ASSIGNMENT

MBA SEM 4
SUBJECT NAME International Business
Management

QUESTION: 1
The world economy is globalizing at an accelerating pace. Discuss this statement and list the
benefits of globalization.
ANSWER
Globalization is the process of international integration arising from the interchange of world views,
products, ideas, and other aspects of culture. Put in simple terms, globalization refers to
processes that increase world-wide exchanges of national and cultural resources. Advances in
transportation and telecommunications infrastructure, including the rise of the telegraph and its
posterity the Internet, are major factors in globalization, generating further interdependence of
economic and cultural activities. To begin with, globalization has contributed to the worlds
economy in many valuable ways. The advances in science and technology have allowed
businesses to easily cross over territorial boundary lines. Accordingly, companies tend to become
more creative, competitive thus raising quality of goods, services and the worlds living
standard.Secondly, several companies from the more developed countries have already venture
to begin foreign operations or branches to take benefit of the low cost of labour in the poorer
countries. This kind of business activity will provide more arrival of cash or asset funds into the
less developed countries. However, one cannot reject the harmful effects which have resulting
from globalization. One crucial social aspect is the risk and danger of outbreak diseases which can
easily be multiply as the mode transportation is easier and faster in todays advance society.
Benefits of globalization are as follows:
1. Imported goods are available
2. The country can produce what it produces best and import the rest
3. There is a feeling of an international economy
4. The local industries work hard to compete with international firms
5. Raw material is available
6. The standard of life becomes better
7. More jobs are created
8. There is security from famine, disease, etc. as international firms intervene.
Demerits:
1. Local industries get dislodged.
2. In times of war, there is a problem
3. There is political interference and conflicts arise
4. The balance of payments is badly affected
5. Under developed countries are exploited




QUESTION: 2
Compare the Adam Smith and David Ricardos theories of international trade with examples.

ANSWER
'Absolute Advantage Theory'
The principle of absolute advantage refers to the ability of a party (an individual, or firm, or
country) to produce more of a good product or service than competitors, using the same amount of
resources. Adam Smith first described the principle of absolute advantage in the context of
international trade, using labor as the only input. Since absolute advantage is determined by a
simple comparison of labor productivities, it is possible for a party to have no absolute advantage
in anything; in that case, according to the theory of absolute advantage, no trade will occur with
the other party. It can be contrasted with the concept of comparative advantage which refers to the
ability to produce specific goods at a lower opportunity cost.
The ability of a country, individual, company or region to produce a good or service at a lower cost
per unit than the cost at which any other entity produces that good or service. Entities with
absolute advantages can produce a product or service using a smaller number of inputs and/or
using a more efficient process than another party producing the same product or service.
Investopedia explains 'Absolute Advantage'
Here are some examples of how absolute advantage works:
-The United States produces 700 million gallons of wine per year, while Italy produces 4 billion
gallons of wine per year. Italy has an absolute advantage because it produces many more gallons
of wine (the output) in the same amount of time (the input) as the United States.
-Jane can knit a sweater in 10 hours, while Kate can knit a sweater in 8 hours. Kate has an
absolute advantage over Jane, because it takes her fewer hours (the input) to produce a sweater
(the output).
An entity can have an absolute advantage in more than one good or service. Absolute advantage
also explains why it makes sense for countries, individuals and businesses to trade with one
another. Because each has advantages in producing certain products and services, they can both
benefit from trade. For example, if Jane can produce a painting in 5 hours while Kate needs 9
hours to produce a comparable painting, Jane has an absolute advantage over Kate in painting.
Remember Kate has an absolute advantage over Jane in knitting sweaters. If both Jane and Kate
specialize in the products they have an absolute advantage in and buy the products they don't
have an absolute advantage in from the other entity, they will both be better off.
David Ricardos theory
The theory of comparative advantage is an economic theory about the potential gains from trade
for individuals, firms, or nations that arise from differences in their factor endowments or
technological progress. In an economic model, an agent has a comparative advantage over
another in producing a particular good if he can produce that good at a lower relative opportunity
cost or autarky price, i.e. at a lower relative marginal cost prior to trade. The closely related law or
principle of comparative advantage holds that under free trade, an agent will produce more of and
consume less of a good for which he has a comparative advantage.
David Ricardo developed the classical theory of comparative advantage in 1817 to explain why
countries engage in international trade even when one country's workers are more efficient at
producing every single good than workers in other countries. He demonstrated that if two countries
capable of producing two commodities engage in the free market, then each country will increase
its overall consumption by exporting the good for which it has a comparative advantage while
importing the other good, provided that there exist differences in labor productivity between both
countries. Widely regarded as one of the most powerful yet counter-intuitive

insights in economics,
Ricardo's theory implies that comparative advantage rather than absolute advantage is
responsible for much of international trade.
Ricardo's example: In a famous example, Ricardo considers a world economy consisting of two
countries, Portugal and England, which produce two goods of identical quality. In Portugal, the a
priori more efficient country, it is possible to produce wine and cloth with less labor than it would
take to produce the same quantities in England. However, the relative costs of producing those
two goods differ between the countries.
Hours of work necessary to produce one unit
Country Cloth Wine
England 100 120
Portugal 90 80
In order to produce an additional unit of cloth, England must commit 100 labor hours, which could
have instead produced units of wine. Although Portugal can produce a unit of cloth with fewer
hours of work (90 hours) than England, it must forego producing a greater amount of wine (

units)
to do so. Accordingly, England is said to possess a comparative advantage in cloth even though
Portugal possesses an absolute advantage in cloth. A similar argument would show that Portugal
has both an absolute and comparative advantage in wine.
In the absence of trade, England requires 220 hours of work to both produce and consume one
unit each of cloth and wine while Portugal requires 170 hours of work to produce and consume the
same quantities. If each country specializes in the good for which it has a comparative advantage,
then the global production of both goods increases, for England can spend 220 labor hours to
produce 2.2 units of cloth while Portugal can spend 170 hours to produce 2.125 units of wine.
Moreover, if both countries specialize in the above manner and England trades a unit of its cloth
for to units of Portugal's wine, then both countries can consume at least a unit each of cloth and
wine, with 0 to 0.2 units of cloth and 0 to 0.125 units of wine remaining in each respective country
to be consumed or exported. Consequently, both England and Portugal can consume more wine
and cloth under free trade than in autarky.



QUESTION: 3
Regional integration is helping the countries in growing their trade. Discuss this statement.
Describe in brief the various types of regional integrations.

Answer
Regional integration: Regional integration is the process by which two or more nation-states
agree to co-operate and work closely together to achieve peace, stability and wealth. It results in
the creation and diversion of trade. It supports overall growth of the region, coupled with efficient
trading practices. Trade creation increases production and income and also leads to new entrants
in the market and, therefore, results in tougher competition. The transfer of technology is also
faster. Regional integration is a process in which neighboring states enter into an agreement in
order to upgrade cooperation through common institutions and rules. The objectives of the
agreement could range from economic to political to environmental, although it has typically taken
the form of a political economy initiative where commercial interests are the focus for achieving
broader socio-political and security objectives, as defined by national governments. Regional
integration has been organized either via supranational institutional structures or through
intergovernmental decision-making, or a combination of both.
It includes reduction on traffic and prohibitions. It spread goodwill among member countries and
also helps in reducing the chances of conflict.
Types of Regional Integration:
1. Preferential trading agreement: It gives preferential access to certain products from the
participating countries. This can be called as a limited or sector based free trade area.
2. Free trade area: It includes the reciprocal removal of tariffs on member countries goods. In an
FTA, each member is free within the limits specified by the
GATT/WTO system on deciding the level of external tariffs that will be applied to
non members. As there is flexibility on the interactions with the third countries, the
members in an FTA are free to establish or join other FTAs.
3. Custom union: It is a type of agreement that include determination of the common external
tariff (CET), in addition to the elimination of the internal tariff rates. Generally, determination of the
CET is done through taking an average of all partners before union tariff levels.
4. Common market: It is where there is free factor mobility capital, investment and labor in
addition to the customs union requirements that determine free flows of goods and services. This
integration requires governments to employ coordinated actions in order to ensure the equal
treatment for all factors in the member countries of the CM.
5. Economic union: It results from the enlargement of a common market with the additional
requirement of the harmonization of economic policies, both monetary and fiscal. It further involves
the creation of an independent regional central bank that has control over exchange rate policy
and inflation rates.
6. Political union: It is a type of agreement which includes the
harmonization of economic and political policies, and so as to become a single
state. This kind of integration necessitates the loss of sovereignty and the creation
of domestic institutions on the international level.



QUESTION: 4
Write short note on:
a) GATS (General Agreement on trade in services)
b) ILO (International Labour organization)
Answer
a) GATS (General Agreement on trade in services)
The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization
(WTO) that entered into force in January 1995 as a result of the Uruguay Round negotiations. The
treaty was created to extend the multilateral trading system to service sector, in the same way the
General Agreement on Tariffs and Trade (GATT) provides such a system for merchandise trade.
All members of the WTO are signatories to the GATS. The basic WTO principle of most favored
nation (MFN) applies to GATS as well. However, upon accession, Members may introduce
temporary exemptions to this rule. ). The GATS aims to remove gradually all barriers to trade in
services. The agreement covers services as diverse as banking, education, healthcare, rubbish
collection, tourism or transport. The GATS constitutes the legal framework through which WTO
members progressively liberalize trade in services. The GATS tried to establish a multilateral
framework of principles and rules for trade in services with a view to the expansion of trade.
Role of GATS (General Agreement on trade in services)
With the increasing internationalization of higher education, some have come to see it as a
tradable commodity which has been both supported and criticized by academics. The General
Agreement on Trade in Services (GATS) facilitates this trade of higher education as a good and
changes perspectives of higher education from a more traditional view to that of a thing to be
traded on the international market. This publications goal is to clarify how the GATS works and
how it relates to higher education, as well as the possible consequences as viewing higher
education as a good which can be bought and sold.
The creation of the GATS was one of the landmark achievements of the Uruguay Round, whose
results entered into force in January 1995. The GATS was inspired by essentially the same
objectives as its counterpart in merchandise trade, the General Agreement on Tariffs and Trade
(GATT): creating a credible and reliable system of international trade rules; ensuring fair and
equitable treatment of all participants (principle of non-discrimination); stimulating economic
activity through guaranteed policy bindings; and promoting trade and development through
progressive liberalization.
While services currently account for over 60 percent of global production and employment, they
represent no more than 20 per cent of total trade (BOP basis). This seemingly modest share
should not be underestimated, however. Many services, which have long been considered
genuine domestic activities, have increasingly become internationally mobile. This trend is likely to
continue, owing to the introduction of new transmission technologies (e.g. electronic banking, tele-
health or tele-education services), the opening up in many countries of long-entrenched
monopolies (e.g. voice telephony and postal services), and regulatory reforms in hitherto tightly
regulated sectors such as transport. Combined with changing consumer preferences, such
technical and regulatory innovations have enhanced the tradability of services and, thus, created
a need for multilateral disciplines.
b) ILO (International Labour organization)
The International Labour Organization (ILO) is a United Nations agency dealing with labour issues,
particularly international labour standards and decent work for all. 185 of the 193 UN member
states are members of the ILO.
In 1969, the organization received the Nobel Peace Prize for improving peace among classes,
pursuing justice for workers, and providing technical assistance to other developing nations.
Definition of 'International Labor Organization - ILO'
A United Nations agency that strives to serve as a uniting force between governments, businesses
and workers to "promote decent work throughout the world." The organization was founded on the
belief that peace in the workplace is essential to prosperity; it emphasizes the need for workers to
enjoy "conditions of freedom, equity, security and human dignity" through their employment.

For nearly 100 years, the ILO has promoted international labor standards through its field offices in
Africa, Latin America and the Caribbean, the Arab States, Asia and the Pacific, and Europe and
Central Asia. The organization provides training on fair employment standards, provides technical
cooperation for projects in partner countries, analyzes labor statistics and publishes related
research, and regularly holds events and conferences to examine critical social and labor issues.
The ILO was awarded the Nobel Peace Prize in 1969.
Role of ILO (International Labour organization)
The World Commission on the Social Dimension of Globalization was established by the ILO's
Governing Body in February 2002, at the initiative of the Director-General of the ILO, Mr. Juan
Somavia. This endeavour was in response to the fact that there did not appear to be a space
within the multilateral system that would cover adequately and comprehensively the social
dimension of the various aspects of globalization. Yet it was urgent that the multilateral system
began responding to the needs of people as they try to cope with the unprecedented changes that
globalization has brought to their lives, their families, and the societies in which they live.
The Governing Body of the ILO (which has a tripartite representation of Member States,
representatives of workers' and employers' organizations) had already established some years
ago a Working Party on the Social Dimension of Globalization. The Working Party meets in
Geneva twice a year, in March and November, as an integral part of the Governing Body's
agenda. The Governing Body could be seen as the "institutional anchor" in terms of the role and
mandate of the ILO in the follow-up of the World Commission's Report.
The International Labour Conference, which meets every year in June in Geneva, assembles the
international community in national tripartite delegations. The 2004 session of the International
Labour Conference provided the "political direction" for the future role of the ILO in promoting a fair
globalization. The Conference had before it a Report of the Director-General on the World
Commission on the Social Dimension of Globalization: A Fair Globalization: the Role of the ILO.
The main thrust of the deliberations that followed is captured in the Director-General's Reply to the
discussion of his Report during the Conference.
The results of the June 2004 Conference debate guided the Governing Body discussions at its
November 2004 session on the implications of the report for the ILO's future work. The Working
Party had also before it a Report prepared by the International Labour Office on Follow-up to the
Report of the World Commission on the Social Dimension of Globalization: Next steps. The
outcome of these discussions is summarized in the Report by the Chairperson of the Working
Party, November 2004 session. On the basis of the priorities outlined by ILO's tripartite
constituents, the Office will prepare more detailed proposals on the most important areas for
follow-up action on the Commission's recommendations for the March 2005 session of the
Governing Body.



QUESTION: 5
What is the difference between domestic and international accounting and how will you measure
this difference?

Answer
Different countries whether domestic or international, have different accounting standards. A
common belief is that these differences reduce the quality and importance of accounting
information. Accounting standards determine the financial reporting quality and provides
separately verified information about an organisation's financial performance to investors
creditors. Though there are differences in accounting methods, domestic businesses are not
affected. The accounting system of a domestic organisation must meet the specialised and
regulatory standards of its home country. But, an MNC and its subsidiaries must meet differing
accounting and auditing standards of all the countries in which it operates. This leads to a need for
comparability between businesses in the group. In order to successfully manage and organise
their operations, local managers require accounting information, which should be prepared
according to the local accounting concepts and denomination in the local currency. Yet, for
financial controllers, to measure the foreign subsidiarys performance and worth, the subsidiarys
accounts must be translated into the organisations home currency. This translation is done using
accounting concepts and measures, which are detailed by the organisation. Investors worldwide
look for the highest possible returns on their capital, in order to interpret the track record, though
they use a currency and an accounting system of their own. The organisation also has to pay
taxes to the countries where it does business, based on the accounting statements prepared in
these countries. Besides this, when a parent corporation tries to combine the accounting records
of its subsidiaries to produce consolidated financial statements, extra complexities occur because
of the changes in the value of the host and home currencies.
There are many differences between International Accounting Standards (IAS) and Domestic
Accounting Standards (DAS). On the basis of difference between the two, two indices, namely
'divergence' and 'absence', are created. Absence is the difference between DAS and IAS; the
rules on certain accounting issues are missed out in DAS and covered in IAS. Divergence
represents the differences between DAS and IAS; the rules on the same accounting issue differ in
DAS and IAS.
Measurement of differences between IAS and DAS
You can measure the differences between IAS and DAS in the following way:
Literature on international accounting differences
Referring to earlier reports on international accounting could give more information about the
subject. Most of the earlier reports understand international accounting differences as various
options adopted by nations for the similar accounting problems, which correspond to divergence
concept.
Framework of analysis
Links between variations in accounting standards and financial reporting quality of various
countries could be clearly seen from the reports published earlier. We should consider the
institutional determinants of accounting differences such as legal origin, governance structure,
economic development, and equity market.
National differences in accounting
One of the major problems encountered by an international business is lack of consistency in
accounting standards in various countries. Organisations show opposite financial results because
of the differences in accounting standards. Differences in accounting standards exist because of
diverse political, legal, economic, and cultural systems of the countries. Accounting standards and
practices are also prejudiced by the sources of capital used to fund business. Figure shows the
influencing factors on a countrys accounting practices.

You might think that accounting systems in the world were uniformly influenced by a few historical
developments. There could be some similarities but no two countries and their systems are alike.
Accounting systems are developed suiting the countrys specific needs. It is a fact that different
countries evolved in different ways. Accounting systems were influenced by private ownership,
industrialisation, inflation, and so on. When there are differences in economic conditions, it is not
surprising to find differences in accounting practices. However, there are other influencing
elements apart from economic factors. These are legal systems, educational systems, socio
cultural features, and political systems. These also influence the need for accounting, speed and
direction of its development. Due to the increasing trend in globalisation of business,
understanding various accounting systems is important.
Legal systems
Law system is divided into civil law and common law in countries worldwide. In countries like US,
Australia, UK and New Zealand accounting procedures originate from decisions of independent
standards setting boards, such as US Financial Accounting Standards Board (FASB). Each board
works with professional accounting groups. In countries, which follow common law, accountants
follow Generally Accepted Accounting Principles (GAAP), which provides a 'true and fair view' of
the organisation's performance, based on the standards approved by these professional boards.
Many civil law countries also have a similar approach as that of GAAP. Functioning within the
limitations of these standards, accountants have freedom to implement their professional judgment
in reporting a 'true and fair' representation of the organisation's performance.
Countries following civil law are likely to codify their national accounting measures and standards.
In these countries, accounting practices are determined by the law. To assist the legal role, all
business accounting records must be officially registered with the government.
The way in which the accounting practices are imposed depends on the legal system. Most of the
developed countries depend on both private and public enforcement of business performance,
though the public or private combination varies from country to country. The difference of legal
system is a major restriction in the growth of accounting standards. In some countries, the
accounting policies are restricted to detailed legislation, which is passed by governments. This
restriction forms a major problem to international accounting bodies that are created to increase
harmonisation of national accounting frameworks. This is because, such government-controlled
regimes are inclined to be less flexible, and perceive private sector influences as less acceptable.



QUESTION: 6

Discuss the various payment terms in international trade. Which is the safest method and why?
Answer
Understanding Payment Mechanism in Foreign Trade-
For successfully conducting international trade in todays competitive international environment, it
is essential for the exporters to offer attractive sales terms and payments to importers so as to
woo them for business. One of the major concerns for exporter is to choose the appropriate
payment method in order to minimize risks related to payments of trade transaction. Payment
should be done after understanding the economic scenario of importers country, importer credit
worthiness and to certain extent accommodating the needs of the importer. Exporter can choose
any mode of payment depending on risk perception, size of deal, importer credit worthiness and
economic situation in importers country.



However, in case of international trade, exporter has to take more precautions as some methods
of payment are unique and usually used in case of international trade only. Key consideration
while deciding upon a payment term in foreign trade is elaborated as under.
A. Some of the major risks involved in realisation of payments in international trade can be either
at importer, importer bank and importers country such as insolvency and default by importer,
insolvency of importer bank and exchange control restrictions, inconvertibility issues with
importers country.
B. Some of the risks involved in international trade in Liberalisation, Privatisation and Globalisation
era can be under control of exporter but some cannot be. For example, credit risk which arises
from a change in the credit worthiness of importer can be covered by ECGC. Exchange Rate
Fluctuation risk can be covered by hedging the currency invoiced in forward contract market but
risk such as Force Majeure which arises from change in policy of a country, which in turn affects
the trade capability, and by a natural disaster cannot be anticipated in complex international
environments. Other risks mainly arises due to a difference in culture, law, or language are also
beyond exporter control.
C. International Trade Operations offers different types, quantum and location of risks, thereby
confusing the exporter with uncertainty over realisation of payments and timing of payments
between the exporter and importer.
D. For exporters, any international sale will be equivalent to gift until he has not realised the
payment from the importer. For importer any payment is donation until he has received the cargo
as sent by exporter.
E. Exporter will always be interested to receive the payments as soon as he/she sends the goods
to importer through shipment. Importer will be willing to delay the payments as he/she will be
interested to sell these goods in markets and then make the payments to exporter.
F. However, the selection criteria for mode of payment is based on mutual negotiation of exporter
and importer and in LPG&M era there are other parties such as bank, credit insurer involved which
helps in exporter in financing and assuring about the payment.
Payment terms in foreign trade
Since international trade deals with exchange of goods, there are various ways in which the
payment terms (finance) will be handled. Bothe seller and trader should be careful about the
method of payment as they are at different locations and transactions happen without face-to-face
interaction. There are four methods of payment for the international transactions. This includes the
Cash-in-advance method, Letter of Credit, Documentary collections and the Open Account.
These are shown in figure 14.1.

As shown in figure 14.1, there is uncertainty during the time when payment transactions happen
between importer and exporter. The figure compares and contrasts the most suitable methodology
from the perspective of importer and exporter. Apparently the most secure methodologies that
work for the exporter is not safe for the importer. For exporters, documentary collection and open
account are less secure and letter of credit and cash in advance are more secure methods. In the
same way, with respect to the importer, the letter of credit and cash in advance are less secure
and the documentary collection and open account are more secure. These terms are explained as
follows.
Cash-in-advance
Cash-in-advance helps in removing the risks of credit by the exporter. By this method, exporter
receives the payment before the transfer of goods. The options that are available with the cash-in-
advance method include wire transfers and credit cards. This is the least attractive method for
many of the buyers as it creates cash flow problems. The buyers are concerned about the
quality/quantity and delivery of the goods that are not sent if the payment is made in advance.
Letters of credit
The letter of credit is the most secure instrument available for international traders. This is the
commitment made by the bank that the payment will be made to the exporter if the terms and
conditions are met. The terms and conditions of the payment are explained in the required
documents.
Documentary collections
Documentary collection is a transaction in which, the exporter's bank (remitter bank) sends the
documents to the importer's bank (collecting bank). The document contains information about the
payment. The funds are collected from the importer and paid to the exporter through the banks
involved in the collection, in exchange for the documents.
Open account
The open account transaction involves the shipping and delivery of goods in advance. The
payment is due usually from 30 to 90 days. This is advantageous for the importer in cash flow and
cost terms, but at the same time it is very risky for the exporters. Buyers from abroad stress on
open accounts since the extension of credit from the seller to the buyer are more common in many
countries. Exporters who avoid extending credit may face loss in the sale because of competitors
in the market.
Letter of credit
International Trade is affected by distance, laws, political instability and lack of familiarity by the
transacting parties. Letter of credit assumes significance since it can be used to mitigate risk. It is
a document that is issued by the bank that guarantees payment to a beneficiary. It is written by the
financial institution in favour of the importer of goods to the seller. In the letter, the bank promises
that it will honour the drafts drawn on it if the seller confirms to the specific conditions that are set
forth in the letter of credit.


Submitted By:
SANA MEHBOOB
Roll no. 1208001980