Q.1 What is WTO? What is GATT? Explain both.

WTO

The World Trade Organization (WTO) is the only global international

organization dealing with the rules of trade between nations. At its heart are
the WTO agreements, negotiated and signed by the bulk of the world’s
trading nations and ratified in their parliaments. The goal is to help
producers of goods and services, exporters, and importers conduct their
business.
The WTO provides a forum for negotiating agreements aimed at reducing
obstacles to international trade and ensuring a level playing field for all, thus
contributing to economic growth and development. The WTO also provides
a legal and institutional framework for the implementation and monitoring
of these agreements, as well as for settling disputes arising from their
interpretation and application. The current body of trade agreements
comprising the WTO consists of 16 different multilateral agreements (to
which all WTO members are parties) and two different plurilateral
agreements (to which only some WTO members are parties).
Over the past 60 years, the WTO, which was established in 1995, and its
predecessor organization the GATT have helped to create a strong and
prosperous international trading system, thereby contributing to
unprecedented global economic growth. The WTO currently has members,
of which 117 are developing countries or separate customs territories. WTO
activities are supported by a Secretariat of some 700 staff, led by the WTO
Director-General. The Secretariat is located in Geneva, Switzerland, and has
an annual budget of approximately CHF 200 million ($180 million, €130
million). The three official languages of the WTO are English, French and
Spanish.
Decisions in the WTO are generally taken by consensus of the entire
membership. The highest institutional body is the Ministerial Conference,
which meets roughly every two years. A General Council conducts the
organization's business in the intervals between Ministerial Conferences.
Both of these bodies comprise all members. Specialized subsidiary bodies
(Councils, Committees, Sub-committees), also comprising all members,
administer and monitor the implementation by members of the various WTO
agreements.
More specifically, the WTO's main activities are:
— negotiating the reduction or elimination of obstacles to trade (import
tariffs, other barriers to trade) and agreeing on rules governing the conduct
of international trade (e.g. antidumping, subsidies, product standards, etc.)

— administering and monitoring the application of the WTO's agreed rules

for trade in goods, trade in services, and trade-related intellectual property
rights

— monitoring and reviewing the trade policies of our members, as well as

ensuring transparency of regional and bilateral trade agreements

— settling disputes among our members regarding the interpretation and

application of the agreements

— building capacity of developing country government officials in

international trade matters

— assisting the process of accession of some 30 countries who are not yet
members of the organization

— conducting economic research and collecting and disseminating trade

data in support of the WTO's other main activities

— explaining to and educating the public about the WTO, its mission and its
activities.

The WTO's founding and guiding principles remain the pursuit of open
borders, the guarantee of most-favored-nation principle and non-
discriminatory treatment by and among members, and a commitment to
transparency in the conduct of its activities. The opening of national markets
to international trade, with justifiable exceptions or with adequate
flexibilities, will encourage and contribute to sustainable development, raise
people's welfare, reduce poverty, and foster peace and stability. At the same
time, such market opening must be accompanied by sound domestic and
international policies that contribute to economic growth and development
according to each member's needs and aspirations.
GATT

The General Agreement on Tariffs and Trade (typically abbreviated GATT)

was negotiated during the UN Conference on Trade and Employment and
was the outcome of the failure of negotiating governments to create the
International Trade Organization (ITO). GATT was signed in 1947 and
lasted until 1993, when it was replaced by the World Trade Organization in
1995. The original GATT text (GATT 1947) is still in effect under the WTO
framework, subject to the modifications of GATT 1994.[1]
In 1993, the GATT was updated (GATT 1994) to include new obligations
upon its signatories. One of the most significant changes was the creation of
the World Trade Organization (WTO). The 75 existing GATT members and
the European Communities became the founding members of the WTO on 1
January 1995. The other 52 GATT members rejoined the WTO in the
following two years (the last being Congo in 1997). Since the founding of
the WTO, 21 new non-GATT members have joined and 29 are currently
negotiating membership. There are a total of 153 member countries in the
WTO.

Of the original GATT members, Syria [4] [5] and the SFR Yugoslavia has
not rejoined the WTO. Since FR Yugoslavia, (renamed to Serbia and
Montenegro and with membership negotiations later split in two), is not
recognized as a direct SFRY successor state; therefore, its application is
considered a new (non-GATT) one. The General Council of WTO, on 4
May 2010, agreed to establish a working party to examine the request of
Syria for WTO membership.[6][7] The contracting parties who founded the
WTO ended official agreement of the "GATT 1947" terms on 31 December
1995. Serbia and Montenegro are in the decision stage of the negotiations
and are expected to become the newest members of the WTO in 2012 or in
near future.
Whereas GATT was a set of rules agreed upon by nations, the WTO is an
institutional body. The WTO expanded its scope from traded goods to trade
within the service sector and intellectual property rights. Although it was
designed to serve multilateral agreements, during several rounds of GATT
negotiations (particularly the Tokyo Round) plurilateral agreements created
selective trading and caused fragmentation among members. WTO
arrangements are generally a multilateral agreement settlement mechanism
of GATT
Q.2 What is MNC? Explain the 3 stages of evolution.
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. 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.

Ownership criterion: some argue that ownership is a key criterion. A firm

becomes multinational only when the headquarter or parent company is
effectively owned by nationals of two or more countries. For example, Shell
and Unilever, controlled by British and Dutch interests, are good examples.
However, by ownership test, very few multinationals are multinational. The
ownership of most MNCs is uni-national. (See videotape concerning the
Smith-Corona versus Brothers case) Depending on the case, each is
considered an American multinational company in one case, and each is
considered a foreign multinational in another case. Thus, ownership does not
really matter.

Nationality mix of headquarter managers: An international company is

multinational if the managers of the parent company are nationals of several
countries. Usually, managers of the headquarters are nationals of the home
country. This may be a transitional phenomenon. Very few companies pass
this test currently.

Business Strategy: global profit maximization

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
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.

Q.3 Mention the differences between currency markets and

exchange rate markets in the context of international business
environment
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 market 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.

Q.4 a) Explain the role of privatization in international business.

[b]Privatization is the incidence or process of transferring ownership of a business,

enterprise, agency or public service from the public sector (the state or government)
to the private sector (businesses that operate for a private profit) or to private non-
profit organizations. In a broader sense, privatization refers to transfer of any
government function to the private sector - including governmental functions like
revenue collection and law enforcement.[1]
The term "privatization" also has been used to describe two unrelated transactions.
The first is a buyout, by the majority owner, of all shares of a public corporation or
holding company's stock, privatizing a publicly traded stock, and often described as
private equity. The second is a demutualization of a mutual organization or
cooperative to form a joint stock company.

The role of privatization in international business

1)Development would be faster (due to competition with the other private

parties)
2)Innovative solutions (due to again competition with the other private
parties)
3)effective & time bound results
4)cost cuttings
Privatization is the implementation of a decision to sell companies owned by
the State to private individuals/ companies.
Benefits of privatization are making the erstwhile public sector commercial
enterprise survive in competitive markets through better efficiency, higher
productivity, improved product quality and customer service, and reduction
of waste and leakages due to State ownership.
There are no limitations of privatization except that hitherto unproductive or
less productive labor would have learn afresh the art of serving through hard
work and excellence.

4/b) Mention the relevance of these international commercial terms:

FCA, EXW, DES, CIF and DDP.
FCA {+ the named point of departure}=Free Carrier

The delivery of goods on truck, rail car or container at the specified point
(depot) of departure, which is usually the seller’s premises, or a named
railroad station or a named cargo terminal or into the custody of the carrier,
at seller’s expense. The point (depot) at origin may or may not be a customs
clearance centre. Buyer is responsible for the main carriage/freight, cargo
insurance and other costs and risks.
The term FCA is also used in the RO/RO (roll on/roll off) services. In the
export quotation, indicate the point of departure (loading) after the acronym
FCA, for example FCA Hong Kong and FCA Seattle.

EXW {+ the named place}=Ex Works

Ex means from. Works means factory, mill or warehouse, which are the
seller’s premises. EXW applies to goods available only at the seller’s
premises. Buyer is responsible for loading the goods on truck or container at
the seller’s premises, and for the subsequent costs and risks.
In the quotation, indicate the named place (seller’s premises) after the
acronym EXW, for example EXW Kobe and EXW San Antonio.The term
EXW is commonly used between the manufacturer (seller) and export-trader
(buyer), and the export-trader resells on other trade terms to the foreign
buyers.

DES {+ the named port of destination}=Delivered Ex Ship

The delivery of goods on board the vessel is at the named port of destination
(discharge) at seller’s expense. Buyer assumes the unloading fee, import
customs clearance, payment of customs duties and taxes, cargo insurance,
and other costs and risks.
In the export quotation, indicate the port of destination (discharge) after the
acronym DES, for example DES Helsinki and DES Stockholm.

CIF {+ the named port of destination}=Cost, Insurance and Freight

The cargo insurance and delivery of goods is to the named port of

destination (discharge) at the seller’s expense. Buyer is responsible for the
import customs clearance and other costs and risks.
In the export quotation, indicate the port of destination (discharge) after the
acronym CIF, for example CIF Pusan and CIF Singapore.
DDP {+ the named point of destination}=Delivered Duty Paid

The seller is responsible for most of the expenses, which include the cargo
insurance, import customs clearance, and payment of customs duties and
taxes at the buyer’s end, and the delivery of goods to the final point at
destination, which is often the project site or buyer’s premises. The seller
may opt not to insure the goods at his/her own risks.
In the export quotation, indicate the point of destination (discharge) after the
acronym DDP, for example DDP Bujumbura and DDP Mbabane.

Q.5 Give short notes on Letter of credit and Bill of Lading

Letter of Credit

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 honor irrespective of any
instructions from the applicant to the contrary. In other words, the obligation
to honors (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.
Letters of credit are often used in international transactions to ensure that
payment will be received. Due to the nature of international dealings
including factors such as distance, differing laws in each country and
difficulty in knowing each party personally, the use of letters of credit has
become a very important aspect of international trade. The bank also acts on
behalf of the buyer (holder of letter of credit) by ensuring that the supplier
will not be paid until the bank receives a confirmation that the goods have
been shipped.

Bill of Lading

A Bill of Lading is a type of document that is used to acknowledge the

receipt of a shipment of goods and is an essential document in transporting
goods overland to the exporter’s international carrier. A through 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 noun "bill", a schedule of
costs for services supplied or to be supplied, and from the verb "to lade"
which means to load a cargo onto a ship or other form of transport.
In addition to acknowledging the receipt of goods, a Bill of Lading indicates
the particular vessel on which the goods have been placed, their intended
destination, and the terms for transporting the shipment to its final
destination. Inland, ocean, through, and airway bill are the names given to
bills of lading.
For example, suppose that a logistics company must transport gasoline from
a plant in Texas to a gas station in Arizona via heavy truck. A plant
representative and the driver would sign the bill of lading after the gas is
loaded onto the truck. Once the gasoline is delivered to the gas station in
Arizona, the truck driver must have the clerk at the station sign the
document as well.

Q.6 Discuss the entry methods in international business with

relevant examples.
Methods of entry in international business

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.