MB0037 – International Business Management

Assignment Set- 1

1 a. How has liberalizing trade helped international business?

Ans: TRADE REFORM has long been part of the arsenal of policies used to
promote economic efficiency, the development of new markets, and growth.
Perhaps surprisingly, even after more than fifty years of trade negotiations, there
is still significant protection in the world economy and thus scope for further
benefits once protection is removed. Protection persists because it is a
convenient and non-transparent way for governments to direct economic
benefits to particular groups. Although trade liberalization raises the average
standard of living in the medium term, groups that had been favoured by
protection will see their incomes decline, and the resulting restructuring of the
economy may create economic dislocations in the short term.

There is increasing awareness that some of those who lose from trade reform
might be the poorest members of society, who have fewer assets to draw on to
protect themselves during hard times, and are thus less able to absorb
adjustment costs, than their fellow citizens. Even a transitory loss of income can
cause the poor to lose opportunities to acquire human capital through education,
health care, and better nutrition and thus can reduce their chances of escaping
poverty. The vulnerability of the poor justifies looking more carefully at the
effects of trade liberalization on the poor and asking whether trade liberalization
can be designed to minimize its negative effects.

Liberalization's effects

Trade liberalization can affect the welfare of the poor by

* changing the prices of tradable goods and improving access to new products;

* changing the relative wages of skilled and unskilled labour and the cost of
capital, thereby affecting the employment of the poor;

* affecting government revenue from trade taxes and thus the government's
ability to finance programs for the poor;

* changing incentives for investment and innovation and affecting economic

growth; and

* affecting the vulnerability of an economy to negative external shocks.

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Prices and availability of products: Trade liberalization helps the poor in the
same way it helps most others, by lowering prices of imports and keeping prices
of substitutes for imported goods low, thus increasing people's real incomes.
Imported products that might be especially important for the poor include basic
foods, pharmaceuticals and other medical or basic health products, and used
clothing. The poor may also benefit significantly from removal of export taxes or
prohibitions, to the extent that the poor are net producers of exports (as is often
true in agriculture). An open trade regime also permits imports of technologies
and processes that can help the poor-for example, packaging for perishable
foods that is light and does not require refrigeration, chemicals for sterilizing
water, and improved seeds and fertilizers. An example of trade liberalization
resulting in tangible and immediate benefits for the poor is the African Summit to
Roll Back Malaria, held in April 2000, at which the continent's he ads of state
pledged to reduce or waive taxes and tariffs for mosquito nets, insecticides, anti-
malarial drugs, and other goods and services needed for malaria control. There is
also some evidence that liberalizing imports of used clothing can improve the
welfare of the poor.

Wages and employment: Trade theory predicts how trade liberalization will
affect wages and employment under very specific conditions. In practice, these
conditions do not often hold, and for a more general analysis, we have to rely on
empirical studies. These suggest at least two factors that will directly affect the
way trade liberalization can change the wages and employment of the poor.
First, how flexible labour markets are will determine whether the effects of trade
reform translate into changes in employment or wages. If firms are constrained
by labour regulations from reducing their workforces, most of the adjustment to
changes in relative prices of outputs will be reflected in changes in real wages. If
minimum wage legislation prohibits downward adjustments in wages but labour
mobility is high, however, adjustment will take place through changes in
employment.

In the rural and informal urban sectors (the informal sector is the part of an
economy where businesses are not incorporated or otherwise registered with
governments) of developing countries where the poor live, labour markets
usually are highly flexible (being generally unregulated) and are characterized by
a high elasticity of supply for labour. Wages will generally be determined by the
requirements of urban and rural subsistence or the next-best employment

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opportunities that are available. Thus, we can expect that adjustment to trade
shocks will take place predominantly through changes in employment. In this
case, the costs of trade reform for the poor may be large, and government
assistance may be required to mitigate their impact.

Second, the initial pattern of protection will have an important bearing on who
wins and who loses when that protection is removed. If the pattern favours
unskilled workers in agriculture and light manufacturing, then the removal of
protection could be expected to lower the relative wages of these segments of
the labour force.

Government revenues and programs for the poor: There is a general

concern that trade reform may lead to lower government revenues as trade
taxes are reduced and that, in an effort to maintain macroeconomic stability,
governments may cut social expenditures or implement new taxes that could
disproportionately affect the poor. At the initial stages of trade liberalization,
however, replacing nontariff barriers with tariffs and eliminating tariff
exemptions will generally increase government revenues. Similarly, if initial
tariffs are prohibitively high, reducing them can result in higher trade flows,
which will increase revenues. Lowering high tariffs also reduces incentives for
smuggling and corruption, which, in turn, can increase the volume of goods
recorded at customs and boost revenues. Finally, simplifying the tariff regime to
create a more uniform structure, with just a few tariff rates, could increase fiscal
revenue by increasing transparency and simplifying tax administration. In the
latter stages of reform, however, lowering tariffs may lead to lower government
revenues. In this instance, domestic tax reform (particularly the introduction of
broader-based and less distortionary taxes) or expenditure restraint that may be
required to maintain macroeconomic stability should be designed to minimize
their adverse effects on the poor.

Investment, innovation, and growth: An important consideration in

sustained poverty reduction is whether the country is experiencing robust
economic growth in which the poor can participate. One of the main channels
through which trade reform affects growth is by reducing the anti-export bias of
trade policy and leading to a more efficient allocation of resources. However, this
is a onetime gain in allocative efficiency and need not affect the economy's long-
term growth rate. In the long term, trade liberalization can affect the economy's
rate of growth by creating incentives for investment. In addition, trade reform

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usually encourages foreign direct investment, with attendant spillovers of
advanced technologies and new business practices that increase overall
productivity and growth in domestic firms.

b. What are the merits and demerits of international trade?

Ans: Merits of international trade

• Enhance your domestic competitiveness

• Increase sales and profits
• Gain your global market share
• Reduce dependence on existing markets
• Exploit international trade technology
• Extend sales potential of existing products
• Stabilize seasonal market fluctuations
• Enhance potential for expansion of your business
• Sell excess production capacity
• Maintain cost competitiveness in your domestic market

Demerits of international trade

• You may need to wait for long-term gains

• Hire staff to launch international trading
• Modify your product or packaging
• Develop new promotional material
• Incur added administrative costs
• Dedicate personnel for travelling
• Wait long for payments
• Apply for additional financing
• Deal with special licenses and regulation

2. Discuss the impact of culture on International Business.

Ans: Cultural Influences

There are some obvious ways culture influences an international business:
The way how we present ourselves
How we express opinions
 Assumptions based on the environment and context
 Perceptions of voice, and other personal physical details
It is essential to to adapt to these cultural differences. They stop interfering with
communication.

When the two aspects of human society, culture and business, interact with
each other, it leads to the development of interesting conditions or scenarios.
When different cultures converge at a common point with business as the
platform, the clashes are bound to take place. But most importantly, such a
scenario helps us adapt to challenging situations.

Different communities or countries in the world follow different mannerisms and

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etiquette. The way or view to see a problem might change from country to
country, across the globe.

The international business culture, as a whole, is a congregation of various

business practices, cultural influences and the thought processes followed in
different nations. The various things that impact an international business are
mannerisms, communication, time, etc.

Body Language: Every nation has a separate culture; a part of which is

reflected in the behaviour and the body language of the people. In an
international business, understanding the undercurrents beneath the
mannerisms or gestures becomes necessary. There are chances that behaviour
might get misinterpreted by people from different cultures. Thus, it requires a
skilled coordinator to handle challenging situations during meetings.

Communication: The way of communicating could be different in different

cultures. The terms used by some might sound harsh to others. The way in which
words are pronounced to impact the intercultural communication in the
corporate houses. In fact, it is one of the major hindrance in the process
of business communication.

Time: People from Britain and Germany are keen on following the time-bound
schedules. The different 'time-cultures' might be the reason behind clashes,
between people from diverse cultures.

The way in which the boardroom meetings are handled, is also a reason behind
differences in opinions. Corporate houses from western countries stick to the
schedules during meetings. They get down to business in an outright manner.
Other cultures may differ in this aspect of business.

The marketing executives sent for international assignments, are bound to face
problems in dealing with the corporate cultures of that particular country.
Understanding a foreign market and formulating the company policies to cater to
the need of international clients is a challenging job. Skilled professionals
possessing the quality called 'empathy' are able to deliver the goods in such
cases.

With today's businesses entering a 'globalized' world, the interaction between

different cultures is bound to happen. Merely learning different languages won't
be enough. It is necessary for corporate houses to understand the social
conditions of different countries, to successfully tap the respective markets.
Being sensitive to the values and beliefs of different cultures of the world is
necessary.

International businesses are not only a way of making profits by the exploitation
of international talent, but also a bridge between different nations of the world.
Tomorrow's world will rely more on a symbiotic relationship
between international businesses and cultures as a whole.

Values and Attitudes: Values and attitudes vary between nations, and even
vary within nations. So if you are planning to take a product or service overseas
make sure that you have a good grasp the locality before you enter the market.
This could mean altering promotional material or subtle branding messages.
There may also be an issue when managing local employees. For example, in

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France workers tend to take vacations for the whole of August, whilst in the
United States employees may only take a couple of week's vacation in an entire
year.

Education: The level and nature of education in each international market will
vary. This may impact the type of message or even the medium that you
employ. For example, in countries with low literacy levels, advertisers would
avoid communications which depended upon written copy, and would favour
radio advertising with an audio message or visual media such as billboards. The
labelling of products may also be an issue.

Social Organizations: This aspect of Cultural Framework relates to how a

national society is organized. For example, what is the role of women in a
society? How is the country governed - centralized or devolved? The level
influence of class or casts upon a society needs to be considered. For example,
India has an established caste system - and many Western countries still have an
embedded class system. So social mobility could be restricted where caste and
class systems are in place. Whether or not there are strong trade unions will
impact upon management decisions if you employ local workers.

Technology and Material Culture: Technology is a term that includes many

other elements. It includes questions such as is their energy to power our
products? Is there a transport infrastructure to distribute our goods to
consumers? Does the local port have large enough cranes to offload containers
from ships? How quickly does innovation diffuse? Also of key importance, do
consumers actually buy material goods i.e. are they materialistic?

Law and Politics: The underpinning social culture will drive the political and
legal landscape. The political ideology on which the society is based will impact
upon your decision to market there. For example, the United Kingdom has a
largely market-driven, democratic society with laws based upon precedent and
legislation, whilst Iran has a political and legal system based upon the teachings
and principles Islam and a Sharia tradition.

Aesthetics: Aesthetics relate to your senses, and the appreciation of the artistic
nature of something, including its smell, taste or ambience. For example, is
something beautiful? Does it have a fashionable design? Was an advert delivered
in good taste? Do you find the colour, music or architecture relating to an
experience pleasing? Is everything relating to branding aesthetically pleasing?

Cross Cultural Marketing Blunders: Although cruel, cross cultural marketing

mistakes are a humorous means of understanding the impact poor cultural
awareness or translations can have on a product or company when selling
abroad.

3. a. Explain the brief structure of WTO.

Ans: WTO structure: all WTO members may participate in all councils,
committees, etc, except Appellate Body, Dispute Settlement panels, and
plurilateral committees.

Structure of the World Trade Organization The World Trade Organization

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came into force on January 1, 1995, fully replacing the previous GATT Secretariat
as the organization responsible for administering the international trade regime.
The basic structure of the WTO includes the following bodies

The Ministerial Conference, which is composed of international trade

ministers from all member countries. This is the governing body of the WTO,
responsible for setting the strategic direction of the organization and making all
final decisions on agreements under its wings. The Ministerial Conference meets
at least once every two years. Although voting can take place, decisions are
generally taken by consensus, a process that can at times be difficult,
particularly in a body composed of 136 very different members.

• The General Council composed of senior representatives (usually

ambassador level) of all members. It is responsible for overseeing the day-
to-day business and management of the WTO, and is based at the WTO
headquarters in Geneva. In practice, this is the key decision-making arm
of the WTO for most issues. Several of the bodies described below report
directly to the General Council.
• The Trade Policy Review Body is also composed of all the WTO
members, and oversees the Trade Policy Review Mechanism, a product of
the Uruguay Round. It periodically reviews the trade policies and practices
of all member states. These reviews are intended to provide a general
indication of how states are implementing their obligations, and to
contribute to improved adherence by the WTO parties to their obligations.
• The Dispute Settlement Body is also composed of all the WTO
members. It oversees the implementation and effectiveness of the dispute
resolution process for all WTO agreements, and the implementation of the
decisions on WTO disputes. Disputes are heard and ruled on by dispute
resolution panels chosen individually for each case, and the permanent
Appellate Body that was established in 1994. Dispute resolution is
mandatory and binding on all members. A final decision of the Appellate
Body can only be reversed by a full consensus of the Dispute Settlement
Body.
• The Councils on Trade in Goods and Trade in Services operate
under the mandate of the General Council and are composed of all
members. They provide a mechanism to oversee the details of the general
and specific agreements on trade in goods (such as those on textiles and
agriculture) and trade in services. There is also a Council for the
Agreement on Trade-Related Aspects of Intellectual Property Rights,
dealing with just that agreement and subject area.
• The Secretariat and Director General of the WTO reside in Geneva, in
the old home of GATT. The Secretariat now numbers just under 550
people, and undertakes the administrative functions of running all aspects
of the organization. The Secretariat has no legal decision-making powers
but provides vital services, and often advice, to those who do. The
Secretariat is headed by the Director General, who is elected by the
members.

• The Committee on Trade and Development and Committee on

Trade and Environment are two of the several committees continued or
established under the Marrakech Agreement in 1994. They have specific
mandates to focus on these relationships, which are especially relevant to
how the WTO deals with sustainable development issues. The Committee
on Trade and Development was established in 1965. The forerunner to the

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 Committee on Trade and Environment (the Group on Environmental
Measures and International Trade) was established in 1971, but did not
meet until 1992. Both Committees are now active as discussion grounds
but do not actually negotiate trade rules.

b. Highlight the drawbacks of GATT.

Ans: Given its provisional nature and limited field of action, the success of GATT
in promoting and securing the liberalization of much of world trade over 47 years
is incontestable. Continual reductions in tariffs alone helped spur very high rates
of world trade growth – around 8 per cent a year on
average during the 1950s and 1960s. And the momentum of trade liberalization
helped ensure that trade growth consistently out-paced production growth
throughout the GATT era. The rush of new members during the Uruguay Round
demonstrated that the multilateral trading system, as then represented by GATT,
was recognized as an anchor for development and an instrument of economic
and trade reform.

The limited achievement of the Tokyo Round, outside the tariff reduction results,
was a sign of difficult times to come. GATT’s success in reducing tariffs to such a
low level, combined with a series of economic recessions in the 1970s and early
1980s, drove governments to devise other forms of protection for sectors facing
increased overseas competition. High rates of unemployment and constant
factory closures led governments in Europe and North America to seek bilateral
market-sharing arrangements with competitors and to embark on a subsidies
race to maintain their holds on agricultural trade. Both these changes
undermined the credibility and effectiveness of GATT.

Apart from the deterioration in the trade policy environment, it also became
apparent by the early 1980s that the General Agreement was no longer as
relevant to the realities of world trade as it had been in the 1940s. For a start,
world trade had become far more complex and important than 40 years before:
the globalization of the world economy was underway, international investment
was exploding and trade in services – not covered by the rules of GATT – was of
major interest to more and more countries and, at the same time, closely tied to
further increases in world merchandise trade. In other respects, the GATT had
been found wanting: for instance, with respect to agriculture where loopholes in
the multilateral system were heavily exploited – and efforts at liberalizing
agricultural trade met with little success – and in the textiles and clothing sector
where an exception to the normal disciplines of GATT was negotiated in the form
of the Multi-fibre Arrangement. Even the institutional structure of GATT and its
dispute settlement system were giving cause for concern.

Together, these and other factors convinced GATT members that a new effort to
reinforce and extend the multilateral system should be attempted. That effort
resulted in the Uruguay Round.

4. a. Give a short note on the regional economic integration.

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Ans: Regional economic integration is an agreement among countries in a
geographic region to reduce and ultimately remove, tariff and non tariff barriers
to the free flow of goods or services and factors of production among each
others. It can be also refers as any type of arrangement in which countries agree
to coordinate their trade, fiscal, and/or monetary policies are referred to as
economic integration. Obviously, there are many different levels of integration.
Free Trade Area: 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.

Regional integration has been defined as an association of states based upon

location in a given geographical area, for the safeguarding or promotion of the
participants, an association whose terms are fixed by a treaty or other
arrangements. Philippe De Lombaerde and Luk Van Langenhove define regional
integration as a worldwide phenomenon of territorial systems that increase the
interactions between their components and create new forms of organisation, co-
existing with traditional forms of state-led organisation at the national
level. According to Hans van Ginkel, regional integration refers to the process by
which states within a particular region increase their level of interaction with
regard to economic, security, political, and also social and cultural issues. In
short, regional integration is the joining of individual states within a region into a
larger whole. The degree of integration depends upon the willingness and
commitment of independent sovereign states to share their sovereignty.
Regional integration initiatives should fulfil at least eight important functions:

 the strengthening of trade integration in the region

 the creation of an appropriate enabling environment for private
sector development
 the development of infrastructure programmes in support of economic
growth and regional integration
 the development of strong public sector institutions and good governance;
 the reduction of social exclusion and the development of an inclusive civil
society
 contribution to peace and security in the region
 the building of environment programmes at the regional level
 the strengthening of the region’s interaction with other regions of the
world.[3]

The crisis of the post-war order led to the emergence of a new global political
structure. This new global political structure made obsolete the classical West

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phalian concept of a system of sovereign states to conceptualise world politics.
The concept of sovereignty becomes looser and the old legal definitions of an
ultimate and fully autonomous power of a nation-state are no longer meaningful.
Sovereignty, which gained meaning as an affirmation of cultural identity, has lost
meaning as power over the economy. All regional integration projects during the
Cold War were built on the West phalian state system and were to
serve economic growth as well as security motives in their assistance to state
building goals. Regional integration and globalisation are the two phenomena
challenging the existing global order based upon sovereign states at the
beginning of the twenty-first century. The two processes deeply affect the
stability of the West phalian state system, thus contributing to both disorder and
a new global order.

Closer integration of neighbouring economies is seen as a first step in creating a

larger regional market for trade and investment. This works as a spur to greater
efficiency, productivity gain and competitiveness, not just by lowering border
barriers, but by reducing other costs and risks of trade and investment. Bilateral
and sub-regional trading arrangements are advocated as development tools as
they encourage a shift towards greater market openness. Such agreements can
also reduce the risk of reversion towards protectionism, locking in reforms
already made and encouraging further structural adjustment.

In broad terms, the desire for closer integration is usually related to a larger
desire for opening to the outside world. Regional economic cooperation is being
pursued as a means of promoting development through greater efficiency, rather
than as a means of disadvantaging others. Most of the members of these
arrangements are genuinely hoping that they will succeed as building blocks for
progress with a growing range of partners and towards a generally freer and
open global environment for trade and investment. Integration is not an end in
itself, but a process to support economic growth strategies, greater social
equality and democratisation.

Regional integration arrangements are a part and parcel of the present global
economic order and this trend is now an acknowledged future of the
international scene. It has achieved a new meaning and new significance.
Regional integration arrangements are mainly the outcome of necessity felt by
nation-states to integrate their economies in order to achieve rapid economic
development, decrease conflict, and build mutual trusts between the integrated
units. The nation-state system, which has been the predominant pattern of
international relations since the Peace of Westphalia in 1648 is evolving towards

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a system in which regional groupings of states is becoming more important than
sovereign states. There is a powerful perception that the idea of the state and its
sovereignty has been made irrelevant by processes that are taking place at both
the global and local level. Walter Lippmann believes that, "the true constituent
members of the international order of the future are communities of states

b. Mention the benefits of WTO.

Ans: Benefits of WTO:

• Helps promote peace within nations: Peace is partly an outcome of

two of the most fundamental principle of the trading system; helping
trade flow smoothly and providing countries with a constructive and fair
outlet for dealing with disputes over trade issues. Peace creates
international confidence and cooperation that the WTO creates and
reinforces.

• Disputes are handled constructively: As trade expands in volume, in

the numbers of products traded and in the number of countries and
company trading, there is a greater chance that disputes will arise. WTO
helps resolve these disputes peacefully and constructively. If this could
be left to the member states, the dispute may lead to serious conflict,
but lot of trade tension is reduced by organizations such as WTO.

• Rules make life easier for all: WTO system is based on rules rather
than power and this makes life easier for all trading nations. WTO
reduces some inequalities giving smaller countries more voice, and at
the same time freeing the major powers from the complexity of having to
negotiate trade agreements with each of the member states.

• Free trade cuts the cost of living: Protectionism is expensive, it raises

prices, WTO lowers trade barriers through negotiation and applies the
principle of non-discrimination. The result is reduced costs of production
(because imports used in production are cheaper) and reduced prices of
finished goods and services, and ultimately a lower cost of living.

• It provides more choice of products and qualities: It gives consumer

more choice and a broader range of qualities to choose from.

• Trade raises income: Through WTO trade barriers are lowered and this
increases imports and exports thus earning the country foreign exchange
thus raising the country's income.

• Trade stimulates economic growth: With upward trend economic

growth, jobs can be created and this can be enhanced by WTO through
careful policy making and powers of freer trade.

• Basic principles make life more efficient: The basic principles make
the system economically more efficient and they cut costs. Many benefits
of the trading system are as a result of essential principle at the heart of
the WTO system and they make life simpler for the enterprises directly
involved in international trade and for the producers of goods/services.

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 Such principles include; non-discrimination, transparency, increased
certainty about trading conditions etc. together they make trading
simpler, cutting company costs and increasing confidence in the future
and this in turn means more job opportunities and better goods and
services for consumers.

• Governments are shielded from lobbying: WTO system shields the

government from narrow interest. Government is better placed to defend
themselves against lobbying from narrow interest groups by focusing on
trade-offs that are made in the interests of everyone in the economy.

• The system encourages good governance: The WTO system

encourages good government. The WTO rules discourage a range of
unwise policies and the commitment made to liberalize a sector of trade
becomes difficult to reverse. These rules reduce opportunities for
corruption.

5 a. Explain five-element product wave model.

Ans: The typical pattern of a product is represented by a curve divided into four
distinct phases: introduction, growth, maturity, and decline. Recent research in
the area has focused on its use in decision making in areas ranging from those
as broad as overall strategy to those as narrow as equipment replacement. The
wave model employs design engineering, process engineering, product
marketing, production, and end-of-life activities as elements. The first wave is
associated with the "A" version of a product or service, and survives through the
traditional PLC introduction and growth phases. A second wave begins with the
"B" version, the markedly improved second model. It starts just before the
traditional life cycle maturity stage and lives until sales decline to a point at
which an EOL decision must be made.
Note that design engineering has a peak of activity level at each upgrade.
Process engineering activity shadows that of design engineering, as system
changes will be contemplated and made to facilitate the changes made in the
product or service. Product marketing also has activity level spikes that closely
match engineering design activity, lagged somewhat for product introduction.
Production has one activity peak that results from demand management and
production planning through master production scheduling.

Finally, the EOL curve peaks at each redesign. The last wave begins shortly
before original production ceases and ends when the product is no longer
manufactured or supported by the EOL Company or division. The EOL element
requires that a decision be made about the preceding version at each major
redesign: continue production, make a short-term run of spares, keep blueprints
active so that parts can be made as ordered, enter into a manufacturing and
support agreement with another entity, or discontinue production.

The five-element product wave, or FPW, uses trigger points, rather than time, as
the horizon over which the element curves vary. Changes in magnitude,
represented by the vertical axis, result from differing activity levels within the
five elements. Simple changes in levels of dollar or unit product sales, in and of
themselves, do not necessarily determine the trigger points. Rather, the varying
activity levels are a direct result of product introductions and redesigns that,
from the outset, must take into account company strategy, core capabilities, and
the state of the competitive environment. For example, a product with strong

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sales may be redesigned in a pre-emptive strike against competitors, further
distancing that product from the competition, such as with Caterpillar’s
innovative high-drive bulldozers.

That the five-element wave is grounded in reality becomes apparent when

considering the recent research that suggests product introduction cycles are
being compressed. Bayus (1994) claims that knowledge is being applied faster,
resulting in increasing levels of new product introductions. Yet since product
removals are not keeping pace with introductions, there are an increasing
number of product variations on the market. Slater (1993) observes that product
life cycles are growing shorter and shorter. Vesey (1992) reports that the
strategy for the 1990s is speed to market and discusses the pressures the
market is exerting to shorten product introduction lead times.

Regardless of whether life cycles are actually being compressed or knowledge is

simply being applied faster, it is apparent that firms are increasing the speed
with which they bring their products to market. The effect of this is a
compression of the design engineering, process engineering, production, and
product marketing elements of the wave model. (The EOL curve may remain
unchanged because accelerated introductions do not necessarily affect EOL
efforts.) The five-element wave clearly shows the inefficiency of traditional "over-
the-wall" systems as speed to market increases. As the elements compress,
more and more information is thrown over the wall. Recipients find themselves
with less and less time to take action. Taken to the extreme, in-baskets, phone
lines, conference rooms, desks, and floors are soon gridlocked and littered with
unanswered correspondence and things to do. Forget quality; production itself
grinds to a halt.

The solution is to maximize the advantage of the relationships within the five-
element wave and work in concurrent teams, as illustrated in Figure 6. That way,
responsibility is shared throughout the system. Members from each discipline
optimize the system. The method tears down barriers between departments and
speeds the introduction process, thus decreasing costs. The focal point becomes
the customer, rather than the task. The system is totally interactive and bound
together. Each element is connected to all of the others and is focused on the
customer.

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b. What do you mean by globalization?

Ans: Globalization is the system of interaction among the countries of the

world in order to develop the global economy. Globalization refers to the
integration of economics and societies all over the world. Globalization involves
technological, economic, political, and cultural exchanges made possible largely
by advances in communication, transportation, and infrastructure.

Liberalization is another aspect of globalization. Both are two faces of one coin.
Liberalization is known for free trade and business. In the global era,
liberalization has a greater positive aspect for trade and business. Liberalization
gives a policy to make an economy open to trade and invest across the world
with suitable growth. In the capitalist and imperialist era, no country has
achieved economic success and substantial increases in living standards for its
people without being open to the rest of the world. Liberalization advocates the
aspect of free trades. In the recent era, free trade has given so many befits for
the poor especially. Liberalization has created many new jobs for unskilled
workers also.

Free trade has been the most successful aspect for developing countries and
industries. It has changed culture and society also with new working culture.
Developing countries would gain more from global trade liberalization as a
percentage of their GDP than industrial countries, because their economies are
more highly protected and because they face higher barriers.

To open up economy to the global economy, a country has developed

competitive advantages in the manufacture of certain products in the global
world of market. For examples, we can take some countries that have opened
their economies in recent years such as – India, Vietnam and Uganda, have

MB0037 Page 14
experienced faster growth and more poverty reduction.

Although, there are only benefits from improved access to other countries’
markets, countries benefits most from liberalizing their own markets. The main
benefits for industrial countries would come from the liberalization of their
agriculture markets. Developing countries would gain about equally from
liberalization of manufacturing and agriculture. The group of low-income
countries, however, would gain most from agricultural liberalization in industrial
countries because of the greater relative importance of agriculture in their
economies.

Globalisation is a historical process rather than political or economical. It is the

result of human innovation and technological progress. Globalization has shown
the increasing integration of economics around the world. It has taken a greater
aspect in the world particularly, through trade and financial flows. Globalization
has covered the broader culture, politics and environmental dimensions of
globalisation. There are two types of integration—negative and
positive. Negative integration is the breaking down of trade barriers or
protective barriers such as tariffs and quotas. In the previous chapter, trade
protectionism and its policies were discussed.

You must remember that the removal of barriers can be beneficial for a country
if it allows for products that are important or essential to the economy. For
example, by eliminating barriers, the costs of imported raw materials will go
down and the supply will increase, making it cheaper to produce the final
products for export (like electronics, car parts, and clothes).
Positive integration on the other hand aims at standardizing international
economic laws and policies. For example, a country which has its own policies on
taxation trades with a country with its own set of policies on tariffs. Likewise,
these countries have their own policies on tariffs. With positive integration (and
the continuing growth of the influence of globalization), these countries will work
on having similar or identical policies on tariffs.
Effects of Globalization
According to economists, there are a lot of global events connected with
globalization and integration.
It is easy to identify the changes brought by globalization.
1. Improvement of International Trade. Because of globalization, the
number of countries where products can be sold or purchased has increased
dramatically.
2. Technological Progress. Because of the need to compete and be
competitive globally, governments have upgraded their level of technology.
3. Increasing Influence of Multinational Companies. A company that has
subsidiaries in various countries is called a multinational. Often, the head office
is found in the country where the company was established.

6. Give some examples of companies doing international business and

discuss how they have they have managed their business in the
international markets.

MB0037 Page 15
Ans: Multinational companies may pursue policies that are home country –
oriented or host country – oriented or world – oriented. Perlmutter uses
such terms as ethnocentric, polycentric and geocentric. However, "ethnocentric"
is misleading because it focuses on race or ethnicity, especially when the home
country itself is populated by many different races, whereas "polycentric" loses
its meaning when the MNCs operate only in one or two foreign countries.
According to Franklin Root (1994), an MNC is a parent company that
1. engages in foreign production through its affiliates located in several
countries,
2. Exercises direct control over the policies of its affiliates,
3. Implements business strategies in production, marketing, finance and staffing
that transcend national boundaries.
In other words, MNCs exhibit no loyalty to the country in which they are
incorporated.
*Howard V. Perlmutter, "The Tortuous Evolution of the Multinational
Corporation,"

Three Stages of Evolution

1. Export stage
· initial inquiries Þ firms rely on export agents
· expansion of export sales
· further expansion Þ foreign sales branch or assembly operations (to save
transport cost)
2. Foreign Production Stage
There is a limit to foreign sales (tariffs, NTBs)
DFI versus Licensing
Once the firm chooses foreign production as a method of delivering goods to
foreign markets, it must decide whether to establish a foreign production
subsidiary or license the technology to a foreign firm.

Licensing is usually first experience (because it is easy)

e.g.: Kentucky Fried Chicken in the U.K.
· it does not require any capital expenditure
· it is not risky
· payment = a fixed % of sales
Problem: the mother firm cannot exercise any managerial control over the
licensee (it is independent)
The licensee may transfer industrial secrets to another independent firm,
thereby creating a rival.
Direct Investment
It requires the decision of top management because it is a critical step.
· it is risky (lack of information) (US firms tend to establish subsidiaries in Canada
first. Singer Manufacturing Company established its foreign plants in Scotland
and Australia in the 1850s)
· plants are established in several countries
· licensing is switched from independent producers to its subsidiaries.
· export continues
3. Multinational Stage
The company becomes a multinational enterprise when it begins to plan,
organize and coordinate production, marketing, R&D, financing, and staffing. For
each of these operations, the firm must find the best location.

Rule of Thumb

MB0037 Page 16
Motives for Foreign Direct Investment (FDI)
A company whose foreign sales are 25% or more of total sales. This ratio is high
for small countries, but low for large countries, e.g. Nestle (98%: Dutch), Phillips
(94%: Swiss).
Examples: Manufacturing MNCs
24 of top fifty firms are located in the U.S.
9 in Japan
6 in Germany.
Petroleum companies: 6/10 located in the U.S.
Food/Restaurant Chains, 10/10 in the U.S.
US Multinational Corporations Exxon, GM, Ford, etc.
New MNCs do not pop up randomly in foreign nations. It is the result of conscious
planning by corporate managers. Investment flows from regions of low
anticipated profits to those of high returns.
1. Growth motive: A company may have reached a plateau satisfying domestic
demand, which is not growing. Looking for new markets.
2. Protection in the importing countries: Foreign direct investment is one way to
expand. FDI is a means to bypassing protective instruments in the importing
country.
- European Community: imposed common external tariff against outsiders. US
companies circumvented these barriers by setting up subsidiaries.
- Japanese corporations located auto assembly plants in the US, to bypass VERs.
3. High Transportation Costs: Transportation costs are like tariffs in that they are
barriers which raise consumer prices. When transportation costs are high,
multinational firms want to build production plants close to the market in order
to save transportation costs. Multinational firms that invested and built
production plants in the United States are better off than the exporting firms that
utilized New Orleans port to ship and distribute products through New Orleans,
provided that they built plants in a safe area.
4. Exchange Rate Fluctuations : Japanese firms invest here to produce heavy
construction machines to avoid excessive exchange rate fluctuations. Also,
Japanese automobile firms have plants to produce automobile parts. For
instance, Toyota imports engines and transmissions from Japanese plants, and
produce the rest in the U.S.
5. Market competition: The most certain method of preventing actual or potential
competition is to acquire foreign businesses.
GM purchased Monarch (GM Canada) and Opel (GM Germany). It did not buy
Toyota, Datsun (Nissan) and Volkswagen. They later became competitors.
6. Cost reduction: United Fruit has established banana-producing facilities in
Honduras.
Cheap foreign labour. Labour costs tend to differ among nations. MNCs can hold
down costs by locating part of all their productive facilities abroad. (Maquildoras)

Supplying Products to Foreign Buyers

Export versus Direct Foreign Investment: Foreign production is not always
an answer. Foreign markets can be better served by exporting, rather than by
creating a foreign subsidiary if there are economies of scale. If large scale
production reduces unit cost, it is better to concentrate production in one place.
MES is the minimum rate of output at which Average Cost (AC) is minimized. If
minimum efficient scale (MES) is not achieved, then export.
In other words, if there is excess capacity, why not utilize that and export
outputs to other countries? There is no point in creating another plant overseas
when domestic capacity is not fully utilized.
If the foreign demand exceeds the minimum efficient scale, then FDI.

MB0037 Page 17
 Minimum efficient scale and FDI.
International Joint Ventures
JV is a business organization established by two or more companies that
combines their skills and assets.
1. A JV is formed by two businesses that conduct business in a third country. (US
firm + British firm jointly operate in the Middle East)
2. joint venture with a local firm (GM + Shanghai Automobile Company)
3. joint venture includes local government.
Bechtel Company, US
Messerschmitt – Boelkow – Blom, Germany => Iran Oil Investment Company
National Iranian Oil Company
Why?
· Large capital costs – costs are too large for a single company
· Protection – LDC governments close their borders to foreign companies
· Bypass protectionism.
e.g.: US workers assemble Japanese parts. The finished goods are sold to the US
consumers.
Problems
Control is divided. The venture serves "two masters"
Welfare Effects
The new venture increases production, lowers price to consumers.
The new business is able to enter the market that neither parent could have
entered singly.
Cost reductions (otherwise, no joint ventures will be formed) increased market
power => not necessarily well.

MB0037 Page 18
 MB0037 – International Business Management
Assignment Set- 2

1. Evaluate the monetary system and currency markets in international

business management.

Ans: The exchange rate regimes adopted by countries in today’s international

monetary and financial system, and the system itself, are profoundly different
from those envisaged at the 1944 meeting at Bretton Woods establishing the IMF
and the World Bank. In the Bretton Woods system:

· exchange rates were fixed but adjustable. This system aimed both to avoid the
undue volatility thought to characterize floating exchange rates and to prevent
competitive depreciations, while permitting enough flexibility to adjust to
fundamental disequilibrium under international supervision;

· private capital flows were expected to play only a limited role in financing
payments imbalances, and widespread use of controls would prevent instability
in such flows;

· temporary official financing of payments imbalances, mainly through the IMF,

would smooth the adjustment process and avoid unduly sharp correction of
current account imbalances, with their repercussions on trade flows, output, and
employment.

In the current system, exchange rates among the major currencies (principally
the U.S. dollar, the euro, and Japanese yen) fluctuate in response to market
forces, with short-run volatility and occasional large medium-run swings (Figure
1). Some medium-sized industrial countries also have market – determined
floating rate regimes, while others have adopted harder pegs, including some
European countries outside the euro area. Developing and transition economies
have a wide variety of exchange rate arrangements, with a tendency for many
but by no means all countries to move toward increased exchange rate
flexibility. This variety of exchange rate regimes exists in an environment with
the following characteristics:

· partly for efficiency reasons, and also because of the limited effectiveness of
capital controls, industrial countries have generally abandoned such controls and
emerging market economies have gradually moved away from them. The growth

MB0037 Page 19
of international capital flows and globalization of financial markets has also been
spurred by the revolution in telecommunications and information technology,
which has dramatically lowered transaction costs in financial markets and further
promoted the liberalization and deregulation of international financial
transactions;

· international private capital flows finance substantial current account

imbalances, but the changes in these flows appear also sometimes to be a cause
of macroeconomic disturbances or an important channel through which they are
transmitted to the international system;

· developing and transition countries have been increasingly drawn into the
integrating world economy, in terms of both their trade in goods and services
and of financial transactions.

Lessons from the recent crises in emerging markets are that for such countries
with important linkages to global capital markets, the requirements for
sustaining pegged exchange rate regimes have become more demanding as a
result of the increased mobility of capital. Therefore, regimes that allow
substantial exchange rate flexibility are probably desirable unless the exchange
rate is firmly fixed through a currency board, unification with another currency,
or the adoption of another currency as the domestic currency (dollarization).

Flexible exchange rates among the major industrial country currencies seem
likely to remain a key feature of the system. The launch of the euro in January
1999 marked a new phase in the evolution of the system, but the European
Central Bank has a clear mandate to focus monetary policy on the domestic
objective of price stability rather than on the exchange rate. Many medium-sized
industrial countries, and developing and transition economies, in an environment
of increasing capital market integration, may also continue to maintain market-
determined floating rates, although more countries could may adopt harder pegs
over the longer term. Thus, prospects are that:

· exchange rates among the euro, the yen, and the dollar are likely to continue to
exhibit volatility, and schemes to reduce volatility are neither likely to be
adopted, nor to be desirable as they prevent monetary policy from being
devoted consistently to domestic stabilization objectives;

· several of the transition countries of central and eastern Europe, especially

those preparing for membership in the European Union, are likely to seek to
establish over time the policy disciplines and institutional structures required to
make possible the eventual adoption of the euro.

The approach taken by the IMF continues to be to advise member countries on

the implications of adopting different exchange rate regimes, to consider the
choice of regime to be a matter for each country to decide and to provide policy
advice that is consistent with the maintenance of the chosen regime.

2 a. Mention the different entry strategies to enter international

markets.

MB0037 Page 20
Ans: With rare exceptions, products just don’t emerge in foreign markets
overnight – a firm has to build up a market over time. Several strategies, which
differ in aggressiveness, risk, and the amount of control that the firm is able to
maintain, are available:

· Exporting is a relatively low risk strategy in which few investments are made in
the new country. A drawback is that, because the firm makes few if any
marketing investments in the new country, market share may be below
potential. Further, the firm, by not operating in the country, learns less about the
market (What do consumers really want? Which kinds of advertising campaigns
are most successful? What are the most effective methods of distribution?) If an
importer is willing to do a good job of marketing, this arrangement may
represent a "win-win" situation, but it may be more difficult for the firm to enter
on its own later if it decides that larger profits can be made within the country.

· Licensing and franchising are also low exposure methods of entry – you allow
someone else to use your trademarks and accumulated expertise. Your partner
puts up the money and assumes the risk. Problems here involve the fact that you
are training a potential competitor and that you have little control over how the
business is operated. For example, American fast food restaurants have found
that foreign franchisees often fail to maintain American standards of cleanliness.
Similarly, a foreign manufacturer may use lower quality ingredients in
manufacturing a brand based on premium contents in the home country.

· Contract manufacturing involves having someone else manufacture products

while you take on some of the marketing efforts yourself. This saves investment,
but again you may be training a competitor.

· Direct entry strategies, where the firm either acquires a firm or builds
operations "from scratch" involve the highest exposure, but also the greatest
opportunities for profits. The firm gains more knowledge about the local market
and maintains greater control, but now has a huge investment. In some
countries, the government may expropriate assets without compensation, so
direct investment entails an additional risk. A variation involves a joint venture,
where a local firm puts up some of the money and knowledge about the local
market.

b. How has E-commerce helped in international marketing?

Ans: Electronic commerce or in short e-commerce, refers to business activities

like selling and purchasing of products and services carried out over electronic
systems like the Internet and computer networks. The history of e-commerce
dates back to 1970, when for the first time, electronic data interchange (EDI) and
electronic fund transfer were introduced. Since then, a rapid growth of e-
commerce has pervaded almost every other aspects of business such as supply
chain management, transaction processing, Internet marketing and inventory
management.
The greatest and the most important advantage of e-commerce, is that it
enables a business concern or individual to reach the global market. It caters to
the demands of both the national and the international market, as your business
activities are no longer restricted by geographical boundaries. With the help of
electronic commerce, even small enterprises can access the global market for
selling and purchasing products and services. Even time restrictions are

MB0037 Page 21
nonexistent while conducting businesses, as e-commerce empowers one to
execute business transactions 24 hours a day and even on holidays and
weekends. This in turn significantly increases sales and profit.

Electronic commerce gives the customers the opportunity to look for cheaper
and quality products. With the help of e-commerce, consumers can easily
research on a specific product and sometimes even find out the original
manufacturer to purchase a product at a much cheaper price than that charged
by the wholesaler. Shopping online is usually more convenient and time saving
than conventional shopping. Besides these, people also come across reviews
posted by other customers, about the products purchased from a particular e-
commerce site, which can help make purchasing decisions.

For business concerns, e-commerce significantly cuts down the cost associated
with marketing, customer care, processing, and information storage and
inventory management. It reduces the time period involved with business
process re-engineering, customization of products to meet the demand of
particular customers, increasing productivity and customer care services.
Electronic commerce reduces the burden of infrastructure to conduct businesses
and thereby raises the amount of funds available for profitable investment. It
also enables efficient customer care services. On the other hand, It collects and
manages information related to customer behaviour, which in turn helps develop
and adopt an efficient marketing and promotional strategy.

3 a. Explain Bill of Lading and Letters of credit.

Ans: A bill of lading (sometimes referred to as a BOL, or B/L) is a document

issued by a carrier to a shipper, acknowledging that specified goods have been
received on board as cargo for conveyance to a named place for delivery to the
consignee who is usually identified. A thorough bill of lading involves the use of
at least two different modes of transport from road, rail, air, and sea. The term
derives from the verb "to lade" which means to load a cargo onto a ship or other
form of transportation.

A bill of lading can be used as a traded object. The standard short form bill of
lading is evidence of the contract of carriage of goods and it serves a number of
purposes:

• It is evidence that a valid contract of carriage, or a chartering contract,

exists, and it may incorporate the full terms of the contract between the
consignor and the carrier by reference (i.e. the short form simply refers to
the main contract as an existing document, whereas the long form of a bill
of lading (connaissement intégral) issued by the carrier sets out all the
terms of the contract of carriage);
• It is a receipt signed by the carrier confirming whether goods matching the
contract description have been received in good condition (a bill will be
described as clean if the goods have been received on board in apparent
good condition and stowed ready for transport); and
• It is also a document of transfer, being freely transferable but not a
negotiable instrument in the legal sense, i.e. it governs all the legal
aspects of physical carriage, and, like a cheque or other negotiable
instrument, it may be endorsed affecting ownership of the goods actually
being carried. This matches everyday experience in that the contract a

MB0037 Page 22
 person might make with a commercial carrier like FedEx for mostly airway
parcels, is separate from any contract for the sale of the goods to be
carried; however, it binds the carrier to its terms, irrespectively of who the
actual holder of the B/L, and owner of the goods, may be at a specific
moment.

The BL must contain the following information: • Name of the shipping company;
• Flag of nationality; • Shipper's name; • Order and notify party; • Description of
Goods; • Gross/net/tare weight; and • Freight rate/Measurements and weight of
goods/Total freight

A letter of credit is a document issued mostly by a financial institution which

usually provides an irrevocable payment undertaking (it can also be revocable,
confirmed, unconfirmed, transferable or others e.g. back to back: revolving but is
most commonly irrevocable/confirmed) to a beneficiary against complying
documents as stated in the credit. Letter of Credit is abbreviated as an LC or L/C,
and often is referred to as a documentary credit, abbreviated as DC or D/C,
documentary letter of credit, or simply as credit (as in the UCP 500 and UCP
600). Once the beneficiary or a presenting bank acting on its behalf, makes a
presentation to the issuing bank or confirming bank, if any, within the expiry
date of the LC, comprising documents complying with the terms and conditions
of the LC, the applicable UCP and international standard banking practice, the
issuing bank or confirming bank, if any, is obliged to honour irrespective of any
instructions from the applicant to the contrary. In other words, the obligation to
honour (usually payment) is shifted from the applicant to the issuing bank or
confirming bank, if any. Non-banks can also issue letters of credit however
parties must balance potential risks.

Letters of credit accomplish their purpose by substituting the credit of the bank
for that of the customer, for the purpose of facilitating trade. There are basically
two types: commercial and standby. The commercial letter of credit is the
primary payment mechanism for a transaction, whereas the standby letter of
credit is a secondary payment mechanism.

b. What is UNCITRAL and what it does?

Ans: The United Nations Commission on International Trade Law (UNCITRAL)

(established in 1966) is a subsidiary body of the General Assembly of the United
Nations with the general mandate to further the progressive harmonization and
unification of the law of international trade. UNCITRAL has since prepared a wide
range of conventions, model laws and other instruments dealing with the
substantive law that governs trade transactions or other aspects of business law
which have an impact on international trade. UNCITRAL meets once a year,
typically in summer, alternatively in New York and in Vienna.

4. Explain the importance of STP in international markets.

Ans: Segmentation, Targeting, and Positioning

The importance of STP

MB0037 Page 23
 Segmentation is the cornerstone of marketing – almost all marketing
efforts in some way relate to decisions on who to serve or how to implement
positioning through the different parts of the marketing mix. For example, one’s
distribution strategy should consider where one’s target market is most likely to
buy the product, and a promotional strategy should consider the target’s media
habits and which kinds of messages will be most persuasive. Although it is often
tempting, when observing large markets, to try to be "all things to all people,"
this is a dangerous strategy because the firm may lose its distinctive appeal to
its chosen segments.

In terms of the "big picture," members of a segment should generally be as

similar as possible to each other on a relevant dimension (e.g., preference for
quality vs. low price) and as different as possible from members of other
segments. That is, members should respond in similar ways to various
treatments (such as discounts or high service) so that common campaigns can
be aimed at segment members, but in order to justify a different treatment of
other segments, their members should have their own unique response
behaviour.

Approaches to global segmentation

There are two main approaches to global segmentation. At the macro

level, countries are seen as segments, given that country aggregate
characteristics and statistics tend to differ significantly. For example, there will
only be a large market for expensive pharmaceuticals in countries with certain
income levels, and entry opportunities into infant clothing will be significantly
greater in countries with large and growing birth-rates (in countries with smaller
birth-rates or stable to declining birth-rates, entrenched competitors will fight
hard to keep the market share).

There are, however, significant differences within countries. For example,

although it was thought that the Italian market would demand "no frills"
inexpensive washing machines while German consumers would insist on high
quality, very reliable ones, it was found that more units of the inexpensive kind
were sold in Germany than in Italy—although many German consumers fit the
predicted profile, there were large segment differences within that country. At
the micro level, where one looks at segments within countries. Two approaches
exist, and their use often parallels the firm’s stage of international involvement.
Intra-market segmentation involves segmenting each country’s markets from
scratch –i.e., an American firm going into the Brazilian market would do research
to segment Brazilian consumers without incorporating knowledge of U.S. buyers.
In contrast, inter-market segmentation involves the detection of segments that
exist across borders. Note that not all segments that exist in one country will
exist in another and that the sizes of the segments may differ significantly. For
example, there is a huge small car segment in Europe, while it is considerably
smaller in the U.S.

Inter-market segmentation entails several benefits. The fact that products and
promotional campaigns may be used across markets introduces economies of
scale, and learning that has been acquired in one market may be used in another
– e.g., a firm that has been serving a segment of premium quality cellular phone
buyers in one country can put its experience to use in another country that
features that same segment. (Even though segments may be similar across the
cultures, it should be noted that it is still necessary to learn about the local

MB0037 Page 24
market. For example, although a segment common across two countries may
seek the same benefits, the cultures of each country may cause people to
respond differently to the "hard sell" advertising that has been successful in
one).

The international product life cycle suggests that product adoption and spread in
some markets may lag significantly behind those of others. Often, then, a
segment that has existed for some time in an "early adopter" country such as
the U.S. or Japan will emerge after several years (or even decades) in a "late
adopter" country such as Britain or most developing countries. (We will discuss
this issue in more detail when we cover the product mix in the second half of the
term).

Positioning across markets

Firms often have to make a trade-off between adapting their products to

the unique demands of a country market or gaining benefits of standardization
such as cost savings and the maintenance of a consistent global brand image.
There are no easy answers here. On the one hand, McDonald’s has spent a great
deal of resources to promote its global image; on the other hand, significant
accommodations are made to local tastes and preferences – for example, while
serving alcohol in U.S. restaurants would go against the family image of the
restaurant carefully nurtured over several decades, McDonald’s has
accommodated this demand of European patrons.

5 a. Write a short note on branding and trademarks.

Ans: A brand is the personality that identifies a product, service or company

(name, term, sign, symbol, or design, or combination of them) and how it relates
to key constituencies: Customers, Staff, Partners and Investors etc.

Some people distinguish the psychological aspect, brand associations like

thoughts, feelings, perceptions, images, experiences, beliefs, attitudes, and so
on that become linked to the brand, of a brand from the experiential aspect.

The experiential aspect consists of the sum of all points of contact with the brand
and is known as the brand experience. The psychological aspect, sometimes
referred to as the brand image, is a symbolic construct created within the
minds of people and consists of all the information and expectations associated
with a product or service.

A trademark or trade mark is a distinctive sign or indicator used by an

individual, business organization, or other legal entity to identify that the
products or services to consumers with which the trademark appears originate
from a unique source, and to distinguish its products or services from those of
other entities.

A trademark is designated by the following symbols:

• ™ (for an unregistered trade mark, that is, a mark used to promote or

brand goods)

MB0037 Page 25
 • ℠ (for an unregistered service mark, that is, a mark used to promote or
brand services)
• ® (for a registered trademark)

A trademark is typically a name, word, phrase, logo, symbol, design, image, or a

combination of these elements.[2] There is also a range of non-conventional
trademarks comprising marks which do not fall into these standard categories,
such as those based on color, smell, or sound.

The owner of a registered trademark may commence legal proceedings for

trademark infringement to prevent unauthorized use of that trademark.
However, registration is not required. The owner of a common law trademark
may also file suit, but an unregistered mark may be protectable only within the
geographical area within which it has been used or in geographical areas into
which it may be reasonably expected to expand.

The term trademark is also used informally to refer to any distinguishing

attribute by which an individual is readily identified, such as the well known
characteristics of celebrities. When a trademark is used in relation to services
rather than products, it may sometimes be called a service mark, particularly in
the United States.

b. What are the features of exchange and currency markets?

Ans: The exchange rate regimes adopted by countries in today’s international

monetary and financial system, and the system itself, are profoundly different
from those envisaged at the 1944 meeting at Bretton Woods establishing the IMF
and the World Bank. In the Bretton Woods system:

· Exchange rates were fixed but adjustable. This system aimed both to avoid the
undue volatility thought to characterize floating exchange rates and to prevent
competitive depreciations, while permitting enough flexibility to adjust to
fundamental disequilibrium under international supervision;

· Private capital flows were expected to play only a limited role in financing
payments imbalances, and widespread use of controls would prevent instability
in such flows;

· Temporary official financing of payments imbalances, mainly through the IMF,

would smooth the adjustment process and avoid unduly sharp correction of
current account imbalances, with their repercussions on trade flows, output, and
employment.

In the current system, exchange rates among the major currencies (principally
the U.S. dollar, the euro, and Japanese yen) fluctuate in response to market
forces, with short-run volatility and occasional large medium-run swings. Some
medium-sized industrial countries also have market – determined floating rate
regimes, while others have adopted harder pegs, including some European
countries outside the euro area. Developing and transition economies have a
wide variety of exchange rate arrangements, with a tendency for many but by no
means all countries to move toward increased exchange rate flexibility.

MB0037 Page 26
This variety of exchange rate regimes exists in an environment with the
following characteristics:

· partly for efficiency reasons, and also because of the limited effectiveness of
capital controls, industrial countries have generally abandoned such controls and
emerging market economies have gradually moved away from them. The growth
of international capital flows and globalization of financial markets has also been
spurred by the revolution in telecommunications and information technology,
which has dramatically lowered transaction costs in financial markets and further
promoted the liberalization and deregulation of international financial
transactions;

· international private capital flows finance substantial current account

imbalances, but the changes in these flows appear also sometimes to be a cause
of macroeconomic disturbances or an important channel through which they are
transmitted to the international system;

· developing and transition countries have been increasingly drawn into the
integrating world economy, in terms of both their trade in goods and services
and of financial transactions.

Lessons from the recent crises in emerging markets are that for such countries
with important linkages to global capital markets, the requirements for
sustaining pegged exchange rate regimes have become more demanding as a
result of the increased mobility of capital. Therefore, regimes that allow
substantial exchange rate flexibility are probably desirable unless the exchange
rate is firmly fixed through a currency board, unification with another currency,
or the adoption of another currency as the domestic currency (dollarization).

6. Discuss the various International product and pricing decisions.

Ans: In decisions on producing or providing products and services in the

international market it is essential that the production of the product or service is
well planned and coordinated, both within and with other functional area of the
firm, particularly marketing. For example, in horticulture, it is essential that any
supplier or any of his "out grower" (sub-contractor) can supply what he says he
can. This is especially vital when contracts for supply are finalized, as failure to
supply could incur large penalties. The main elements to consider are the
production process itself, specifications, culture, the physical product, packaging,
labelling, branding, warranty and service.

Recent developments in open-economy macroeconomics have progressed

under the paradigm of nominal price rigidities, where monetary disturbances are
the main source of fluctuations. Following developments in closed-economy
models, new open-economy models have combined price rigidities and market
imperfections in a fully micro founded inter-temporal general equilibrium setup.
This framework has been used extensively to study the properties of the
international transmission of shocks, as well as the welfare implications of
alternative monetary and exchange rate policies.

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Imperfect competition is a key feature of the new open-economy framework.
Because agents have some degree of monopoly power instead of being price
takers, this framework allows the explicit analysis of pricing decisions. The two
polar cases for pricing decisions are producer-currency pricing and local-currency
pricing. The first case is the traditional approach, which assumes that prices are
preset in the currency of the seller. In this case, prices of imported goods change
proportionally with unexpected changes in the nominal exchange rate, and the
law of one price always holds.’ In contrast, under the assumption of local-
currency pricing, prices are preset in the buyer’s currency. Here, unexpected
movements in the nominal exchange rate do not affect the price of imported
goods and lead to short-run deviations from the law of one price.

Empirical evidence using disaggregated data suggests that international markets

for tradable goods remain highly segmented and that deviations in the law of
one price are large, persistent, and highly correlated with movements in the
nominal exchange rate, even for highly tradable goods. Moreover, there is strong
evidence that the large and persistent movements that characterize the
behaviour of real exchange rates at the aggregate level are largely accounted
for by deviations in the law of one price for tradable goods.

In this article I make use of a simplified version of a two-country model where

the two markets are segmented, allowing firms to price discriminate across
countries, and where prices are preset in the consumer’s currency. This model
generates movements in the real exchange rate in response to unexpected
monetary shocks, which are a result of the failure of the law of one price for
tradable goods. I then compare this model to a version in which prices are preset
in the producer’s currency and examine the implications of these two alternative
price-setting regimes for several key issues.

The price-setting regime determines the currency of denomination of imported

goods and the extent to which changes in exchange rates affect the relative
price of imported to domestic goods and the international allocation of goods in
the short run. That is, different pricing regimes imply different roles for the
exchange rate in the international transmission of monetary disturbances. As we
shall see, this assumption has very striking implications for several important
questions, namely real exchange rate variability, the linkage between
macroeconomic volatility and international trade, and the welfare effects of
alternative exchange rate regimes, among others.

While generating deviations from the law of one price that are absent from
models assuming producer-currency pricing, the assumption of local-currency
pricing still leaves important features of the data unexplained. The key role of
this assumption in the properties of open-economy models suggests that it is
necessary to keep exploring the implications of alternative pricing structures in
open-economy models.

In Section 1, I review the empirical evidence on the behaviour of real exchange

rates and on international market segmentation and pricing. In Section 2, I
present the model with local-currency pricing and explore the main implications
of this pricing assumption. The final section concludes.

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