, often officially registered, by which merchants or
manufacturers designate and differentiate their products.
-They provide an incentive for people to search for novel ways of doing things, and they
reward creativity.-IP rights protection provisions differ country wise.
-183 countries that are now members of the World Intellectual Property Organization
(WIPO).
 E-COMMERCE

E-commerce can be defined as the use of the Internet to conduct business transactions
nationally or internationally.
The Internet is dramatically expanding opportunities for business-to-business and business-to
consumer e-commerce transactions across borders.
For business to consumer transactions especially, the internet sets up a potential revolution in
global commerce: the individualization of trade. It gives consumers the ability to conduct a
transaction directly with a foreign seller without traveling to the seller’s country. The Internet
allows sellers to put their storefronts, in the form of Web pages, in front of consumers all over
the world.
Amazon and eBay-
the world's largest online marketplace, where practically anyone can buy and sell anything.
E-Commerce

involves linking buyers and sellers electronically through internet i.e. individualized
interaction
can access pictures of products, read the specs, shop among on-line vendors for the best
prices and terms, and click to order and pay.
connecting with all customers on one-on-one basis
 connecting with carefully selected customers on one-on-one basis
connecting with customers for a lifetime i.e. relationship marketing.
direct marketing
cost effective due to direct marketing and no middlemen
convenient shopping i.e. not required to go to store but delivered to where you want.
promotion through e-mail & web sites
e-business and e-commerce take placed over
four major internet domains

a) business to consumer (B2C): business firms selling goods directly to consumers over the
internet virtually anything
b) Business to business (B2B): business firms selling to other business buyers (or buying from
suppliers i.e. e-purchasing)
c) Consumer to consumer (C2C): i.e. chat rooms allow them buy, sell or exchange goods
among; e-mail as digital post bag; consumers of a specific product or serve have come
together and formed their own web sites for sharing information & experiences.
d) Consumer to business (C2B): internet facilities communication link between consumers
and marketing firms; consumers can access websites of the company that allows entering a
call-me-button that connects to a company employee ready to listen to the consumers/s
comments, complains and suggestions. Consumers can also communicate with the company
using the e-mail services.
WHY CULTURE MATTERS IN INTERNATIONAL
BUSINESS?

Business success in a variety of countries requires cross-cultural literacy.

IB managers should be well aware of the socio-cultural values, systems and practices in the
countries they operate.

At least five reasons explain why culture matters in managing IB:

Varying communication implications: Communication meanings vary across cultures
-Non-verbal communications: varying cultural implications
Kinesics
Proxemics
Time language
Paralanguage
Physical context
Haptics
Contd..

 Varying impact of social attitude behaviors on IB: social behaviors affecting business
vary across cultures
 Varying CSR and ethical standards: standards of business ethics and corporate social
responsibility vary across cultures
 Impact of socio-cultural nuances on business negotiations: Socio-cultural nuances
influence nature of business negotiations
 Varying customer reactions to marketing: customer reactions to the firm’s marketing
and advertisements vary across cultures
Managing socio-cultural differences

 Harmonizing cross-cultural behaviors

 Making little or no adjustment
 Making communications effective
 Managing ‘culture shock’
 Managing company and management orientations
a) Ethnocentrism
b) Regio-centrism
c) Polycentrism
d) Geo-centrism
REGIONAL ECONOMIC INTEGRATION-TYPES

Regional economic integration means agreements among countries in

a geographic region to reduce, and ultimately remove, tariff and non-
tariff barriers to the free flow of goods, services and factors of
production between each other.
 Geographical proximity: most important criteria.
 Consumers’ tastes and preferences
 Distribution channels
 Common history and interests
 Common economic and trade opportunities, and problems
REGIONAL ECONOMIC INTEGRATION-TYPES

(A) Free trade area (FTA)

(E.g. NAFTA: US, Canada, Mexico) 90% of regional economic integration of this type
-All tariff and non-tariff barriers eliminated ultimately
1) Internal tariff among member countries are eliminated
-However, each member country maintains its own separate external tariff
against non FTA countries/outside world, i.e. against goods imported from non-
members. E.g. if a British company exports a product to the US or Canada or Mexico,
it likely will have to pay different tariff rates in each of them.
-The objective of such regional organizations is to reduce or eliminate tariff between
member countries to share the benefits of economic growth.
Contd..

(B) Customs union

(E.g. The EU began as a customs union, but has now moved beyond this stage.)
-In customs union, level of economic cooperation is higher.
-A customs union eliminates trade barriers between member countries and adopts a common
external trade policy.
-Here in addition to 1) eliminating internal tariffs, member countries levy a
2) common external tariff on goods being imported from non-member countries.
-For example, during EU is a custom union, if a US company were to export a product
to the UK and France, two members, the product would enter both countries at the
same tariff rate.
Contd..

(C) Common market

(E.g. For years, the EU functioned as a common market, although it has now moved
beyond this stage.
-A common market, has no barriers to trade between member countries, includes a
common external trade policy, and allows factors of production to move freely
between members.
-Here in addition to 1) eliminating internal tariffs, member countries levy a 2)
common external tariff on goods being imported from non-members, and 3) also
allows free mobility of production factors such as labor and capital, no visa)
Contd..

(D) Economic union/ integration

(No full-fledged economic union in the world, although EU is moving great deal
towards it.)
-Level of economic integration is extremely high due to greater socio-economic
harmonization by 4) adopting common economic/trade policies, i.e. common fiscal
or monetary policies are adopted by all the member countries.
-For example, EU is moving great deal towards it. It has a common currency and a
common Central Bank.
- Not all members of the EU have adopted the euro, the currency of the EU;
differences in tax rates and regulations
Contd..

(E) Political union

(It is not available so far at least in the present time.)
-A central political apparatus coordinates the economic, social and foreign
policy of the member states.
-In the past, USA and Canada had several independents states that were
effectively combined into a single nation.
-Unification of East Germany and West Germany into United Germany.
-Sikkim into India
-EU is moving towards it.
LEADING ECONOMIC BLOCS

(i) European Union (EU)

(ii) North American Free Trade Agreement (NAFTA)
(iii) SAFTA (South Asia Free Trade Agreement)
(iv) BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical
and Economic Cooperation)
(v)Association of South East Asian Nations (ASEAN) 1967
(vi) Asia Pacific Economic Cooperation (APEC) 1989
Contd..

vii) Latin American Integration Association (ALADI) 1981

viii) MERCOSUR
ix) Caribbean Free Trade Association (CARIFTA)
x) Caribbean Community and Common Market (CARICOM)
xi) The Organization of Petroleum Exporting Countries (OPEC)
Regional economic groupings such as EU NAFTA, APEC,
ASEAN, SAFTA, AND BIMSTEC

European Union (EU)

 European Union (EU), international organization comprising 27 European
countries and governing common economic, social, and security policies.
Originally confined to western Europe, the EU undertook a robust expansion into
central and eastern Europe in the early 21st century.
 The EU’s members are Austria, Belgium, Bulgaria, Croatia, Cyprus, the
Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary,
Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland,
Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden.
 The United Kingdom, which had been a founding member of the EU, left the
organization in 2020.
Contd..
 Understanding the EuroThe euro is the official currency of the European Union, used as sole legal
tender by 19 of the EU's 27 member countries.
 EurozoneThe eurozone is a geographic area that consists of the European Union (EU) countries
that have fully incorporated the euro as their national currency.

 How Does the European Customs Union Work?The European Union Customs Union regulates the
tariff-free movement of goods within the European Union and standardizes duties on imported
goods.
 European Economic and Monetary Union (EMU)The European Economic and Monetary Union
(EMU) refers to all of the countries that have adopted a free trade monetary agreement in the
Eurozone.
 What Is the Maastricht Treaty?The Maastricht Treaty was responsible for the creation of the
European Union and was approved by leaders of member states that made up the European
Community in 1992.
The EU has seven main institutions :
• European Parliament
 Represents the citizens of EU countries and is directly elected by them. It takes decisions
on European laws jointly with the Council of the European Union. It also approves the EU
budget.
• European Council
 The heads of state or government of the EU countries meet, as the European Council, to
define the general political direction and priorities of the European Union.
• Council of the European Union
 Represents the governments of EU countries. The Council of the EU is where national
ministers from each government meet to adopt laws and coordinate policies. The Council
of the EU takes decisions on European laws jointly with the European Parliament.
• European Commission
 Represents the common interests of the EU and is the EU’s main executive body. It uses its
‘right of initiative’ to put forward proposals for new laws, which are scrutinised and adopted by
the European Parliament and the Council of the European Union. It also manages EU policies
and the EU’s budget and ensures that countries apply EU law correctly.
 Court of Justice of the European Union
 The Court ensures that EU law is followed, and that the Treaties are correctly interpreted and
applied: it reviews the legality of the acts of the EU institutions, ensures that EU countries
comply with their obligations under the Treaties, and interprets EU law at the request of
national courts.
• European Central Bank
 The ECB and the European System of Central Banks are responsible for keeping prices stable
in the euro area. They are also responsible for the monetary and exchange rate policy in the
Eurozone and support EU economic policies.
• European Court of Auditors
 The ECA contributes to improving EU financial management, and promoting accountability
and transparency, and acts as the independent guardian of the financial interests of EU citizens.
NAFTA
(North American Free Trade Agreement)
 NAFTA is a free trade agreement (FTA) that encompasses
 Canada, the United States, and México (1994).
 world’s largest FTA
 NAFTA has contributed to the economic growth and rising standards of
living for people in all three countries.
 Mexico (latest member) has reduced or eliminated tariffs & non-tariff
barriers: some immediately and some phased wise bases over 5-10
years.
 Canada and US previously used to establish their manufacturing facilities in
Asia due to cheap labor, now they do the same in Mexico, i.e. labor cost here
is cheaper than most industrialized countries in the world including Asia.
 Mexico is a good market for US products.

Purpose of NAFTA:
 friendship, cooperation, mutually beneficial trade, market for their products,
framework for investment opportunity, conditions for fair competition,
intellectual property rights, opportunities for employment, sustainable
development, workers’ rights, implementing the trade agreements, in
environment friendly manner & reduce trade barriers, dispute resolution
mechanism
Contd..

 After U.S. President Donald Trump took office in January 2017, he sought to
replace NAFTA with a new agreement, beginning negotiations with Canada and
Mexico.
 In September 2018, the United States, Mexico, and Canada reached an
agreement to replace NAFTA with the United States–Mexico–Canada Agreement
(USMCA), and all three countries had ratified it by March 2020.
 NAFTA remained in force until USMCA was implemented. In April 2020, Canada
and Mexico notified the U.S. that they were ready to implement the agreement.
 The USMCA took effect on July 1, 2020, replacing NAFTA. The new law involved
only small changes.
ASEAN
Association of Southeast Asian Nations 1967
 (10 countries), Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar,
Philippines, Singapore, Thailand, Vietnam
 set up the ASEAN Free Trade Area (AFTA) in 1992;
 Free Trade Area with the objectives of cutting tariffs on all intra-zonal trade
gradually and ultimately eliminating them
 “three pillars” of regional cooperation: security, sociocultural integration,
and economic integration.

 Objectives
(1) to accelerate the economic growth, social progress and cultural development in the region through joint endeavors
in various sectors in the spirit of equality and partnership for a prosperous and peaceful community of Southeast Asian
nations
(2) to promote regional peace and stability through abiding respect for justice and the rule of law in the relationship
among countries in the region and adherence to the principles of the United Nations Charter.
Fundamental principles
 Mutual respect for the independence, sovereignty, equality, territorial
integrity,
 the right of every State to lead its national existence free from external
interference, subversion or coercion;
 non-interference in the internal affairs,
 settlement of differences peacefully;
 renunciation of the threat or use of force
 Effective cooperation among themselves.
APEC
Asia-Pacific Economic Cooperation 1989
 21 member economies (spanning 4 continents) bordering the Pacific Rim:
Australia, New Zealand, Japan, China, Taipei, Hong Kong, the US, Canada,
Mexico, Russia, Chile, Peru, Brunei, Singapore, Indonesia, Malaysia,
Thailand, Vietnam, The Philippines, Korea (R), Papua New Guinea.
 contribute 46% of world trade, and command 58% of world GDP, making it
the largest regional integration grouping by geographic area
 to promote multilateral economic cooperation in trade & investment
liberalization in the Pacific Rim
 to reduce tariffs and other trade barriers across the region
 progress toward free trade is hampered by the size of APEC and the
geographical distance between member countries (unlike in case of EU, and
NAFTA).
Goal
 (primary) to support sustainable economic growth & prosperity
 by free and open trade and investment in the region,
 promoting and accelerating regional economic integration,
 encouraging economic and technical cooperation,
 enhancing human security, and
 facilitating a favorable & sustainable business environment.

 Achievement
One practical achievement is the APEC Business Travel Card, which allows
businesspeople visa-free entry and fast track immigration processing at airports
in participating economies.
Emerging Foreign Market

• An emerging market economy (EME) is a nation with an economy with low to

middle per capita income and is moving towards becoming developed.
• Emerging market economies are transitioning from a closed market system to
an open market system while developing economic reform programs.
• BRIC countries or Brazil, Russia, India and China. These countries are
currently considered the top four emerging markets.
• Ten big emerging markets, located in every part of the world, will change the face
of global economics and politics. They are: Mexico, Brazil, Argentina, South
Africa, Poland, Turkey, India, Indonesia, China, and South Korea.
Features

i. developing economies = GNI per capita =< $12535 in 2020)

ii. substantial industrialization, modernization, and rapid economic growth.
iii. rapidly improving living standards and a growing middle class
iv. As a result, rising & attractive destinations for exports & FDI
v. Skewed economic prosperity between urban & rural
vi. high average annual GDP growth rate of about 7%
vii. advantages like low-cost labor, knowledge workers, government support, low-
cost capital, and powerful, highly networked conglomerates
Contd..
viii. emerging market/economy has some characteristics of a developed market, but
does not meet standards to be a developed market.
ix. Emerging foreign markets contribute to almost 50% of global PPP based GDP.
x. They have 60% of global population; attract 25% of global FDI inflow.
xi. Even during recession in developed countries, international companies enjoy sales in
emerging markets
xii. Large imports, increasing demand for electronics, automobiles, and health
care/medicines, machines & tools.
xiii. governments and state enterprises large purchases
xiv. Emerging foreign markets in general have political instability (corruption, weak law,
weak IP protection, bureaucracy, red tape, and lack of transparency, bribery,
kickbacks, and extortion) poor physical infrastructure
71

sanjayjanuary16@gmail.com 98511-999-89 04/17/2024

INTERNATIONAL MONETARY & FINANCIAL ENVIRONMENT-CURRENCIES
AND EXCHANGE RATE SYSTEMS

International monetary environment consists of all those actors, instruments, and variables
that are related to the international currencies and their exchange systems.
International financial environment consists of all those actors, instruments, and variables
that are related to international finance, i.e. investment, financing, and distribution of financial
gains.
International monetary & financial environment encompasses foreign exchange market,
major foreign exchange instruments, determinants/theories of exchange rates, exchange
control & liberalization techniques.
CURRENCIES

Foreign exchange/currency is money denominated in the currency of another nation (e.g. US

Dollar) or group of nations (e.g. EU’s Euro Dollar).
Foreign currency/exchange can be in the form of cash, funds on credit/debit cards, traveler’s
checks, bank deposits, or other short-term claims.
An Exchange rate is the price of a currency, i.e. it is the no of units of one currency that buys
one unit of another currency, and this number can change daily. For example, 1 Euro can
purchase US $ 1.0417. Exchange rate is simply the rate at which one currency is converted
into another.
Contd..

Foreign currency/exchange market is the market in which buying & selling of foreign
exchange takes place. It is a market for converting the currency of one country into that of
another country.” The actors of foreign-exchange market affect supply & demand of foreign
currencies, i.e. exporters, importers, investors in FDI, portfolio investors, commercial banks,
investment banks, securities exchanges etc.
Foreign exchange market may or may not involve a specific place, i.e. most foreign exchange
trade activities take place by telephones, cell phones, cables and mails.
Foreign exchange market operates 24 hours a day, i.e. it never sleeps!
Foreign currency market consists of banks (both commercial and investment banks through
separate foreign exchange trading counter) and financial institutions that deal in foreign
currency exchange, i.e. securities exchanges like Chicago Mercantile Exchange, Philadelphia
Stock Exchange.
Contd..

Parties, involved in international business, are exposed to foreign exchange risk, i.e. risk due to
changes in exchange rates. Several traditional and non-traditional instruments provide hedge against
such foreign exchange risk.
a) Spot exchange/transactions
b) Forward exchange/transaction (Outright forward)
c) FX swaps operations

The Spot Market/Spot exchange/transactions

Spot exchange/transactions involve immediate delivery, or exchange of currencies on the spot. In
practice, the settlement takes place within 2 days in most markets (i.e. the second day immediately after
the date on which the two foreign-exchange traders agree to the transaction).
The bid is foreign exchange trader’s quote of buying price and the offer is the selling price of foreign
currency, the spread is the difference between the bid and offer rates, and it is the trader’s profit margin.
Contd..

The Forward Market/ Forward exchange/transaction (Outright forward)

 In forward exchange, actual settlement takes place three or more days after the date on
which the traders agree to the transaction. Outright forward rate is the rate at which the
outright forward transaction is settled and is the contract rate between the two parties. The
forward exchange rate may be fixed at par (equal to spot rate), at premium or at discount.
FX swaps operations
 In FX swaps, one currency is swapped for another on one day and then swapped back on a
future date. Most often, the first leg of an FX swap is a spot transaction, with the second
leg of the swap a forward transaction/future transaction.
 Although an FX swap is both a spot & forward transaction, it is accounted for and
considered as a single transaction.
Contd..

 For example, assume that IBM , USA receives dividend in British pounds from its
subsidiary in the UK but has no use for British pounds until it has to pay a British supplier
in pound in 30 days. It would rather have dollars now than hold on to the pounds for 30
days. IBM could enter into an FX swap in which it sells the pounds for dollars to a trader
in the spot market at the spot rate and agrees to buy pounds for dollars from the trader in
30 days at the forward rate.
The size, composition, & location of the foreign-exchange
market

Size
-Size of foreign exchange has been growing over the years but the growth rate has been affected by
consolidation of banking industry and introduction of Euro.

Composition
-US dollar (followed by Euro and Yen) is the most important currency in the foreign-exchange market
(i.e. about 90 % worldwide) and in international transaction.

Market
-The largest volume of foreign exchange transactions occurs in the UK (London), followed by US
(New York), Japan (Tokyo), and Singapore due to London’s central location (i.e. international financial
center having time zone benefit)
EXCHANGE RATE SYSTEMS (Determinants/theories)

An Exchange rate is the price of a currency, i.e. it is the no of units of one currency that buys one
unit of another currency.

Companies engaged in international business must understand exchange rate arrangements in various
countries. Since payments in international business (i.e. where 2 or more currencies are used) is
fundamentally different from payment in domestic market (i.e. where only one currency is used).
(According to Bretton Woods Agreement)
From the end of World War II to the early 1970s, the Bretton Woods Agreement meant that the
exchange rates of participating nations were pegged to the value of the U.S. dollar, which was
fixed to the price of gold. Under the system, each IMF member country sets a par value for its
currency based on its reserves mainly of gold and the US dollar.
Later, par value was done away with when IMF moved to greater exchange rate flexibility as US
dollar itself was devaluated time and again. Such activities gave rise to floating exchange rate
theories in place of fixed exchange rate theory.
Contd..

(A) Fixed exchange rate theory

 A fixed exchange rate is typically used to stabilize the exchange rate of a currency by
directly fixing its value in a predetermined ratio to a different, more stable, or more
internationally prevalent currency (or currencies) to which the currency is pegged.

 Pegged exchange rate

-Under this theory, a country pegs the value of its currency to that of a major currency, for
example, dollar. And when the US dollar rises in value, its own currency rises too. It is popular
among many of the world’s smaller/developing nations like Nepal. Nepal has pegged its
exchange rate with Indian currency.
Contd..

(B) FLOATING EXCHANGE RATE SYSTEM

Demand and supply theory
-Currency is freely floated in the market and it is the free play of demand & supply of the currency in
the country that determines its price.
Floating exchange rate
-Under this, the exchange rate is determined by demand and supply for foreign currency. In practice, it
is widely used. Under free market condition, market forces (i.e. free play of demand and supply)
determine the exchange rate just like the price of any commodity is determined. For example, US
dollar, Euro, British pound, Japanese Yen have floating exchange rates.
Managed fixed rate regime:
-Under this, government intervenes for the purpose of exchange rate stabilization, i.e. through purchase
and sale of offering currency in domestic market. Central bank keeps reserve of foreign currencies for
contingencies & regulates its supply or buys foreign currency to stabilize exchange rate
MODES OF PAYMENT IN INTERNATIONAL TRADE

(1) Cash-in-Advance
-With cash-in-advance payment terms, the exporter can avoid credit risk because payment is
received before the ownership of the goods is transferred.
-Wire transfers and credit cards are the most commonly used cash-in-advance options
available to exporters. However, requiring payment in advance is the least attractive option for
the buyer, because it creates cash-flow problems.
-Foreign buyers are also concerned that the goods may not be sent if payment is made in
advance. Thus, exporters who insist on this payment method as their sole manner of doing
business may lose to competitors who offer more attractive payment terms.
Contd..

(2) Letters of Credit

-Letters of credit (LCs) are one of the most secure instruments available to international
traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made to
the exporter, provided that the terms and conditions stated in the LC have been met, as verified
through the presentation of all required documents. The buyer pays his bank to render this
service.
-An LC is useful when reliable credit information about a foreign buyer is difficult to obtain,
but the exporter is satisfied with the creditworthiness of the buyer’s foreign bank. An LC also
protects the buyer because no payment obligation arises until the goods have been shipped or
delivered as promised.
Contd..

(3) Counter Trade

 The counter trade mode of payment refers to a range of barter-like agreements by which
goods and services can be traded for other goods and services, particularly when country’s
currency is non-convertible.
 In other words, counter trade occurs when goods and services cannot be traded for cash but
only for other goods.
 Yet, from the viewpoint of payment security, it is generally not desirable and preferable as
it is most unsecure.
Contd..

(4) Open Account

-An open account transaction is a sale where the goods are shipped and delivered before
payment is due, which is usually in 30 to 90 days. Obviously, this option is the most
advantageous option to the importer in terms of cash flow and cost, but it is consequently the
highest risk option for an exporter.
-Because of intense competition in export markets, foreign buyers often press exporters for
open account terms since the extension of credit by the seller to the buyer is more common
abroad. Therefore, exporters who are reluctant to extend credit may lose a sale to their
competitors.
-However, the exporter can offer competitive open account terms while substantially
mitigating the risk of non-payment by using of one or more of the appropriate trade finance
techniques, such as export credit insurance.
Contd..

(5) Consignment
-Consignment in international trade is a variation of open account in which payment is sent to the exporter
only after the goods have been sold by the foreign distributor to the end customer.
-An international consignment transaction is based on a contractual arrangement in which the foreign
distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they
are sold.
-Clearly, exporting on consignment is very risky as the exporter is not guaranteed any payment and its
goods are in a foreign country in the hands of an independent distributor or agent.
-Consignment helps exporters become more competitive on the basis of better availability and faster
delivery of goods. Selling on consignment can also help exporters reduce the direct costs of storing and
managing inventory.
-The key to success in exporting on consignment is to partner with a reputable and trustworthy foreign
distributor or a third-party logistics provider. Appropriate insurance should be in place to cover consigned
goods in transit or in possession of a foreign distributor as well as to mitigate the risk of non-payment.
GLOBAL FINANCIAL SYSTEM

Global financial system consists of no. of financial subsystems and variables at the national,
regional, and international level that help the flow of finance across the globe.
It consists of commercial banks, financial intermediaries, central banks, international
financial institutions (e.g. IMF, World Bank, ADB), financial markets, regulations related to
this, borrowers and lenders in the global economy.
The international financial system provides the framework enabling residents of one country
to make payments to residents of other countries.
INTERNATIONAL ECONOMIC INSTITUTIONS

The World Trade Organization (WTO)

United Nations
International Labor Organization
The World Bank
International Monetary Fund (IMF)
The Organization for Economic Cooperation and Development (OECD)

-International financial institutions facilitate and contribute to the development of

international business. Important of them are World Bank (IBRD and its affiliates), ADB, and
IMF.
Contd..

(A) World Bank

World Bank Group includes altogether 5 institutions: 2 main and 3 affiliates.
1 the international bank for reconstruction and development (IBRD) 1944
2. The International Development Association (IDA) 1960
3. The International Finance Corporation (IFC) 1956
4. The International Center for Settlement of Investment Disputes (ICSID) 1966
5. The Multilateral Investment Guarantee Agency (MIGA) 1988

-The World Bank refers = Mainly IBRD + plus IDA

World Bank

World Bank (founded by United Nations) is the multilateral lending agency outcome
of Bretton Woods Conference held in New Hampshire, the USA in July 1944.
-It was predominantly designed to construct Western Europe and Japan in the aftermath of
the Second World War devastation (i.e. IBRD). Later, its activities have been extended in
various sectors.
-World Bank is owned by 189 member counties.
(i) Global poverty reduction/elimination: provides development assistance to the poorest of the poor
where worst form of poverty exists,
(ii) Bringing a mix of finance & ideas to improve living standards of people in the developing
world: Financial & technical assistance (including advisory work) to developing countries in the
world.
(iii) Funding for building infrastructure, promoting economic growth & stability,
thus improving quality & quantity of demand.
Contd..

(a) The international bank for reconstruction and development

(IBRD) (better known as the World Bank)
IBRD is a specialized United Nations agency, established at the Bretton Woods Conference,
New Hampshire in 1944, to help reconstruct/recover Western Europe and Japan from the
devastation of World War II.
The IBRD focuses on middle income and creditworthy poor countries, i.e. they are directed
toward developing countries at more advanced stages of economic & social growth
It provides low-interest loans, interest-free credit, and grants to developing countries for
education, health, infrastructure, communications, and many other purposes.
Its capital is subscribed by its member countries.
IBRD loans are repayable over 20 years, or less with generally a 5-year grace period.
189 members
 Contd.

(b) The International Development Association (IDA), the World Bank’s

concessionary lending affiliate

By the 1950s, it became clear that the poorest developing countries needed softer terms,
than those that could be offered by the IBRD)
-With the United States taking the initiative, a group of the Bank’s member countries
(of IBRD) set up an agency in 1960 that could lend to the poorest countries on the most
favorable terms possible. They called the agency the "International Development
Association”.
-173 countries are IDA members, Nepal joined IDA in 1968.

(The World's Fund to Help the Poorest People)

Contd..

-IDA helps the earth’s poorest countries reduce poverty by providing interest-free
loans, low-interest loans, and some grants for programs aimed at boosting economic
growth and improving living conditions in education, health, infrastructure,
communications and many other purposes.

- IDA’s loans are deeply concessional

-IDA credits have maturities of 20, 35 or 40 years with a 10-year grace period before
repayments of principal begins.
Contd..

(c) The International Finance Corporation (IFC) 1956

185 member countries; Nepal joined IFC in 1966.
IFC to improve the quality of the lives of people in its developing member countries through long
term loan & equity financing for private sector projects in the developing world, i.e. buys equity &
quasi equity shares, (i.e. preference shares, convertible debt/debentures) in projects. It usually
finances 5-45 % shares of such projects.
IFC operates on commercial terms, targeting profitability, i.e. it has made a profit every year since
its inception.
To be eligible for IFC financing, projects must be profitable for investors, benefit the economy of
the host country, and comply with stringent environmental & social guidelines.
IFC finances projects in all multilateral areas e.g. manufacturing, infrastructure, tourism, health &
education etc.
IFC can provide financial instruments singly or jointly with others to ensure that projects are
adequately funded.
Contd..

Providing advice/advisory & technical assistance to businesses & governments

-IFC advises business in developing countries on a wide variety of matters, including physical
and financial restructuring; formulation of business plans; identification of markets, products,
technologies, and financial & technical partners; and mobilization of project finance. It can
provide advisory services in the context of an investment, or independently for a fee, in line
with market practice.
-IFC also advises/helps governments in developing countries on how to create an enabling
business environment that stimulates the flow of both domestic and foreign private savings
and investment and it provides guidance on attracting FDI.
Contd..

(d)The Multilateral Investment Guarantee Agency (MIGA) 1988, 181 member

countries

to promote FDI into developing countries to help support economic growth, reduce poverty,
and improve people's lives.
It creates investment environments and sound perceptions of political risk to attract foreign
direct investment (FDI).
FDI helps developing infrastructure and solving various problems by promoting private
sector profitable investments.
This releases government fund to address acute social needs like Developing country
governments alone cannot shoulder the burden, financially or technically, of addressing these
needs.
Contd..

Political risk insurance:

-It acts as a multilateral risk mitigator for the investors against political or non-commercial risks in developing
countries.
To restore the business community's confidence,
-it is involved in ongoing collaboration with the public & private insurance market to increase the amount of
insurance available to investors. It invests into conflict-affected countries.
- It offers confidence, security, and credibility needed for private investors to make sustainable investments in
developing countries.
Dispute mediation
-It mediates dispute between investors & governments to remove possible obstacles to future investment.

Expert Advice:
-It offers expert advice to governments on attracting & retaining quality foreign investment.
Sharing information/technical assistance:
-It does this to improve investment climates and promote investment opportunities in member developing
countries, through online
Contd..

(e)The International Center for Settlement of Investment Disputes (ICSID),

1966, 163 member countries

encourages the flow of foreign investment to developing countries through arbitration &
conciliation facilities for settlement of disputes between foreign investors and governments of
host countries or between governments; an important role in promoting international
business/investment
Recourse to ICSID conciliation and arbitration is entirely voluntary However, once the
parties have consented to arbitration under the ICSID Convention, neither can unilaterally
withdraw its consent.
International Monetary Fund (IMF) 1945

IMF was conceived at a United Nations conference convened in Bretton Woods, New
Hampshire, U.S. in July 1944, but it was created & operational in 1945.
188 member countries
IMF encourages countries to adopt sound economic policies to reduce poverty in countries
around the globe, independently and in collaboration with the World Bank and other
organizations.
for international economic & monetary cooperation

 consultation & collaboration on international monetary problems to avoid a repetition of the

disastrous economic policies that contributed to the Great Depression 30s.
-To promote stability of global economic &
financial system to prevent & resolve economic crisis, i.e. exchange stability & free/orderly
exchange rate system and to avoid competitive exchange depreciation/devaluation.
Contd..

It provides system of international payments & exchange rates among national currencies that
enables trade to take place between countries.
-to contribute to global economic growth
For high levels of employment & real income and to alleviate poverty

To provide temporary financial assistance to countries to help orderly correct balance of
payments problems:
It shortens the duration & lessens the degree of disequilibrium in international BOP of
members.
To facilitate the balanced growth of international trade
To assist in the establishment of a multilateral system of payments in respect of current
transactions between members and help in the elimination of foreign exchange restrictions
which hamper the growth of world trade
Contd..

surveillance, financial assistance/lending, and technical assistance

IMF monitors economic & financial developments & policies, in member countries and at
the global level, and gives policy advice to its members based on its more than fifty years of
experience.
 Asian development bank (ADB)

This multinational development bank was established in 1966.

Now, there are 67 member countries mostly from the Asia and Pacific
region. USA and Japan are the largest shareholders. Its headquartered in
Manila, Philippines.
Objectives
-It is dedicated to reducing poverty in Asia and Pacific region and
promoting the development of the region.
ADB operations
Lending, technical assistance, capacity building, economic & sector work,
donor coordination, and policy dialogue
Contd..

Strategies
To reducing poverty, ADB carries out the following activities:
-promotes sustainable economic growth; protects the environment; develops human
resources; improves the status of women; law & policy reforms; regional cooperation
-market driven private-sector development; facilitates employment and income
generation for the poor; social development,
Which enables the poor to make full use of opportunities to improve their living
standard, and programs that directly address the severity of poverty.
Contd..

 Nepal was a founding member of the Asian Development Bank (ADB) in 1966. The
bank's assistance has since been directed mainly to improvements in energy
security, transport, water supply and urban infrastructure services,
agriculture and irrigation, and education.