Q.

1] Define Country risk and state political and economic risk associated with the country can be evaluated.

Ans.

Country Risk

A collection of risks associated with investing in a foreign country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk, which is the risk of capital being locked up or frozen by government action. Country risk varies from one country to the next. Country risk can reduce the expected return on an investment and must be taken into consideration whenever investing abroad

Political Risk Analysis Foreign Direct Investment (F.D.I.) continues to grow in emerging markets, some of which can be hazardous. Consequently, war, civil conflict, terrorism, insurgency, social unrest, and crime can cause fatalities, injuries, damage, and loss for the people, assets, operations, reputations, and environments of transnational businesses and Non Governmental Organizations (N.G.O.s) that have interests in these dangerous environments. Analysis of the politics of these volatile areas provides management with a qualified and quantified assessment of the likelihood of the occurrence of such threats and the consequent level of impacts on their organizations. This political risk analysis can then be applied by management to mitigate the level of damage by strengthening organizational vulnerabilities. If political risk analysis is not undertaken and subsequently maintained as an integral part of business planning, organizational vulnerabilities cannot be identified and consequently strengthened and levels of impact cannot then be reduced or negated. An organization would, therefore, be more exposed than necessary to political risk. Thus, political risk analysis is critical for effective business planning from Board to project level.

Economic risk Economic risks can be manifested in lower incomes or higher expenditures than expected. The causes can be many, for instance, the hike in the price 1

for raw materials, the lapsing of deadlines for construction of a new operating facility, disruptions in a production process, emergence of a serious competitor on the market, the loss of key personnel, the change of a political regime, or natural disasters. Reference class forecasting was developed to eliminate or reduce economic risk.

In business means of assessing risk vary widely between professions. Indeed, they may define these professions; for example, a doctor manages medical risk, while a civil engineer manages risk of structural failure. A professional code of ethics is usually focused on risk assessment and mitigation (by the professional on behalf of client, public, society or life in general). In the workplace, incidental and inherent risks exist. Incidental risks are those that occur naturally in the business but are not part of the core of the business. Inherent risks have a negative effect on the operating profit of the business.

Q. 2] Explain issues involved in sub-contracting and international procurement.

ANS. Procurement, contracting and subcontracting safety-critical system analysis, development, and operation must involve defining and pursuing the roles and responsibilities of all of the stakeholders in the process, including the procurer, the prime contractor and any subcontractors. Some of the more complex issues that must be dealt with in safety contract management are those where a subsystem is being procured. In such cases, hazard identification and risk analysis usually involve a range of stakeholders through mechanisms such as system safety working groups. Many problems occur when the limits of the contractual duties and duty of care of various stakeholders have become confused. There are perceived risks in international procurement that are not present in domestic procurement. One major risk is exchange rate fluctuations, which, at a minimum, make pricing uncertain over time. Hedging can reduce this uncertainty, but hedging has its own hazards. Failure to buy according to forecast (the normal state of affairs in most manufacturing companies) can lead to significant unexpected gains or losses when hedge contracts are put into place based on the forecasts. Another danger of exchange rate changes is that they might make a supplier selection less than optimum if the suppliers currency strengthens relative to the currency of its competition. (Of course, this could happen with domestic suppliers as well as foreign ones.) 2

This study addressed how these issues are handled by the partner companies. The second major investigated risk is political uncertainty. This uncertainty is frequently mentioned as a significant concern for companies, and the study examined how many of them deal with it.

Q.3 ] The NAFTA and EU are important regional co-operation agreements. Discuss. Ans. NAFTA- The north American free trade agreement (NAFTA) came into being on January 1,1994.the most affluent nations of the world ,i.e. the USA and Canada along with Mexico a developing country joined together to form a trade block. A free trade agreement was signed by the USA and Canada in 1989.this was extended to Mexico in 1994.NAFTA is expected to eliminates all tariffs and trade barriers amng these countries by 2009.However internal tariffs on a large number of product categories were removed already. NAFTA has a population of 363 million and hence it is one of the significant trading areas in the globe. Objectives

To create new business opportunities particularly in the Mexico To enhance the competitive advantage of the companies operating in the USA,Canada and Mexico in wider international markets. To reduce the prices f the products and services by enhancing the competition To enhance industrial development and thereby employment throughout the region. To provide stable and predictable political environment for the investors. To develop industries in Mexico in order to create employment and to reduce migration from Mexico to the USA. To assist Mexico in earning additional foreign exchange to meet its foreign debt burden. To improve and consolidate political relationship among member countries. 3

 Measures

Opening up of government procurement markets in each member country of NAFTA. Residents of NAFTA countries can invest in any other NAFTA countries freely. Protection on intellectual property rights of the NAFTA member countries. Simplification and harmonization of products standards in all the member countries of the NAFTA. Free flow of employees and business people from one member country to another. Prevention of on-Mexican firms assembling goods in Mexico. Avoidance of re-export of the products imported by any member country from the third party. This condition is not applicable, in case certain percentages of manufacturing costs are incurred in the importing country. This percentage is 50% in case of the USA and Canada and 80 in case of Mexico. Pollution control along the USA-Mexico border.

Critical Appraisal The emergence of NAFTA enables further development of the USA and Canada and for the significant development of Mexico. Further ,the free flow of capital and human resources enables achieving equilibrium in the regional development. From the U.S and Canadian governments point of view, NAFTA was an opportunity to respond to the growing threat of the large European Union trading block. From the Mexican governments point of view the agreement was a way to secure future foreign investment. A number of companies in the automotive industry, large agribusiness, telecommunications, high technology manufacturing, and big grain import industries have benefited from NAFTA. EUROPEAN UNION (EU) 4

EU consist of three organizations, i.ie., the European coal and steel community(ECSC), THE EUROPEAN economic community(EEC), and the European atomic energy community( Euratom).ECSC functions for 50 years and he EEC and EURATOM function for an unlimited time duration. The main objective of the EEG is the community shall have its task ,by setting up a common market\, to promote throughout the community a harmonious development by economic activities, a continuous and balanced expansion, an increase in stability and accelerated raising of the standard of living and closer relations between the member states belonging to it. Activities Of the European Union

Elimination of custom duties, quantitative restrictions with regard to exports and imports of goods among member countries. ESTABLISHMENT /formulation of a common custom tariffs and common commercial policy with regards to non-member countries. Abolition of all obstacles for movement of persons, services and capital among member countries. Formulation of common policy in the area of agriculture Formulation of a common policy in the area of transport. Establishment of a system which would ensure competition among member countries. Application of programmes in order to coordinate the economic policies of the member countries. Application of the procedures and programmes to control the disequilibrium in the balance of payments of member countries. Approximation of legislation of the member governments to extend required for the proper functioning of the common market. Establishment of European social fund with a view to enhance the employment opportunities for workers and to improve their living standards. Establishment of European investment bank for mobilization of fresh resources and to contribute to the economic development of the community.

 Development of associations with foreign countries to promote jointly the economic and social development of the EU.

Q.4 ]Any indigenous organization has potential to become global organization in the todays business environment. Explain sequential steps which are prerequisites to emerge as global corporation. ANS. Globalization does not take place in a single instance. It takes place gradually through an evolutionary approach. Depending on the industry you are in, and where you intend to seek business, here are 5 considerations before you take that big leap: 1) Dont assume you have to be big to go global. Its largely thanks to inexpensive technology and services designed to help small businesses operate across borders with the same efficiencies as large businesses. 2) Research the legal, HR and tax environment in any countries where you will have a physical presence, before you leap. If you need or plan to have a presence in or ongoing sales to another country such as local employees, local warehouses or exports of goods to that country be sure to investigate all legal, HR and tax implications. Two main considerations: Employment Regulations and Practices. Shipping and Importation.

3) Invest in technology from the get-go. The right technology, especially cloud based software, can position your business to scale without adding incremental cost or a large staff base. Web-based software services, email, social media and inexpensive telecommunications bring the world to your fingertips, helping bridge wide distances. 4 ) If you plan to export physical goods, get exporting help. There are many considerations tied up in the decision to export. You have to understand your market in the country you are targeting. You have to understand exporting laws and regulations, both here in the United States and in the target country. Sometimes licenses are required. 5) Figure out how youre going to get paid . Doing business internationally used to rely heavily on letters of credit. Letters of credit are still widely used.

6) Determine the Culture of that country. Culture is part of the external influences that impact the consumer. That is, culture represents influences that are imposed on the consumer by other individuals. Therefore, cultural knowledge is necessary. After going through these through considerations we can go through 5 stages. According to Ohamae, globalization has five stages. They are, 1) Domestic company exports to foreign countries directly on its own. 2) In the second stage, the domestic company exports to foreign countries directly on its own. 3) In the third stage, the domestic company becomes an international company by establishing production and marketing operations in various key foreign countries. 4) In the fourth stage, the company replicates a foreign company in the foreign country by having all the facilities including R&D, full-fledged human resources etc. 5) In the fifth stage, the company becomes a true foreign company. Q.5] Multinationals and FDIs have become an integral part of the developing economies like India. State the merits and demerits of permitting MNCs and FDIs from international experiences witnessed by few nations during pervious decade. ANS. The growing role of foreign direct investment and multinational corporations (MNCs) in developing countries in the age of globalization is rarely disputed. The nature of the impact of FDI on the growth and development of the Third World, however, is a controversial topic in contemporary international relations and economic development theory. Historically, developing countries heavily depended on the economies of the industrialized world for their own economic survival. During the past two decades, however, the world economy has increasingly "globalized" through the liberalization of world trade and capital markets, the growing internationalization of corporate production and distribution, and the destruction of barriers to the trade of goods and services through technological advances. Meanwhile, the worlds developing countries are now more important, and influential, actors in international trade and the global market. Consequently, developing states now have a significantly greater impact on the global economy, particularly on the economies of industrialized states. 7

The increasing integration of developing countries into international trade and the global market is accompanied by a dramatic influx of foreign capital in developing countries, particularly in the form of foreign direct investment (FDI) through multinational corporations (MNCs). Pros and Cons of MNCs and FDI witness by India Merits: MNCs have access to qualified people in India. Due to rising FDI, Indias federal government, instead of inviting foreign investment and then allocating inflows to the states, the initiative lies with the state itself. Another benefit concerns Indias growing middle class. So, Indian consumption is now able to expand rather then limited to only domestic products. MNCs played important role in helping to supply Indias ever increasing demand for infrastructure. Demerits: MNCs bring inappropriate products to India. E.g. some MNCs such as PepsiCo, Pizza hut and Mc Donalds have experienced opposition over the years. Connected to the power of brand names in India is the criticism that MNCs often crowd out Indias domestic industries. Indian workers are often exploited and paid low wages by MNCs. Another criticism of MNCs in India concerns Child labor.

Pros and Cons of Chinese Investments in Zambia Of late, investments by Chinese corporations in Zambia seem to have become a topical issue among politicians and the general public.

Ordinarily, investments by Chinese companies take the form of foreign direct investment (FDI). Proponents of this form of investment usually cite the potential benefits of the multinational enterprise (MNE) to a host nation in discerning the necessity of such investment, since the MNE is generally regarded as the vector of FDI.

For a country like Zambia, which has failed to break the bondage of the majority of its people to destitution, the potential benefits of Chinese and other foreign investments certainly outweigh the potential costs of such investments. In fact, the costs often associated with FDI and the MNE are normal effects of a live economy which Zambia could reduce to acceptable levels through regulatory and administrative mechanisms.

But Zambia should not expect such investments to flow into its economy like manna from heaven, because a great deal of effort is needed to lure foreign investors. It is, therefore, essential to create an enabling investment environment that provides for attractive tax incentives, adequate skilled labor, a network of business support services and institutions, well-developed infrastructure (including energy, water, telecommunications, and transport facilities), and protracted industrial harmony.

Besides, both local and foreign investors expect the Zambian government to provide for the following: (a) Adequate public services, including police and fire protection; (b) Adequate public facilities, including educational, vocational, recreational, sewage, and healthcare facilities; (c) Political and civic leaders who are fair and honest in their dealings with private businesses; (d) Stable economic policies, including a formal assurance against nationalization or expropriation of privately owned businesses; (e) A well-developed stock market; (f) Less bureaucratic licensing, import, export, and other procedures; (g) Adequate information about investment and marketing problems and opportunities, such as that which is currently being provided by the Zambia Development Agency.

If they are adequately catered for, these services and facilities can boost investments by both local and foreign investors, as well as enable businesses to operate more efficiently and eventually deliver economic and social outputs to society at reasonable costs and prices.

The Zambian government should expect foreign investors to: (a) Cooperate with local institutions in improving community life, and participate in programs designed to benefit less-advantaged citizens; (b) Comply with stipulated laws and regulations; (c) Respect local peoples traditional and ethical values; (d) Refrain from engaging in unscrupulous business practices. Q6) State the advantages and disadvantages of FDI to the home and host country? List out the problems faced by MNEs in the home country and the problems faced by host country due to MNEs ANS. Benefits of Foreign Direct Investment (Home Country) FDI benefits the home country to a large extent. The home country refers to the country from which the funds originate for onward investment in another foreign country. Listed below are some of the reasons as to why foreign direct investment is beneficial to the home country.

1. Cost Advantages.
2. New Markets. 3. Exposure to other countries. 4. International Relations. Disadvantages of Foreign Direct Investment (Home Country) Foreign direct investment may be very advantageous to the home country, that is the country which provides the investment flows with respect to the profits, dividends and gains being repatriated to it, however, having operations in another country gives rise to additional risks which at times may prove very costly for the home country. Let us see some of the ways in which foreign direct investment may be disadvantageous to the home country. 1. Loss of Employment. 2. Problem of Repatriation. 3. Possibility of Loosing Competitive Advantage. Benefits of Foreign Direct Investment (Host Country) Foreign Direct Investment (FDI) has become a very popular means of transfer for capital flows from one country to another. In short, FDI refers to an investment in which an entity for another country invests capital in some 10

income generating assets in another country and maintains full or partial control over such assets acquired. There are several benefits of foreign direct investment which accrue to both the home country as well as the host country. However, it must be noted that such benefits accrue only when appropriate regulation and an ethical sense of doing business exists with the home country, the host country as well as the foreign investor. Some benefits of foreign direct investment are mentioned below. 1. Technological Gap. 2. Exploitation of Natural Resources. 3. Employment Generation. 4. Development of Managerial Pool.

Disadvantages of Foreign Direct Investment (Host Country) Foreign direct investment may be very advantageous to the host country that is the country which receives the investment flows in terms of helping the country progress economically and financially. However, foreign direct investment can remain beneficial only when the governments of the host countries put in needed regulations so as to prevent the country from being exploited and used as a profit generating machine for such corporate giants. The past has given many examples of how foreign direct investment can also at times be detrimental to the economy of a country, some examples of which are highlighted below:

1. 2. 3. 4.

Political Lobbying. Exploitation of Resources. Threaten Small Scale Industries. Technology.

Problems faced by Host country due to MNEs Technology developed by the MNCs may not suit the needs of host country. MNCs may not operate within national autonomy and sovereignty. Monopolistic practices of MNCs may kill the domestic industry. MNCs may adopt ethnocentric approach in staffing. MNCs may use the natural resources of the host country indiscriminately.

11

A large sum of money may flow from the domestic country in the form of dividends and royalty. MNCs normally concentrate on consumer goods and not capital goods and infrastructural goods in host country. MNCs may distort the economic structure of the host country. MNCs normally provide the outdated technology to the host country industry. Pollutes the environment of the host countries.

Problems faced by MNEs in the Home country. Transfer capital to other countries and cause unfavorable balance of payments. May not create employment opportunities to domestic people by following geocentric approach or outsourcing business operations in various countries like USA software companies outsourcing business operation in India. May neglect the industrial development of the home country as the transnational companies follow the secular approach. May cause erosion of the domestic culture. May exploit the natural resources resulting in excessive exploitation of natural resources.

Q7) Why is FDI important for home and host country? Discuss the FDI environment in china and India. Draw lessons for India to increase inward FDI. ANS. FDI Definition: FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct 12

investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly. Importance of FDI The simple answer is that making a direct foreign investment allows companies to accomplish several tasks: Avoiding foreign government pressure for local production. Circumventing trade barriers, hidden and otherwise. Making the move from domestic export sales to a locally-based national sales office. Capability to increase total production capacity. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc; A more complete response might address the issue of global business partnering in very general terms. While it is nice that many business writers like the expression, think globally, act locally, this often used clich does not really mean very much to the average business executive in a small and medium sized company. The phrase does have significant connotations for multinational corporations. But for executives in SMEs, it is still just another buzzword. The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies. Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets. Small and medium sized companies tend to be more concerned with selling their products in overseas markets. The advent of the Internet has ushered in a new and very different mindset that tends to focus more on access issues. SMEs in particular are now focusing on access to markets, access to expertise and most of all access to technology.

FDI Environment in China: Foreign direct investment in China rose to a record $105.7 billion last year, underscoring confidence that rising incomes will boost demand in the worlds 13

fastest-growing major economy.Investment climbed 17.4 percent from a year earlier, the Ministry of Commerce said in a statement in Beijing today. Spending in December rose 15.6 percent from a year earlier to $14 billion. Estimates of five economists surveyed by Bloomberg News for the month ranged from an increase of 29 percent to a decline of 21 percent. Boosting wages and reducing income inequality will be major tasks over the next five years, Chinas leaders said in October after setting targets for the economy for the 12th five-year plan. Samsung Electronics Co. and LG Display Co., the worlds two biggest makers of liquid-crystal displays, received Chinese government approval to build LCD factories in the country and meet surging demand. Foreign companies tapping Chinese consumers will benefit from rising wages and will continue to invest in China, said Alan Liao, an economist at China trust Commercial Bank in Taipei. Theres a misconception that higher salaries will force companies out of China, this may apply to low-margin textiles or toy manufacturers, but its not true for value-added service sectors and highmargin technology companies. Mergers Jump Outbound investment by non-financial companies climbed 36.3 percent to $59 billion, the commerce ministry said today. Overseas mergers and acquisitions by Chinese companies rose more than 30 percent last year to a record 188 with a combined deal value of $38 billion. Middle-income and affluent consumers with annual household incomes of more than 60,000 yuan ($9,000) will probably almost triple in the next 10 years to 415 million. will be strong increases in salaries in the five years to 2015 as the nations supply of labor dwindles and consumers spend more and save less. Wages may rise by 19 percent a year and private consumption may climb to 41.7 percent of GDP in 2015 from 35.6 percent last year. FDI Environment in India:

14

The constant efforts of the Government of India in making the country an investor friendly destination are reaping dividends. Alongside the United Nations Conference on Trade and Development (UNCTAD) ranking India at second place in global foreign direct investments (FDI) in 2010, in its report titled, 'World Investment Prospects Survey 2009-2012' has added to the initiative to a great extent . The report further forecasts, India to be among the top five attractive destinations for international investors during 2010-12. FDI inflow rose by more than 100 per cent to US$ 4.66 billion in May 2011, which is the highest monthly inflow in 39 months, while the cumulative amount of FDI equity inflows from April 2000 to May 2011 stood at US$ 205.96 billion, according to the latest data released by the Department of Industrial Policy and Promotion (DIPP). The service (including financial and non-financial) sectors attracted highest FDI equity inflows during April-May 2011-12 at US$ 910 million. India received maximum FDI from countries like Mauritius, Singapore, and the US at US$ 56.31 billion, US$ 13.25 billion and US$ 9.71 billion, respectively, during April 2000-May 2011. India's foreign exchange (Forex) reserves have increased by US$ 2.29 billion for the week ended July 22, 2011, according to the weekly statistical bulletin released by the Reserve Bank of India (RBI). In the week under consideration, foreign currency assets went up by US$ 2.23 billion to US$ 284.53 billion. Furthermore, India may emerge as US Export Import Bank's (Ex-Im) largest market in next 12-18 months. During the last nine months, we have approved 173 transactions involving 100 companies and US$ 1.4 billion in financing of US exports to India, as per Fred P Hochberg, the bank's Chairman and President. Investment Scenario The total merger and acquisitions (M&A) and private equity (PE) (including qualified institutional placement (QIP)) deals in the first half of 2011 include 524 deals valued at US$ 32.48 billion, according to data released by Grant Thornton India. The global M&A activity has been increasing so far in 2011 (Jan-June 2011) clocking deals worth US$ 1.5 trillion. In addition, the total value of outbound deals-Indian companies acquiring businesses outside India-in the first half of 2011 was recoded at 86 deals worth US$ 5.89 billion. PE deals amounted to 203 deals worth US$ 5.09 billion in the first half of 2011 as compared to 125 deals worth US$ 2.95 billion during the corresponding period in 2010.

15

Q8) Companies and countries enter into international Business when opportunities are available in domestic market. ANS. A mode of entry into an international market is the channel which your organization employs to gain entry to a new international market. This lesson considers a number of key alternatives, but recognizes that alternatives are many and diverse. Here you will be consider modes of entry into international markets such as the Internet, Exporting, Licensing, International Agents, International Distributors, Strategic Alliances, Joint Ventures, Overseas Manufacture and International Sales Subsidiaries. Finally we consider the Stages of Internationalization. It is worth noting that not all authorities on international marketing agree as to which mode of entry sits where. For example, some see franchising as a stand alone mode, whilst others see franchising as part of licensing. In reality, the most important point is that you consider all useful modes of entry into international markets - over and above which pigeon-hole it fits into. If in doubt, always clarify your tutor's preferred view. The International Marketing Entry Evaluation Process is a five stage process, and its purpose is to gauge which international market or markets offer the best opportunities for our products or services to succeed. The five steps are Country Identification, Preliminary Screening, In-Depth Screening, Final Selection and Direct Experience.

SHORT NOTES WITH EXAMPLES

9) US recession and its impact on india

A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down. Cause: An economy which grows over a period of time tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. 16

Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment. Crisis in the US The defaults on sub-prime mortgages (homeloan defaults) have led to a major crisis in the US. Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes. Major banks have landed in trouble after people could not pay back loans The housing market soared on the back of easy availability of loans. The realty sector boomed but could not sustain the momentum for long, and it collapsed under the gargantuan weight of crippling loan defaults. Foreclosures spread like wildfire putting the US economy on shaky ground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth of the economy. Impact of a US recession on India A slowdown in the US economy is bad news for India. Indian companies have major outsourcing deals from the US. India's exports to the US have also grown substantially over the years. The India economy is likely to lose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their profit margins shrinking. The worries for exporters will grow as rupee strengthens further against the dollar. But experts note that the long-term prospects for India are stable. A weak dollar could bring more foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring down oil prices to $70. The whole of Asia would be hit by a recession as it depends on the US economy. Asia is yet to totally decouple itself (or be independent) from the rest of the world, say experts.

Example: The US economy has suffered 10 recessions since the end of World War II. The Great Depression in the United was an economic slowdown, from 1930 to 1939. It was a decade of high unemployment, low profits, low prices of goods, and high poverty. The trade market was brought to a standstill, which consequently affected the world markets in the 1930s. Industries that suffered the most included agriculture, mining, and logging. In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production declined sharply, as didprofits and employment. Unemployment jumped from 14.3 per cent in 1937 to 19.0 per cent in 1938. The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and sharp correction to overproduction of the previous 17

decade. This was followed by Black Monday in October 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by 22.6 per cent affecting the lives of millions of Americans. The early 1990s saw a collapse of junk bonds and a financial crisis. The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest expansion on record. From March to November 2001, employment dropped by almost 1.7 million. In the 1990-91 recession, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The 2001 recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000. The dot-com burst hit the US economy and many developing countries as well. The economy also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock prices crashed.

10) Doing business with expanded ASEAN The Association of Southeast Asian Nations commonly abbreviated ASEAN is ageo-political and economic organization of ten countries located in Southeast Asia, which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims include the acceleration of economic growth, social progress, cultural development among its members, the protection of the peace and stability of the region, and to provide opportunities for member countries to discuss differences peacefully. ASEAN covers an area of 4.46 million km, 3% of the total land area of Earth, with a population of approximately 600 million people, 8.8% of the world population. In 2010, its combined nominal GDP had grown to US$1.8 trillion. [10] If ASEAN was a single entity, it would rank as the ninth largest economy in the world. ASEAN was preceded by an organisation called the Association of Southeast Asia, commonly called ASA, an alliance consisting of the Philippines, Malaysia and Thailand that was formed in 1961. The bloc itself, however, was established on 8 August 1967, when foreign ministers of five countries Indonesia, Malaysia, the Philippines, Singapore, and Thailand met at the Thai Department of Foreign Affairs building in Bangkok and signed the ASEAN Declaration, more commonly known as the Bangkok Declaration. The five foreign ministers Adam Malik of Indonesia, Narciso Ramos of the 18

Philippines, Abdul Razak of Malaysia, S. Rajaratnam of Singapore, and Thanat Khoman of Thailand are considered the organisation's Founding Fathers. Continued expansion On 28 July 1995, Vietnam became the seventh member. Laos and Burma (Burma) joined two years later on 23 July 1997. Cambodia was to have joined together with Laos and Burma, but was deferred due to the country's internal political struggle. The country later joined on 30 April 1999, following the stabilisation of its government. In 1992, the Common Effective Preferential Tariff (CEPT) scheme was signed as a schedule for phasing tariffs and as a goal to increase the regions competitive advantage as a production base geared for the world market. This law would act as the framework for the ASEAN Free Trade Area. After the East Asian Financial Crisis of 1997, a revival of the Malaysian proposal was established in Chiang Mai, known as the Chiang Mai Initiative, which calls for better integration between the economies of ASEAN as well as the ASEAN Plus Three countries (China, Japan, and South Korea). Early 2011, East Timor plans to submit a letter of application to the ASEAN Secretariat in Indonesia to be the eleventh member of ASEAN at the summit in Jakarta. Indonesia has shown a warm welcome to East Timor.[23][24][25] In 2007, ASEAN celebrated its 40th anniversary since its inception, and 30 years of diplomatic relations with the United States. On 26 August 2007, ASEAN stated that it aims to complete all itsfree trade agreements with China, Japan, South Korea, India, Australia and New Zealand by 2013, in line with the establishment of the ASEAN Economic Community by 2015. In November 2007 the ASEAN members signed the ASEAN Charter, a constitution governing relations among the ASEAN members and establishing ASEAN itself as an international legal entity.[citation needed] During the same year, the Cebu Declaration on East Asian Energy Security was signed in Cebu on 15 January 2007, by ASEAN and the other members of the EAS (Australia, People's Republic of China, India, Japan, New Zealand, South Korea), which promotes energy security by finding energy alternatives to conventional fuels.[citation needed] On 27 February 2009 a Free Trade Agreement with the ASEAN regional block of 10 countries and New Zealand and its close partner Australia was signed, it

19

is estimated that this FTA would boost aggregate GDP across the 12 countries by more than US$48 billion over the period 20002020.

The ASEAN way In the 1960s, the push for decolonisation promoted the sovereignty of Indonesia and Malaysia among others. Since nation building is often messy and vulnerable to foreign intervention, the governing elite wanted to be free to implement independent policies with the knowledge that neighbours would refrain from interfering in their domestic affairs The ASEAN way can be traced back to the signing of the Treaty of Amity and Cooperation in Southeast Asia. "Fundamental principles adopted from this included: mutual respect for the independence, sovereignty, equality, territorial integrity, and national identity of all nations; the right of every State to lead its national existence free from external interference, subversion or coercion; non-interference in the internal affairs of one another; settlement of differences or disputes by peaceful manner; renunciation of the threat or use of force; and effective cooperation among themselves".

Policies Apart from consultations and consensus, ASEANs agenda-setting and decision-making processes can be usefully understood in terms of the so-called Track I and Track II. Track I refers to the practice of diplomacy among government channels. The participants stand as representatives of their respective states and reflect the official positions of their governments during negotiations and discussions. All official decisions are made in Track I. Therefore, "Track I refers to intergovernmental processes". Track II differs slightly from Track I, involving civil society groups and other individuals with various links who work alongside governments. This track enables governments to discuss controversial issues and 20

test new ideas without making official statements or binding commitments, and, if necessary, backtrack on positions. Although Track II dialogues are sometimes cited as examples of the involvement of civil society in regional decision-making process by governments and other second track actors, NGOs have rarely got access to this track, meanwhile participants from the academic community are a dozen think-tanks. However, these think-tanks are, in most cases, very much linked to their respective governments, and dependent on government funding for their academic and policy-relevant activities, and many working in Track II have previous bureaucratic experience. Their recommendations, especially in economic integration, are often closer to ASEANs decisions than the rest of civil societys positions.

10) General Characteristics Of IPRs Intellectual property rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time. Intellectual property rights are customarily divided into two main areas: i) ii) Copyright and rights related to copyright. Industrial property

In general terms, intellectual property rights have certain common characteristics. The rights apply only in relation to a sub-set of all innovative/creative emanations from the human intellect this sub-set being specific types of IP subject matter defined in the IPR laws. The rights apply only to those defined subject matters that satisfy a specific innovation/creativity threshold. The rights are not absolute; third parties remain free to engage in certain types of activity with the IP, even without the consent of the IP owner. The rights are generally of limited duration. The rights are generally freely transferable to other IP and Intangible Assets: A Legal Perspective 14 parties. The rights are usually, but not always, created under statute. 21

11) Ethnocentric and polycentric orientation of MNEs Ethnocentric Approach- under this approach, parent country nationals are selected for all the key management jobs. This approach was widely followed by PROCTER AND GAMBLE, PHILLIPS, MATUSHITA,TOYOTA etc. when Philips filled the important vacancies by Dutch nationals, on Dutch employees referred them to as Dutch mafia. Some of the international firms follow this approach due to the following reasons: Non availability of qualified personnel in host countries particularly developing countries. To maintain a unified corporate culture. Japanese firms follow this reason. P &G also preferred this reason To transfer the core competencies of the company when the cre competencies are held by the existing employees of parent country nationals.

Though this approach claims the above discussed advantages, it suffers from the following disadvantages: When important positions of the subsidiaries are filled with the parent country nationals, the staff of the host country feels frustrated resulting in low productivity. The subsidiary may fail to understand and respond to the host countrys culture due to culture myopia. P&G experienced a number of failures due to this problem and subsequently filing ,senior management positions by the host country nationals.

POLYCENTRIC APPROACH Under this approach, the positions including the senior management positions of the subsidiaries are filled by the host country nationals. The reason for adopting this approach includes: Host country nationals are familiar with the culture of the country including business culture. 22

Level of job satisfaction of the employees of the subsidiaries can be enhanced. It is les expensive as the salary level f host country nationals is lower than that of host country nationals in case of MNC of advanced countries. It reduces overall cost of staff of subsidiaries.

It suffers from the following limitations: This approach limits the mobility of the employees among subsidiaries and between subsidiaries and the headquarters. Organizational culture of the parent company cannot be completely adopted in the subsidiaries. Culture of the subsidiaries and the headquarters cannot be exchanged as it isolates the headquarters from their subsidiaries.

13) TRADE BARRIERS Government imposed restriction on the free international exchange of goods or services. Despite all the obvious benefits of international trade, governments have a tendency to put up trade barriers to protect the domestic industry. There are twokinds of barriers: tariff and non-tariff. Tariff Barriers Tariff is a tax levied on goods traded internationally. When imposed on goods being brought into the country, it is referred to as an import duty. Import duty is levied to increase the effective cost of imported goods to increase the demand for domestically produced goods. Another type of tariff, less frequently imposed, is the export duty, which is levied on goods being taken out of the country, to discourage their export. This may be done if the country is facing a shortage of that particular 23

commodity or if the government wants to promote the export of that good in some other form, for example, a processed form rather than in raw material form. It may also be done to discourage exporting of natural resources. When imposed on goods passing through the country, the tariff is called transit duty. Tariff can be imposed on three different bases. A specific duty is a flat duty based on the number of units regardless of the value of the goods. For example, there may be a duty of Rs.5,000 per computer imported into India. In this case, a person importing, say, 20 computers would have to pay a duty of (5,000 x 20 =) Rs.1,00,000. An ad valorem duty is expressed as a percentage of the value of the good. So a person importing a walkman worth Rs.2,000 carrying an import duty of 10% would have to pay Rs.200 towards duty charges. A compound duty is a combination of a specific and an ad valorem duty. For example, a book worth Rs.500 carrying a specific duty of Rs.25 and an ad valorem duty of 2% would in effect be carrying a compound duty of Rs.35. Over the last few decades, tariffs have been losing their importance as barriers to trade, their place being taken by non-tariff barriers. Non-tariff Barriers Non-tariff barriers (NTBs) include all the rules, regulations and bureaucratic delays that help in keeping foreign goods out of the domestic markets. The following are the different types of NTBs: Quotas A quota is a limit on the number of units that can be imported or the market share that can be held by foreign producers. For example, the US has imposed a quota on textiles imported from India and other countries. Deliberate slow processing of import permits under a quota system acts as a further barrier to trade. 24

Embargo When imports from a particular country are totally banned, it is called an embargo. It is mostly put in place due to political reasons. For example, the United Nations imposed an embargo on trade with Iraq as a part of economic sanctions in 1990. Voluntary Export Restraint (VER) A country facing a persistent, huge trade deficit against another country may pressurize it to adhere to a self-imposed limit on the exports. This act of limiting exports is referred to as voluntary export restraint. After facing consistent trade deficits over a number of years with Japan, the US persuaded it to impose such limits on itself. subsidies to local Goods Governments may directly or indirectly subsidize local production in an effort to make it more competitive in the domestic and foreign markets. For example, tax benefits may be extended to a firm producing in a certain part of the country to reduce regional imbalances, or duty drawbacks may be allowed for exported goods, or, as an extreme case, local firms may be given direct subsidies to enable them to sell their goods at a lower price than foreign firms. Local Content Requirement A foreign company may find it more cost effective or otherwise attractive to assemble its goods in the market in which it expects to sell its product, rather than exporting the assembled product itself. In such a case, the company may be forced to produce a minimum percentage of the value added locally. This benefits the importing country in two ways it reduces its imports and increases the employment opportunities in the local market. 25

Technical Barriers Countries generally specify some quality standards to be met by imported goods for various health, welfare and safety reasons. This facility can be misused for blocking the import of certain goods from specific countries by setting up of such standards, which deliberately exclude these products. The process is further complicated by the requirement that testing and certification of the products regarding their meeting the set standards be done only in the importing country. These testing procedures being expensive, time consuming and cumbersome to the exporters, act as a trade barrier. Under the new system of international trade, trading partners are required to consult each other before fixing such standards. It also requires that the domestic and imported goods be treated equally as far as testing and certification procedures are concerned and that there should be no disparity between the quality standards required to be fulfilled by these two. The importing country is now expected to accept testing done in the exporting country. Procurement Policies Governments quite often follow the policy of procuring their requirements (including that of government-owned companies) only from local producers, or at least extend some price advantage to them. This closes a big prospective market to the foreign producers. International Price Fixing Some commodities are produced by a limited number of producers scattered around the world. In such cases, these producers may come together to form a cartel and limit the production or price of the commodity so as to protect their profits. OPEC (Organization of Petroleum Exporting Countries) is an example of 26

such cartel formation. This artificial limitation on the production and price of the commodity makes international trade less efficient than it could have been. Exchange Controls Controlling the amount of foreign exchange available to residents for purchasing foreign goods domestically or while travelling abroad is another way of restricting imports. Direct and Indirect Restrictions on Foreign Investments A country may directly restrict foreign investment to some specific sectors or up to a certain percentage of equity. Indirect restrictions may come in the form of limits on profits that can be repatriated or prohibition of payment of royalty to a foreign parent company. These restrictions discourage foreign producers from setting up domestic operations. Foreign companies are generally interested in setting up local operations when they foresee increased sales or reduced costs as a consequence. Thus, restrictions against foreign investments add impediments to international trade by giving rise to inefficiencies. Customs Valuation There is a widely held view that the invoice values of goods traded internationally do not reflect their real cost. This gave rise to a very subjective system of valuation of imports and exports for levy of duty. If the value attributed to a particular product would turn out to be substantially higher than its real cost, it could result in affecting its competitiveness by increasing the total cost to the importer due to the excess duty. This would again act as a barrier to international trade. This problem has now been considerably reduced due to an agreement between various countries regarding the valuation of goods involved in a cross-border trade. 27

14) NAFTA TRADE BLOCK NAFTA- The north American free trade agreement (NAFTA) came into being on January 1,1994.the most affluent nations of the world ,i.e. the USA and Canada along with Mexico a developing country joined together to form a trade block. A free trade agreement was signed by the USA and Canada in 1989.this was extended to Mexico in 1994.NAFTA is expected to eliminates all tariffs and trade barriers amng these countries by 2009.However internal tariffs on a large number of product categories were removed already. NAFTA has a population of 363 million and hence it is one of the significant trading areas in the globe.

Objectives

To create new business opportunities particularly in the Mexico To enhance the competitive advantage of the companies operating in the USA,Canada and Mexico in wider international markets. To reduce the prices f the products and services by enhancing the competition To enhance industrial development and thereby employment throughout the region. To provide stable and predictable political environment for the investors. To develop industries in Mexico in order to create employment and to reduce migration from Mexico to the USA. To assist Mexico in earning additional foreign exchange to meet its foreign debt burden. To improve and consolidate political relationship among member countries.

Measures

28

Opening up of government procurement markets in each member country of NAFTA. Residents of NAFTA countries can invest in any other NAFTA countries freely. Protection on intellectual property rights of the NAFTA member countries. Simplification and harmonization of products standards in all the member countries of the NAFTA. Free flow of employees and business people from one member country to another. Prevention of on-Mexican firms assembling goods in Mexico. Avoidance of re-export of the products imported by any member country from the third party. This condition is not applicable, in case certain percentages of manufacturing costs are incurred in the importing country. This percentage is 50% in case of the USA and Canada and 80 in case of Mexico. Pollution control along the USA-Mexico border.

Critical Appraisal The emergence of NAFTA enables further development of the USA and Canada and for the significant development of Mexico. Further ,the free flow of capital and human resources enables achieving equilibrium in the regional development. From the U.S and Canadian governments point of view, NAFTA was an opportunity to respond to the growing threat of the large European Union trading block. From the Mexican governments point of view the agreement was a way to secure future foreign investment. A number of companies in the automotive industry, large agribusiness, telecommunications, high technology manufacturing, and big grain import industries have benefited from NAFTA.

15) GSTP( GLOBAL SYSTEM OF TARIFF PREFERENCE) The Agreement on the Global System of Trade Preferences Among Developing Countries (GSTP) was established in 1988 as a framework for the exchange of trade preferences among developing countries in order to promote intra-developing-country trade. The idea received its first political 29

expression at the 1976 ministerial meeting of the Group of 77 (G77) in Mexico City and was further developed at G77 ministerial meetings in Arusha (1979) and Caracas (1981). In 1982, the Ministers of Foreign Affairs of the Group of 77 in New York defined the basic components of the Agreement and established a framework for negotiations. In 1984, the G77 began preparatory work in Geneva on various aspects of a framework agreement. In 1985, the New Delhi ministerial meeting provided further impetus to the process of negotiations in Geneva. The ministerial meeting in Brasilia in 1986 established the provisional framework of the Agreement and launched the first round of negotiations on preferential trade concessions. In 1988, the text of the Agreement was adopted and the first round of negotiations concluded in Belgrade. The Agreement was envisaged as a dynamic instrument of economic cooperation, proceeding with step-by-step negotiations in successive stages. Following a comprehensive review of the operations of the Agreement since its entry into force in 1989, the Committee of Participants recently decided to launch a new round of negotiations to broaden and deepen the scope of tariff preferences. Ministers of GSTP Participants met in So Paulo tonight, in the context of UNCTAD XI, to launch the new negotiations. Following are several principles and features of the Agreement:

The GSTP is reserved for the exclusive participation of members of the Group of 77 and China and the benefits accrue to those members that are also "participants" in the Agreement. The GSTP must be based and applied on the principle of mutuality of advantages in such a way as to benefit equitably all participants, taking into account their respective levels of economic development and trade needs. The Agreement recognizes the special needs of the LDCs and envisages concrete preferential measures in their favour. To provide a stable basis for GSTP preferential trade, tariff preferences are bound and form part of the Agreement. The GSTP must be negotiated step-by-step and improved and extended in successive stages, with periodic reviews. The GSTP must supplement and reinforce present and future subregional, regional and interregional economic groupings of developing countries and must take into account their concerns and commitments.

To date, 43 countries have ratified/acceded to the Agreement: Algeria, Argentina, Bangladesh, Benin, Bolivia, Brazil, Cameroon, Chile, Colombia, Cuba, Democratic People's Republic of Korea, Ecuador, Egypt, Ghana, Guinea, Guyana, India, Indonesia, Iran, Iraq, Libya, Malaysia, Mexico, Morocco, Mozambique, Myanmar, Nicaragua, Nigeria, Pakistan, Peru, Philippines, Republic of Korea, Romania, Singapore, Sri Lanka.

Q16) Explain following types of , INTERNATIONAL TRADE THEORIES with the help of model and examples 30

A. Product Life cycle theory B. Global Strategic Rivalry theory C. PORTERs national competitive advantage theory

A) PRODUCT LIFE CYCLE THEORY

Raymond Vernon of Harvard Business School developed the product life cycle theory. This theory traces the role of innovation, market expansion, comparative advantage and strategic response of global rivals in international manufacturing, trade and investment decisions.

Product life cycle consists of four stages

Product life cycle stages

New Product introduction

Growth

Maturing Product

Decline

STAGE 1 : NEW PRODUCT Firms innovate new products based on needs and problems in the domestic country. Eg: 1. US firms became the leaders in the production of frozen food consequent upon the large kitchens, cheap electricity and more number of working women. 2. French firms developed food packaging that would eliminate the need for refrigeration, consequent upon small freezer compartments. Location of innovation:

31

Though the innovated product can be produced anywhere in the world and marketed in the domestic market , the firm mostly locates the manufacturing facilities in the domestic country to have immediate market feedback to be able to modify and develop the product accordingly and to save time and cost of transportation. About 95% of innovations (both product and technology) take place in industrially advanced countries. This is mostly due to severe competition, customer demands, availability of R&D facilities including scientists and engineers , financial stability of the firms etc. Significance of innovation : 1. Innovation is the prime source of competitive advantage.

2. Leading firms innovate continuously and develop the products continuously in order to be on the forefront as innovations are imitated and copied. (The innovations can be in products, manufacturing process, and marketing the product.)

3. Developing countries can have the utility of innovations by importing either technology or products from the R&D intensive countries. (During this stage the firms sell most part of their product in domestic country and a limited part in other countries.)

EG : MICROSOFT sold most part of its innovated software in the USA and the remaining part in various countries including India.

STAGE 2 : GROWTH Increase in the sales of the new product attracts the competitors. At the same time, the increased awareness of the new product in various countries particularly in advanced countries increases the demand of the product. Added to this , further innovation in product, cost reduction , market process , etc. take place in resulting in increased capital intensity of the industry. These three factors influence either the innovator or competitor or both to produce in foreign countries in order to attain lower cost of 32

production , lower transportation cost , better quality if the product and the like . Production in foreign countries mostly increases the sales in the foreign markets. The competitors at this stage may concentrate mostly on the process technology rather than on product technology. Technology at this stage would be more of labour intensive type. Thus , competitors start producing the product in various foreign markets at this stage. However, the original producing country would increase its exports to various countries though the competition has emerged in certain important foreign markers where local production has taken place. STAGE 3 : MATURITY Worldwide production increases during this stage alongwith the demand for the product resulting in decline in exports. The increased competition results in increased product standardisation and cost reduction. The producers start gaining the economies of scale reducing the cost of production per unit. The lower per unit cost of production results in exports to developing countries. At this stage , technology becomes standars. Therefore, the producers start locating their plants in developing countries in order to take the advantage of lower labour costs. This factor further reduces the cost of production per unit and increases the competition based on cost. STAGE 4 : DECLINE Markets for the product at this stage concentrate in less developed countries as the customers in advanced countries shift their demand to further new products . Thus most of the production plants at this stage locate in developing countries and exports decline considerably at this stage. Even the original country may become net importer during this stage . Thus the volume and direction of international trade may come down considerably at this stage.

B) GLOBAL STRATEGIC RIVALRY THEORY : This theory focuses on firms strategic decisions to acquire and develop some sustainable competitive advantage in order to compete internationally.

33

MNCs acquire and develop competitive advantage through a number of means. They are classified as :

Owning Intellectual Property Rights Investing in R&D Achieving Large Scale Economies Exploiting the Experience Curve.

1. OWNING INTELLECTUAL PROPERTY RIGHTS:

Firms which own an intellectual property right in the forms of patent , brand name, copy right and trade mark acquire competitive advantage over their competitors. For example , KODAK, LG, Coca-Cola and the like have competitive advantage over their competitors.

2. INVESTING IN R&D :

Investment in R&D would probably result in the development of new products, improvements to the existing products and development of new technologies etc. These developments provide competitive advantage to the firms.

Eg. Boeing spent US $2 billion and developed the 747 jet and the US air spent $4.5 billion and developed the 747 aircraft.

The firms that gain the competitive advantage through R&D have the first mover advantages.

34

3. ACHIEVING LARGE SCALE ECONOMIES:

Companies with large scale operations enjoy low cost of production / operations per unit . These companies may enjoy low cost leadership.

4. EXPLOITING THE EXPERIENCE CURVE: Production cost per unit tends to decline with the increase in the experience of the firm in manufacturing in case of certain industries. This is due to increase in employees experience , expertise and skill . The companies gain global competitive advantage with the presence of experience curve. Eg . SAMSUNG has the lowest cost advantage in manufacturing standardised semiconductor chips.

C) PORTERS NATIONAL COMPETITIVE ADVANTAGE THEORY : Competitive Advantages : Competitive Study is derived from four factors viz., Demand conditions, factor endowment, relating & supporting industries and firm strategy, structure and rivalry. The foll. Fig presents the determinants of global competitive advantage . All the four factors need not always be favourable for a company to get global supremacy. But the interactive affect of these four factors need to be favourable if an industry/company in a country is to gain a global competitive advantage.

Firm Strategy , Structure and Rivalry.

Factor Conditions

Demand Conditions

35

Related and Supporting Industries Figure : Determinants of Global Competitive Advantage

Factor Conditions : Factor conditions include factors of production. Hecksher-Ohlin theory deals with the classical factors vix., land, labour, capital and organization. Porter emphasizes other factors like educational level of labour and quality of the countrys infrastructure. Countrys ability to compete globally depends upon the countrys factor resources viz., research , innovation and training. The USA has rich factor endowments and enjoys top position in world trade and world economy.

Demand Conditions : The existence of a large number of sophisticated domestic consumers who are economically able and willing to consume create and improve the demand for various products in the country. Companies improve the existing products and develop new products to meet the increasing demand . In addition, domestic companies compete with each other in developing existing & new products. As such some of the processing domestic companies would be ahead of the international companies and export to other countries. For example, Japanese companies developed camcorders, big screen TVs and VCRs better than the international companies and exported them to the European and North American countries after meeting the domestic demand.

Related & Supported Industries : The emergence & growth of an industry provide the scope for the development of suppliers of raw material , market intermediaries, financial companies , consulting agencies , ancillary industries etc . These supporting service agencies compete among themselves leading to high input quality 36

and lower prices . Availability of high quality inputs at lower prices in the domestic country enhances competitive advantage of the firm internationally.

Firm Strategy , Structure & Rivalry : Firms continuously improve the quality, product design , invest in R & D in order to compete domestically. Firms also invest in human resource development, technology etc., in the domestic market . These developments result in high quality and lower prices in domestic country which are transferable to International Markets. Intense competition for Japanese automobile manufacturers and electronic goods manufacturers led to their success in International markets . The same theory holds good in case of Indian garment manufacturers & US personal computer manufacturers.

Q 17) Explain following types of , INTERNATIONAL TRADE THEORIES with the help of model & examples. A. Comparative Cost Advantage with Money theory B. Relative factor endowment / Heckscher ohlin theory C. Country Similarity Theory ANS. A) COMPARATIVE COST ADVANTAGE WITH MONEY THEORY

Modern economy is money economy and almost all the transactions take place in the form of money. Therefore, absolute differences in money prices determine international trade. Comparative differences in labour cost of commodities can be translated into absolute differences in prices without affecting the real exchange between products.

The following table introduces money . The output per day of labour in Japan and India for pens and audiotape recorder is presented in the below table. 37

THE THEORY OF COMPARATIVE COST ADVANTAGE WITH MONEY : AN EXAMPLE Cost of Goods in Japan Japan Made Indian Made (Ys.) (Ys.) 6 4 60 100 Cost of Goods in India Japan Made Indian Made (Rs.) (Rs.) 3 2 30 50

Pens Audio Tape Recorders

We observe from above table that,

In absence of trade in Japan one pen costs Yen 6 ( an equivalent of Rs. 3) and an audio tape recorder costs Yen 60 ( an equivalent of Rs. 30) . Similarly , in the absence of trade in India one pen costs Rs. 2 ( an equivalent of Yen 4) and audio tape recorder costs Rs. 50 ( an equivalent of Yen 100) If the two countries trade with each other , Indian made pen is cheaper in Japan i.e., Yen 4 than Japan made pen i.e., Yen 6 Similarly , Japan made audio tape recorder is cheaper in India , i.e., Rs. 30 than Indian made tape recorder i.e., Rs.50.

Japan has comparative cost advantage in producing audio tape recorders and India has comparative cost advantage in producing pens. Therefore, India can import audio tape recorders from Japan and Japan can import pens from India

B) RELATIVE FACTOR ENDOWMENT / HECKSCHER OHLIN THEORY In view of the criticism cost against comparative advantage theory , the question pointed out by many was : how do the countries acquire comparative advantage? Eli Heckscher and Bertil Ohlin Swedish economists developed the theory of relative factor endowments to answer

38

this question. Factor endowments are land, natural resources, laour, climate etc. The observation made by these two economists include: Factor endowments vary among countries: for example, the USA is rich in capital resources, India is rich in laour, Saudi Arabia is rich in ol, South Africa and Papua New Guinea have gold mines etc. Theories of International Trade According to these economists, if labour is available in abundance in relation to land and capital, in a country, the price of labour would be low and the price of lad and capital would be high in that country. The vice-versa is true in those countries where land and capital are available in abundance in relation to labour These relative factor costs would lead countries to produce the products at low costs. Countries have comparative advantage based on the factors endowed and in turn the price of the factors. Countries acquire comparative advantage in those for which the factors endowed by the country concerned ar used as inputs. For example, India and China have comparative advantage in labour-intensive industry like textile and tobacco, Saudi Arabia has comparative advantage in oil. Therefore, countries export those goods in which they have comparative advantage due to factors endowed. Countries participate in international trade by exporting those products which they can produce at low cost consequent upon abundance of factors and import the other products which they can produce comparatively at high cost.

Land- Labour Relationship : Countries where area of land available is less in relation to the people , go for multistorey factories and produce lightweight products. For example , clothing production in Hongkong. Countries with large area of land in relation to population can go sheep, wheat and other agricultural related products. Eg. Canada, Australia, India etc. Labour- Capital Relationship : Countries where labour is abundant in relation to capital can be expected to export labour- intensive products , and vice-versa is true in case of capital abundant countries.

39

For example, India has export competitiveness in textile garments while Iran has export competitiveness in Handmade carpets . Leontief Paradox : There are certain surprising aspects to the Labour Capital relationship in international trade. Wassily Leontief observed that US exports are labour-intensive compared with US imports. But, it is assumed that the USA has abundant capital relative to labour. Therefore, this surprise finding is known as the Leontief Paradox. This is because of variation in labour skills. Advanced countries have higher labour skills compared to developing countries. Therefore advanced countries have competitive advantage to exporting products requiring higher labour skills while the developing countries have advantage in exporting products requiring less than skilled labour. Technological Complexities : Technological advancements made it possible to produce products in different methods. Canada produces wheat with more machines and India produces mostly with labour. In addition, industries locate different production processes in different countries in order to reduce cost of production.

C) COUNTRY SIMILARITY THEORY

International trade takes place between two industries of two countries . But, it also takes place within each industry between two coutries. Intra-industry trade amounts to nearly 40% of world trade.

FOR EXAMPLE : Japan exports Toyota cars to Germany whereas Germany exports BMW cars to Japan. This happens due to the fact that Japan markets provide prestige and performance seeking automobile buyers to BMW cars while German market provides quality-conscious and value oriented customers to Toyota Cars.

Economic Similarity of Developed countries

40

The similarities in consumer preferences in the countries that are at the same stage of economic development provide the scope for intra-industry trade among countries.

Eg. India and China are in the same stage of economic development. India provides market for low cost motor cycles produced in China due to the priceconsciousness of the lower income group customers whereas Chinas rich income group customers provide market for Indias motor cycles due to their quality-consciousness. Thus, this theory suggests that intra-industry trade takes place between the countries with similar levels of development.

However , developing countries mostly do not trade among themselves as the surplus of most of these countries would be raw materials and agricultural products and their requirements would be technology and high technology-oriented products. As such , they export raw material to and import technology from developed countries. Eg. Vietnam,Papua New Guinea and Ethiopia export raw material , labourintensive products and agricultural products to and import technology and finished products.

Similarity of Location

Countries prefer to export to the neighbouring countries in order to have the advantage of less transportation cost. Eg. Papua New Guineas majority of exports are to Australia and Finland is a major exporter to Russia due to less transportation costs. Similarly, some of the SAARC countries prefer to import from India.

Cultural Similarity

Countries prefer to export to those countries having similar culture. For example, exports and imports among European countries, between the USA and Canada, among Asian countries, and among Islamic countries . Similarly, 41

trade among the UK and its former colonies like India, Pakistan and South Africa and Australia and Papua New Guinea.

Similarity of Political and Economic Interests

Similar political interests , close political relations and economic interests enable the countries to enter into agreements for exports and imports. Countries prefer to trade with their politically friendly countries. Eg. India used to export to the Former USSR and Pakistan prefer to export to USA. CASE STUDY Q.1 . MOVING UP THE VALUE CHAIN IS overall global mission TATAs are trying to achieve. Explain philosophy Giving examples. Ans. GLOBAL VALUE CHAINS The globalisation of value chains is motivated by a number of factors. One is the desire to increase efficiency, as growing competition in domestic and international markets forces firms to become more efficient and lower costs. One way of achieving that goal is to source inputs from more efficient producers, either domestically orinternationally, and either within or outside the boundaries of the firm. Other important motivations are entry into new emerging markets and access to strategic assets that can help tap into foreign knowledge. Notwithstanding these anticipated benefits, engaging in global value chains also involves costs and risks for firms.

IMPLY OUTSOURCING AND OFFSHORING The fragmentation of the production process across various countries has given rise to considerable restructuring in firms including the outsourcing and offshoring of certain functions. Outsourcing typically involves the purchase of intermediate goods and services from outside specialist providers, while offshoring refers to purchases by firms of intermediate goods and services from foreign providers, or to the transfer of particular tasks within the firm to a foreign location. Offshoring thus includes both international outsourcing (where activities are contracted out to independent third parties abroad) and international in-sourcing (to foreign affiliates).

TRADE IN INTERMEDIATES IS GROWING 42

Global value chains allow intermediate and final production to be outsourced abroad, leading to increased trade through exports and imports, and to a rapidly growing volume of intermediate inputs being exchanged between different countries. In 2003, 54% of world manufactured imports were classified as intermediate goods (which includes primary goods, parts and components and semi-finished goods). and domestic production increasingly relies on foreign inputs. As a result of the growing global linkages between countries, a decreasing share of production is created within national boundaries. A decline in the production depth (value added over production) and a growing importance of intermediates can be observed in the OECD area. The growing international sourcing of intermediates within global value chains has resulted in manufacturing exports and imports of individual countries increasingly moving together & growing faster in production, indicating that international transactions between OECD countries are growing very rapidly. The globalisation of value chains has also resulted in increasing intra-industry trade. While these evolutions are observed in almost all countries, they become particularly clear in smaller OECD countries with large FDI inflows.

Globalisation has positive impacts on productivity While globalisation has certain negative consequences for particular groups, especially in the short term, it also has important positive effects . The impact on productivity is important, as openness is found to raise productivity and hence average incomes and wages. A number of studies have shown that more open countriestypically grow faster than less open countries a n d h a v e h i g h e r i n c o m e l e v e l s . At the economy-wide level, the OECD Growth Study estimated that an increase in openness by 10% points translates over time into an increase of 4% in per capita income in the OECD area. Gains from trade typically arise from the exploitation of comparative advantages and economies of scale. Instead of producing a particular good or service, a country can obtain more of it, indirectly, by exporting goods and services in which it has a comparative advantage. Trade opens foreign markets for goods and services that can be most efficiently produced in the home country. Furthermore, larger markets due to international trade may enable firms to take advantage of economies of scale not available when sales are limited to the domestic market, helping to lower costs. At the same time, trade generally results in lower prices for imported goods and services (final and intermediate) and increases product variety and quality in the home country. Larger markets through trade also allow a deeper division of labour across borders and can accommodate a greater variety of specialised firms. Access to better, cheaper and a wider variety of inputs helps improve the productivity of firms that incorporate these inputs into their products and services. Moving up the value chain by OECD countries: the response to globalisation? 43

If developed countries are to remain competitive in the global economy, they will have to rely more on knowledge, technology and intangible assets. Investment in knowledge is therefore a crucial factor for sustained economic growth, job creation and improved living standards. Indeed, investment in knowledge has increased in all OECD countries in recent years. At the same time, most OECD countries are shifting into higher technology-intensive manufacturing industries and into knowledgeintensive market services. This shift is also observed within lower technology industries, as shown in the high rates of productivity growth and the increasing R&D intensity within these industries. Moving up the value chain by non-OECD economies: the challenge of China The increased activity of non-OECD economies in high-technology industries poses additional challenges for OECD countries (Figure 11). China in particular is moving up the value chain and thus seems to compete directly with OECD countries. The imported technology embodied in FDI has changed Chinas trade over the past decade as the commodity composition has been diversified from traditional industriesinto higher technology-intensive industries. Chinas t r a d e s u r p l u s, h o w e v e r, is not due to hightechnology exports, but still to lower-technology industries such as toys, textiles and footwear. T h e s t r o n g g r o w t h o f Chinese exports in more sophisticated electronics, furniture and transport goods is closely linked to the growing imports of parts and components by China.

Moving up the value chain implies a continuous process of change, innovation and productivity growth. Products and services that are currently regarded as among the most innovative and experimental ultimately end up as commodities that can be produced anywhere and by many producers. Developed economies can only grow by inventing new technology, by innovating products and processes and by designing new management methods. To foster and support the innovation process, several policy areas could be considered: Innovation policies can help increase the level of technology and knowledgeembodied in production and exports, which would make competition from lowerincome (lower-cost and lower-productivity) countries less likely in the relevant markets. Policies aimed at strengthening creativity in business, or at developing intangible assets as sources of value creation are closely related to these policies. Policies to upgrade the human resource base of the economy. A more innovative and productive economy sector may require more highly skilled workers or a different mix of skills. Standard production tasks can increasingly be carried out outside the OECD area where labour costs are often considerably lower. Upgrading the workforce can support a shift of economic activity towards more high value-added areas that might remain in OECD countries. Addressing this through education and training policy requires a growing focus on life-long learning. 44

Policies to foster entrepreneurship and new areas of economic activity. Policies might also aim at creating new areas of economic activity , in stimulating new firm creation and entrepreneurship, or in stimulating innovation and technology in new areas, e.g. through public procurement. New firms are of great importance to innovation, particularly in areas where radical changes to existing markets and production processes are feasible.

Cluster policies and efforts at the local/regional level. Local and are also an important asset for economic policy. International and local firms may be attracted to very specific activities and skills that only exist in some regions and locations. These may be linked to scientific or educational institutions, historical heritages, natural resources, geographical location and so on. Policies aimed at the development of clusters, poles of excellence as well as regional policies may help capitalise on these strengths.

Policies to enhance attractiveness. Making a country an attractive location for economic activities can help attract foreign direct investment and foster new areas of economic activities. Understanding what determines national attractiveness, building on national strengths and addressing weaknesses to the extent possible can help in drawing greater benefits from the globalisation process.

Q.2 In Global widest acquisitions what competitive advantage company may have in domestic market against competitors? Competition analysis In order to know how best to compete, one needs to know the way competitors measure themselves, their strategy to date, their major strengths and weaknesses and likely future strategy. In the first of these - knowing the way competitors see themselves - much can be learned from public accounts, interviews and the trade press. Other ways are to have competitive personnel, take part in trade fairs, purchase the competitor's product and take it apart, or indulge in "espionage". In identifying the competitor's strategy to date, it is not enough to believe what they say but to reconstruct their strategy. Evaluating resources is difficult. It is essential to look at their production, marketing, financial and management resources. On the basis of these first three, it is possible to guess the future. Not all competitors are necessarily bad. Good competitors can absorb demand fluctuations, expand the market, increase motivation, and act responsively to the industry. There is, for example, room for all developing countries to take a share in most world markets in commodities, without one country wishing to be too aggressive.

45

Sources of Competitive Advantage from a Global Strategy A well-designed global strategy can help a firm to gain a competitive advantage. This advantage can arise from the following sources: Efficiency Economies of scale from access to more customers and markets Exploit another country's resources - labor, raw materials Extend the product life cycle - older products can be sold in lesser developed countries Operational flexibility - shift production as costs, exchange rates, etc. change over time First mover advantage and only provider of a product to a market Cross subsidization between countries Transfer price Diversify macroeconomic risks (business cycles not perfectly correlated among countries) Diversify operational risks (labor problems, earthquakes, wars) Broaden learning opportunities due to diversity of operating environments Crossover customers between markets - reputation and brand identification

Strategic Risk

Learning Reputation

Country Comparative Advantages Competitive advantage is a firm's ability to transform inputs into goods and services at a maximum profit on a sustained basis, better than competitors. Comparative advantage resides in the factor endowments and created endowments of particular regions. Factor endowments include land, natural resources, labor, and the size of the local population. Michael E. Porter argued that a nation can create its own endowments to gain a comparative advantage. Created endowments include skilled labor, the technology and knowledge base, government support, and culture. Porter's Diamond of National Advantage is a framework that illustrates the determinants of national advantage. This diamond represents the national playing field that countries establish for their industries.

46

Q.3.Will these global expansion help TATA Motors long struggling- NANO & INDICA range of products to Global? - Suggest Strategy. Tata is not the first company to think up the idea of globalizing a really cheap car. Consumers have become more demanding over quality standards. How will the Nano stack up in this new globalized scenario? Tata could use the value adding chain, also known as the business system, which comprises all the activities that a business conducts. A typical sequence begins with research and development, runs through production, and finishes with selling, marketing, distribution and after sales service. The value chain can provide advantage to a company if the company is superior in one or more elements of the value chain. Companies can leverage their business system advantage by either exporting from their domestic business system or through relocation of specific activities. Tata Motors is already doing both to leverage its competitive advantage. It already exports commercial vehicles to over fifteen countries from India using its domestic business system. Tata also has to consider the direction in which they move in 'the pyramid of international competitive advantage.' Professor Yips general rule is that when a company is moving down the pyramid it should emphasize the country of origin, because the new market perceives it as superior. When a company is selling up the pyramid it should hide the country of origin and acquire another local name and brand and sell that there, because the products from the home company are considered as inferior. Having the right partners is also another plus. Emerging market companies can follow their partners, have partners follow them or find new, local partners to go global. Tata Motors is leveraging local partners to sell its existing passenger cars (Indica, Indigo, Sumo, Safari and Maruti) and has entered into an agreement including branding and distribution inter alia with the UK's long established MG Rover to sell them across the UK and Europe. Tata should seriously consider this alternative for the Nano, bearing in mind that none of their partnerships have involved anything as ambitious as a $2.500 car. The globalization model which should not be followed is the one Renault adopted in Brazil. This involves persuading a prominent local partner to set up a dealer network for imported cars and promote the brand and then pushing the local partner aside when he has created sufficient critical mass so as to be able to produce cars locally. Renault rues the day it went it alone, whereas the former partner has being doing very nicely with another Asian brand.

47

48