SOLUTION TO ASSIGNMENT

Question 1. Why is Comparative Cost Theory considered as an improvement upon

Absolute Cost Advantage Theory? Explain Porters Diamond Model.
Answer.
1.
Comparative Cost Theory V/s Absolute Cost Advantage Theory 'Absolute
Advantage' means 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. The main concept of absolute advantage is generally attributed to Adam Smith
for his most notable book Wealth of Nations in 1776, Adam Smith attacked the
mercantilism and argued that countries differ in their ability to produce goods and services
efficiently due to variety of. A country that has an absolute advantage produces greater
output of a good or service than other countries using the same amount of resources. Smith
stated that tariffs and quotas should not restrict international trade; it should be allowed to
flow according to market forces. Adam Smiths theory suggests that such a country that
has absolute advantage might not have benefitted from international trade as trade is
positive sum game and countries prosper only if they exchange the goods in which they
have absolute advantage. The answer to this problem can be found in the extension of
absolute advantage, the theory of comparative advantage. David Ricardo, in his notable
book Principles of Political Economy published in 1817 came up with an improvement on
Adam Smiths absolute advantage theory ie Comparative Cost theory. Comparative
advantage refers to a countrys ability to produce a particular good with a lower opportunity
cost than another country. Ricardo argued what might happen if one country has an
absolute advantage in the production of all goods. For a sustainable economic system,
Ricardo argued that a country should specialize in the production of those goods that it can
produce most efficiently and import the goods which it produces less efficiently even if it
has absolute cost advantage in the production of those goods.
2.
Porters Diamond Model. A model that attempts to explain the competitive
advantage some nations or groups have due to certain factors available to them. The Porter
Diamond is a model that helps analyze and improve a nation's role in a globally competitive
field. The model was developed by Michael Porter, who is recognized as an authority on
company strategy and competition; it is a more proactive version of economic theories that
quantify comparative advantages for countries or regions. Michael Porter considers the
competitiveness of a country as a function of four major determinants:(a)
Factor Conditions.
Factor conditions being the inputs which affect
competition in any industry comprise a number of broad categories. These could be
Basic factors such as Natural resources: the abundance, quality, accessibility, and
cost of the nations land, water, mineral, or timber deposits, hydroelectric power
sources, fishing grounds, and other physical traits, Climate, Geographical location,
and demographics or advanced factors like Human resources: the quantity, skills,
and cost of personnel including management, Knowledge resources: the
accumulated scientific, technical, research and market knowledge in a nation in the
sphere of goods and services, Capital resources: the stock of capital available in a
country and the cost of its deployment, Communications, Infrastructure resources:
the characteristics and the cost of using the infrastructure available and Research
facilities. Basic factors can provide only an initial advantage and they must be
supported by advanced factors to maintain success. Japan is a country which lacks
arable land and mineral deposits. Large pool of engineers - very vital for a

manufacturing industry. Hence, Japan has high priced land and so its factory space
is at a premium.
(b)
Demand Conditions. The importance of demand conditions as a factor
influencing competitive advantage stems from the fact that in a market economy the
direction of production, that is, the kinds of goods which are produced, is determined
by the needs of buyers. Home country Demand plays an important role as it enables
better understand the needs and desires of the customers, shapes the attributes of
domestic ally made products and creates pressure for innovation and quality. The
sources of this influence within the context of home demand are divided into three
broad attributes: the composition of home demand, the size and pattern of growth of
home demand, and the mechanisms by which a nations domestic preferences are
transmitted to foreign markets. For example, the Japanese camera industry which
caters to a sophisticated and knowledgeable local market.
(c)
Related and Supporting Industries. When trying to determine the sources
of competitive advantage in an industry, The presence of suppliers or related
industries is advantageous as the advantages of investment in advanced factors of
production viz communications infrastructure, research facilities also extend to the
supporting industries. It also creates clusters of supporting industries, thereby
achieving a strong competitive position internationally. For example Silicon Valley.
(d)
Firm Strategy, Structure, and Rivalry. Closing the circle of factors which
determine the existence of competitive advantage it is necessary to consider the
context in which firms are created, organized and managed as well as the nature of
domestic rivalry. The goals, strategies, and ways of organizing firms in industries are
widely influenced by national circumstances. Domestic rivalry creates pressure to
innovate, improve quality, and reduce costs which in turn helps create world-class
competitors. Germany tends to have hierarchical management structures composed
of managers with strong technical backgrounds.

(e)
Porter suggested that the a/m attributes constituted a diamond and he
contended that firms are most likely to succeed in industries where the diamond is
most favourable. He also stated that the diamond is a mutually reinforcing system
and the effect of one attribute depends on the state of others. For example,
favourable demand conditions will not result in a competitive advantage unless the
state of rivalry is enough to elicit a response from the firms.

Question 2. Explain Hofstedes Cultural dimension

Answer.
1.
Hofstedes Cultural Dimension. Geert Hofstede is a Dutch social psychologist and
anthropologist who has studied the interactions between cultures. Professor Hofstede
carried out a detailed study of how values in the workplace are influenced by culture.
According to Dr. Geert Hofstede, Culture is more often a source of conflict than of synergy.
Cultural differences are a trouble and always a disaster. One of his most notable
accomplishments is the establishment of the cultural dimensions theory, which provides a
systematic framework for assessing the differences between nations and cultures. He
established a model using the results of the study which identifies four dimensions to
differentiate cultures. Later, a fifth dimension called long-term outlook was added. The
following are the five cultural dimensions:(a)
Power-Distance Index. Power distance is the extent to which the less
powerful members of organizations and institutions accept and expect that power is
distributed unequally. This dimension does measure the level of equality or
inequality between individuals in a nations society. High power-distance scores
mean that less powerful members of the society accept their place and realize the
existence of formal hierarchical positions and that inequality of power and wealth has
been allowed to grow within the society. Low power-distance scores mean that a
culture expects and accepts that power relations are democratic and members are
viewed as equals. Such a society de-emphasises the differences between its
peoples power and wealth. Countries with high PDI index are Arab countries,
Russia, India and China. Those with low score are Australia and Japan.
(b)
Individualism vs. Collectivism: It is the degree to which individuals are
integrated into groups. This dimension has no political connotation and refers to the
group rather than the individual and focuses on the extent to which the society
reinforces individual or collective achievement and interpersonal relationships. A high
individualism ranking depicts that individuality and individual rights are dominant
within the society and the in these societies form a larger number of looser
relationships. A low individualism ranking characterises societies of a more collective
nature with close links between individuals. These cultures support extended families
and collectives where everyone takes responsibility for fellow members of their
group. Asian and African countries like Indonesia and Colombia have low
individualism and Western countries, Canada and Hungary have high individualism.
(c)
Uncertainty-Avoidance Index. This depicts the societys tolerance for
uncertainty and ambiguity. This is a dimension that measures the way a society
deals with unknown situations, unexpected events, and the stress of change.
Cultures that score high on this index are less tolerant of change and tend to
minimize the anxiety of the unknown by implementing rigid rules, regulations, and/or
laws. These are rule-oriented societies that incorporates rules, regulations, laws, and
controls are created to minimise the amount of uncertainty Societies that score low
on this index are more open to change and have fewer rules and laws and more
loose guidelines. Such a society is less rule-oriented, readily agrees to changes, and
takes greater risks. Latin American countries, Germany, Belgium, Japan and
Eastern Europe score high on this. Countries with low UAI score are Sweden,
Denmark and China.
(d)
Masculinity vs. Femininity. This shows the distribution of emotional roles
between the genders and the extent to which the level of importance a culture places
on stereotypically masculine values such as assertiveness, ambition, power, and
materialism as well as stereotypically feminine values such as an emphasis on
human relationships. Cultures that are high on the masculinity scale generally have
more prominent differences between genders and tend to be more competitive and

ambitious. Those that score low on this dimension have fewer differences between
genders and place a higher value on relationship building. Countries like like Japan,
Venezuela and Hungary have a high masculinity index and those like Norway and
Sweden have a lower index.
Question 3. An economic union comprises of a common market and a custom
union. Explain.
Answer.
1.

There are five levels Of Regional Economic Integration:(a)

Free Trade Area

(b)

Customs Union

(c)

Common Market

(d)

Economic Union

(e)

Political Union

2.
An economic union is the fourth level of integration and is a type of trade bloc which
is composed of a common market between members with a customs union ie a common
trade policy between non-members, but where members are free to pursue independent
macro-economic policies.
(a)
Common Market. Services and capital are free to move within member
countries, expanding scale economies and comparative advantages. However, each
national market has its own regulations such as product standards.
(b)
Custom Union. Sets common external tariffs among member countries,
implying that the same tariffs are applied to third countries; a common trade regime
is achieved. Custom unions are particularly useful to level the competitive playing
field and address the problem of re-exports (using preferential tariffs in one country
to enter another country).
3.
The participant countries have both common policies on product regulation, freedom
of movement of goods along with a common taxing method for imports from non-member
countries, services and the factors of production (capital and labour) and a common
external trade policy. The purpose of an economic union is to promote closer cultural and
political ties while increasing the economic efficiency between the member countries.
Economic unions are established by means of a formal intergovernmental legal agreement
among independent countries with the intention of fostering greater economic integration.
The members of an economic union share some elements associated with their national
economic jurisdictions.

Question 4. Explain the components of International Financial Management.

Answer
1.
International Financial Management (IFM) came into existence when the countries
all over the world started opening their doors to each other. This phenomenon is also called
liberalization. The components like foreign exchange market, foreign currency derivatives,
international monetary markets and international financial markets which are essential to
the international financial management, are discussed below:(a)
Foreign Exchange Market. These markets facilitates the participants to
obtain, trade, exchange and speculate foreign currency. They consists of banks,
central banks, commercial companies, hedge funds, investment management firms
and retail foreign exchange brokers and investors. Such a market is considered to be
the leading financial market in the world. It is vital to realise that the foreign
exchange is not a single exchange, but is created from a global network of
computers that connects the participants from all over the world. The foreign
exchange market is quite big and includes various functions including funding of
cross-border investment, loans, trade in goods, trade in services and currency
speculation. The participant in a foreign exchange market will normally ask for a
price. The trading in the foreign exchange market may take place as outright cash or
foreign exchange currency deals that take place on the date of the deal, next day ie
foreign exchange currency deals that take place on the next working day, swap ,
which is simultaneous sale and purchase of identical amounts of currency for
different maturities and spot and forward contracts ie a binding obligation to buy or
sell a definite amount of foreign currency at the pre-agreed rate of exchange, on or
before a certain date.
(b)
Foreign Currency Derivatives. Any financial instrument that locks in a future
foreign exchange rate. It is a financial contract that seeks to swap two currencies at
a predetermined rate. It can also be termed as the agreement where the value can
be determined from the rate of exchange of two currencies at the spot. These can be
used by currency or forex traders, as well as large multinational corporations. The
latter often uses these products when they expect to receive large amounts of
money in the future but want to hedge their exposure to currency exchange risk.
Financial instruments that fall into this category include: currency options contracts,
currency swaps, forward contracts and futures contracts.
The agreement
undertaken to exchange cash flow streams in one currency for cash flow streams in
another currency in future is provided by currency swaps. These will help to increase
the funds of foreign currency from the cheapest sources. Some of the risks
associated with currency derivatives are:
(i)

Credit risk takes place, arising from the parties involved in a contract.

(ii)

Market risk occurs due to adverse moves in the overall market.

(iii)
Liquidity risks occur due to the requirement of available counterparties
to take the other side of the trade.
(iv)
Settlement risks similar to the credit risks occur when the parties
involved in the contract fail to provide the currency at the agreed time.
(v)
Operational risks are one of the biggest risks that occur in trading
derivatives due to human error.
(vi)
Legal risks pertain to the counterparties of currency swaps that go into
receivership while the swap is taking place.
(c)
International Monetary System. Any country needs to have its own
monetary system and an authority to maintain order in the system, and facilitate
trade and investment. India has its own monetary policy, and the Reserve Bank of

India (RBI) administers it. The same is the case with world, its needs a monetary
system to promote trade and investment across the countries. International monetary
system exists since 1944. The International Monetary Fund (IMF) and the World
Bank have been maintaining order in the international monetary system and general
economic development respectively. International monetary systems provide the
mode of payment acceptable between buyers and sellers of different nationality, with
addition to deferred payment. The global balance can be corrected by providing
sufficient liquidity for the variations occurring in trade. Thereby it can be operated
successfully.
(d)
International Financial Markets. International financial market born in midfifties and gradually grown in size and scope. International financial markets
comprises of international banks, Eurocurrency market, Eurobond market, and
international stock market. International banks play a crucial role in financing
international business by acting as both commercial banks and investment banks.
Most international banking is undertaken through reciprocal correspondent
relationships between banks located in different countries. These markets are
independent markets that are not under the authority of any one country and the
financial markets of each country are linked by international foreign markets. What
governs the heart of the international financial market is the market where
international trade and investment dominates foreign currency. As a result the
purchase of currency precedes the purchase of services and goods. The purpose of
international securities markets, international capital markets, international money
markets and foreign currency markets is stated below:
(i)
The foreign currency markets An international market that has no
central place for trading to take place or is familiar in structure.
(ii)
International money markets A market for accounts, deposits or
deposits that include maturities of one year or less may be conventionally said
to be an international money market.
(iii)
International capital markets They are markets of individual countries,
which are linked by international capital. .
(iv)
International security markets The continued opportunity to provide
large portion of the international financial needs of the government and
business have allowed the banks to experience the greatest growth in the
past decade. The international security market includes private placements,
bonds and equities.
Question 5. What are the differences between International Accounting Standards
and Domestic Accounting Standards?
Answer

1.

Differences between IAS and DAS. 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 provide separately verified information about
an organisation's financial performance to investors creditors. However, domestic
businesses are not affected by differences in accounting methods as the accounting system
of a domestic organisation must meet the specialised and regulatory standards of its home
country. On the other hand, an MNC and its subsidiaries must meet differing accounting
and auditing standards of all the countries in which it operates, which 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.
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.

2.

Measurement of differences between IAS and DAS. You can measure the
differences between IAS and DAS in the following way:(a)
Literature on International Accounting Differences. Various data sources
have been used to measure international accounting differences in prior literature.
Most of the prior studies interpret international accounting differences as different
options adopted by different nations for the same accounting issues, which
corresponds to our divergence concept. 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.
(b)
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.

3.

Implications of the Differnces. There are two implications of the differences

between DAS and IAS ie on earnings management and on synchronicity of stock prices.
The main findings indicate that absence creates an opportunity for more earnings
management and exacerbates the synchronicity of stock prices. Greater synchronicity
implies that the idiosyncratic component of the changes in prices is small, thus stock prices
are mainly affected by market-wide stock price swings. This result is consistent with the
theory that lack of transparency (opaqueness) leads to a high level of synchronicity. We
also find that divergence between DAS and IAS as no effect on earnings management
and is negatively related to the synchronicity of stock prices.
Question 6 Explain the key component of International Strategic management.
Answer
1.
International Strategic Planning. Strategic planning involves the organized efforts
of an organisation to successfully sustain its purposes for existing, craft for itself the
direction that it needs to pursue, and take the direction to achieve its short-term and longterm goals. It is an important element in all kinds of organisations and is applied by
governments, non-profit agencies, individuals and businesses. The concept of strategic
management process in an MNC is similar to that of any other organisation. However, a
major complicating factor is that before considering various strategic options, the strategic
management process has to analyse and understand the environmental needs from a
regional and country perspective. In the approach to strategic planning the first step is to
accurately assess where the entity is today, with respect to its ability and resources, to
recognise where the organisation would like to reach at some specific point of time in the
future, by efficiently setting goals and objectives that it needs to accomplish and choose
how to successfully progress from the conditions of today and methodically work toward

those goals in a structured and logical manner. The various componente of a Strategic Plan
are discussed in the succeeding paragraphs.
2.

Types of Planning. Any business plan can be classified into three types. They are:
(a)
Strategic Planning. It is a long-term process that the business owners utilise
to unveil their business vision and mission. It also determines a roadmap for
achieving their goals. Strategic planning fulfils the mission and the overall goals of
the firm.
(b)
Intermediate Planning. This is a short-term planning process for six months
to two years. It outlines the manner in which a strategic plan is pursued. Intermediate
plans are often used for campaigns with the purpose and goal of supporting the
trades long-term goals.
(c)
Short-term Planning. This planning process involves planning for few weeks
or at least for a year. It involves specifying out the functioning of a strategic plan on a
daily basis. Resources are allocated for business management and development
that takes place daily within the strategic plan.

3.
Gap Analysis. A GAP analysis is a simple tool that helps to identify methods to
close the performance gaps. For this the planners must be fully aware of the current affairs
and the required future state. The performance gap is closed by modifying resources from
activities to be terminated to activities to be started. If there is uncertainty that the initial gap
cannot be closed, then the feasibility of the required future state must be reconsidered.
Businesses implement gap analysis to accomplish company-wide goals, or those for a
specific department or area. Gap analysis also help businesses measure their possible
profitability of a goal, which helps the management and staff to understand the plans laid
out in the analysis as well as stay eager about it.
4.

Top-down vs. Bottom-up Planning

(a)
Top-down Planning. Top-down planning is a common strategy that is used
for project planning, which helps maintain the decision making process at the senior
level. Goals and allowances are established at the highest level. Senior-level
managers have to be very specific when laying out expectations because the people
following the plan are not involved in the planning process. It is very important to
keep the morale of the employees high and motivate them to perform the job. Since
employees are not included in any of the decision making processes, they are
motivated only through fear or incentives. Management must choose techniques to
align projects and goals with top-down planning. Management alone is held
responsible for the plans set and the end result. The benefit of talented employees
with prior experience on definite aspects of the project are not utilised based on the
assumption that the management can plan and perform a project better without the
inputs from these employees. Some think that the top-down planning process is the
right way to make a plan, and that the plan development is not important. It permits
the management to segregate a project into steps, and then break the work into
smaller executable parts of the project. Simultaneously, the work that is broken down
is analysed until all the steps could be studied, due-dates are precisely assigned,
and then parts of the project are given to employees. However, the focus is on longterm goals and the short-term and uncertain goals can get lost. This approach is best
applicable for small projects. Top-down planning helps to:(i)

Determine all the goals at the initial stage of the process.

(ii)

Identify the lack of ground level staff participation.

(iii)

Estimate the inflexibility.

(iv)

Find how management imposes the processes.

(v)

Determine the lack of motivation.

(vi)

Find whether the staffs feel that their input is valued or not

(b)
Bottom-up Planning. Bottom-up planning is commonly referred to as tactics.
With bottom-up planning, an organisation gives its project deeper focus because
each organisation has a huge number of employees involved, and each employee is
an expert in their own area. Team members work side-by-side and contribute during
each stage of the process. Plans are developed at the lowest levels, and then
passed on to each of the subsequent higher levels. Finally, it then reaches the senior
management for approval. Lower-level employees take personal interest in a plan
that they are involved in planning. Employees are more encouraged which in turn
improves their morale. Project managers are responsible for the successful
completion of the project. Bottom-up planning helps to:
(i)

As there are no long term vision here.

(ii)

Encourage teamwork.

(iii)

Estimate flexibility.

(iv)

Determine whether team motivation is of high level.

(v)
Identify whether the project is team driven.
feels valued or not.

Find whether the staff

5.
Finally, a combination of these two project management methods is most effective.
Using the positive aspects of each, the organisation can align each step so that the
requirements of the project are met. An organisation can determine the top requirements of
the project and allow accountability to get down with the lower levels. With this combination,
the vision of senior management with the skills of lower level employees is merged. This
helps in completion of the project more efficiently using the best employees of the
organisation.