Master of Business Administration- MBA Semester 4 MB0053 International Business Management -4 Credits (Book ID: B1315)

MB0053 International Business Management

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Kunal Mhatre 581111279

Master of Business Administration- MBA Semester 4 MB0053 International Business Management -4 Credits (Book ID: B1315)

1) Write a short note on GATT and WTO, highlighting the difference between the two.
General Agreement on Tariff and Trade (GATT): The GATT was established on a provisional basis after the Second World War in the wake of other new multilateral institutions dedicated to international economic cooperation notably the "Britton Woods" institutions now known as the World Bank and the International Monetary Fund. The original 23 GATT countries were among over 50 which agreed a draft Charter for an International Trade Organization (ITO) a new specialized agency of the United Nations. The Charter was intended to provide not only world trade disciplines but also contained rules relating to employment, commodity agreements, restrictive business practices, international investment and services. In an effort to give an early boost to trade liberalization after the Second World War and to begin to correct the large overhang of protectionist measures which remained in place from the early 1930s-tariff negotiations were opened among the 23 founding GATT "contracting parties" in 1946. This first round of negotiations resulted in 45,000 tariff concessions affecting $10 billion or about one-fifth of world trade. It was also agreed that the value of these concessions should be protected by early and largely "provisional" acceptance of some of the trade rules in the draft ITO Charter. The tariff concessions and rules together became known as the General Agreement on Tariffs and Trade and entered into force in January 1948. Although the ITO Charter was finally agreed at a UN Conference on Trade and Employment in Havana in March 1948, ratification in national legislatures proved impossible in some cases. When the United States government announced, in 1950, that it would not seek Congressional ratification of the Havana Charter, the ITO was effectively dead. Despite its provisional nature, the GATT remained the only multilateral instrument governing international trade from 1948 until the establishment of the WTO. Although, in its 47 years, the basic legal text of the GATT remained much as it was in 1948, there were additions in the form of "plural-lateral voluntary membership agreements and continual efforts to reduce tariffs. Much of this was achieved through a series of "trade rounds". The biggest leaps forward in international trade liberalization have come through multilateral trade negotiations, or "trade rounds", under the auspices of GATT the Uruguay Round was the latest and most extensive. The limited achievement of the Tokyo Round, outside the tariff reduction results, was a sign of difficult times to come. GATTs success in reducing tariffs to such a low level, combined with a series of economic recessions in the 1970s and early 1980s, drove governments to devise other forms of protection for sectors facing increased overseas competition. High rates of unemployment and constant factory closures led governments in Europe and North America to seek bilateral market-sharing

Master of Business Administration- MBA Semester 4 MB0053 International Business Management -4 Credits (Book ID: B1315)
arrangements with competitors and to embark on a subsidies race to maintain their holds on agricultural trade. Both these changes undermined the credibility and effectiveness of GATT. WTO World Trade Organization came into existence in 1995 after the desolation of General Agreement on Tariff and Trade (GATT). The WTOs overriding objective is to help trade flow smoothly, freely, fairly and predictably. It does this by: Administering trade agreements Acting as a forum for trade negotiations Settling trade disputes Reviewing national trade policies Assisting developing countries in trade policy issues, through technical assistance and training programs Cooperating with other international organizations The WTO has nearly 150 members, accounting for over 97% of world trade. Around 30 others are negotiating membership. Decisions are made by the entire membership. This is typically by consensus. A majority vote is also possible but it has never been used in the WTO, and was extremely rare under the WTOs predecessor, GATT. The WTOs agreements have been ratified in all members parliaments. The WTOs top level decision-making body is the Ministerial Conference which meets at least once every two years. Below this is the General Council which meets several times a year in the Geneva headquarters. The General Council also meets as the Trade Policy Review Body and the Dispute Settlement Body. At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS) Council report to the General Council. Numerous specialized committees, working groups and working parties deal with the individual agreements and other areas such as the environment, development, membership applications and regional trade agreements. The WTO Secretariat, based in Geneva, has around 600 staff and is headed by a director-general. Its annual budget is roughly 160 million Swiss francs. It does not have branch offices outside Geneva. Since decisions are taken by the members themselves, the Secretariat does not have the decisionmaking role that other international bureaucracies are given with.

Master of Business Administration- MBA Semester 4 MB0053 International Business Management -4 Credits (Book ID: B1315)
The WTO is run by its member governments. All major decisions are made by the membership as a whole, either by ministers (who meet at least once every two years) or by their ambassadors or delegates (who meet regularly in Geneva). Decisions are normally taken by consensus. Difference between WTO and GATT:The World Trade Organization is not a simple extension of GATT; on the contrary, it completely replaces its predecessor and has a very different character. Among the principal differences are the following: a. The GATT was a set of rules, a multilateral agreement, with no institutional foundation, only a small associated secretariat which had its origins in the attempt to establish an International Trade Organization in the 1940s. The WTO is a permanent institution with its own secretariat. b. The GATT was applied on a "provisional basis" even if, after more than forty years, governments chose to treat it as a permanent commitment. The WTO commitments are full and permanent. c. The GATT rules applied to trade in merchandise goods. In addition to goods, the WTO covers trade in services and trade-related aspects of intellectual property. d. While GATT was a multilateral instrument, by the 1980s many new agreements had been added of a plural-lateral, and therefore selective, nature. The agreements which constitute the WTO are almost all multilateral and, thus, involve commitments for the entire membership. The WTO dispute settlement system is faster, more automatic, and thus much less susceptible to blockages, than the old GATT system. The implementation of WTO dispute findings will also be more easily assured.

2) Describe various entry strategies available to a firm when it wants to enter a foreign market.
International Market Entry Strategies Organizations that plan to go for international marketing should know the answers for some basic questions like a. In how many countries would the company like to operate? What are the types of countries it plans to enter? Thats why companies evaluate each country against the market size, market growth, and cost of doing business, competitive advantage and risk level. Once the market is found to be attractive, companies should decide how to enter this market. Companies can enter the international market by adopting any one of the following strategies. They area. Exporting. Licensing. Contract manufacturing. Management contracts. Joint ownership. Direct investment Exporting is the technique of selling the goods produced in the domestic country in a foreign country with some modifications. For example, Gokaldas textiles export the cloth to different countries from India. Exporting may be indirect or direct. In case of indirect exporting, company works with independent international marketing intermediaries. This is cost effective and less risky too.

Master of Business Administration- MBA Semester 4 MB0053 International Business Management -4 Credits (Book ID: B1315)

Direct exporting is the technique in which organization exports the goods on its own by taking all the risks. Maruti Udyog Limited, Indias leading car manufacturer exports its cars on its own. Company can also set up overseas branches to sell their products. Adani Exports, another leading exporter from India has international office in Singapore. Licensing: According to Philip Kotler, licensing is a method of entering a foreign market in which the company enters into an agreement with a license in the foreign market, offering the right to use a manufacturing process, trademark, patent, or other item of value for a fee or royalty. For example, Torrent Pharmaceuticals has license to sell the cardiovascular drugs of Chinese manufacturer Tasly. Licensing may cause some problems to the parent company. Licensee may violate the agreement and can use the technology of the parent company. Contract manufacturing: Company enters the international market with a tie up between manufacturer to produce the product or the service. For example, Gigabyte Technology has contract manufacturing agreement with D- link India to produce and sell their mother boards. Another significant manufacturer is TVS Electronics; it produces key boards in its own name as well as for other companies too. Management contracting: In this case, a company enters the international market by providing the knowhow of the product to the domestic manufacturer. The capital, marketing and other activities are carried out by the local manufacturer, hence it is less risky too. Joint ownership: A form of joint venture in which an international company invests equally with a domestic manufacturer. Therefore it also has equal right in the controlling operations. For example, Barbara, a lingerie manufacturer has joint venture with Gokaldas Images in India. Direct Investment: In this method of international market entry, Company invests in manufacturing or assembling. The company may enjoy the low cost advantages of that country. Many manufacturing firms invested directly in the Chinese market to get its low cost advantage. Some governments provide incentives and tax benefits to the company which manufactures the product in their country. There is government restriction in some countries to opt only for direct investment, as it produces the jobs to the local people. This mode also depends on the country attractiveness. It may become risky if the market matures or unstable government exists.

3) Write a note on Globalization.

The term "globalization" has acquired considerable emotive force. Some view it as a process that is beneficial a key to future world economic development and also inevitable and irreversible. Others regard it with hostility, even fear, believing that it increases inequality within and between nations, threatens employment and living standards and thwarts social progress. This brief offers an overview of some aspects of globalization and aims to identify ways in which countries can tap the gains of this process, while remaining realistic about its potential and its risks. Globalization offers extensive opportunities for truly worldwide development but it is not progressing evenly. Some countries are becoming integrated into the global economy more quickly than others. Countries that have been able to integrate are seeing faster growth and reduced poverty.

Master of Business Administration- MBA Semester 4 MB0053 International Business Management -4 Credits (Book ID: B1315)
Economic "globalization" is a historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through trade and financial flows. The term sometimes also refers to the movement of people (labor) and knowledge (technology) across international borders. There are also broader cultural, political and environmental dimensions of globalization that are not covered here. At its most basic, there is nothing mysterious about globalization. The term has come into common usage since the 1980s, reflecting technological advances that have made it easier and quicker to complete international transactions both trade and financial flows. It refers to an extension beyond national borders of the same market forces that have operated for centuries at all levels of human economic activity village markets, urban industries, or financial centers. Globalization is not just a recent phenomenon. Some analysts have argued that the world economy was just as globalized 100 years ago as it is today. But today commerce and financial services are far more developed and deeply integrated than they were at that time. The most striking aspect of this has been the integration of financial markets made possible by modern electronic communication. There are four aspects of globalization: 1. Trade: Developing countries as a whole have increased their share of world trade from 19 percent in 1971 to 29 percent in 1999. For instance, the newly industrialized economies (NIEs) of Asia have done well, while Africa as a whole has fared poorly. The composition of what countries export is also important. The strongest rise by far has been in the export of manufactured goods. The share of primary commodities in world exports such as food and raw materials that are often produced by the poorest countries, has declined. 2. Capital movements: Globalization sharply increased private capital flows to developing countries during much of the 1990s. It also shows that: The increase followed a particularly "dry" period in the 1980s;

Net official flows of "aid" or development assistance have fallen significantly since the early 1980s; and The composition of private flows has changed dramatically. Direct foreign investment has become the most important category. Both portfolio investment and bank credit rose but they have been more volatile, falling sharply in the wake of the financial crises of the late 1990s. 3. Movement of people: Workers move from one country to another partly to find better employment opportunities. The numbers involved are still quite small, but in the period 1965-90, the proportion of labor forces round the world that was foreign born increased by about one-half. Most migration occurs between developing countries. But the flow of migrants to advanced economies is likely to provide a means through which global wages converge. There is also the potential for skills to be transferred back to the developing countries and for wages in those countries to rise. 4. Spread of knowledge (and technology): Information exchange is an integral, often overlooked, aspect of globalization. For instance, direct foreign investment brings not only an expansion of the physical capital stock, but also technical innovation. More generally, knowledge about production

Master of Business Administration- MBA Semester 4 MB0053 International Business Management -4 Credits (Book ID: B1315)
methods, management techniques, export markets and economic policies is available at very low cost, and it represents a highly valuable resource for the developing countries.

4) What does FDI stand for? Why do MNCs opt for FDI to enter international market?
FDI stands for Foreign Direct Investment. New MNCs do not pop up randomly in foreign nations. It is the result of conscious planning by corporate managers. Investment flows from regions of low anticipated profits to those of high returns. When MNC incorporated in one country, invests in another country, it is said that the FDI has flowed into the other country from some foreign origin. The main reasons for MNCs to opt for FDI to enter international market are stated as follows: 1. Growth motive: A company may have reached a plateau satisfying domestic demand, which is not growing. Looking for new markets. 2. Protection in the importing countries: Foreign direct investment is one way to expand. FDI is a means to bypassing protective instruments in the importing country. European Community imposed common external tariff against outsiders. US companies circumvented these barriers by setting up subsidiaries. Japanese corporations located auto assembly plants in the US, to bypass VERs. 3. High Transportation Costs: Transportation costs are like tariffs in that they are barriers which raise consumer prices. When transportation costs are high, multinational firms want to build production plants close to the market in order to save transportation costs. Multinational firms that invested and built production plants in the United States are better off than the exporting firms that utilized New Orleans port to ship and distribute products through New Orleans, provided that they built plants in a safe area. 4. Exchange Rate Fluctuations: Japanese firms invest here to produce heavy construction machines to avoid excessive exchange rate fluctuations. Also, Japanese automobile firms have plants to produce automobile parts. For instance, Toyota imports engines and transmissions from Japanese plants, and produce the rest in the U.S. 5. Market competition: The most certain method of preventing actual or potential competition is to acquire foreign businesses. GM purchased Monarch (GM Canada) and Opel (GM Germany). It did not buy Toyota, Datsun (Nissan) and Volkswagen. They later became competitors. 6. Cost reduction: United Fruit has established banana-producing facilities in Honduras. Cheap foreign labor. Labor costs tend to differ among nations. MNCs can hold down costs by locating part of all their productive facilities abroad. (Maquildoras)

5) What is the need to understand to understand cultural differences?

Master of Business Administration- MBA Semester 4 MB0053 International Business Management -4 Credits (Book ID: B1315)

Explain Hofstedes cultural dimensions.

There are two kinds of approach construct of culture. One is a multi-level approach, viewing culture as a multi-level construct that consists of various levels nested within each other from the most macrolevel of a global culture, through national cultures, organizational cultures, group cultures, and cultural values that are represented in the self at the individual level. The second is based on Scheins (1992) model viewing culture as a multi layer construct consisting of the most external layer of observed artifacts and behaviors, the deeper level of values, which is testable by social consensus, and the deepest level of basic assumption, which is invisible and taken for granted. The present model proposes that culture as a multi layer construct exists at all levels from the global to the individual and that at each level change first occurs at the most external layer of behavior, and then, when shared by individuals who belong to the same cultural context, it becomes a shared value that characterizes the aggregated unit (group, organizations, or nations). In the model, the most macro-level is that of a global culture being created by global networks and global institutions that cross national and cultural borders.

Figure-1: The dynamic of top-downbottom-up processes across levels of culture. Given the dominance of Western MNCs, the values that dominate the global context are often based on a free market economy, democracy, acceptance and tolerance of diversity, respect of freedom of choice, individual rights, and openness to change. Below the global level are nested organizations and networks at the national level with their local cultures varying from one nation or network to another. Further down are local organizations, and although all of them share some common values of their national culture, they vary in their local organizational cultures, which are also shaped by the type of industry that they represent, the type of ownership, the values of the founders, etc. Within each organization are sub-units and groups that share the common national and organizational culture, but that differ from each other in their unit culture on the basis of the differences in their functions (e.g., R&D vs manufacturing), their leaders

Master of Business Administration- MBA Semester 4 MB0053 International Business Management -4 Credits (Book ID: B1315)
values, and the professional and educational level of their members. At the bottom of this structure are individuals who through the process of socialization acquire the cultural values transmitted to them from higher levels of culture. Individuals who belong to the same group share the same values that differentiate them from other groups and create a group level culture through a bottom-up process of aggregation of shared values. For example, employees of an R&D unit are selected into the unit because of their creative cognitive style and professional expertise. Their leader also typically facilitates the display of these personal characteristics because they are crucial for developing innovative products. Thus, all members of this unit share similar core values, which differentiate them from other organizational units. Groups that share similar values create the organizational culture through a process of aggregation, and local organizations that share similar values create the national culture that is different from other national cultures. Both top-down and bottom-up processes reflect the dynamic nature of culture, and explain how culture at different levels is being shaped and reshaped by changes that occur at other levels, either above it through top-down processes or below it through bottom-up processes. Similarly, changes at each level affect lower levels through a top-down process, and upper levels through a bottom-up process of aggregation. Global organizations and networks are being formed by having local-level organizations join the global arena. That means that there is a continuous reciprocal process of shaping and reshaping organizations at both levels. For example, multinational companies that operate in the global market develop common rules and cultural values that enable them to create a synergy between the various regions, and different parts of the multinational company. These global rules and values filter down to the local organizations that constitute the global company, and, over time, they shape the local organizations. Reciprocally, having local organizations join a global company may introduce changes into the global company because of its need to function effectively across different cultural boarders.

6) Write short notes on: a) Ethnocentric approach

Ethnocentric is a staffing policy that is used in companies that has primarily international strategic orientation. This policy is generally adopted by headquarters by sending employees from the home or parent countries to the host country. This approach is used best in some situations such as, a team is sent from the home country to help setting up a new plant as well as train subsidiary personnel to use new system. The benefit of having staffs from home country abroad is that employees may gain experiences worldwide in order to become higher level in management of their headquarters because international managers require broad perspective and international exposure.

b) Polycentric approach
Polycentric is the policy involved hiring and promoting employees who are citizens of the host countries that the subsidiary is operated. This policy is best used when companies want to keep hiring cost low.

Master of Business Administration- MBA Semester 4 MB0053 International Business Management -4 Credits (Book ID: B1315)
Moreover, employees who are hired at subsidiary level would not have any problem adapting to the culture. Communication is smooth within the operation.