01 - MM Notes KadsDatabank

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MANAGING MULTINATIONALS
S.
No.
1
2
3
3a
4
5
SYLLABUS/ TOPICS COVERED

Ch-2, RM Joshi
International Trade Theory and Application Handout give by Prof. Chawla
Ch-5, RM Joshi (Pg 175-185,211-217)
Ch-6, RM Joshi (221-229, 249-252) Sec 6.6
Important
Ch 7 International Cultural Environment
Ch-12, RM Joshi (Pg 506-522)
Ch-13, RM Joshi ;Sections Focus on 13.5 and 13.6
Ch-14, RM Joshi ; Focus on Sec 14.5 and 14.6 and
What to Export and Where
Remarks
Presentations shared in Wiggio-Path is Group

Folders > MBA(E) FMS North Campus Folder >
MANAGING MULTINATIONALS > eBook-PPT
Read PPTs for Ch1, Ch8-16
Chapter 16 SCM
Chapter 17 HRM
Title of Material shared by Dr Sumeet Jerath

7 Dynamics of RTAs
Lecture 1- International Trade Theory and
8 Application
Managing MultiNationals
9
10 Overview of GATT WTO key principles
11 Risk Management
12 WTO
Already covered by Ch-6, Optional to read

Already covered by S.No.1 above, Optional to
read
Mostly common with S.No.1 above, Go through
this for topics not covered in S.No.1
Slide 33 onwards
Not to do
Read, Focus on Slide 21 onwards
Topics as per Syllabus Given in Prospectus for FMS

International Business Theories; Liberalisation: Tariff and Non-tariff barriers;
Institutional setting of global businesses; Recent Trends and main Drivers of
International Trade-Real Merchandise Trade and Trade in services; Regional Blocks:
Regional Integration Agreement (RIAs) and Trade - Economic Effects of RIAs; Trade
Creation and Diversion and the Types of RIA; The Proliferation of Regional Preference
__________________________________ Managing Multinationals - Executive MBA - Semester IV
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Systems; Indias Regional Integration Agreements; Regional Integration Agreements

and Foreign Investment; Making Regionalism Complementary to Multilateralism:
Building Blocks versus Stumbling Blocks; International Production: An
Interdisciplinary Appr3333333333oach; Global Trends in International Production;
Trade in Services: Opportunities and Constraints; Internationalization of Service
Firms; Operation Management in International Companies; Global Competitiveness;
Internationalisation of Technological Innovations; Designing Global Organizational
Structure and Control; Global Knowledge Management; Globalisation and Human
Resource Developments; Multicultural Management; International Marketing; Export
Management; Indias Foreign Trade; Policy and Trends; Financing on International
Trade; Licensing; Joint Ventures; International Capital Flows: Foreign Direct
Investment- Global FDI Patterns; FDI Distribution by Regions; Sectoral Analysis of
FDI; Cross-border Mergers and Acquisitions; Strategic Issues in International
Management; Global e-business.
International Monetary Systems; Forex Markets and Risk Management; Corporate
Governance; Business Ethics; Corporate Social Responsibility; World Economic
Growth and the Environmental Issues; Country Risk Analysis; Taxation in an
International Economy.
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Ch-2, RM Joshi
International Trade Theory and Application - Handout given by Prof. Chawla
International Trade Theories

International trade is the exchange of goods and services across borders. Export
structures vary across countries. A number of international trade theories can explain
these different structures.
The Mercantilist Doctrine
Mercantilism is a 16th Century doctrine stating that a nation should export more goods
that it imports.
Governments job is to create policy that promotes heavy exportation, collection of
revenue, and industrial development internally.
In practice, it serves to make the State the stockholder, financier, customer, marketer,
collector, and enforcer of contracts with other nations.
Absolute Advantage Theory
In 1776, Adam Smith proposed that market forces rather than government desires were
a better predictor of trade.
Laissez-Faire policy where government has no influence should promote trade better.
Nations will export to pay for goods they import.
Nations could specialize in producing and exporting goods where they have a natural
or acquired Absolute Advantage and import those goods they dont produce as well.
Comparative Advantage Theory
David Ricardo indicated in 1817 there may be a better explanation since few States
actually specialize like that.
Ricardo indicated that nations that are comparatively more efficient at production will
make those goods even though they may not have an absolute advantage.
Comparative Advantage Theory
Comparative Advantage explains and predicts trade of goods where absolute

advantages may not exist.
Opportunity Cost the amount of other goods which have to be given up to product
one unit of a good.
Comparative Advantage must be explained by:
Comparative Production Cost depends on the commoditys production
process.
Production Factors such as labor, land, capital, and natural resources.
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Heckscher-Ohlin Theorem
Countries export goods that make intensive use of the countrys abundant factor.
Countries import goods that make intensive use of the countrys scarce factor.
Differences in comparative advantage are attributed to differences in the structure of
the economy.
Assumptions:
Countries vary in the availability of various factors of production.
The Production Function is identical anywhere in the world.
The amount of output produced by using any given amount of capital and
labor.
Technology is constant in all trading countries.
Conditions of demand for production factors are the same in all countries.
Implications
Trade should be greatest between countries with the greatest differences in
economic structure.
Trade should cause countries to specialize more.
Trade policy should take the form of trade restrictions.
Countries should export goods that make use of the abundant factors.
Free trade should equalize factor prices between countries with similar relative
factor endowments.
Factor prices should be nearly equal between countries with more liberal mutual
trade.
International investment should be stimulated by difference in factor
endowments.
Factor endowment theory
A trade theory which holds that nations will produce and export products that use large
amounts of production factors that they have in abundance and will import products
requiring a large amount of production factors that they lack. This theory is also known
as the HeckscherOhlin theory (after the two economists who first developed it).
The Leontief Paradox
Leontief challenges Heckscher-Ohlin on a number of grounds.

The U.S (a capital intensive nation) exports labor-intensive goods.
The U.S also exports technically sophisticated goods that require skilled labor.
The U.S imports capital intensive goods made with unskilled labor.
Stimulated a search for explanations.
Demand bias for capital-investment goods.
Existence of trade barriers.
Importance of natural resources
Prevalence of factor-intensity reversals.
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Human Skills and Technology-Based View
Keesing indicated that trade direction and flow is predicted by gaps in human skills and
technology.
Nations with higher levels of humans skills and technology will produce and export
goods to nations with lower levels.
Human Skills and Technology-Based View
Human Skills are predicted by
Level of development in the scientific, technical, managerial, and skilled labor
sectors.
Technology level is predicted by:
capital-intensive technology development
imitation lag that exists as technology innovations diffuse to developing areas.
The Product Life-Cycle Model
Product innovation and initial use occurs first in higher income countries
Diffuses to middle and lower income countries as technology and skills gaps overcome
and consumer preferences switch to the newer products.
Several trends emerge in PLC:
The export performance of the mature innovating country is better than others.
Technology is better in the mature countries as products diffuse production
tends to move from technology-intensive to labor-intensive.
Countries that were innovators can fall from that place.
Trade may increase in later stages of product maturity as costs and prices
decline and production economies rise.
Exhibit 2-5: Product cycle model of international trade innovating country
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Exhibit 2-6: Product cycle model of international trade imitating country
Linders Income-Preference Similarity Theory
Developed countries trade more than less developed countries (assumption)

Trade should take place between developed nations producing manufactured products
and less developed nations producing primary products (e.g. natural resources) and
labor-intensive goods.
According to Linder, the range of production is determined by internal demand.
Countries with similar internal demand conditions should therefore trade. This is called
Preference Similarity.
The New Trade Theory
Countries do not specialize and trade solely to take advantages of differences.

They also trade because of increasing returns.
Because of economies of scale, there are increasing returns to specialization.
Economies of scale reduction of manufacturing cost per unit as a result of increased
production quantity during a given period.
Inter-industry trade determined by Heckscher-Ohlin.
Intra-industry trade driven by increasing returns resulting from specialization within
the industry.
Externality when the actions of one agent directly affect the environment of another.
Theory Assessment
These theories provide insights in international trade.
No theorem can fully explain the range of motives for international trade.
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Ch-5, RM Joshi (Pg 175-185)

What is GATT?
The General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating
international trade. According to its preamble, its purpose was the "substantial reduction of
tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually
advantageous basis."
What is WTO?
Successor to GATT
International Organisation embodied in the results of the Uruguay Round
Established: 1 January 1995
Member driven (159 +1 Members)
Serviced by WTO Secretariat - 650+ staff
Based in Geneva
Classification of Members
Developing Countries
Least-Developed Countries (LDCs)
Developed
Transition Economies
How does the WTO differ from the GATT?

The WTO is not simply a continuation of the GATT; it has a completely different character. The
main differences are as follows:
The GATT was a series of rules, a multilateral agreement without an institutional foundation
and with just an ad hoc secretariat, originating from the attempt to establish an International
Trade Organization in the 1940s. The WTO is a permanent institution with its own
secretariat.
The GATT was applied on a provisional basis even if, after more than 40 years of
existence, governments came to regard it as a permanent commitment. Commitments
entered into under the aegis of the WTO exist in their own right and are permanent.
The GATT rules applied to trade in goods. The WTO covers not just goods, but also trade
in services and trade-related aspects of intellectual property rights.
The GATT was originally a multilateral instrument but, towards the 1980s, several new
agreements of a plurilateral and hence optional nature were added to it. The agreements*
on which the WTO is founded are almost all multilateral and therefore carry with them
commitments to which all Members have subscribed.
The WTO system for the settlement* of disputes is faster and more automatic, and thus
less susceptible to blockages than the former GATT system. The implementation of the
decisions resulting from the WTO settlement of disputes will be better assured.
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Full form
Year of creation
Purpose
Framework
Scope
Dispute resolution
GATT
General Agreement on Tariffs
and Trade
1948
To strengthen international
trade.
No permanent structure or
framework.
Trade in goods.
Has a permanent appellate
body to review findings and
settle disputes.
WTO
World Trade Organization
1995
To govern GATT and international trade
practices.
Has a permanent structure with a permanent
framework.
Trade in goods; trade in services and traderelated aspects of intellectual property rights.
Disputes are resolved faster as settlement
system has a select time frame.
Why should countries join WTO

1. The system helps promote peace
2. Disputes are handled constructively
3. Rules make life easier for all
4. Freer trade cuts the costs of living
5. It provides more choice of products and qualities
6. Trade raises incomes
7. Trade stimulates economic growth
8. The basic principles make life more efficient
9. Governments are shielded from lobbying
10. The system encourages good government
Functions of the WTO

Among the various functions of the WTO, these are regarded by analysts as the most
important:
It oversees the implementation, administration and operation of the covered agreements.
It provides a forum for negotiations and for settling disputes.
Review and propagate the national trade policies, and to ensure the coherence and
transparency of trade policies through surveillance in global economic policy-making.
Assistance of developing, least-developed and low-income countries in transition to adjust
to WTO rules and disciplines through technical cooperation and training.
Facilitate the implementation, administration and operation and further the objectives of this
Agreement and of the Multilateral Trade Agreements
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Provide the frame work for the implementation, administration and operation of the
multilateral Trade Agreements.
Provide the forum for negotiations among its members concerning their multilateral trade
relations in matters dealt with under the Agreement in the Annexes to this Agreement.
Administer the Understanding on Rules and Procedures Governing the Settlement of
Disputes.
Administer Trade Policy Review Mechanism.
Cooperate, as appropriate, with the international Monetary Fund (IMF) and with the
International Bank for Reconstruction and Development (IBRD) and its affiliated agencies.
WTO: Basic Principles
Non-Discrimination - The essence of the non-discrimination obligations is that: like

products should be treated equally, irrespective of their origin (AB Report, EC Bananas
III)
Most Favoured Nation (MFN) - Under the WTO agreements, countries cannot
normally discriminate between their trading partners. Grant someone a special favour
(such as a lower customs duty rate for one of their products) and you have to do the
same for all other WTO members.This principle is known as most-favoured-nation
(MFN) treatment
National Treatment - Treating foreigners and locals equally Imported and locallyproduced goods should be treated equally at least after the foreign goods have
entered the market. The same should apply to foreign and domestic services, and to
foreign and local trademarks, copyrights and patents. This principle of national
treatment (giving others the same treatment as ones own nationals) is also found in all
the three main WTO agreements
Predictability and Transparency - through binding and transparency - Sometimes,

promising not to raise a trade barrier can be as important as lowering one, because the
promise gives businesses a clearer view of their future opportunities. With stability and
predictability, investment is encouraged, jobs are created and consumers can fully enjoy
the benefits of competition choice and lower prices. The multilateral trading system is
an attempt by governments to make the business environment stable and predictable.
Liberalization: Freer trade through negotiations Freer trade: gradually, through

negotiation back to top - Lowering trade barriers is one of the most obvious means of
encouraging trade. The barriers concerned include customs duties (or tariffs) and
measures such as import bans or quotas that restrict quantities selectively. From time to
time other issues such as red tape and exchange rate policies have also been discussed.
Opening markets can be beneficial, but it also requires adjustment. The WTO agreements
allow countries to introduce changes gradually, through progressive liberalization.
Goods (tariffs, NTMs), services, rules
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Trade remedies (fair trade) - The rules on non-discrimination MFN and national
treatment are designed to secure fair conditions of trade. So too are those on dumping
(exporting at below cost to gain market share) and subsidies. The issues are complex, and
the rules try to establish what is fair or unfair, and how governments can respond, in
particular by charging additional import duties calculated to compensate for damage
caused by unfair trade. Many of the other WTO agreements aim to support fair competition:
in agriculture, intellectual property, services, for example. The agreement on government
procurement (a plurilateral agreement because it is signed by only a few WTO members)
extends competition rules to purchases by thousands of government entities in many
countries.
Trade and development

Special and differential treatment
Mainstreaming trade into national development policies (A4T)
WTO : Organisational Structure
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Ch-5, RM Joshi (Pg 211-217)

Ministerial Conference
The Ministerial Conference is the top decision making body of the World Trade Organization
(WTO). There have been nine conferences from 1996 to 2013, usually every two years.
#
1st
2nd
3rd
4th
5th
6th
7th
8th
9th
Date
913 December 1996
1820 May 1998
30 November 3 December 1999
914 November 2001
1014 September 2003
1318 December 2005
30 November 2 December 2009
1517 December 2011
36 December 2013
Host City
Singapore
Geneva, Switzerland
Seattle, United States
Doha, Qatar
Cancn, Mexico
Hong Kong
Geneva, Switzerland
Geneva, Switzerland
Bali, Indonesia
First ministerial conference: World Trade Organization Ministerial Conference of 1996

The inaugural ministerial conference was held in Singapore in 1996. Its primary purpose was
to initiate an international effort among global trading nations to overhaul the structure
and mechanisms of the General Agreement on Tariffs and Trade (GATT) while preserving
the considerable progress and success achieved by that system since its inception in 1948.
Second ministerial conference: WTO Ministerial Conference of 1998
Was held in Geneva in Switzerland.
Third ministerial conference: World Trade Organization Ministerial Conference of 1999
The third conference in Seattle, United States ended in failure, with massive demonstrations
and police and National Guard crowd control efforts drawing worldwide attention.
Fourth ministerial conference: WTO Ministerial Conference of 2001
Was held in Doha in Persian Gulf nation of Qatar. The Doha Development Round was
launched at the conference. The conference also approved the joining of China, which became
the 143rd member to join.
Fifth ministerial conference: World Trade Organization Ministerial Conference of 2003
The ministerial conference was held in Cancn, Mexico, aiming at forging agreement on the
Doha round. An alliance of 22 southern states, the G20 (led by India, China and Brazil),
resisted demands from the North for agreements on the so-called "Singapore issues"
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and called for an end to agricultural subsidies within the EU and the US. The talks broke
down without progress.
Sixth ministerial conference: World Trade Organization Ministerial Conference of 2005
Held in Hong Kong from 13 December 18 December 2005. In this meeting, countries agreed
to phase out all their agricultural export subsidies by the end of 2013, and terminate any
cotton export subsidies by the end of 2006. Further concessions to developing countries
included an agreement to introduce duty-free, tariff-free access for goods from the Least
Developed Countries, following the Everything But Arms initiative of the European Union
but with up to 3% of tariff lines exempted.
Seventh ministerial conference: WTO Ministerial Conference of 2009
Was held 30 November 2 December 2009 in Geneva, Switzerland. The general theme for
discussion was "The WTO, the Multilateral Trading System and the Current Global Economic
Environment".
Eighth ministerial conference: World Trade Organization Ministerial Conference of 2011
Was held 1517 December 2011 in Geneva, Switzerland. Membership agreement where
made for Russia, Samoa, and Montenegro.
Ninth ministerial conference: World Trade Organization Ministerial Conference of 2013
Was held 36 December 2013 in Bali, Indonesia. 159 members of World Trade Organization
agreed to the Bali Package which eases barriers to international trade.
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Ch-6, RM Joshi (221-229, 249-252) Sec 6.6 Important
INTERNATIONAL ECONOMIC INTEGRATION

Regional Economic Integration - agreements between countries in a geographic region to
reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production
between each other
Levels of Regional Economic Integration / Regional or Preferential Trade Agreement
1. A free trade area eliminates all barriers to the trade of goods and services among member
countries
European Free Trade Association (EFTA) - Norway, Iceland, Liechtenstein, and
Switzerland
North American Free Trade Agreement (NAFTA) - U.S., Canada, and Mexico
2. A customs union eliminates trade barriers between member countries and adopts a
common external trade policy
Andean Community (Bolivia, Columbia, Ecuador, and Peru)
3. A common market has no barriers to trade between member countries, a common external
trade policy, and the free movement of the factors of production
MERCOSUR (Brazil, Argentina, Paraguay, and Uruguay)
4. An economic union has the free flow of products and factors of production between
members, a common external trade policy, a common currency, a harmonized tax rate, and a
common monetary and fiscal policy
European Union (EU)
5. A political union involves a central political apparatus that coordinates the economic,
social, and foreign policy of member states
the EU is headed toward at least partial political union, and the U.S. is an example of
even closer political union
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Difference between FTA and PTA

What is PTA?
PTA stands for Preferential Trade Agreement, and is an economic pact between participating
countries to help improve quantity of trade by gradually reducing tariffs between
participating countries. The barriers to trade are not altogether removed, but a preference is
shown towards participating countries in comparison to other countries of the world. There are
departures from WTO in the sense that duties and tariffs are reduced significantly. WTO aims
to have same tariffs and duties in international trade between countries but in the case
of PTA, these tariffs are reduced much more than what GATT allows.
What is FTA?
FTA stands for Free Trade Agreement, and is considered to be an advanced stage in trade
between participating countries of a trade block. These are countries that agree to eliminate
altogether artificial barriers and tariffs in trade between participating countries.
Countries that share cultural links and geographical links are much more likely to have a trade
block of this magnitude. One such block is European Union where free trade is practiced
between the countries of the union.
What is the difference between FTA and PTA?

The aim of PTA and FTA being similar, thin line dividing these agreements gets blurred at
times but it is a fact that PTA is always a starting point and FTA is the final goal of participating
countries in a trade block. Whereas PTA aims at reducing tariffs, FTA aims at elimination
of tariffs altogether.
Tariff Barriers vs Non Tariff Barriers

Importing goods from foreign countries at cheap prices hits domestic producers badly. As such,
countries impose taxes on goods coming from abroad to make their cost comparable with
domestic goods. These are called tariff barriers.
Tariff Barriers
Tariffs are taxes that are put in place not only to protect infant industries at home, but also to
prevent unemployment because of shut down of domestic industries. There are Ad Valorem
tariffs that are a ploy to keep imported goods pricier. This is done to protect domestic producers
of similar products.
Non Tariff Barriers
Placing tariff barriers are not enough to protect domestic industries, countries resort to non
tariff barriers that prevent foreign goods from coming inside the country.
One of these non tariff barriers is the creation of licenses. Companies are granted
licenses so that they can import goods and services. But enough restrictions are imposed
on new entrants so that there is less competition and very few companies actually are able
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to import goods in certain categories. This keeps the amount of goods imported under check
and thus protects domestic producers.
Import Quotas is another trick used by countries to place a barrier to the entry of foreign
goods in certain categories. This allows a government to set a limit on the amount of goods
imported in a particular category. As soon as this limit is crossed, no importer can import
further quantities of the goods.
Non tariff barriers are sometimes retaliatory in nature as when a country is antagonistic to a
particular country and does not wish to allow goods from that country to be imported. There
are instances where restrictions are placed on flimsy grounds such as when western countries
cite reasons of human rights or child labor on goods imported from third world countries. They
also place barriers to trade citing environmental reasons.
What is the difference between Tariff Barriers and non Tariff Barriers
The purpose of both tariff and non tariff barriers is same that is to impose restriction on
import but they differ in approach and manner.
Tariff barriers ensure revenue for a government but non tariff barriers do not bring any
revenue. Import Licenses and Import quotas are some of the non tariff barriers.
Non tariff barriers are country specific and often based upon flimsy grounds that can serve
to sour relations between countries whereas tariff barriers are more transparent in nature.
Trade Creation and Trade Diversion
Regional economic integration is only beneficial if the amount of trade it creates exceeds
the amount it diverts
trade creation occurs when low cost producers within the free trade area replace high
cost domestic producers
trade diversion occurs when higher cost suppliers within the free trade area replace
lower cost external suppliers
Trade Creation
This involves a shift in domestic consumer spending from a higher cost domestic
source to a lower cost partner source within the EU, as a result of the abolition tariffs on
intra-union trade. So for example UK households may switch their spending on car and
home insurance away from a higher-priced UK supplier towards a French insurance
company operating in the UK market.
Trade creation should stimulate an increase in trade within the customs union and should,
in theory, lead to an improvement in the efficient allocation of scarce resources and gains
in consumer and producer welfare.
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Trade Diversion
Trade diversion is best described as a shift in domestic consumer spending from a lower
cost world source to a higher cost partner source (e.g. from another country within the EU27) as a result of the elimination of tariffs on imports from the partner. The common external
tariff on many goods and services coming into the EU makes imports more expensive.
This can lead to higher costs for producers and higher prices for consumers if previously
they had access to a lower cost / lower price supply from a non-EU country.
The overall effect of a customs union on the economic welfare of citizens in a country
depends on whether the customs union creates effects that are mainly trade creating or
trade diverting.
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Regional Trade Agreements vs WTO
Indias Participation in Preferential Trade Agreements
Indo-Sri Lanka Free Trade Agreement (ISLAFTA)

South Asia Free Trade Area (SAFTA)
Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC)
India-Thailand FTA
India-Singapore Comprehensive Economic Cooperation Agreement (CECA)
India-Nepal Treaty of Trade
India-Sri Lanka FTA

Asymmetric structure: Indian negative list was smaller and preferential list was larger
Very high growth rate of Indian exports as well as imports
Synergy generated between exports in goods, FDI and services
Preferential treatment by India has been distorted by differential incidence of state taxes on
domestically produced goods and Sri Lankan goods
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Major Features of SAFTA

Was preceded by SAPTA among the same nations which was a failure due to limited product
coverage
Asymmetric structure again similar to that in ISFTA
Is hampered by long negative lists, long time frames for tariff liberalisation and coverage only
being extended to goods
Future RTAs by India can lock the other SAARC countries out of Indias market
Salient Features of BIMSTEC
Bridging link between ASEAN and SAARC
Important element of Indias Look East strategy
No agreement even at deadline dates
Salient Features of India-Thailand FTA
EHS: tariff liberalisation achieved within a short time frame (three-four years)
Above feature led to inverted duty structure (tariffs on intermediate goods becoming much
higher than that for the produced good in the export market)
India-Singapore CECA
Not much change in Singapores treatment of Indian goods as duties were already close to
or at zero and Indian gains from trade were not very significant
Singapore service sector made major inroads into India (construction, communication,
business services, insurance, banking)
Not much progress in facilitation of movement of Indian nationals into Singapore
Indo-Nepal Treaty of Trade
Free trade in primary products
Free non-reciprocal access by India to Nepalese manufacture without quantity restrictions
Huge increase in Indias exports to Nepal during 2001-06
No matching increase in Indias imports
Huge increase in trade balance with Nepal
INDIAS CURRENT ENGAGEMENTS IN RTAs 1

1.
2.
3.
4.
5.
6.
7.
1
Framework Agreement on Comprehensive Economic Co-operation between the Association

of South East Asian Nations (ASEAN) and India.
India-Singapore Comprehensive Economic Cooperation Agreement (CECA)
Framework Agreement for establishing Free Trade between India and Thailand
Joint Study Group (JSG) to Explore the Feasibility of Comprehensive Economic Cooperation
Agreement (CECA) between India and Malaysia
Joint Study Group (JSG) to Explore the Feasibility of Comprehensive Economic Cooperation
Agreement (CECA) between India and Indonesia
Framework Agreement with South Africa Customs Union (SACU)
Preferential Trade Agreement between India-Chile
http://commerce.nic.in/india_rta_main.htm
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8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
19
Comprehensive Economic Cooperation and Partnership Agreement (CECPA) between India

with Mauritius.
Free Trade Agreement (FTA) between India and Gulf Cooperation Council(GCC)
Status of Negotiations between India and Korea
Status of Negotiation between India and Japan
Status of India-China RTA Negotiations
India-Mercosur PTA
ASIA PACIFIC TRADE AGREEMENT (APTA)
Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC)
Global System of Trade Preferences (GSTP)
Generalized System of Preferences (GSP)
Agreement on South Asia Free Trade Area (SAFTA)
India-Afghanistan Preferential Trade Agreement
Agreement on India-Bhutan Trade & Commerce
India-Nepal Treaty of Trade
India-Sri Lanka Free Trade Agreement
Trade Agreement between India and Bangladesh
Trade Agreement between India and Maldives
Joint Study Group between India and Russia
Joint Study Group between Israel and India
India-EU High Level Trade Group
India-MERCOSUR PTA
A Framework Agreement was signed between India and MERCOSUR on 17th June
2003 at Asuncion, Paraguay. The aim of this Framework Agreement is to create conditions
and mechanisms for negotiations in the first stage, by granting reciprocal tariff preferences and
in the second stage, to negotiate a free trade area between the two parties in conformity with
the rules of the World Trade Organization.
2.
As a follow up to the Framework Agreement, a Preferential Trade Agreement (PTA)
was signed in New Delhi on January 25, 2004. The aim of this Preferential Trade Agreement
is to expand and strengthen the existing relations between MERCOSUR and India and
promote the expansion of trade by granting reciprocal fixed tariff preferences with the ultimate
objective of creating a free trade area between the parties.
3.
The India-MERCOSUR PTA provides for five Annexes. These five annexes have been
signed between the two sides on March 19, 2005, upon the conclusion of G-20 Meeting in New
Delhi. The five Annexes are: Offer List of MERCOSUR, Offer List of India, Rules of Origin,
Safeguard Measures and Dispute Settlement Procedure.
4.
Under this PTA India and MERCOSUR have agreed to give tariff concession to the
other side on 450 and 452 tariff lines respectively.
5.
The PTA would be operational after its ratification by the legislatures of the MERCOSUR
countries.
6.
Through IBSA Declaration made by the Heads of India, Brazil and South Africa on
th
13 September 2006, it was agreed that India-MERCOSUR PTA would be expanded by
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increasing the number of products covered and increasing the tariff concessions agreed by
each side. Accordingly, a preliminary discussion to work out the modalities of the future
negotiations was held in New Delhi on 15 and 16 November 2006 wherein India presented a
wish list of 626 additional products. In December 2006, MERCOSUR also presented its wish
list of 2099 products which is being considered in consultation with all concerned stakeholders.
Association of South East Asian Nations (ASEAN) and India.

Indias engagement with the Association of South East Asian Nations (ASEAN) started with its
"Look East Policy" in the year 1991. ASEAN has a membership of 10 countries namely Brunei
Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore,
Thailand and Vietnam. India became a Sectoral Dialogue Partner of ASEAN in 1992 and Full
Dialogue Partner in 1996. In November 2001, the ASEAN-India relationship was upgraded to
the summit level.
At the First ASEAN-India Summit held on 5 November 2002 in Phnom Penh, Cambodia, the
erstwhile Prime Minister of India made the following major announcements:i.
India will extend special & differential trade treatment to ASEAN countries, based
on their levels of development to improve their market access to India;
FTA within 10 years timeframe;
ii.
3.
A Framework Agreement on Comprehensive Economic Cooperation between the
Association of South East Asian Nations (ASEAN) and India was signed by the Prime Minster
of India and the Heads of Nation/Governments of ASEAN members during the Second ASEAN
India Summit on 8th October 2003 in Bali, Indonesia.
4.
The key elements of the Framework Agreement on Comprehensive Economic
Cooperation between the Association of South East Asian Nations (ASEAN) and India cover
FTA in Goods, Services and Investment, as well as Areas of Economic Cooperation. The
Agreement also provided for an Early Harvest Programme (EHP) which covers areas of
Economic Cooperation and a common list of items for exchange of tariff concessions as a
confidence building measure.
Current Status
5. The ASEAN-India Trade Negotiating Committee (TNC) was constituted and 14 meetings
have been held so far. The ASEAN-India TNC is undertaking negotiations for a Comprehensive
Economic Cooperation Agreement (CECA) which includes a Free Trade Area in goods,
services and investment. Due to difference of opinion on Rules of Origin, the EHP, agreed
under the Framework Agreement, on Goods could not be implemented. The new time frame
for FTA in Goods has been agreed. The ASEAN-India FTA(AI-FTA) negotiations are targeted
to be concluded by July, 2007. Agreement has been reached on the Rules of Origin. The
TNC is now negotiating the Sensitive Lists, modalities for tariff reduction and elimination,
Dispute Settlement Mechanism, etc. Both sides have reached an agreement recently on the
size of Negative List to be maintained by both sides, which will be 490 products with a trade
value cap of 5%.
Negotiations in Trade in Services and Investment are expected to
begin immediately after the Agreement on Trade in Goods is concluded
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Ch 7 International Cultural Environment
Self Reference Criterion (SRC) An unconscious reference to ones own cultural values,
experiences, and knowledge as a basis for decision-making. SRC significantly influences
ability of international managers to objectively evaluate environmental factors and make
business decision.
Approach to Eliminate SRC

Step 1:Define the business problem or goal in home-country traits, habits, or norms.
Step 2:Define the business problem or goal in foreign country cultural traits, habits, or
norms. Make no value judgments.
Step 3:Isolate the SRC influence in the problem and examine it carefully to see how it
complicates the problem.
Step 4:Redefine the problem without the SRC influence and solve for the optimum
business goal situation.
The Concept of Culture Culture is the way of life of people, including their attitudes,
values, beliefs, arts, sciences, modes of perception, and habits of thought and activity.
Cultural differences across the countries significantly influence business decisions.
Constituents of Culture A variety of learned traits that influence human behaviour can
contribute to the culture of a social group, the major constituents, include: value system
norms aesthetics customs and traditions language religion
Characteristics of culture
Learned
Shared
Trans-generational
Symbolic
Patterned
Adaptive
Value System Shared assumptions of a group about how things ought to be or abstract
ideas about what a group believes to be good, desirable, or right.
Value systems vary among managers across different countries : Eg. US managers : high
achievement orientation vs Japanese managers how have a growth and size orientation vs
Indian Managers who have moralistic orientation.
Norms Guidelines or social rules that prescribe appropriate behaviour in a given situation.
For eg. In Japan, aggressive selling is not perceived in the positive spirit. Eg. Indian use
hands or different types of spoons for eating. Chinese and Japanese use chopsticks.
Europeans and American use forks and knives to cut the food before eating. Lessons:
International managers need to know what is acceptable , unacceptable in foreign culture.
They also need to know cultural tolerance to business customs that may be grouped as :
Cultural Imperatives; Cultural Exclusives; Cultural Adiaphora
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Culture Imperatives It refers to norms that must be followed / avoided in a foreign

country. For Eg. Too much eye contact in Japan is considered to completely offensive.
On the other hand in the Gulf , strong eye contact necessary with an Arab, to establish
trustworthiness.
Cultural Exclusives: Social patterns which are considered appropriate for locals and in
which foreigners are expected not to participate. Eg. Foreigners should stay away from
discussions on local country politics, social customs and practices.
Cultural Adiaphora : social customs in which a foreigner may participate, so that the Intl.
manager may decide whether to participate or avoid. Eg. Bowing in Japanese culture is
not expected of foreigners, but such display may be appreciated .
Aesthetics Ideas and perceptions that a cultural group upholds in terms of beauty and
good taste. music, It includes areas related to dance, painting, drama, architecture, etc.
Eg. Colours have different aesthetic value in different cultures:
Africa : bright colours are favourites
Japan : pastel colours preferred as they express harmony.
China : red is lucky colour but associated with witchcraft in Africa.
America : blues and greys are perfect for official environments. But blue is evil in Africa
Death colours :
Black signifies death in America, Europe; In India, Japan & other Asian countries it is
white, For Latin Americans Purple means death; Dark red is the mourning colour in the
Ivory Coast.
Traditions and Customs Traditions: passed The down elements from of culture
generation to generation. Customs: An established pattern behaviour within a society.
International managers need to know the customs and traditions of the culture being dealt
with: Eg. Food Habits eg. Chocolate flavors preferred are different in different cultures : Eg.
Americans and Germans prefer blends, French- Dark, Dutch White. Coffee brews:
Nescafe manufactures200 different varieties of coffee to suit local tastes. The concept of
Indian vegetarianism is very complex for foreigners to understand. Vessels used for
cooking both should be different. KFC offers vegetarian dishes in its Indian outlets. Pizza
Hut offers Jain Pizza in India alone. Lessons: companies need to modify products/services
to suit the local customs and traditions.
Manners and Customs. Manners in gift giving: A lot of preparation and sensitivity required
while giving gifts. What and when is important. China : occasion : New Year Preferred Gifts:
Modest gifts such as coffee table, books, ties, pens. Japan: Oseibo( January 1) Preferred
Gifts : Brandy. Scotch, round fruits such as melons Manners and Customs in the Way
Products are used should also be considered Example Orange juice: Breakfast item in US,
Refreshment in France Moisturizers : After bath lotion in one, beauty 19 product in another.
Language A systematic means of communicating ideas or feelings by the use of
conventionalized signs, gestures, marks, or especially articulate vocal sounds. The Four
Roles of Language
Language aids in information gathering and evaluation.
Language provides access to local society.
Language capability is increasingly important in company communications.
Language provides more than the ability to communicate because it extends beyond
mechanics to the interpretation of contexts that may influence business operations
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Language some lessons for managers Even though English is considered linguafranca for non English speaking countries, it fails to provide non-verbal cues for example:
Coca Cola was named Ke-kou-ke-la in China which translates in Mandarin to Bite the
wax tadpole. Subsequently Coke found a close phonetic equivalent Ko-kou-ko-Le which
translates to Happiness in the mouth after researching 40,000 Chinese characters. The
Swedish vacuum cleaner Manufacturer Electrolux introduced the same print ad which was
successful in Britain in the US Market with the tag line Nothing sucks like an Electrolux.
Later they found this to be a disaster in the US because sucks in American means really
Bad. i.e. Electrolux is a really bad vacuum cleaner
Religion Religious beliefs significantly influence people behaviour and business decision
making. Religion encompasses three distinct elements:
Explanation: God seen as a first cause behind the creation of the universe
A standard organization: Consisting of places of worships and rituals
Moral rules of good behaviour : concerning principles of right and wrong in human
behaviour.
Religion : lessons for managers Considerable influences international business
decisions. For. Eg. Location of commerical buildings and office interiors need to be as per
Fen shui in China and Vastu Shastra in India, as it concerns free flow of cosmic energy and
keeps evil spirits away. Advertisements and corporate communications must keep religious
sentiments in mind. For eg. Islam does not permit shaving. So Shaving equipment makers
like Gillette need to be sensitive while advertising their product in Islamic countries.
Comparison of Cross Cultural Behavior An appreciation facilitates of cultural

international conceptualize and differences managers implement to business strategies in
view of cultural sensitivities in various countries.
Hofstedes Cultural Classification

Power distance The extent to which less powerful members of an institution accept that power
is distributed unequally.
High Power Distance Countries High social inequalities tolerated with differences in
power and income distribution Organizational structures are hierarchical based an
inequality among superiors and subordinates Decision making is centralized Juniors
blindly follow the orders of their superiors For instance, Malaysia, countries, India etc.
Low Power Distance Countries S upe riors a nd s ubordina te s consider each other
equal
O rga niz
instance, Austria, Sweden, Great Britain, the US etc. Lessons: In view of the power
distance, the international manager has to asses the organizational dynamics, identify
the key decision makers and accordingly formulate their business strategy for different
countries.
Individualism vs. Collectivism

Individualism: The tendency of people to look after themselves and their immediate
family.
S trong work
ethics
P rom otio
in the organization is calculative.
Ability to
be the key criterion for success in individualistic societies. Countries with high
individualism include, the US, Great Britain, France, South Africa etc
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Collectivism: The tendency of people to belong to groups and to look after each other in
exchange for loyalty. In such cultures, interest of groups have precedence over individual
interest . For instance, Guatemala, Pakistan, Singapore, Malaysia etc. Lessons:
International Business strategy is greatly influenced by individualism vs. collectivism in
terms of decision making and market communication. For a product to be successful. In
collective societies, it should have group individualistic societies. acceptability unlike in
the
Masculinity vs. femininity In masculine societies, the dominant values emphasize on
work goals, such as earnings, advancement, success, and material belongings. e.g.
Japan, Switzerland, Great Britain, the US etc. In feminine societies the dominant values
are achievement of personal goals, such as quality of life, caring for others, friendly
atmosphere, getting along with boss and others. e.g. Sweden, Norway, Denmark,
Thailand etc. India falls in between. Summarily, in masculine societies, people live to
work, whereas in feminine societies people work to live.
Uncertainty avoidance The extent to which people feel threatened by ambiguous
situations. In high uncertainty avoidance societies there is lack of tolerance for ambiguity
and the need for formal rules. For instance, Greece, Portugal, Japan, France are the most
uncertainty avoidance countries. Low uncertainty avoidance countries Singapore,
Denmark, India, the US etc. include
Trompenaars Cultural Classification
Universalism vs. Particularism
Universalism: The belief that ideas and practices can be defined and applied everywhere
without modification e.g. the US, Australia, Germany, Sweden etc.
Particularism: The belief that unique circumstances and relationships, rather than abstract
rules are more important considerations that determine how ideas and practices should be
applied e.g. Venezuela, the US, Indonesia, China etc.
Individualism vs. Communitarianism
Individualism: people regarding themselves as individuals. For instance the US,

Czechoslovakia, Argentina, the CIS, Mexico, and the UK . Societies with high individualism
make frequent references to I and me. And achievement and responsibility are personal.
Communitarianism: people regarding themselves as part of a group. For instance,
Singapore, Thailand, Japan, and Indonesia. In collectivist societies we is used more
frequently than I and achievement is considered group achievement.
Neutral vs. Affective

Neutral Cultures: Cultures in which people tend to hold back their emotions and try not to
exhibit their feelings. For instance, Japan, the UK, Singapore, Australia, etc. Will consider
anger, delight or intensity in the workplace as unprofessional
Affective Cultures: Cultures where emotions are expressed openly. For instance, Mexico,
Netherlands, Switzerland, China, Brazil, etc. Will consider holding back of emotions by
colleagues to signify emotionally dead or a mask of deceit.
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Specific vs. Diffused The relative size of Public space and Private space and the degree to
which individuals feed comfortable sharing it with others differ considerably across societies .
Specific Cultures: Cultures in which individuals tend to have a large public space which is
readily shared, and a smaller private space. For instance, Australia, the UK, the USA and
Switzerland.
Diffused Cultures: Culture in which public and private space are more or less similar and
public space is guarded more carefully. For instance, Venezuela, China and Spain
Achievement vs. Ascription
Achievement Cultures: Culture in which status is accorded to high achievers and high
performers. For instance Austria, the USA, Switzerland, the UK, Sweden and Mexico etc.
Ascription Cultures: Culture in which status is accorded to those who naturally evoke
admiration from others such as elderly, seniors, highly qualified and skilled people. For
instance, Venezuela, Indonesia, China, the CIS, and Singapore etc.
Other Cross-Cultural Classifications
High Context vs. Low Context High Context Cultures: Culture in which high significance
is given to implicit communications, such as non-verbal and subtle situational cues. For
instance, countries. China, Korea, Japan and Arab Low Context Cultures: Cultures in
which communication is more explicit with heavy reliance on words to convey the
meanings. For instance, Germany, Switzerland, Scandinavia, North America and Britain.
Homophilous vs. Heterophilous
Homophilous Cultures: Cultures where people share beliefs, speak the same language,
and practice the same religion. For instance, Japan, Korea and Scandinavian countries.
Heterophilous Cultures: Countries that have a fair amount of differentiation in languages,
beliefs, and religions followed. For instance, India and China.
Relationship vs. Deal-focused
Relationship-focused Cultures: Cultures in which strong orientation towards building
relationships and developing mutual trust. For instance, India, Japan, China, Singapore,
Saudi Arabia, United Arab Emirates, Egypt, Brazil, Mexico, and Russia.
Deal-focused Cultures: Task-oriented cultures with openness to hold direct business talks
with strangers. For instance, Britain, USA, Germany, Denmark, Australia, Canada, Finland
etc.
Formal vs. informal cultures
Formal Cultures: Status differences are large and valued and formality is used to show
respect. For instance, India, UAE, Egypt, Brazil, Russia, Poland, Japan, China,, Singapore,
France, Belgium, Britain, Germany, Denmark, Finland etc
Informal Cultures: Status differences are not valued and Informal behaviour is not
considered disrespectful. For instance, the USA, Canada, and Australia etc.
Polychronic vs. Monochronic
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Polychronic Cultures: Cultures in which time schedules and deadlines are flexible and
relationships take precedence. For instance, India, Thailand, Philippines, UAE, Egypt,
Brazil, Russia etc.
Monochronic Cultures: Cultures with rigid time schedules and deadlines with high
emphasis on punctuality. For instance, Japan, China, Singapore, Britain, USA, Canada,
Australia, Germany, Denmark etc.
Expressive vs. Reserved Cultures
Expressive cultures: people are more expressive with direct eye contact. For instance,
Russia, Poland, Romania, USA, Australia, and Canada
Reserved cultures : people restrain their facial expression and gesturing. For instance,
India, Japan, China, Singapore, Britain, Germany, Denmark, Finland etc
Parochialism vs. Simplification
Parochialism: Belief that views the rest of the world from ones own cultural perspective.
Simplification: Exhibiting same cultural orientation groups.
EPRG Approach
Ethnocentric orientation The belief which considers ones own culture as superior to
others. The belief that the business strategy which has worked in the home country would
also be suitable in alien cultures.
Polycentric orientation It is based on the belief that substantial differences exist among
various countries. Therefore, a single business strategy cannot be effective across the
world and customized business strategies need to be adapted in different countries.
Regiocentric orientation A firm treats the region as a uniform cultural segment and adopts
a similar business strategy within the region but not across the region. For example Mc
Donalds strategy is to not serve beef based products in India, but serves beef based
products in other countries. Also in the Middle East, it does not serve pork and all meat
based preparations are made out of halal process only .
Geocentric orientation The approach considers the whole world a single market and
attempts to formulate integrated business strategies. A geocentric firm attempts to identify
cultural similarities across countries and formulates a globally uniform business strategy.
Examples: the Harry Potter series of books and films, cartoon characters and their serials,
Jeans, T-shirts etc apparels like
Emic vs. Etic Dilemma
The Emic school holds that attitudes, interests, and behaviour are unique to a culture and
best understood in their own terms. It emphasizes studying the business research problem
in each countrys specific context and identifying and understanding its unique facets. The
Etic school emphasizes identifying and assessing universal attitudinal and behavioural
concepts and developing pan-cultural measures. Thus, etic is basically concerned with
measuring universal behavioural and attitudinal traits.
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Operationalisation of Emic and Etic Emphasis is often placed an identifying and developing
constructs that are feasible across countries and cultures, while conducting cross country
research.
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Ch-12, RM Joshi (Pg 506-522)
Theories of International Investment

The FDI theories explain the reason why FDI occurs and the determinants of FDI
They are grouped into three categories:1).Traditional theories Traditional theories are based on neo-classical economic and explain
FDI in terms of location-specific advantages.
2).Modern theories Modern theories emphasise the fact that product and factor markets are
imperfect both domestically and internationally and that considerable transactional costs are
involved in market solutions. Also they acknowledge that managerial and organisational
functions play an important role in undertaking FDI.
3).Radical theories - The radical theories, these take a more critical view of Multinational
National Corporation (MNCs).
Monopolistic Advantage Theory
Product and Factor Market Imperfections

International Product Life Cycle
Other Theories
Follow-the-leader theory
Cross investment
Internationalism theory
Dunnings Eclectic Theory of International Production
Ownership-specific
Internalization
Location-specific
TRADITIONAL THEORY
Capital arbitrage theory - The theory states that direct investment flows from countries
where profitability is low to countries where profitability is high. It means therefore that
capital is mobile both nationally and internationally. But sometimes implication is that countries
with abundant capital should export and countries with less capital should import. If there was
a link between the long-term interest rate and return on capital, portfolio investment and FDI
should be moving in the same direction.
International trade theory-the country will specialise in production of, and export those
commodities which make intensive use of the countrys relatively abundant factor.
MODERN THEORY
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Product-cycle theory New products appear first in the most advanced economy in respond
to demand conditions. The maturing product stage is described by standardisation of the
product, increased economies of scale, high demand and low price. The standardised product
stage is reached when the commodity is sold entirely on price basis.
Internalisation Theories Of FDI
The theory explain that why the cross-border transactions of intermediate products are
organised by hierarchies rather than determined by market forces.
Theory Of Appropriability. The theory explains why there is a strong presence of hightechnology industries among MNCs.
Eclectic Theory of FDI
The theory tries to offer a general framework for determining the extent and pattern of both
foreign-owned production undertaken by a countrys own enterprises, and that of domestic
production owned or controlled by foreign firm. Dunning and Lundan(2008) assert that, the
eclectic theory of international production enlarges the theoretical framework by including both
home-country and host-country characteristics as international explanatory factors. It argues
that the extent, form, and patterns of international production are determined by the
configuration of three sets of advantages as perceived by the enterprises.
First Ownership (O) advantage
2nd Location (L) and
3rd Internalization (I) advantage in order for the firm to transfer its ownership advantages
across national boundary
Theories of FDI may be classified under the following headings:

Production Cycle Theory of Vernon
Production cycle theory developed by Vernon in 1966 was used to explain certain types of
foreign direct investment made by U.S. companies in Western Europe after the Second World
War in the manufacturing industry.
Vernon believes that there are four stages of production cycle: innovation, growth, maturity
and decline. According to Vernon, in the first stage the U.S. transnational companies create
new innovative products for local consumption and export the surplus in order to serve
also the foreign markets. According to the theory of the production cycle, after the Second
World War in Europe has increased demand for manufactured products like those produced
in USA. Thus, American firms began to export, having the advantage of technology on
international competitors. If in the first stage of the production cycle, manufacturers have an
advantage by possessing new technologies, as the product develops also the technology
becomes known. Manufacturers will standardize the product, but there will be
companies that you will copy it. Thereby, European firms have started imitating American
products that U.S. firms were exporting to these countries. US companies were forced to
perform production facilities on the local markets to maintain their market shares in those
areas. This theory managed to explain certain types of investments in Europe Western made
by U.S. companies between 1950-1970. Although there are areas where Americans have not
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possessed the technological advantage and foreign direct investments were made during that
period.
Theory of Exchange Rates on Imperfect Capital Markets
This is another theory which tried to explain FDI. Initially the foreign exchange risk has been
analyzed from the perspective of international trade. Itagaki (1981) and Cushman (1985)
analyzed the influence of uncertainty as a factor of FDI. In the only empirical analysis made so
far, Cushman shows that real exchange rate increase stimulated FDI made by USD, while
a foreign currency appreciation has reduced American FDI. Currency risk rate theory
cannot explain simultaneous foreign direct investment between countries with different
currencies. The sustainers argue that such investments are made in different times, but there
are enough cases that contradict these claims.
The Internalisation Theory

This theory tries to explain the growth of transnational companies and their motivations for
achieving foreign direct investment. In his Doctoral Dissertation, Hymer identified two major
determinants of FDI. One was the removal of competition. The other was the advantages
which some firms possess in a particular activity (Hymer, 1976). Buckley and Casson,
who founded the theory demonstrates that transnational companies are organizing their
internal activities so as to develop specific advantages, which then to be exploited.
Internalisation theory is considered very important also by Dunning, who uses it in the
eclectic theory, but also argues that this explains only part of FDI flows.
Hennart (1982) develops the idea of internalization by developing models between the two
types of integration: vertical and horizontal.
The concept of firm-specific advantages and demonstrates that FDI take place only if the
benefits of exploiting firm-specific advantages outweigh the relative costs of the operations
abroad. According to Hymer (1976) the MNE appears due to the market imperfections that
led to a divergence from perfect competition in the final product market. Hymer has
discussed the problem of information costs for foreign firms respected to local firms,
different treatment of governments, currency risk (Eden and Miller, 2004). The result meant
the same conclusion: transnational companies face some adjustment costs when the
investments are made abroad. Hymer recognized that FDI is a firm-level strategy decision
rather than a capital-market financial decision.
The Eclectic Paradigm of Dunning

The eclectic theory developed by professor Dunning is a mix of three different theories of direct
foreign investments (O-L-I):
O from Ownership advantages: This refer to intangible assets, which are, at least for a
while exclusive possesses of the company and may be transferred within transnational
companies at low costs, leading either to higher incomes or reduced costs. But TNCs
operations performed in different countries face some additional costs. Thereby to
successfully enter a foreign market, a company must have certain characteristics that would
triumph over operating costs on a foreign market. These advantages are the property
competences or the specific benefits of the company. The firm has a monopoly over its own
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specific advantages and using them abroad leads to higher marginal profitability or lower
marginal cost than other competitors.
There are three types of specific advantages:
a) Monopoly advantages in the form of privileged access to markets through ownership
of natural limited resources, patents, trademarks;
b) Technology, knowledge broadly defined so as to contain all forms of innovation
activities
c) Economies of large size such as economies of learning, economies of scale and
scope, greater access to financial capital;
L from Location: When the first condition is fulfilled, it must be more advantageous for
the company that owns them to use them itself rather than sell them or rent them to foreign
firms. Location advantages of different countries are de key factors to determining who will
become host countries for the activities of the transnational corporations. The specific
advantages of each country can be divided into three categories:
a) The economic benefits consist of quantitative and qualitative factors of
production, costs of transport, telecommunications, market size etc.
b) Political advantages: common and specific government policies that affect FDI
flows
c) Social advantages: includes distance between the home and home countries,
cultural diversity, attitude towards strangers etc.
I from Internalisation: Supposing the first two conditions are met, it must be profitable
for the company the use of these advantages, in collaboration with at least some factors
outside the country of origin . This third characteristic of the eclectic paradigm OLI offers a
framework for assessing different ways in which the company will exploit its powers from
the sale of goods and services to various agreements that might be signed between the
companies. As cross-border market Internalisation benefits is higher the more the firm will
want to engage in foreign production rather than offering this right under license, franchise.
Eclectic paradigm OLI shows that OLI parameters are different from company to company
and depend on context and reflect the economic, political, social characteristics of the host
country. Therefore the objectives and strategies of the firms, the magnitude and pattern of
production will depend on the challenges and opportunities offered by different types of
countries.
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Ch-13, RM Joshi ; Sections Focus on 13.5 and 13.6
Measuring the extent of MNEs Internationalisation

Size size determined may be by sales of revenue , profits , market value, return of equity
etc
Structure Based on number of countries an MNE operates in, the citizenship of its top
managers and corporate owners influence the level of internalization of an MNE.
Performance - The extent of commitment of the firms resources to foreign operations and
the rewards from these commitments are used to determine the MNEs performance. Eg foreign
sales , profits, assets etc
Management Orientation The EPRG framework attempts, four broad types of orientation of a firm towards
foreign marketing. They are:
1. ETHNOCENTRIC ORIENTATION :
The ethnocentric orientation of a firm considers that the products, marketing strategies and
techniques applicable in the home market are equally so in the overseas market as well. In
such a firm, all foreign marketing operations are planned and carried out from home base,
with little or no difference in product formulation and specifications, pricing strategy,
distribution and promotion measures between home and overseas markets. The firm
generally depends on its foreign agents and export-import merchants for its export sales.
2. REGIOCENTRIC ORIENTATION :
In regiocentric approach, the firm accepts a regional marketing policy covering a group of
countries which have comparable market characteristics. The operational strategies are
formulated on the basis of the entire region rather than individual countries. The production
and distribution facilities are created to serve the whole region with effective economy on
operation, close control and co-ordination.
3. GEOCENTRIC ORIENTATION :
In geocentric orientation, the firms accept a world wide approach to marketing and its
operations become global. In global enterprise, the management establishes manufacturing
and processing facilities around the world in order to serve the various regional and national
markets through a complicated but well co-ordinated system of distribution network. There
are similarities between geocentric and regiocentric approaches in the international market
except that the geocentric approach calls for a much greater scale of operation.
4. POLYCENTRIC OPERATION :
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When a firm adopts polycentric approach to overseas markets, it attempts to organize its
international marketing activities on a country to country basis. Each country is treated as a
separate entity and individual strategies are worked out accordingly. Local assembly or
production facilities and marketing organisations are created for serving market needs in
each country. Polycentric orientation could be most suitable for firms seriously committed
to international marketing and have its resources for investing abroad for fuller and longterm penetration into chosen markets. Polycentric approach works better among countries
which have significant economic, political and cultural differences and performance of these
tasks are free from the problems created primarily by the environmental factors.
Indices for Measuring the extent of MNEs Internationalisation

Transnationality Index - is the relationship between home and foreign activities for any
particular company. Thus a company is considered to be very internationalised if the ratio of
its foreign to domestic activities is very high, independently of whether those foreign activities
take place in one single foreign country or in many of them.
The Transnationality Index (TNI) is a means of ranking multinational corporations that is
employed by economists and politicians. It is calculated as the arithmetic mean of the following
three ratios (where "foreign" means outside of the corporation's home country):
the ratio of foreign assets to total assets

the ratio of foreign sales to total sales
the ratio of foreign employment to total employment
Internationalisation Index - Network Spread Index A different indicator of

internationalisation has been developed and values calculated in Vernon (1979). The indicator
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assesses the overall spread of activities in terms of the number of countries in which the TNCs
have direct linkages (affiliates/subsidiaries). A company is therefore assessed as having a high
degree of internationalisation if it operates in many foreign countries. It is an attempt to
measure the overall geographical spread of TNCs subsidiaries according to the number of
countries/nations/states in which they are established.
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Ch-14, RM Joshi ; Focus on Sec 14.5 and 14.6 and Presentations shared in WiggioPath is Group Folders > MBA(E) FMS North Campus Folder > MANAGING
MULTINATIONALS > eBook-PPT
Read PPTs for Ch1, Ch8-16
Ch-14, RM Joshi ; Focus on Sec 14.5 and 14.6
Sec 14.5 - ENTRY MODE DECISIONS
Entry Mode is the institutional mechanism to make the companys products and services
available in international markets. Various types of entry mode are as follows :-
Low Investment Entry modes - such as exports are yield low returns but are less risky and
involve much lower exit costs. Small firms usually prefer exports as entry modes. Large
companies use these for testing new markets
Contractual Entry Modes - such as international licensing and franchising, offers rapid
entry market entry opportunity with low resource commitment .
Sec 14.6 International Marketing Mix Decisions
Four Ps of marketing Mix Price product place and promotion.

External Environmental Factors such as social legal political economic etc are called
uncontrollable elements over which marketer has no control.
Marketing challenge is to adapt the Controllable elements of marketing mix like Price
product place and promotion and distribution
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PRODUCTS WHAT TO EXPORT ?

Products What To Export ?
The wisdom of finding the right product for exports comes with research and experience
LED lights ; handicrafts; drugs and pharma.
There are some sites on the internet which provide reliable data on the export and import
covering about 90% of all the traded products in the world trade.
Data Mining on the export product is essential:

What is the size of the world market for a product ?
What are the trends for that market i.e. is the market growing and by how much ?
With which countries does my country currently trade for certain products?
Are there opportunities to identify new or alternative markets?
What tariff and non tariff barriers exist in a specific market for the identified product?
Which countries compete to supply to a specific market and to the world ?
Rules ?
Anything allowed.
Almost everything is allowed (Open General License OGL)
One can export goods and services.
Restricted and prohibited items are on the DGFT website.
ITC HS (International Trade Classification Harmonised System) Code

The primary search engine for any product in international trade is the ITC HS
(International Trade Classification Harmonised System) Code
The ITC HS Code is like an identification badge of a good being traded in the world
markets. It readily classifies the good under a 2 digit , 4 digit , 6 digit or more codes and
helps in data entry, monitoring , regulation and eases the flow of trade information.
First two digits Identify the chapter the goods belong to.
Next two digits Identify groupings within the chapter.
Next two digits More specific classification.
For example -:
09 - Coffee , Tea , Mate and Spices.
09.02 Tea , whether or not flavoured.
09.02.10 Green Tea (not fermented)
Specificity increases with number of digits, with most developed nations using 10 or 12
digit codes now eg EU.
Most of the exports are freely allowed (OGL). However there are some controls
predominantly on account of security, public health, public morals, environmental grounds
and exhaustible resources.
Prohibited items 59 beef , ivory.
Restricted items 155 live animals , birds.
Canalised items through State Trading Enterprises (STC/MMTC) 15 - Urea
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Export restrictions
Export restrictions fall under two categories -:
General Trading Items : For these exports , one has to approach Export Facilitation
Committee (EFC) at DGFT HQs.
The Dual Use Items (SCOMET Special Chemicals , Organisms , Materials, Equipment
and Technologies) Special provisions for nuclear material under the WMD Act , 2005.
Most of the items are allowed to be freely imported (OGL)
However, there are some import controls on account of security, public health, public morals
and environmental grounds.
Prohibited items include beef, beef tallow, products of wild animals and ivory.
Restricted items include live animals, birds,
Restricted imports - Vegetable planting material , psychotropic substances, special
chemicals, unworked stones, arms and ammunition, aircrafts, security printing paper,
second hand consumer goods, certain categories of waste and scrap, satellite and
communication equipment of certain frequency
Canalised imports through State Trading Enterprises food grains , coconut oil, certain
petroleum products , fertilisers etc.
Import controls :
Less than 4% of Indias tariff lines (at 8 digit level) are under import controls,
Rest about 11,100 lines are free for import.
Presently :
Prohibited items 53 lines.
Restricted items 485 lines.
Canalised items (through STEs) 33 lines
Indias Export Basket
Merchandise exports 300 billion USD appx
Petroleum products 60 billion USD
Gems and Jewellery 40 billion USD
Engineering products auto components etc
Textiles Ready made garments etc
Pharmaceuticals
Handicrafts , Leather
Merchandise Imports 500 billion USD appx
Petroleum crude 170 billion USD
Gold 55 billion USD
Pearls , semi precious stones 23 billion USD
Coal , Coke 15 billion USD
Vegetable oils - 11 billion USD
India has an adverse Balance of Trade Merchandise Exports < Merchandise Imports
Service Exports 150 billion USD out of which software exports are about 50%.
Service Imports 80 billion USD
Thus India has a surplus in its Balance of Services as Service exports > Service
imports.
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Even though net remittances are positive , the overall balance in the current account
of Balance of Payments (BoP) is negative. This is balanced by a positive in the
capital account of BoP.
Markets Where To Export ?
Emergent (serendipitous) strategy Honda penetrated the USA market by chance
Honda cubs 50/100 cc motorcycles took on the might of Harley Davidson, the American
icon.
Deliberate (systematic ) strategy Honda penetrated the Indian market by choice by
forging a joint venture with Hero ; later aborted this joint venture and now is present in India
as Honda Motorcycle and Scooter Ltd; Hero Moto Corp is entering Latin America by setting
up an assembly plant in Columbia ; penetrating the African market through Kenya and
SAARC market through Bangladesh.
Naive rule use the same expansion mode for all foreign markets ignoring the
heterogeneity of different foreign markets.
Pragmatic rule enter a few markets initially with a low risk entry mode.
Strategy rule all alternative expansion modes need to be systematically compared.
Waterfall approach cascading effect first penetrate the platform economies like
Dubai / Singapore/ Hongkong and then focus on emerging economies like Vietanam ,
Myanmar, Laos and Cambodia OR growth economies like BRICS or mature economies
like South Korea/ Taiwan OR established economies like USA , EU and Japan.
Sprinkler approach penetrate all economies, all at the same time.
Sovereign and Political risk The first and foremost is peaceful and lawful conditions ;
political stability so that MNC businesses can flourish with a sense of security and
confidence . Today , Ukraine (in the midst of a civil war) ; Syria ; Iraq and some countries
in Africa Somalia ; earlier Rwanda and Sere Leone were theatres of war and thus out of
bounds for the MNCs.
Legal and contractual risk a good market / country should have rule of law ; strong legal
system where legal contracts and property rights can be enforced. Afghanistan fares very
poorly on this criterion.
Market size Population Honble PM of India attracts FDI and FPI into India by our 3
Ds Demand ; Demographic dividend and Democracy . We are the second largest
populated country in the world after China ; 65% of our population is below the age of 35
years and we are the worlds largest democracy thereby attracting the attention of the
worlds most powerful democracy USA. In National Income Accounting -:
Y=C+I+G+XM
Income GDP (nominal and PPP) and Per Capita Income.
Indias nominal GDP is about 2 Trillion USD but in terms of PPP terms it is ranked fourth in
the world after USA , China and Japan. Our USP is our affluent middle class about 300
million with robust purchasing power making every MNC FMCG / Consumer durables /
Luxury brands look at India seriously.
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Macro economic strength and stability Fiscal , Monetary, Trade & Commercial ,
Wage & Income policies should be transparent , consistent, stable and predictable. Voda
phone retrospective tax issue was a big dampener earlier.
World Economic Forum (WEF) ranks the countries in terms of Global Competitiveness
Index (GCI) . GCI refers to a set of institutions, policies and factors that determine the level
of productivity of a country which in return determines the rate of return obtained by
investing in that country. GCI sits on 12 pillars -:
(i) Institutions.
(ii) Infrastructure.
(iii) Market Size.
(iv) Macro economic stability.
(v) Health and Primary education.
(vi) Higher education and training.
(vii) Goods market efficiency.
(viii) Labour market efficiency.
(ix) Financial market sophistication.
(x) Business sophistication.
(xi) Technological readiness.
(xii) Innovation.
World Bank computes the Ease of doing business across the economies , based on
regulations affecting the ten stages of a businesss life -:
(i)
Starting a business.
(ii)
Dealing with licences.
(iii) Employing workers.
(iv) Registering property.
(v) Getting credit.
(vi) Protecting investors.
Ease of doing business:(vii) Paying taxes .
(viii) Trading across borders.
(ix) Enforcing contracts.
(x) Closing a business.
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Chapter 16 SCM
Chapter 17 HRM

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SYLLABUS/ TOPICS COVERED

What to Export and Where

Presentations shared in Wiggio-Path is Group

Title of Material shared by Dr Sumeet Jerath

Already covered by Ch-6, Optional to read

Topics as per Syllabus Given in Prospectus for FMS

Systems; Indias Regional Integration Agreements; Regional Integration Agreements

__________________________________ Managing Multinationals - Executive MBA - Semester IV

International Trade Theories

Absolute Advantage Theory

Comparative Advantage Theory

Comparative Advantage explains and predicts trade of goods where absolute

__________________________________ Managing Multinationals - Executive MBA - Semester IV

The Leontief Paradox

Leontief challenges Heckscher-Ohlin on a number of grounds.

__________________________________ Managing Multinationals - Executive MBA - Semester IV

Human Skills and Technology-Based View

The Product Life-Cycle Model

Exhibit 2-5: Product cycle model of international trade innovating country

__________________________________ Managing Multinationals - Executive MBA - Semester IV

Exhibit 2-6: Product cycle model of international trade imitating country

Linders Income-Preference Similarity Theory

Developed countries trade more than less developed countries (assumption)

The New Trade Theory

Countries do not specialize and trade solely to take advantages of differences.

__________________________________ Managing Multinationals - Executive MBA - Semester IV

Ch-5, RM Joshi (Pg 175-185)

How does the WTO differ from the GATT?

Why should countries join WTO

Functions of the WTO

WTO: Basic Principles

Non-Discrimination - The essence of the non-discrimination obligations is that: like

Predictability and Transparency - through binding and transparency - Sometimes,

Liberalization: Freer trade through negotiations Freer trade: gradually, through

__________________________________ Managing Multinationals - Executive MBA - Semester IV

Trade and development

WTO : Organisational Structure

__________________________________ Managing Multinationals - Executive MBA - Semester IV

Ch-5, RM Joshi (Pg 211-217)

First ministerial conference: World Trade Organization Ministerial Conference of 1996

__________________________________ Managing Multinationals - Executive MBA - Semester IV

Ch-6, RM Joshi (221-229, 249-252) Sec 6.6 Important

INTERNATIONAL ECONOMIC INTEGRATION

__________________________________ Managing Multinationals - Executive MBA - Semester IV

Difference between FTA and PTA

What is the difference between FTA and PTA?

Tariff Barriers vs Non Tariff Barriers

Trade Creation and Trade Diversion

__________________________________ Managing Multinationals - Executive MBA - Semester IV

__________________________________ Managing Multinationals - Executive MBA - Semester IV

Regional Trade Agreements vs WTO

Indias Participation in Preferential Trade Agreements

Indo-Sri Lanka Free Trade Agreement (ISLAFTA)

India-Sri Lanka FTA

__________________________________ Managing Multinationals - Executive MBA - Semester IV

Major Features of SAFTA

INDIAS CURRENT ENGAGEMENTS IN RTAs 1

Framework Agreement on Comprehensive Economic Co-operation between the Association

__________________________________ Managing Multinationals - Executive MBA - Semester IV

Comprehensive Economic Cooperation and Partnership Agreement (CECPA) between India

Association of South East Asian Nations (ASEAN) and India.

__________________________________ Managing Multinationals - Executive MBA - Semester IV