FOUNDATIONS OFPAPER CODE: BBAN-603

UNIT-I

Types of international business; basic structure of international business

environment; risk in international business; motives for international business;
barriers to international business; global trading and financial system an overview.

UNIT-II

Foreign market entry modes; factors of country evaluation and selection; decisions
concerning foreign direct and portfolio investment; control methods in international
business.

UNIT-III

Basic foreign manufacturing and sourcing decisions; product and branding

decisions for foreign markets; approaches to international pricing; foreign channel
and logistical decisions.

UNIT-IV

Accounting differences across countries; cross cultural challenges in international

business; international staffing and compensation decisions; basic techniques of risk
management in international business.

SUGGESTED READINGS:

1. Daniels, J.D., and H.L. Radebaugh, International Business: Environment and

operations, Pearson Education, New Delhi 2. Hill, Charles W.L., International
Business, Tata McGraw Hill, New Delhi 3. Sharan, V., International Business:
Concept, Environment and Strategy, Pearson Education, New Delhi 4. Bennett,
Roger, International Business, Pearson Education, New Delhi

Note: 1. Instructions for External Examiner: The question paper shall be divided in
two sections. Section A shall comprise of eight short answer type questions from
whole of the syllabus carrying two marks each, which shall be compulsory. Answer

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 to each question should not exceed 50 words normally. 2. Section B shall comprise
of 8 questions (2 questions from each unit). The students will be required to
attempt four questions selecting one question from each unit. 3. All questions will
carry equal marks.

UNIT 1

International business is defined as commercial transactions that occur

across country borders. When a company sells products in the US, Japan
and throughout Europe, this is an example of international business.

Features of International Business

1. Large scale operations: In international business, all the operations are

conducted on a very huge scale. Production and marketing activities are
conducted on a large scale. It first sells its goods in the local market. Then
the surplus goods are exported.

2. Integration of economies: International business integrates (combines)

the economies of many countries. This is because it uses finance from one
country, labour from another country, and infrastructure from another
country. It designs the product in one country, produces its parts in many
different countries and assembles the product in another country. It sells
the product in many countries, i.e. in the international market.

3. Dominated by developed countries and MNCs: International business

is dominated by developed countries and their multinational corporations
(MNCs). At present, MNCs from USA, Europe and Japan dominate foreign
trade. This is because they have large financial and other resources. They
also have the best technology and research and development. They have
highly skilled employees and managers because they give very high
salaries and other benefits. Therefore, they produce good quality goods
and services at low prices. This helps them to capture and dominate the
world market.

4. Benefits to participating countries: International business gives

benefits to all participating countries. However, the developed (rich)
countries get the maximum benefits. The developing (poor) countries also
get benefits. They get foreign capital and technology. They get rapid
industrial development. They get more employment opportunities. All this

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 results in economic development of the developing countries. Therefore,
developing countries open up their economies through liberal economic
policies.

5. Keen competition: International business has to face keen competition

in the world market. The competition is between unequal partners i.e.
developed and developing countries. In this keen competition, developed
countries and their MNCs are in a favorable position because they produce
superior quality goods and services at very low prices. Developed countries
also have many contacts in the world market. So, developing countries find
it very difficult to face competition from developed countries.

6. Special role of science and technology: International business gives a

lot of importance to science and technology. Science and Technology help
the business to have large-scale production. Developed countries use high
technologies. Therefore, they dominate global business. International
business helps them to transfer such top high-end technologies to the
developing countries.

7. International restrictions: International business faces many

restrictions on the inflow and outflow of capital, technology and goods.
Many governments do not allow international businesses to enter their
countries. They have many trade blocks, tariff barriers, foreign exchange
restrictions, etc. All this is harmful to international business.

8. Sensitive nature: The international business is very sensitive in nature.

Any changes in the economic policies, technology, political environment,
etc. have a huge impact on it. Therefore, international business must
conduct marketing research to find out and study these changes. They
must adjust their business activities and adapt accordingly to survive
changes.

9. Exchange of goods and services: International business involves

purchase and sale of goods and services to another country. Purchase of
goods is known as import and sale of good is known as export. But when
the goods are imported from one country with the objective of exporting
them to some other country it is known as entrepot trade.

10. Involves two or more countries: International business involves two or

more countries.

11. Foreign currency: International trade involves use of foreign currency.

Payments are made in import and received in export.

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12. Language barrier: Each country has its own language. There might be
problem in trading due to difference in language used in different
countries.

Motives of Internationalization of Firms

The factors which motivate firms to go international may be divided into two
groups :
(1) Pull factors
(2) Push factors

(1) Pull Factors:

Those factors or forces which attract the foreign firms to do business in

Foreign market come under this categories. Such attraction includes,
broadly, the relative profitability & growth prospects. These are also called
Proactive reasons. The followings are important Pull Factors:

Profit Advantage
Growth opportunities
Economies of scale
Access to imported inputs
Economic integration and free markets
Emergence of WTO

(2) Push Factors:

It refers to the compulsion of the domestic market such as saturation of the

market, which prompt companies to internationalize. These reasons are also
called Reactive reasons. The followings are important push factors:

Competition

Domestic market constraints

Political Stability Vs. Political Instability
Uniqueness of product
Spreading R&D
Quality improvement

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 Government policies and regulation

Importance of international business

1. Earn foreign exchange: International business exports its goods and

services all over the world. This helps to earn valuable foreign exchange.
This foreign exchange is used to pay for imports. Foreign exchange helps to
make the business more profitable and to strengthen the economy of its
country.

2. Optimum utilisation of resources: International business makes

optimum utilisation of resources. This is because it produces goods on a
very large scale for the international market. International business utilises
resources from all over the world. It uses the finance and technology of rich
countries and the raw materials and labour of the poor countries.

3. Achieve its objectives: International business achieves its objectives

easily and quickly. The main objective of an international business is to
earn high profits. This objective is achieved easily. It produces high-quality
goods. It sells these goods all over the world. All this results in high profits
for the international business.

4. To spread business risks: International business spreads its business

risk. This is because it does business all over the world. So, a loss in one
country can be balanced by a profit in another country. The surplus goods
in one country can be exported to another country. The surplus resources
can also be transferred to other countries. All this helps to minimise the
business risks.

5. Improve organisation's efficiency: International business has very

high organisation efficiency. This is because without efficiency, they will not
be able to face the competition in the international market. So, they use all
the modern management techniques to improve their efficiency. They hire
the most qualified and experienced employees and managers. These
people are trained regularly. They are highly motivated with very high
salaries and other benefits such as international transfers, promotions, etc.
All this results in high organisational efficiency, i.e. low costs and high
returns.

6. Get benefits from Government: International business brings a lot

of foreign exchange for the country. Therefore, it gets many benefits,
facilities and concessions from the government. It gets many financial and
tax benefits from the government.

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7. Expand and diversify: International business can expand and
diversify its activities. This is because it earns very high profits. It also gets
financial help from the government.

8. Increase competitive capacity: International business produces

high-quality goods at low cost. It spends a lot of money on advertising all
over the world. It uses superior technology, management techniques,
marketing techniques, etc. All this makes it more competitive. So, it can
fight competition from foreign companies.

International Business in India

International Business in India looks really lucrative and every passing day, it
is coming up with only more possibilities. The growth in the international
business sector in India is more than 7% annually. There is scope for more
improvement if only the relations with the neighboring countries are
stabilized. The mind-blowing performance of the stock market in India has
gathered all the more attention. India definitely stands as an opportune place
to explore business possibilities, with its high-skilled manpower and budding
middle class segment.

With the diverse cultural setup, it is advisable not to formulate a uniform

business strategy in India. Different parts of the country are well-known for
its different traits. The eastern part of India is known as the 'Land of the
intellectuals', whereas the southern part is known for its 'technology
acumen'.

On the other hand, the western part is known as the 'commercial-capital of

the country', with the northern part being the hub of political power'. With
such diversities in all the four segments of the country, international
business opportunity in India is surely huge.

Sectors having potential for International business in India: Information

Technology and Electronics Hardware. Telecommunication. Pharmaceuticals
and Biotechnology. R&D. Banking, Financial Institutions and Insurance &
Pensions. Capital Market. Chemicals and Hydrocarbons. Infrastructure.
Agriculture and Food Processing. Retailing. Logistics. Manufacturing. Power
and Non-conventional Energy. Sectors like Health, Education, Housing,
Resource Conservation & Management Group, Water Resources,
Environment, Rural Development, Small and Medium Enterprises (SME) and
Urban Development are still not tapped properly and thus the huge scope
should be exploited.

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To foster the international business scenario in India, bodies like CII, FICCI
and the various Chambers of Commerce, have a host of services like:

These bodies work closely with the Government and the different
business promotion organizations to infuse more business
development in India.
They help to build strong relationships with the different international
business organizations and the multinational corporations.
These bodies help to identify the bilateral business co-operation
potential and thereafter make apt policy recommendations to the
different overseas Governments.
With opportunities huge, the International Business trend in India is
mind boggling. India International Business community along with the
domestic business community is striving towards a steady path to be
the Knowledge Capital of the world.

It was evident till a few years back that India had a marginal role in the
international affairs. The image was not bright enough to be the cynosure
among the shining stars. The credit rating agencies had radically brought
down the country's ratings. But, as of now, after liberalization process and
the concept of an open economy - international business in India grew
manifold. Future definitely has more to offer to the entire world.

Advantages and Disadvantages of International

Business
Though international businesses are most important for a countrys economy
but there are some advantages and disadvantages of international business
which are described in detail below:

Following are the advantages of international business:

1. Earning valuable foreign currency: A country is able to earn

valuable foreign currency by exporting its goods to other countries.

2. Division of labor: International business leads to specialization in the

production of goods. Thus, quality goods for which it has maximum
advantage.

3. Optimum utilization of available resources: International business

reduces waste of national resources. It helps each country to make

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 optimum use of its natural resources. Every country produces those
goods for which it has maximum advantage.

4. Increase in the standard of living of people: Sale of surplus

production of one country to another country leads to increase in the
incomes and savings of the people of the former country. This raises
the standard of living of the people of the exporting country.

5. Benefits to consumers: Consumers are also benefited from

international business. A variety of goods of better quality is available
to them at reasonable prices. Hence, consumers of importing countries
are benefited as they have a good scope of choice of products.

6. Encouragement to industrialization: Exchange of technological

know-how enables underdeveloped and developing countries to
establish new industries with the assistance of foreign aid. Thus,
international business helps in the development of industry.

7. International peace and harmony: International business removes

rivalry between different countries and promotes international peace
and harmony. It creates dependence on each other, improves mutual
confidence and good faith.

8. Cultural development: International business fosters exchange of

culture and ideas between countries having greater diversities. A
better way of life, dress, food, etc. can be adopted form other
countries.

9. Economies of large-scale production: International business leads

to production on a large scale because of extensive demand. All the
countries of the world can obtain the advantages of large-scale
production.

10. Stability in prices of products: International business irons out

wide fluctuations in the prices of products. It leads to stabilization of
prices of products throughout the world.

11. Widening the market for products: International business

widens the market for products all over the world. With the increase in
the scale of operation, the profit of the business increases.

12. Advantageous in emergencies: International business

enables us to face emergencies. In case of natural calamity, goods can
be imported to meet necessaries.

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 13. Creating employment opportunities: International business
boosts employment opportunities in an export-oriented market. It
raises the standard of living of the countries dealing international
business.

14. Increase in Government revenue: The Government imposes

import and export duties for this trade. Thus, Government is able to
earn a great deal of revenue from international business.

15. Other advantages:

Effective business education

Improvement in production systems.

Elimination of monopolies, etc.

Disadvantages of international business are as follows:

1. Adverse effects on economy: One country affects the economy of

another country through international business. Moreover, large-scale
exports discourage the industrial development of importing country.
Consequently, the economy of the importing country suffers.

2. Competition with developed countries: Developing countries are

unable to compete with developed countries. It hampers the growth
and development of developing countries, unless international
business is controlled.

3. Rivalry among nations: Intense competition and eagerness to export

more commodities may lead rivalry among nations. As a consequence,
international peace may be hampered.

4. Colonization: Sometimes, the importing country is reduced to a

colony due to economic and political dependence and industrial
backwardness.

5. Exploitation: International business leads to exploitation of

developing countries by the developed countries. The prosperous and
dominant countries regulate the economy poor nations.

6. Legal problems: Varied laws regulations and customs formalities

followed different countries, have a direct b earring on their export and
import trade.

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7. Publicity of undesirable fashions: Cultural values and heritages are
not identical in all the countries. There are many aspects, which may
not be suitable for our atmosphere, culture, tradition, etc. This,
indecency is often found to be created in the name of cultural
exchange

8. Language problems: Different languages in different countries create

barriers to establish trade relations between various countries.

9. Dumping policy: Developed countries often sell their products to

developing countries below the cost of production. As a result,
industries in developing countries often close down.

10 Complicated technical procedure: International business in highly

technical and it has complicated procedure. It involves various uses of
important documents. It requires expert services to cope with complicated
procedures at different stages.

11. Shortage of goods in the exporting country: Sometimes, traders

prefer to sell their goods to other countries in state of in their own country
in order to earn more profits. This results in the shortage of goods within
the home country.

12. Adverse effects on home industry: International business poses a

threat to the survival of infant and nascent industries. Due to foreign
competition and unrestricted imports upcoming industries in the home
country may collapse.

13. Huge foreign debts: The developing countries with less purchasing
power are buried into a debt due to the operations of MNCs in this
country.

14. Exchange instability: Currencies of countries are depreciated due to

the imbalances in the balance of payment, political instability and foreign
debtness.

15. High cost: Internationalising the business involves high cost of

market survey, product improvement, quality up gradation, managerial
efficiency.

Difference between Domestic and international Business

Differences between Domestic and international Business are as follows:

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S. International Business Domestic Business
No

1. It is extension of Domestic The Domestic Business Follow

Business and Marketing the same marketing
Principles do not remain Principles
same.

2. Difference in customs, No such difference. In large

cultural factors countries like India, we have
many languages.

3. Conduct and selling Selling Procedures remain

procedure changes unaltered

4. Working environment and No such changes are

management practices necessary
change to suit local
conditions.

5. Will have to face restrictions These have little or no impact

in trade practices, licenses on Domestic trade.
and government rules.

6. Long Distances and hence Short Distances, quick

more transaction time. business is possible.

7. Currency, interest rates, Currency, interest rates,

taxation, inflation and taxation, inflation and
economy have impact on economy have little or no
trade. impact on Domestic Trade.

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 8. MNCs have set principles, No such experience or
procedures and practices at exposure.
international level

9. MNCs take advantage of No such advantage once

location economies wherever plant is built it cannot be
cheaper resources available. easily shifted.

10. Large companies enjoy It is possible to get this

benefits of experience curve benefit through collaborators.

11. High Volume cost advantage. Cost Advantage by

automation, new methods
etc.

12. Global Standardization No such advantage

13. Global business seeks to No such advantage

create new values and global
brand image.

14. Can Shift production bases to No such advantage and get

different countries whenever competition from some
there are problems in taxes spurious or SSI Unit who get
or markets patronage of Government.

Internationalization ProcessStages in International Business

Most companies pass through different stages of international business. The

following are the stages through which a company passes:

Domestic Company
International Company

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 Multinational Company
Global or Transnational Company

Domestic Company

A purely domestic company operates domestically because it never

considers the alternative of going international. It limits its operations,
mission and vision to the national boundaries of the country. It focuses on
domestic market opportunities, domestic suppliers, domestic agents,
domestic customers etc. The growing stage-one company, when it reaches
growth limits in its primary market, diversifies into new markets, products &
technologies instead of focusing on penetrating international markets.
However, if factors like domestic market constraints, foreign market
prospects, increasing competition etc., make the company reorient its
strategies to top foreign market potential, it would be moving to the next
stage in the evolution.

A domestic company may extend (expand, enlarge increase) by exporting,

licensing and franchising. The company may develop a more serious
attribute towards foreign business and move to the next stage of
development i.e., international company.

International Company

An international company is normally the second stage in the development

of a company towards the transnational corporation. The marketing mix
developed for the home market is extended into foreign markets.

They grow beyond their production and marketing capacities, think of

internationalizing their business. These companies remain ethnocentric..
Their focus is domestic but extend their wings to foreign market.

Multinational Company

When a company decides to respond to market differences, it evolves into a

stage-three, multinational that pursues a multi-domestic strategy. The focus

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of the stage-three company is multinational, or in strategic terms, multi-
domestic (i.e. the company formulates a unique strategy for each country in
which it conducts business). In multinational companies, each foreign
subsidiary is managed as if it were an independent city state. The
subsidiaries are part of an area structure in which each country is part of a
regional organization that reports to world headquarters.

The international companies turn into multinational when they start

responding to the specific needs of different country markets regarding
product, price and promotion. The company becomes polycentric. The
subsidiaries of the company work like domestic company in each country
where they operate with distinct policies and strategies suitable to the
country concerned.

Global/Transnational Company

According to Keegan, a global company represents stage-four and a

transnational company stage-five, in the evolution of companies. However,
several people use these terms as synonyms and by global corporation they
refer to the final stage in development of the corporation. According to
Keegan, The global company will have either a global marketing strategy or
a global sourcing strategy but not both. It will either focus on a global
markets and source from the home or a single country to supply these
markets, or it will focus on the domestic market & source from the world to
supply its domestic channels. However, all strategies i.e. product
development, production (including sourcing), marketing, etc., will be global
with respect to the global corporation.

The international company is much more than a company with sales,

investments and operations in many countries. This company, which is
increasingly dominating markets and industries around the world, is an
integrated world enterprise that links global resources with global markets at
a profit. This is the company that thinks globally and acts locally. It adopts a
global strategy allowing it to minimize adaption in countries to that which will
actually add value to the country customer.

International business approaches

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1. Ethnocentric. The home country practice prevails with this approach.
Headquarters from the home country makes key decisions, employees from
the home country hold important jobs, and the subsidiaries follow the home
country resource management practice.

2. Polycentric. Each subsidiary manages on a local basis. A local employee

heads a subsidiary because headquarters managers are not considered to
have adequate local knowledge. Subsidiaries usually develop human
resource management practices locally.

3. Geocentric or global. The company that applies the global integrated

business strategy manages and staffs employees on a global basis. For
example, Electrolux (the vacuum cleaner company) has for many years
attempted to recruit and develop a group of international managers from
diverse countries. These people constitute a mobile base of managers who
are used in a variety of facilities as the need arises.

4. Regiocentric: The Company after operating in a foreign country, exports

to neighbouring countries of the host country. Policies and procedures are
based on regional environment. It markets more or less the same product
with different marketing strategy.

Types of IB
Trading
Manufacturing & Marketing
Assemble operations
Out sourcing
Foreign Market entry modes like licensing, Turnkey projects, Joint
venture, Merger etc.

Trading

Trading is import of goods and services from one country and export to
another country. Trading can be done by different modes like:

Direct export: The goods are directly sold by the exporter to the importer in
the other country.

Indirect export: The manufacturer sells the good to the middleman who
further sells the goods to the other country.

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Import: The goods are purchased by the host country from the foreign
country.

Barter trade: In barter trade goods are exchanged for goods.

Third party trading: Three parties are involved in third party trading. The
manufacturer, buyer and seller.

Manufacturing and marketing

The manufacture exporters are those who manufacture the goods and sell
the same. It involves contract manufacturing and fully owned manufacturing.

Assembly operations

The assembly of products in foreign market is very advantageous as import

duty on components is quite low and the initial investment is also less.

Outsourcing

It involves outsourcing the work from other countries. It started with IT

companies. There are many KPO and BPO performing these works.

Foreign market entry modes

There are various modes of entering the foreign market like licensing, import,
export, contract manufacturing, Turnkey projects, mergers etc.

Risk in IB

Cultural risk
Strategic risk
Property risk
Country risk
Financial risk
Credit risk
Marine risk
Environmental risk
Operational risk
Regulatory risk
Economic risk
Political risk
Technological risk
Currency risk

International business environment

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The international business environment can be defined as the environment
in different sovereign countries, with factors exogenous to the home
environment of the organization that influences decision-making on resource
use and capabilities.

Environment poses threats as well as opportunities to the business. The

business should increase its strengths to make the most from opportunities.
The international business environment means the factors that influence
MNCs or Transactional companies. The environment can be divided into
External and Internal environment.

The internal environment includes organization structure, production,

Finance, Marketing, Human resource, R&D.

The external environment can be further divided into Micro

environment and Macro environment. Micro environment includes
shareholders, creditors, employees, customers etc. And Macro environment
includes:

Economic Environment
Political environment
Cultural Environment
Technological Environment
Financial environment
Legal environment

International Economic Environment

It includes the level of development of economy, economic policies,

economic conditions, domestic demand and domestic supply. The various
economic factors which affect the business are:

Nature of Economy: The economy can be classified on the basis of per

capita income as low income countries, Middle income countries and
High income countries.
Economic Policies: Economic policies like industrial policy, Trade policy,
Foreign exchange policy, Fiscal policy, monetary policy have an impact
on the business.
Economic system: There are 3 types of Economic systems: Capitalist
economic system, mixed economic system and communist economic
system. In capitalist economies the customers choice/preference
dominates the production of goods. In Mixed economy the factors of
production are owned by the state and those goods are produced
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 which benefit the public. In communist economy, all the factors of
production are held by the state.

International Technical Environment: Technology is the application of

knowledge. Technology changes at a very fast pace. The technical
environment of the country has an impact on the business as:

Technology and Economic Development: Different countries have

different level of technology. Developing counties welcome MNCs to
have benefit of latest technology.
Technology and Investment: Developed countries spend considerably
more amount on the Research and Development compared to
Developing countries. This makes developed countries technically
strong.
Appropriate technology: Technology that suits one country might not
be suitable for another. Thus, the counties adopt the technology which
suits their climatic condition, soil condition, infrastructure etc.
Transfer of Technology: International business is helping to transfer the
technology from advanced countries to developing countries.
Information technology and International business: The IT has almost
revolutionalized global business. The use of e mail, internet, websites
and computer aided designs has raised the standards of business.

International Financial Environment

The International financial environment includes factors like currency

convertibility, International monetary system, International financial markets
and International monetary market.

The International financial institutions help to raise finance for foreign

investment projects. The institutes like IMF, ADB, WB and IFC provide loans in
international markets. The international monetary stem helps to maintain
currency discipline. It also helps to determine the value of currencies.

International Legal Environment

Laws have direct or indirect on the business in the country. Every country has
its own set of laws like civil laws, contract laws, common laws, Environment
laws, Health standards, Tariffs etc. The product standard, disclosure on the
product, Packaging, Labelling, Promotion tools depend on the legal system of
the country.

Global trading Systems

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International trade is the exchange of capital, goods, and services across
international borders or territories, which could involve the activities of the
government and individual. In most countries, such trade represents a
significant share of gross domestic product (GDP).

Global trade, also known as international trade, is the import and export of
goods and services across international boundaries.
Goods and services that enter into a country for sale are called imports.
Goods and services that leave a country for sale in another country are
called exports. For example, a country may import wheat because it doesn't
have much arable land, but export oil because it has oil in abundance.
A fundamental concept underlying global trade is the concept of
comparative advantage, developed by David Ricardo in the 19th century.
In a nutshell, the doctrine of comparative advantage states that a country
can produce some goods or services more cheaply than other countries. In
technical terms, the country is able to produce a specific good or service at a
lower opportunity cost than others.
There are two important global trading systems:
Protective trade system
Free trade system

Protective Trade system

Protective Trade system restricts the people to import or export goods

without prior approval of the government. It refers to policies framed by the
government to protect domestic industry from foreign competition. The
instruments of protection are:

Tariffs
Subsidies
Import Quotas
Voluntary Export Restraints
Administrative policies

Tariff refers to the tax imposed on the imports. The purpose of tariff is to
protect the domestic industry by increasing the cost of imported goods.

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A subsidy is a direct payment made by the government to the company in
order to make it more competitive nationally and internationally. It can be in
the form of tax benefits, R&D support, interest free loans etc.

A quota is a quantitative restriction imposed on imports and exports. It

specifies the amount of quantity that could be imported and exported. The
restriction can be enforced by providing license. Import quota can be global
quota, Allocated quota, Unilateral quota or Bilateral quota.

Voluntary export restraints is also a quota where the exporting nation

after consultation with the importing nation, voluntarily fixes the quota
regarding the maximum amount of quantity which it will be exporting to the
concerned nations. Through this the countries restraint the quantity of goods
that can be imported or exported.

Administrative policies are the rules to be followed with the objective of

discouraging exports. These include monetary policies, Environment
protection laws, Foreign Exchange Regulation, Custom and entry procedure
and diplomatic formalities.

Objectives of Protection
To protect domestic industry from foreign competitors.
To give shape to the directions of global trade.
To promote R&D.
To conserve the foreign exchange resources of the country.
To make balance of payment position favorable.
To earn revenue to the government
To discriminate among certain countries.

There are various arguments that favour this trading

system:
Infant industry argument
Diversification argument
Terms of trade argument
Bargaining Argument
Anti-dumping argument
Employment argument

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 Balance of payment argument
National security argument
Pauper labour Argument
Retaliation Argument

Free Trade system

Free trade is the unrestricted purchase and sale of goods and services between countries
without the imposition of constraints such as tariffs, duties and quotas. Free trade is a win-
win proposition because it enables nations to focus on their core competitive advantage(s),
thereby maximizing economic output and fostering income growth for their citizens.

There are various arguments that favour this trading system:

Optimum utilisation of resources

Wide markets
Prevent monopolies
Optimisation of consumption
Educative value
Maximisation of output
Best policy for economy development

Economic Integration

Preferential Trade Agreement (PTA)

A preferential trade agreement is perhaps the weakest form of economic integration. In a PTA
countries would offer tariff reductions. This type of trade agreement is not allowed among WTO
members who are obligated to grant most-favored nation status to all other WTO members.
Under the most-favored nation (MFN) rule countries agree not to discriminate against other
WTO member countries. Thus, if a country's low tariff on bicycle imports, for example, is 5%,
then it must charge 5% on imports from all other WTO members. Discrimination or preferential
treatment for some countries is not allowed. The country is free to charge a higher tariff on
imports from non-WTO members, however. In 1998 the US proposed legislation to eliminate
tariffs on imports from the nations in sub-Sahara Africa. This action represents a unilateral
preferential trade agreement since tariffs would be reduced in one direction but not the other.

Free Trade Area (FTA)

A free trade area occurs when a group of countries agree to eliminate tariffs
between themselves, but maintain their own external tariff on imports from
the rest of the world. The North American Free Trade Area is an example of a
FTA. When the NAFTA is fully implemented, tariffs of automobile imports
21
between the US and Mexico will be zero. However, Mexico may continue to
set a different tariff than the US on auto imports from non-NAFTA countries.

Customs Union

A customs union occurs when a group of countries agree to eliminate tariffs between themselves
and set a common external tariff on imports from the rest of the world. The European Union
represents such an arrangement. A customs union avoids the problem of developing complicated
rules of origin, but introduces the problem of policy coordination. With a customs union, all
member countries must be able to agree on tariff rates across many different import industries.

Common Market

A common market establishes free trade in goods and services sets common external tariffs
among members and also allows for the free mobility of capital and labor across countries. All
the member countries abolish all the trade restrictions among themselves and also adopt uniform
commercial policy of barriers and restrictions with non members.

The European Union was established as a common market by the Treaty of Rome in 1957. EU
citizens have a common passport, can work in any EU member country and can invest
throughout the union without restriction.

Economic Union

An economic union maintains free trade in goods and services, set common external tariffs
among members, allow the free mobility of capital and labor, and also adopt uniform monetary
and fiscal policy among themselves. The European Union's Common Agriculture Policy (CAP)
is an example of a type of fiscal coordination indicative of an economic union.

Monetary Union

Monetary union establishes a common currency among a group of countries. This involves the
formation of a central monetary authority which will determine monetary policy for the entire
group. The Maastricht treaty signed by EU members in 1991 proposed the implementation of a
single European currency (the Euro) by 1999.

Trade Blocks
A trade bloc is a type of intergovernmental agreement, often part of a
regional intergovernmental organization, where regional barriers to trade,
(tariffs and non-tariff barriers) are reduced or eliminated among the
participating states.

European Union

22
The European Union is an economic and political union of 28 countries. Each
of the countries within the Union are independent but they agree to trade
under the agreements made between the nations.

The 28 countries within the European Union include Austria, Belgium,

Bulgaria, Croatia, the Republic of Cyprus, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia,
Slovenia, Spain, Sweden and the United Kingdom.

The European Union (EU) is a political community constituted as

an international organization whose aim is to promote integration and
a common government of the European people and countries.
According to the Article 3 of the European Union Treaty, Unions aim is to
promote peace, its values and the well-being of its peoples. It is based on the
values of freedom, democracy, equality, law enforcement and respect
for human rights and dignity.

The elected governments of the member countries together created a

currency EURO. Twelve member countries are participating in single
currency.

The Unions mission:

Establishing an area of freedom, security and justice without internal
borders.
Developing an internal market where competition is free, within the
framework of a social economy market whose aim is full employment.

Creating a sustainable development with an economic growth capable of

fulfilling the well-being needs of our society in the short, medium
and, especially, long term.
Promoting scientific and technical progress.
Fighting against social exclusion and discrimination. Promoting social
justice and protection, equality between women and men, solidarity between
generations and, protection of childrens rights.
Promoting economic, social and territorial cohesion and solidarity
among Member States.

It also aims at formulation of common policies for agriculture, common

commercial policy for non-members, elimination of import and export tariff
among member nations.

23
Also, the European Union aims to respect its cultural richness and
linguistic diversity (23 official languages) and, to ensure the conservation
and development of European cultural heritage.

NAFTA
The North American Free Trade Agreement (NAFTA), came into effect on
January 1, 1994, creating the largest free trade region in the world,
generating economic growth and helping to raise the standard of living for
the people of all three member countries i. e Canada, Mexico and USA. By
strengthening the rules and procedures governing trade and investment, the
NAFTA has proved to be a solid foundation for building Canadas prosperity
and has set a valuable example of the benefits of trade liberalization for the
rest of the world.

Objectives of NAFTA:

To create new business opportunities particularly in MEXICO.

To increase the competitive advantage of the companies operating in
USA, Canada and Mexico.
To reduce the prices of products and services by increasing
competition.
To enhance industrial development
To provide stable environment for investors.
To create employment opportunities.
To assist Mexico in earning foreign exchange.
To improve relationship among member countries.
To enhance industrial development.

The main objectives of the North American Free Trade Agreement, or NAFTA,
include removal of barriers to trade, enhancement of fair competition, to
open up more opportunities, provision of security, to easily solve disputes
and to explore new ways of co-operation.

ASEAN
The Association of Southeast Asian Nations (ASEAN) was formed in 1967 by
Indonesia, Malaysia, the Philippines, Singapore, and Thailand to promote
political and economic cooperation and regional stability. Brunei joined in
1984, shortly after its independence from the United Kingdom, and Vietnam
joined ASEAN as its seventh member in 1995. Laos and Burma were

24
admitted into full membership in July 1997 as ASEAN celebrated its 30th
anniversary. Cambodia became ASEANs tenth member in 1999.
The ASEAN Community is comprised of three pillars, the Political-Security
Community, Economic Community and Socio-Cultural Community. Each pillar
has its own Blueprint approved at the summit level, and, together with the
Initiative for ASEAN Integration (IAI) Strategic Framework and IAI Work Plan
Phase II (2009-2015), they form the Roadmap for and ASEAN Community
2009-2015.
ASEAN commands far greater influence on Asia-Pacific trade, political, and
security issues than its members could achieve individually. This has driven
ASEANs community building efforts. This work is based largely on
consultation, consensus, and cooperation.
U.S. relations with ASEAN have been excellent since its inception. The United
States became a Dialogue Partner country of ASEAN in 1977. Dialogue
partners meet regularly with ASEAN at the working and senior levels to guide
the development of our regional relations.
The ASEAN countries are rich in oil, mineral resource, agricultural goods,
Human resource and these countries invite free flow of foreign capital.
SAARC
The South Asian Association for Regional Cooperation (SAARC) is an
economic and geopolitical organisation of eight countries that are primarily
located in South Asia or the Indian subcontinent. The SAARC Secretariat is
based in Kathmandu, Nepal. The combined economy of SAARC is the third
largest in the world in the terms of GDP (PPP) after the United States and
China and fifth largest in the terms of nominal GDP.

The SAARC seeks to promote the welfare of the peoples of South Asia,
strengthen collective self-reliance, promote active collaboration and mutual
assistance in various fields, and cooperate with international and regional
organizations.

The main objectives of SAARC are:

To improve the quality life of member nations.

To develop the region economically, socially and culturally.
To provide opportunities to people to live in dignity.
To enhance self-reliance of member countries.
To enhance mutual assistance among member nations in areas of
economic, social cultural, scientific, cultural and technical fields.
To promote unity among member nations.

25
 To enhance cooperation with other member countries.

APEC

Asia-Pacific Economic Cooperation, or APEC, is the premier forum for

facilitating economic growth, cooperation, trade and investment in the Asia-
Pacific region. APEC's 21 Member Economies are the United States; Australia;
Brunei Darussalam; Canada; Chile; China; Hong Kong, China; Indonesia;
Japan; Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; The
Philippines; Russia; Singapore; Republic of Korea; Chinese Taipei; Thailand;
and Viet Nam.
The Asia-Pacific Economic Cooperation (APEC) is a regional economic forum
established in 1989 to leverage the growing interdependence of the Asia-
Pacific. APEC's 21 members aim to create greater prosperity for the people of
the region by promoting balanced, inclusive, sustainable, innovative and
secure growth and by accelerating regional economic integration.
Objectives of APEC Are:
To eliminate tariff among member nations.
To abolish trade restrictions regarding imports and exports of goods
among member nation.
To enhance economic development, employment, income and living
standards of the people of the member countries.

To enable free trade in Western Europe.

EFTA
The European Free Trade Association (EFTA) is an intergovernmental
organisation set up for the promotion of free trade and economic integration
to the benefit of its four Member States.

EFTA was founded in 1960 on the premise of free trade as a means of

achieving growth and prosperity amongst its Member States as well as
promoting closer economic cooperation between the Western European

26
countries. The member countries are: Austria, Norway, Portugal, Sweden,
Switzerland. Furthermore, the EFTA countries wished to contribute to the
expansion of trade globally.

Its objectives are:

To eliminate tariff among member nations.

To abolish trade restraints among member nations.
To improve standard of living of people of member countries.
To encourage tax free trade.

Global Financing System

The finance in the international business is available from 2 sources:

1. Official Sources
Word Bank
IFC
IDA
MIGA
IMF
ADB
UNCTAD
EXIM Bank

2. Non official sources:

International Banks
Securities Market

WTO
Its main function is to ensure that trade flows as smoothly, predictably and
freely as possible.

Organisational structure of WTO

The organisational structure of the WTO is very organized.

The Ministerial Conference (MC) is at the top of the structural organisation of

the WTO. It is the supreme governing body which takes ultimate decisions on

all matters. It is constituted by representatives of all the member countries.

27
The General Council (GC) is composed of the representatives of all the

members. It is the real engine of the WTO which acts on behalf of the MC. It

also acts as the Dispute Settlement Body as well as the Trade Policy Review

Body.

There are three councils, viz.: the Council for Trade in Services and the

Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS)

operating under the GC. These councils with their subsidiary bodies carry out

their specific responsibilities

Further, there are three committees, viz., the Committee on Trade and

Development (CTD), the Committee on Balance of Payments Restrictions

(CBOPR), and the Committee on Budget, Finance and Administration (CF A)

which execute the functions assigned to them by WTO Agreement and the

GC.

28
The administration of the WTO is conducted by the Secretariat which is

headed by the Director General appointed by the MC for the tenure of four

years. He is assisted by the four Deputy Directors from different member

countries. The annual budget estimates and financial statement of the WTO

are presented by the DG to the CBFA for review and recommendations for

the final approval by the GC.

Functions of WTO

29
The former GATT was not really an organisation; it was merely a legal
arrangement. On the other hand, the WTO is a new international organisation
set up as a permanent body. It is designed to play the role of a watchdog in
the spheres of trade in goods, trade in services, foreign investment,
intellectual property rights, etc.

(i) The WTO shall facilitate the implementation, administration and operation
and further the objectives of this Agreement and of the Multilateral Trade
Agreements, and shall also provide the frame work for the implementation,
administration and operation of the plurilateral Trade Agreements.

(ii) The WTO shall 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.

(iii) The WTO shall administer the Understanding on Rules and Procedures
Governing the Settlement of Disputes.

(iv) The WTO shall administer Trade Policy Review Mechanism.

Objectives of WTO

Important objectives of WTO are mentioned below:

(i) to implement the new world trade system as visualised in the Agreement;

(ii) to promote World Trade in a manner that benefits every country;

(iii) to ensure that developing countries secure a better balance in the

sharing of the advantages resulting from the expansion of international trade
corresponding to their developmental needs;

(iv) to demolish all hurdles to an open world trading system and usher in
international economic renaissance because the world trade is an effective
instrument to foster economic growth;

(v) to enhance competitiveness among all trading partners so as to benefit

consumers and help in global integration;

(vi) to increase the level of production and productivity with a view to

ensuring level of employment in the world;

(vii) to expand and utilize world resources to the best;

(viii) to improve the level of living for the global population and speed up
economic development of the member nations.

30
Differences between the GATT and the WTO

i. The GATT was provisional. Its contracting parties never ratified the General

Agreement, and it contained no provisions for the creation of an

organisation.

ii. The WTO and its agreements are permanent. As an international

organisation, the WTO has a sound legal basis because all members have

ratified the WTO Agreements, and the agreements themselves describe how

the WTO is to function.

iii. The WTO has members. GATT had contracting parties, underscoring

the fact that officially the GATT was a legal text.

iv. The GATT dealt with trade in goods. The WTO deals with trade in services

and intellectual property as well.

v. The WTO dispute settlement system is faster and more automatic than the

old GATT system. Its rulings cannot be blocked.

vii. The WTO has introduced a trade policy review mechanism that increases

the transparency of members trade policies and practices.

WTO Agreements

The agreements establishing the WTO consists of the following which

embody the results of the Uruguay round of the multilateral trade
negotiations.

1. Multilateral agreement on trade in goods.

2. General agreement on trade in services.
3. Agreement on trade related aspects of intellectual property rights.
4. Understanding on rules and procedures governing the settlement of
disputes.

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 5. Plurilateral trade agreements.
6. Trade policy review mechanism.

World Bank

The International Bank for Reconstruction and Development (IBRD),

commonly referred to as the World Bank, is an international financial

institution whose purposes include assisting the development of its member

nations territories, promoting and supplementing private foreign investment

and promoting long-range balance growth in international trade.

The World Bank was established in December 1945 at the United Nations

Monetary and Financial Conference in Bretton Woods, New Hampshire. It

opened for business in June 1946 and helped in the reconstruction of nations

devastated by World War II. Since 1960s the World Bank has shifted its focus

from the advanced industrialized nations to developing third-world countries.

Organization and Structure:

The organization of the bank consists of the Board of Governors, the Board of

Executive Directors and the Advisory Committee, the Loan Committee and

the president and other staff members. All the powers of the bank are vested

in the Board of Governors which the supreme policy is making body of the

bank.

The board consists of one Governor and one Alternative Governor appointed

for five years by each member country. Each Governor has the voting power

which is related to the financial contribution of the Government which he

represents.

32
The Board of Executive Directors consists of 21 members, 6 of them are

appointed by the six largest shareholders, namely the USA, the UK, West

Germany, France, Japan and India. The rest of the 15 members are elected

by the remaining countries.

Each Executive Director holds voting power in proportion to the shares held

by his Government. The board of Executive Directors meets regularly once a

month to carry on the routine working of the bank.

The president of the bank is pointed by the Board of Executive Directors. He

is the Chief Executive of the Bank and he is responsible for the conduct of

the day-to-day business of the bank. The Advisory committees appointed by

the Board of Directors.

It consists of 7 members who are expects in different branches of banking.

There is also another body known as the Loan Committee. This committee is

consulted by the bank before any loan is extended to a member country.

Capital Resources of World Bank:

The initial authorized capital of the World Bank was $ 10,000 million, which
was divided in 1 lakh shares of $ 1 lakh each. The authorized capital of the

Bank has been increased from time to time with the approval of member

countries.

On June 30, 1996, the authorized capital of the Bank was $ 188 billion out of

which $ 180.6 billion (96% of total authorized capital) was issued to member

countries in the form of shares.

33
Member countries repay the share amount to the World Bank in the

following ways:

1. 2% of allotted share are repaid in gold, US dollar or Special Drawing Rights

(SDR).

2. Every member country is free to repay 18% of its capital share in its own

currency.

3. The remaining 80% share deposited by the member country only on

demand by the World Bank.

Objectives:

The following objectives are assigned by the World Bank:

1. To provide long-run capital to member countries for economic

reconstruction and development.

2. To induce long-run capital investment for assuring Balance of Payments

(BoP) equilibrium and balanced development of international trade.

3. To provide guarantee for loans granted to small and large units and other

projects of member countries.

4. To ensure the implementation of development projects so as to bring

about a smooth transference from a war-time to peace economy.

5. To promote capital investment in member countries by the following ways;

(a) To provide guarantee on private loans or capital investment.

34
(b) If private capital is not available even after providing guarantee, then

IBRD provides loans for productive activities on considerate conditions.

6. With a view to achieving greater coherence in global economic policy

making, the WTO shall cooperate, as appropriate, with the international
Monetary Fund (IMF) and with the International Bank for Reconstruction and
Development (IBRD) and its affiliated agencies.

7. To arrange loans or guarantees by it in relation to international loans

through other channels so that more useful and urgent small and large
projects are dealt with first.

8. To promote private foreign investment by means of guarantee on

participation in loans and other investment made by private investors.

Functions:

World Bank is playing main role of providing loans for development works to

member countries, especially to underdeveloped countries. The World Bank

provides long-term loans for various development projects of 5 to 20 years

duration.

1. World Bank provides various technical services to the member countries.

For this purpose, the Bank has established The Economic Development

Institute and a Staff College in Washington.

2. Bank can grant loans to a member country up to 20% of its share in the

paid-up capital.

3. The quantities of loans, interest rate and terms and conditions are

determined by the Bank itself.

35
4. Generally, Bank grants loans for a particular project duly submitted to the

Bank by the member country.

5. The debtor nation has to repay either in reserve currencies or in the

currency in which the loan was sanctioned.

6. Bank also provides loan to private investors belonging to member

countries on its own guarantee, but for this loan private investors have to

seek prior permission from those counties where this amount will be

collected.

IFC

The International Finance Corporation was established in July 1956, with the

specific subject of providing finance to the private sector.

Though it is affiliated to the World Bank, it is a separate legal entity with

separate fund and functions. Members of the World Bank are eligible for its

membership.

Objectives:

IFCs objective is to assist economic development by encouraging the growth

of productive private enterprise in its member nations, particularly in the

underdeveloped areas.

1. To invest in productive private enterprises, in association with private

investors, and without government guarantee of repayment, in cases where

sufficient private capital is not available on reasonable terms.

36
2. To serve as a clearing house to bring together investment opportunities,

private capital (both foreign and domestic) and experienced management.

3. To help in stimulating the productive investment of private capital, both

domestic and foreign.

IFC provides financial assistance to large, medium and small scale private

sector industries of the member countries.

IFC directly invests through equity in companies in developing

countries. The investment should not be more than 505 of the total

paid up capital of the company.

IFC provides foreign capital and loan capital to the private industry in

the form of loans.

It even provides technical assistance to the industries in developing

countries.
It helps small scale enterprises in preparing project reports.

IDA

The International Development Association (IDA) was established in 1960,

affiliated to the World Bank.

It was started to provide finance to less developed members on a soft loan

basis, that is, on terms imposing a lower servicing charge on loans than what

the conventional bank charges.

Objectives:

37
1. To provide development finance on easy terms to less developed member

countries.

2. To promote economic development, increase productivity and thus, raise

the standards of living in the underdeveloped areas.

3. To encourage free flow of foreign investment into less developed

countries.

4. To provide promotional and Advisory services.

5. To establish credibility among investors.

6. To provide insurance cover to investors against political risk.

FUNCTIONS OF IDA:

1. To provide long term credit to poor countries at soft terms.

2. To co-ordinate with IBRD in co-financing.

3. To create supplementary source of capital for member countries.

4. To increase the productivity.

5. To promote economic growth of member developing countries.

IMF

A landmark in the history of world economic cooperation is the creation of

the International Monetary Fund, called IMF. The IMF was organised in 1946

and commenced operations in March, 1947.

The fundamental object of the IMF was the avoidance of competitive

devaluation and exchange control that had characterised the era of 1930s. It

38
was set up to administer a code of fair practice, in the field of foreign

exchange and to make short-term loans to member nations experiencing

temporary deficits in their balance of payments, to enable them to meet

these payments without resorting to devaluation or exchange control, while

at the same time following international policies to maintain domestic

income and employment at high levels.

General objectives of the IMF:

(i) The elimination or reduction of existing exchange controls,

(ii) The establishment and maintenance of currency convertibility with stable

exchange rates, and

(iii) The widest extension of multi-lateral trade and payments.

(iv) To avoid the competitive devaluation and exchange control.

In essence the Fund is an attempt to achieve the external or international

advantages of gold standard system without subjecting nations to its internal

disadvantages, and at the same time maintaining the internal advantages of

paper standard while bypassing its external disadvantages.

The following are the major functions of the IMF:

1. It functions as a short-term credit institution.

2. It provides machinery for the orderly adjustments of exchange rates.

3. It is a reservoir of the currencies of all the member countries from which a

borrower nation can borrow the currency of other nations.

39
4. It is a sort of lending institution in foreign exchange. However, it grants

loans for financing current transactions only and not capital transactions.

5. It also provides machinery for altering sometimes the par value of the

currency of a member country. In this way, it tries to provide for an orderly

adjustment of exchange rates, which will improve the long-term balance of

payments position of member countries.

6. It also provides machinery for international consultations.

Organizational Structure:

The organization of the IMF has, at its top a board of governors and alternate

governors, who are usually the ministers of finance and heads of central

banks of each member country.

Because of their positions, they are able to speak authoritatively for their

countries. The entire board of governors and alternate governors meets once

a year in Washington, D.C., to formally determine IMF policies.

During the rest of the year, a twenty-four member executive board

composed of representatives or the total board of governors meets a number

of times each week to supervise the implementation of the policies adopted

by the board of governors.

The IMF staff is headed by its managing director, who is appointed by the

executive board. The managing director chairs meetings of the executive

board. The managing director chairs meetings of the executive board after

appointment.

40
Most staff members work at IMF headquarters in Washington, D.C. A small

number of staff members are assigned to offices in Geneva, Paris and Tokyo

and at the United Nations.

Surveillance and Consultations:

At least annually, a team of IMF staff members visits each member country

for two weeks. The team of four or five meets with government officials,

makes inquiries, engages in discussions and gathers information about the

countrys economic policies and their effectiveness.

If there are currency exchange restrictions, the consultation includes inquiry

as to progress toward the elimination of such, restrictions. Statistics are also

collected on such, matters as exports and imports, tax revenues and

budgetary expenditures.

The team reports the results of the visit to the IMF executive board. A

summary of the discussion is transmitted to the countrys government and

for countries agreeing to the release of the summary, to the public.

ADB

The Asian Development Bank (ADB) is a multilateral development finance

institution whose mission is to reduce poverty in the Asia Pacific region.

Although the ADB claims to operate in the interest of Asias poorest citizens,

civil society groups have long been concerned about the ADBs role in

promoting sustainable and equitable growth in the region.

41
The ADB was founded in 1966 with the goal of eradicating poverty in the

region. With over 1.9 billion people living on less than $2 a day in Asia, the

institution has a formidable challenge.

It has following functions:

i. Provides loans and equity investments to its Developing Member Countries

(DMCs)

ii. Provides technical assistance for the planning and execution of

development projects and programs and for advisory services

iii. Promotes and facilitates investment of public and private capital for

development

iv. Assists in coordinating development policies and plans of its DMCs

v. banks provide financial assistance in the form of loans.

vi. It conducts surveys and research in order to formulate policies for the

future and to promote regional economic integration.

UN Conference on Trade and Development

The United Nations Conference on Trade and Development (UNCTAD)

promotes the development-friendly integration of developing countries into

the world economy. The Organization aims to help shape current policy

debates and thinking on development, with a particular focus on ensuring

that domestic policies and international action are mutually supportive in

bringing about sustainable development. Established in 1964, UNCTAD is the

42
principal organ of the General Assembly in the field of trade and

development. UNCTAD undertakes its mandate through key functions: (i) as a

forum for intergovernmental deliberations, supported by discussions with

experts and exchanges of experience, aimed at consensus building; (ii)

undertaking research, policy analysis and data collection; and (iii) providing

technical assistance tailored to the specific requirements of developing

countries, with special attention to the needs of the least developed

countries (LDCs) and of economies in transition. (iv) To make proposal for

putting the said principles and policies into effect. (v) To formulate principles

and policies of international trade and related problems of economic

problem.

EXIM Bank

The Export-Import Bank of India was set up by the Government of India on

January 1, 1982. Its main objects are:

1. To ensure and integrated and co-ordinated approach in solving the allied

problems encountered by exporters in India.

2. To pay specific attention to the exports of capital goods;

3. Export projection;

4. To facilitate and encourage joint ventures and export of technical services

and international and merchant banking;

5. To extend buyers credit and lines of credit;

43
6. To tap domestic and foreign markets for resources for undertaking

development and financial activities in the export sector.

7. To anticipate and absorb new developments in banking, export financing

and information technology.

8. To initiate and participate in debates on issues central to Indias

international trade.

9. To develop mutually beneficial relationship with international financial

community.

The functions of Exim Bank include:

(a) Planning, promoting and developing exports and imports;

(b) Providing technical, administrative and managerial assistance for

promotion, management and expansion of exports; and

(c) Undertaking market and investment surveys and techno-economic

studies related to development of exports of goods and services.

The Exim Bank has a 17-member Board of Directors, with Chairman and

Managing Director as the chief executive and full-time director. The Board of

Directors consists of the representative of the Government of India, RBI, IDBI,

ECGC, commercial banks and the exporting community.

MIGA

The Multilateral Investment Guarantee Agency (MIGA) is an

international financial institution which offers political risk insurance and
credit enhancement guarantees. Such guarantees help investors protect

44
foreign direct investments against political and non-commercial risks in
developing countries. MIGA is a member of the World Bank Group and is
headquartered in Washington, D.C., United States. It was established in 1988
as an investment insurance facility to encourage confident investment in
developing countries. MIGA's stated mission is "to promote foreign direct
investment into developing countries to support economic growth, reduce
poverty, and improve people's lives". It targets projects that endeavor to
create new jobs, develop infrastructure, generate new tax revenues, and
take advantage of natural resources through sustainable policies and
programs

MIGA is owned and governed by its member states, but has its own
executive leadership and staff which carry out its daily operations. Its
shareholders are member governments which provide paid-in capital and
have the right to vote on its matters. It insures long-term debt and equity
investments as well as other assets and contracts with long-term periods.
The agency is assessed by the World Bank's Independent Evaluation Group .

INTERNATIONAL BANKS

The international banks are the banks which deal in currency of host country

as well as foreign currency. The various ways in which banks go international

are:

Setting up of representative offices abroad.

Establishing network of correspondent banking system.

Setting up of foreign branches.

Participation in the equity of a foreign bank.

A Acquisition of a foreign bank.

These banks perform the following functions:

Accept the deposit.

Lend the loans.

Help foreign and Indian companies enter the joint venture.

Managing data and information system by using latest technology.

45
 Help in together FII and companies in the host country.

Providing finance for power generation, telecommunication etc.

SECURITIES MARKET

Funds can be raised in the international market through sale of securities

such as international equities, Euro bonds, Medium term and short term euro

notes, Euro commercial.

There are different types of international bonds such as global bonds,

straight bonds, floating interest rate bonds .Straight bands have fixed rate of

interest. Floating rate bonds do not have fixed rate of interest. Convertible

bonds can be converted into equity.

Foreign bonds are those which are issued in the currency of the country in

which it is issued whereas the Euro bonds are issued in a currency other than

the currency of the country where bonds are issued.

BARRIERS TO INTERNATIONAL TRADE

Trade barrier is government policy or regulation that restricts international

trade. These barriers can be categorized into 2 categories:

1. Tariff barriers
Import tariff and export tariff

Protective and Revenue tariff

Specific duties

Ad Valorem duty

Combined duty

46
2. No Tariff barriers
Subsidies

Import quotas

Voluntary Export Restraints

Administrative policy

Anti-Dumping policy

Standards

UNIT 2

47
Foreign market entry modes

Companies have to decide the mode of entering the foreign market. Firms

can adopt various modes ranging from indirect export to direct investment in

manufacturing units in foreign countries. Each of these strategies requires

different level of investment and risk. The various modes of entering foreign

market are:

Exporting

Licensing

Joint venture.

Strategic alliance

Mergers and Acquisitions

Contract manufacturing

Assembly operations

Opening the branches abroad

Establishment of plants

Turnkey contracts

Exclusive agent abroad

Exporting is selling the goods from home country to the foreign country. It

allows the manufacturing operations to be concentrated in a single location,

which may lead to scale economies. It can be done in the form of direct

exporting and indirect exporting.

Licensing is when a company grants rights to intangible property to another

country for a specific period, in exchange, the licensee pays the royalty to

48
the licensor. It allows foreign company to use trademarks, technical know-

how, copy rights, patents.

Franchising is a means of marketing the goods and services in which the

franchiser grants the legal right to use branding, trademarks and products

and the methods of operation is transferred to the third party in return for

franchise fee. The franchiser provides assistance, training and help with

sourcing components and exercises significant control over the franchisers

method of operation

Contract manufacturing is when a firm which markets and sells products into

international market might arrange for a local manufacturer to produce the

product for them under the contract.

Management contract is an agreement between 2 companies whereby the

one company provides managerial assistance, technical expertise and

specialized services to the second company of the argument for a certain

agreed period in return for monetary compensation.

Joint venture is a kind of cooperative agreement between two or more

independent companies which leads to the establishment of a third entity

organizationally separate from the parent companies. It is mainly entering

into partnership in collaboration with the local company in the importing

country.

Strategic alliance is an agreement wherein two or more companies combine

their value chain activities for the purpose of competitive advantage. It helps

to improve the long term competitive advantage of the firm by forming

alliance with its competitors.

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Merger is an external strategy for the growth of the firm wherein two or more

firms combine, in which one acquires the assets and liabilities of other in

exchange for shares or cash. This strategy provides internal access to the

markets and distribution systems.

Turnkey operation is an agreement by the seller to supply a buyer with a

facility fully equipped and ready to be operated by the buyers employees,

who will be trained by the seller.

Selection of country

Identification and selection of markets is the first stage in international

marketing. The firm should select a market where it can sell its product. The

markets can be classified on the basis of:

Industrial development

Population

Gross national product

Per capita income

Socio economic variables etc.

Industrial Development: The countries can be classified on the basis of

industrialization as industrially developed economy, industrially developing

economy, Subsistence economies.

Industrially developed economies provide a large market as they have no

restriction on imports. These economies focus on R&D and production of

sophisticated products. They import simple technology.

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Industrially less developed economies: These economies strive to update

their technologies and thus are open to imports. They are interested in joint

venture, mergers etc.

Subsistence economies: These are least developed countries which depend

upon imports. These countries import technology to exploit their resources.

Population: The counties can be classified on the basis of population as

highly populated or less population. The countries with high population

provide large market. The population can be divided on the basis of age,
gender, income, education background, number of households.

Gross National Product: The countries with high GNP provide customers

which prefer imported products. These countries have higher standard of

living.

Other characteristics: The markets can be classified on the basis of socio

economic variables, Cultural grouping, Language etc.

Factors affecting selection of market

Market size

Political environment

Social and cultural environment

Legal environment

Economic factors

Population factors

Geographical factors

The market size is an important factor in selecting foreign market. The

various factors influence market size and growth. GNP, GDP, Per capita

Income, Personal disposal income, Balance of payment, Trade policies

51
 of the country, Population structure, Gender ratio, Educational

background, Religion, Density of population.

Political environment: The policies of the government, stage of

business cycle of the country, Taxation system, Fiscal policy, monetary

policy affect the selection of country.

Cultural Environment: Culture determines the needs and expectations

of the consumers. The language, food habits, religion, family system,

beliefs and attitudes affect the selection of country.

Legal Environment: The environment laws, natural laws, Legal system,

Taxation policies affect the international business.

Steps for selection of foreign market

Organizations need to select the target country where they need to invest.

The following steps are involved in the selection the target country.

1. Determine the International Marketing Objectives

2. Country Identification

3. Preliminary screening

4. In depth screening

5. Final selection

6. Direct experience

Determination of Objective: Firstly, the companies need to identify the

objective of going international. It can be short term or long term objective.

The companies might be willing to increase profit, avail low labour cost,

exploit natural resources of host country, Take advantage in trading blocs

52
etc. The selection of the country will be based on the purpose of

internationalization of the organization.

Country Identification: The organization needs to identify the countries which

match the objective of the company.

Preliminary Screening: Preliminary screening is identification and elimination

of countries with unsuitable trading climates by applying macro-level

indicators giving clues to disparities between organizational objectives and

features of the foreign market. This helps to reduce the number of countries
which are more suitable for business.

In depth screening: During this stage of international market selection, in

depth screening, information specific to the industry t, the organization is

operating is gathered, analyzed and evaluated for each of the potential

foreign target markets remaining from the previous stage.

Final selection: The organization has final list of potential nations. Managers

reflect upon strategic goals and look for a match in the nations at hand. The

managers assess these countries based upon the competitors, presence of

other domestic companies in that country.

Direct Experience: Personal experience is the most important decision

making factor. Marketing managers or their representatives should

personally travel to a particular nation to experience the culture and

business practices of the nation.

FDI
A foreign direct investment (FDI) is a controlling ownership in a business

enterprise in one country by an entity based in another country.

According to the International Monetary Fund, foreign direct investment,

commonly known as FDI, "... refers to an investment made to acquire lasting

or long-term interest in enterprises operating outside of the economy of the

53
investor." The investment is direct because the investor, which could be a

foreign person, company or group of entities, is seeking to control, manage,

or have significant influence over the foreign enterprise.

FDI is a major source of external finance which means that countries with

limited amounts of capital can receive finance beyond national borders from

wealthier countries. Exports and FDI have been the two key ingredients in

China's rapid economic growth. According to the World Bank, FDI and small
business growth are the two critical elements in developing the private

sector in lower-income economies and reducing poverty.

Advantages of Foreign Direct Investment

Foreign direct investment benefits the global economy, as well as investors

and recipients. Capital goes to whatever businesses have the best growth
prospects anywhere in the world. That's because investors seek the best
return for their money with the least risk. This profit motive is color-blind and
doesn't care about religion or form of government.

That gives well-run businesses -- regardless of race, color, or creed -- a

competitive advantage. It reduces the effects of politics, cronyism, and
bribery.

As a result, the smartest money rewards the best businesses all over the
world. Their goods and services go to market faster than if unrestricted FDI
weren't available.

Individual investors receive the extra benefits of lowered FDI. FDI diversifies
their holdings outside of a specific country, industry or political system.
Diversification always increases return without increasing risk.

Recipient businesses receive "best practices" management, accounting or

legal guidance from their investors. They can incorporate the latest
technology, innovations in operational practices, and new financing tools. By
adopting these practices, they enhance their employees' lifestyles. That
raises the standard of living for more people in the recipient country. FDI
rewards the best companies in any country. It reduces the influence of local

54
governments over them, making them less able to pursue poor economic
policies.

Recipient countries see their standard of living rise. As the recipient company
benefits from the foreign investment, it can pay higher taxes. Unfortunately,
some countries offset this benefit by offering tax incentives to attract the FDI
in the first place.

Another advantage of FDI is that it offsets the volatility created by "hot

money." That's when short-term lenders and currency traders create an asset
bubble in a country. They invest lots of money in a short period, then sell
their investments just as fast. That creates the kind of boom-bust cycle that
ruins economies and ends political regimes.

Factors Affecting FDI Decision:

Rate of return on underlying project.

Return and risk involved in the project.
Availability of Natural Resources.
Availability of cheap labour.
Market size.
Socio Economic condition.
Political condition.
Need for internationalization
International immobility of factors of production.
Strategic and Long term factors

Driving Factors of FDI

To increase sales and profits.

To enter fast growing markets.
To reduce cost.
To consolidate Trade blocs.
To protect domestic markets.
To protect foreign markets.
To acquire technological know how.

Positive Impact of FDI on Host countries

Brings in important factors of production.

Impact of FDI on Macro economic Growth.
Improvement in Balance of payment.

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Positive Impact on Home Country

Create new employment opportunities

Introduction to new technology.
Increases income.
Improvement in Balance of Payment.
Increases export of products.
Improve political relations

Negative Impact to Host country

Political lobbying: Many times, MNCs resort to political lobbying in

order to get certain policies and laws implemented in their favor.
Exploitation of natural resources: The resources of host country are
exploited for short run profit ignoring the sustainability factors
associated with the local communities and local habitat.
Threat to small scale industries
MNCs do not bring latest technology with the fear that home country
might loose the competitive advantage.

Portfolio Investment
A combination of various groups of securities is called portfolio. An investor
constructs a portfolio by purchasing different securities having different rate
of risk and return. Instead of investing in single security, investor invests in
combination of different securities to reduce risk and return. The portfolio
should aim at reducing risk, increasing return, safety and growth of capital,
liquidity and regular income.

If an investor has only interest in investing capital in buying equities, bonds

or other securities in foreign country it is referred to as portfolio investment.
It is done with the aim to earn interest. Portfolio investment can be done in
India through FII, GDR, ADR, FCCB etc.

GDR and FCCB are issued by Indian companies in foreign market for getting
foreign capital by facilitating portfolio investment by foreigners in Indian
securities.

Components of Portfolio Investment

There are two main rous of foreign investment in India:

Foreign Institutional Investors

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 Euro Issues

A foreign institutional investor (FII) is an investor or investment fund that is

from or registered in a country outside of the one in which it is currently
investing. Institutional investors include hedge funds, insurance companies,
pension funds and mutual funds.

Foreign institutional investors (FIIs) are those institutional investors which

invest in the assets belonging to a different country other than that where
these organizations are based.

Foreign institutional investors play a very important role in any economy.

These are the big companies such as investment banks, mutual funds etc,
who invest considerable amount of money in the Indian markets. With the
buying of securities by these big players, markets trend to move upward and
vice-versa. They exert strong influence on the total inflows coming into the
economy.

Market regulator SEBI has over 1450 foreign institutional investors registered
with it. The FIIs are considered as both a trigger and a catalyst for the market
performance by encouraging investment from all classes of investors which
further leads to growth in financial market trends under a self-organized
system.

According to Michael Frenkel and Lukas Menkhoff, FIIs are beneficial for an
economy under specific institutional conditions. It is defining characteristic of
an emerging market that these conditions are often not met.

Foreign institutional investors investments are volatile in nature, and they

mostly invest in
the emerging markets. They usually keep in mind the potential of a particular
market to
grow.

Foreign institutional investment is a short-term investment, mostly in the

financial
markets. FII, given its short-term nature, can have bidirectional causation
with the returns
of other domestic financial markets such as money markets, stock markets,
and foreign
exchange markets. Hence, understanding the determinants of FII is very
important for
any emerging economy as FII exerts a larger impact on the domestic
financial markets in
the short run and a real impact in the long run.

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Apart from being a critical driver of economic growth, foreign direct
investment (FDI) is a major source of non-debt financial resource for the
economic development of India. Foreign companies invest in India to take
advantage of relatively lower wages, special investment privileges such as
tax exemptions, etc. For a country where foreign investments are being
made, it also means achieving technical know-how and generating
employment.

The Indian governments favorable policy regime and robust business

environment have ensured that foreign capital keeps flowing into the
country. The government has taken many initiatives in recent years such as
relaxing FDI norms across sectors such as defense, PSU oil refineries,
telecom, power exchanges, and stock exchanges, among others.

Foreign investment can be done through automatic route up to 100 per cent
without need for any approvals in certain sectors which are open for foreign
investment. The investor has to keep the Reserve Bank of India informed.

The department of industrial policy and promotion is the nodal agency for
information and assistance for foreign investors.

Advantages of FII Investments

The advantages of having FII investments can be broadly classified

under the following categories.

1. Enhanced flows of Equity Capital: FIIs are well known for a greater
appetite for equity than debt in their asset structure.

2. Managing Uncertainty and Controlling Risks: Institutional investors support

financial innovation and development of hedging instruments. Institutions for
example, because of their interest in hedging risks are known to have
contributed to the development of Zero coupon bonds and index futures. FIIs
as professional bodies of asset managers and financial analysts just not only
enhance competition in financial markets but also improve the alignment of
asset prices to fundamentals. Institutions in general and FIIs in particular are
known to have good information and low transaction costs.

3. Improving Capital Markets: FIIs as professional bodies of asset

managers and financial analysis, enhance competition and efficiency of
financial markets. Equity market development aids economic
development by increasing the availability of riskier long term capital for
projects and increasing firm incentives to supply more information about
themselves, FIIs can help in the process of economic development.

58
4. Improved Corporate Governance: Good Corporate Governance is essential
to overcome the principal agent problem between Shareholder and
Management. FIIs constitute professional bodies of asset managers and
financial analysts, who by contributing to better understanding of firms
operations improve corporate governance.

Disadvantages of FII Investments:

The two common apprehensions about FII inflows are the fear of
management takeover and potential capital outflows.

1. Management Control: There are domestic laws that effectively prohibit

institutional investors form taking management control. FDI is that
category of international investment that reflects the objective of obtaining
a lasting interest by a resident of other economy. The lasting interest implies
the existence of a long term relationship between the direct investor and the
enterprise.

2. Potential Capital Outflows: FII inflows are popularly described as hot

money because of the herding behavior and potential for large capital
outflows. All the FIIs try to either only buying or only selling at the same
time particularly at times of market stress.

Difference between FDI and FII

FDI Fll

FDI is when foreign company brings FII is when a foreign company

capital into a country or an buys equity in a company through

economy to set up a production or the stock markets. Therefore, in

1
some other facility. FDI gives the this case, FII would not give the

foreign company some control in foreign company any control in

the operations of the company the company

59
 FDI involves in the direct FII is a short term investment

2 production activity & also of mostly in the financial markets &

medium to long term nature it consist of FII

It enables a degree of control in the It does not involve obtaining a

3
company degree of control in a company

4 FDI brings-long term capital FII brings short-term capital

Eligibility for FII

An institution established outside India as pension fund.

An AMC incorporated outside India.

A trustee established outside India.

FII can invest in following:

Securities in the primary and secondary markets.

Unit schemes floated by domestic mutual funds including UTI.

Government securities.

Derivatives traded on a recognized stock exchange.

Commercial paper.

GDR

A global depositary receipt (GDR) is a bank certificate issued in more than

one country for shares in a foreign company. The shares are held by a foreign

branch of an international bank. The shares trade as domestic shares, but

are offered for sale globally through the various bank branches.
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GDR is a negotiable certificate issued by the international bank to a company

against a certain number of shares which are traded on international stock

exchange. They are derivative equities which are traded in foreign markets,

giving rights to shareholders for respective amount of local securities. In

such case, shareholders are entitled to all dividends and capital gains. Thus,

GDR allow investors in any country to purchase shares of company in any

other country without losing the income or trading flexibility. GDR is also

called as International Depository Receipt or Euro Depository Receipt.

It is a financial instrument used by private markets to raise capital

denominated in either U.S. dollars or euros. It facilitates trade of shares in

emerging markets.

Importance of GDRs

If any company gets GDRs for his purchased shares, then these can be sold in any stock market of

world through global network of banks and financial institutions.

Global Depositary Receipts (GDRs) give power to investors and companies access to two or more

markets, most frequently the US market and the Euromarkets, with one security. GDRs are most

commonly used when the company is raising capital in the local market as well as in the

international and US markets, either through private placement or public offerings.

Securities and Exchange Commission of USA has allowed USA companies and also foreign

companies to buy and sell shares through GDRs.

Among the Indian Companies, Reliance Industries Ltd. was the first company to get funds through a

GDR issue, after this many other Indian Companies like Infosys, WIPRO AND ICICI have started to

raise funds via GDRs.

ADR

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An American depositary receipt (ADR) is a negotiable certificate issued by a
U.S. bank representing a specified number of shares (or one share) in a
foreign stock that is traded on a U.S. exchange. ADRs are denominated in
U.S. dollars, with the underlying security held by a U.S. financial institution
overseas. ADRs help to reduce administration and duty costs that would
otherwise be levied on each transaction.

An ADR is a convenient way for companies whose stock is listed on a foreign

exchange to cross-list their stock in the United States and make their stock
available for purchase by U.S. investors, as these receipts can be traded on
U.S. exchanges.
Some ADRs are traded on major stock exchanges such as the Nasdaq Stock
Market (NDAQ) and the New York Stock Exchange, which require these
foreign companies to conform to many of the same reporting and accounting
standards as U.S. companies. Other ADRs are traded on over-the-counter
exchanges that impose fewer listing requirements.

FCCB

A foreign currency convertible bond (FCCB) is a type of convertible bond

issued in a currency different than the issuer's domestic currency. In other

words, the money being raised by the issuing company is in the form of a

foreign currency. A convertible bond is a mix between a debt and equity

instrument.

These types of bonds are attractive to both investors and issuers. The

investors receive the safety of guaranteed payments on the bond and are

also able to take advantage of any large price appreciation in the company's

stock.

It is a type of convertible bond that is purchased and distributes principle payments

in a foreign currency. It also allows the option to convert the bond into stock. As

62
long as the issuing company remains viable, this debt instrument is attractive for

both the issuer and the bondholders. The company can usually obtain lower interest

financing terms in exchange for the warrants which can dramatically add value to

the bonds. This arrangement helps to ensure that the bondholders will be

compensated for their investment. It also allows them to take advantage of any

significant increase in the company's stock price.

Euro Issues

Euro issue is a method of raising funds required by a company in foreign

exchange. It provides greater flexibility to the issuers finance and allows

room for controlling their cost of capital.

Euro issue means an issue made abroad through instruments denominated

in a foreign currency and listed on a European stock exchange, the

subscriptions for which may come from any part of the world.

Control of International Business

Control function includes planning, formulating strategies, implementing, evaluating

and correcting the performance in order to ensure that the organisation achieves its

objectives. Evaluation and control keeps the MNC strategy and direction on track.

Essential elements of control system

These elements of control system help to monitor the implementation process and

take corrective measures to ensure effective working in host country.

63
 Assumption control: IB is based on certain assumptions about international

environment. Thus, there is a need to constantly check the changes in the

environment.

Surveillance control: It involves constant check on environment of host, home

and global countries.

Climate control: There is always a need to maintain friendly environment with

customers to know their needs and to gain their support.

Operational control: There is a need to keep a check on marketing, Finance,

Human resource, manufacturing departments in host country.

Crisis control: A company needs to deal with sudden unforeseen situations

and resolve them quickly.

Objectives of Control in International Business

It should supply adequate data for top management to monitor,

evaluate and adjust the global strategy of the enterprise as the

situation demands.
It should provide the means for coordinating the units of the enterprise

so that they work towards common objective.

It should provide the basis for evaluating the performance of the units

and their managers at each level of the organisation.

Steps of control in IB

1. Establishment of standards: The establishment of standards is

critical because it determines the pattern of the while control

process. The standards must be clearly defined, easily

64
 understood and accepted by all. The standards should be based

on goals.

2. Measurement of Performance: The organisation needs to

measure the performance against the standards. The

performance can be measured with the help of reports from

subsidiaries, meetings with subsidiaries, cost analysis, marketing

audit.

3. Evaluation of performance: The management needs to evaluate

the performance to find the deviation from the standards. The

management needs to take required action for any deviation in

the performance.

4. Taking Corrective measures: It involves comparison of actual

performance with the planned performance. Corrective actions

are taken to modify the operations to correct the deviation in the

results.

Problems in control in IB

Distance: Distance between two countries makes it difficult to control the

international business. As the face to face interaction is not possible in it.

Diversity: Diversity in culture, market structure, product, labour cost, and

currency makes control of IB difficult.

Political factors: The change in government policies, rules also affects the

IB.

Change in economic policy: The economic policies have a large impact on

the business. Any change in policy has an impact on the IB.

65
 Change in market situation: Any change in the phase of business cycle,

market situation, competition has an impact on the control of business in

International market.

Methods of implementing control in IB

Organisational culture: Every company has its common values, traditions,

customs and practices. MNCs follow common corporate culture in all its

subsidiaries and headquarters by promoting closer contact among managers

of different subsidiaries in various countries.

Budgetary control: The budgetary control is required for allocation funds

among various functions and subsidiaries, Planning and coordination of

production and supplies, Evaluation of subsidiary performance against

prescribed norms and targets.

Performance evaluation: Performance control is exercised with respect to

budgets. Different measures of performance are adopted by multinational

companies. The method of evaluation of performance depends upon the

nature of the company.

Reports: The subsidiaries send their report to the headquarters through

reports and headquarters use these reports for allocating resources,

personnel and facilities. These reports are useful to evaluate, regulate and

control the operations of the subsidiary companies.

Visit to subsidiaries: All the data and information cannot be provided to

headquarters through reports. Thus, the headquarters undertake visits to

subsidiaries in order to have face to face interactions.

Cost and accounting comparability: Management of MNCs use cost of

production of various products to control the subsidiaries.

66
 Identify critical success factors: Critical success factors are those aspects

of the strategy in which a company must excel to outperform its competitors,

and these are underlying core competences in specific activities of the

company.

Problems faced in controlling

5. Acquisition: MNCs face problem like overlapping geographic

responsibilities and markets and managing new lines of business

without experience. Company should follow different strategies

in controlling different acquired businesses.

6. Shared Ownership: In case of shared ownership companies

should take measures like contract stipulations, dividing voting,

side agreements etc.

7. Business strategy: Change in business strategy of MNEs

creates problem of control. Many multinational companies have

changed strategies from multidomestic to global or

transnational.

Performance Measurement

Operations of International business should be planned and then its

performance against plans should be measured. The measured performance

should then be compared with the plans with the view to find the deviations

and control them. The performance of MNCs can be measured in the

following areas:

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 Organisational structure: It includes type of organisation structure,

degree of freedom provided to the employees for decision making,

degree of decentralization, degree of flexibility.

Marketing areas: It includes percentage of market share, customers

preference, trends in customer demand.

Production area: Compatibility of product design, location of

company, contribution to ecological balance.

Human resource area: It includes structuring the job, working hours,

working conditions, structuring the pay and benefit schemes,

treatment of local employees.

Finance area: It includes reinvestment of the profits in the local

country, diversion of investment to various subsidiaries, level of

working capital.
Social responsibility area and ethic area: It includes allocation of

profits for discharging social responsibility, maintaining ethical

standards.

Performance Indicators

Financial indicators: They include level of cash flow, Availability of

capital, dividend rates and profit.

Human Resource: They include level of general skills, level of

production skills, employees attitude towards foreign companies, Level

of employable skills.
Production Resource: These include percentage of capacity

utilisation, Degree of monopolistic characteristics, Degree of fastness

in transport.

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 Environmental indicators: It includes supply and cost changes,

cyclical changes in demand, comparison with competition.

Marketing indicators: It includes level of sales, volume of sales,

government intervention in promotional programs and increase in

mark up.

Role of Information system in controlling

Control process depends upon the flow of information from one subsidiary to

another and from the subsidiary to the headquarters and vice versa. It also

includes flow of information from one sub system to another.

Information regarding environmental factors, plans, objectives, goals,

strategies should flow freely from subsidiary to the headquarters and

vice versa.
Information regarding the product design, ingredients, price and

availability should flow from company to market.

Information regarding competitors, market intermediaries,

government policies should flow from global centers to stakeholders.

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