Master of Business Management Semester IV

MB0053 International Business Management - 4Credits Assignment Set- 1 (60 Marks)

MANISH RAJAN RAJPUT IVth Semester, Operational Roll No -571012050

Q. 1.

Define Globalization.

What are its benefits?

Answer:
Globalization is a process where businesses are dealt in markets around the world, apart from the local and national markets. According to business terminologies, globalization is defined as the worldwide trend of businesses expanding beyond their domestic boundaries. It is advantageous for the economy of countries because it promotes prosperity in the countries that embrace globalization. In this section, we will understand globalization, its benefits and challenges.

Benefits of globalization The merits and demerits of globalization are highly debatable. While globalization creates employment opportunities in the host countries, it also exploits labor at a very low cost compared to the home country. Let us consider the benefits and ill-effects of globalization. Some of the benefits of globalization are as follows: 1 2 3 Promotes foreign trade and liberalization of economies. 4 5 Increases the living standards of people in several developing countries through capital investments in developing countries by developed countries. 6 7 Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies to be competitive by keeping the cost low, with increased productivity. 8 9 Promotes better education and jobs. 10 11 leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices, and culture. 12 13 Provides better quality of products, customer services, and standardized delivery models across countries. 14 15 Gives better access to finance for corporate and sovereign borrowers. 16 17 Increases business travel, which in turn leads to a flourishing travel and hospitality industry across the world. 18

19 Increases sales as the availability of cutting edge technologies and production techniques decrease the cost of production. 20 21 provides several platforms for international dispute resolutions in business, which facilitates international trade.

2 Q2. Discuss the impact of economic environment on international business? Answer:

The economic environment refers to the conditions under which a business operates and takes into account all factors that have affected it. It includes prime interest rates, legislation concerning employment of foreigners, return of profits, safety of country, political stability and so on. National economic policies National economic policies depend on that countrys socio-economic and cultural background. All governments aspire to achieve four major economic objectives: 1 Full employment. 2 A high economic growth rate. 3 A low rate of inflation. 4 Absence of deficit in the countrys balance of payments. The basic problem is that the first two objectives work against the last two. Measures such as low interest rates, tax cuts and increase in public spending creates jobs and stimulates growth but also causes inflation, increase in wage, and higher imports. Due to increased consumer expenditure the countrys balance of trade worsens. So the issue lies in balancing the effects of the policies to achieve the four given objectives. Foreign Direct Investment (FDI) Policy Foreign direct investment (FDI) is an investment made with an intention of establishing a long term interest by a business enterprise in another country. It is also required that such an enterprise holds directly or indirectly, an ownership of 10% or more of voting rights in the target enterprise. FDI policy, which is dictated by the Government of the host country, plays a vital role in the economic growth of that country. Attracting FDI inflows with constructive policy is a challenge for any nation. Developing countries offer a lot of incentives for FDI, particularly in capital intensive sectors like power, infrastructure, transport, construction. Effective FDI policies help the host country to portray itself as an attractive investment destination. Main objectives of FDI policy are to provide and facilitate investor friendly business environment, so that the foreign investors feel safe with the financial and legal framework of the country. The Government of the host countries often formulate new or special regulatory framework to attract FDI. The host country often needs to invest in development of domestic infrastructure to make it investor friendly. Economic structure IB managers need to understand and assess international economic forces at work. Key variables that need to be examined include Gross Domestic Product (GDP) per capita, regional distribution of GDP, levels of investment, consumer expenditure, labor costs, inflation and unemployment. Variables that are examined when assessing national economic environments include: Economic structure The structure of a nations economy is determined by the size and rate of its population growth, income levels and distribution of income, natural resources, agricultural, manufacturing and services sector. Economic infrastructure is the sum of all the external facilities and services that support the work of firms including communication, transportation, electricity supply, banking and financial services.

Industry structure The structure of an industry is determined by factors such as: 1 Entry and exit barriers. 2 Number of competing firms. 3 Market share among firms in that sector. 4 Average size of competing units. Market growth It is measured in terms of local currency and adjusted for inflation. Local currency is used because conversions into other currencies are affected by exchange rate fluctuations. Income levels It is taken as the Gross Domestic Product (GDP) per capita and GDP is directly proportional to the productivity of the country. Net income is another important variable and is without tax payments from individual gross incomes. Sector wise trends Growth activity in a country might vary significantly among certain industries. For example, India has a vibrant software services industry. Openness of the economy The ratio of a countrys imports and exports to its Gross National Product (GNP) indicates its vulnerability to fluctuations in international trade. A nation with a high foreign trade or GNP depends heavily on the economic well-being of the nations it exports to. Conversely, closed economies have a high degree of control of the economy. International debt - The comparison of a nations obligations to service and repay foreign debt with its forex earnings shows its ability to remain solvent. On the other hand, a high foreign debt servicing requirement maybe a positive indicator, suggesting that a country has borrowed heavily to invest in its future. Degree of urbanization - This is an important factor because in most countries there are important differences in incomes and lifestyles between urban and rural areas. Major dissimilarities are: 1 Shopping patterns - shopping frequency, average purchase value. 2 Nature of goods bought. 3 Expectations in quality and technical sophistication. 4 Education levels. 5 Ease of distribution. Balance of payments Importance - Balance of payments is a record of all transactions that occur between residents of that country and foreigners over a specific period of time. The balance is shown monthly, quarterly or annually. The accounts show the structure of the external trade, net position as a lender or borrower and trends in economic relationships with the world. The balance of payments is a good overall indicator of its economic health; the likelihood of the countrys government imposing forex controls, import restrictions and policies such as tax increases and interest rate hikes. Balance of payment account - These accounts attempt to identify the reasons behind various categories of international receipts and payments, making it possible to establish the values of payments by domestic residents to foreigners, and vice versa, for purchase of imports, use of services, lending, or direct foreign investment. The account is divided into categories for long and short term financial transactions which is initiated by the national monetary body, and involves goods and services. Deficits and surpluses - Current account deficit, records physical imports and exports along with international transactions in invisibles, that is non-physical items such as residents pensions, interest and royalties from abroad, domestic firms fees for the movement of goods in other countries, and so on. The balance of trade within the current account is the balance on physical (visible) imports and exports.

The other major grouping is the capital account which shows the balance of transactions in financial assets, including direct investments in foreign financial instruments, movements in short-term assets, inter-governmental loans and changes in the countrys gold and forex reserves. Reserves will decline if there is, for example, a current account deficit which in turn affects the currency rate. To prevent the local currency from depreciating too far, some foreign currency reserves will be sold, but since it is limited, this is only a temporary measure.

Q3. What is the need to understand cultural differences in international business 3 context? Answer:
Need to understand cultural differences Cultural differences affect the success or failure of multinational firms in many ways. The company must modify the product to meet the demand of the customers in a specific location and use different marketing strategy to advertise their product to the customers. Adaptations must be made to the product where there is demand or the message must be advertised by the company. The following are the factors which a company must consider while dealing with international business: 1 The consumers across the world do not use same products. This is due to varied preferences and tastes. Before manufacturing any product, the organization has to be aware of the customer choice or preferences. 2 The organization must manage and motivate people with broad different cultural values and attitudes. Hence the management style, practices, and systems must be modified. 3 The organization must identify candidates and train them to work in other countries as the cultural and corporate environment differs. The training may include language training, corporate training, training them on the technology and so on, which help the candidate to work in a foreign environment. 4 The organization must consider the concept of international business and construct guidelines that help them to take business decisions, and perform activities as they are different in different nations. The following are the two main tasks that a company must perform: 0 Product differentiation and marketing - As there are differences in consumer tastes and preferences across nations; product differentiation has become business strategy all over the world. The kinds of products and services that consumers can afford are determined by the level of per capita income. For example, in underdeveloped countries, the demand for luxury products is limited. 0 Manage employees - It is said that employees in Japan were normally not satisfied with their work as compared with employees of North America and European countries; however the production levels stayed high. To motivate employees in North America, they have come up with models. These models show that there is a relation between job satisfaction and production. This study showed the fact that it is tough for Japanese workers to change jobs. While this trend is changing, the fact that job turnover among Japanese workers is still lower than the American workers is true. Also, even if a worker can go to another Japanese entity, they know that the management style and practices will be quite alike to those found in their present firm. Thus, even if Japanese workers were not satisfied with the specific aspects of their work, they know that the conditions may not change considerably at another place. As such, discontent might not impact their level of production. The following are the three mega trends in world cultures: 1 The reverse culture influence on modern Western cultures from growing economies, particularly those with an ancient cultural heritage. 2 The trend is Asia centric and not European or American centric, because of the growing economic and political power of China, India, South Korea, and Japan and also the ASEAN. 3 The increased diversity within cultures and geographies. The following are the necessary implications in international business: 1 Avoid self reference criterion such as, ones own upbringing, values and viewpoints.

2 Follow a philosophical viewpoint that considers that many perspectives of a single observation or phenomenon can be true. 3 Discover and identify global segments and global niche markets, as national markets are diverse with growing mobility of products, people, capital, and culture. 4 Grow the total share market by innovating affordable products and services, and making them accessible so that, they are affordable for even subsistence level consumers rather than fighting for market share.

Q4. Explain country risk analysis.

Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border investment. CRA represents the potentially adverse impact of a country's environment on the multinational corporation's cash flows and is the probability of loss due to exposure to the political, economic, and social upheavals in a foreign country. All business dealings involve risks. An increasing number of companies involving in external trade indicate huge business opportunities and promising markets. Since the 1980s, the financial markets are being refined with the introduction of new products. When business transactions occur across international borders, they bring additional risks compared to those in domestic transactions. These additional risks are called country risks which include risks arising from national differences in socio-political institutions, economic structures, policies, currencies, and geography. The CRA monitors the potential for these risks to decrease the expected return of a cross-border investment. For example, a multinational enterprise (MNE) that sets up a plant in a foreign country faces different risks compared to bank lending to a foreign government. The MNE must consider the risks from a broader spectrum of country characteristics. Some categories relevant to a plant investment contain a much higher degree of risk because the MNE remains exposed to risk for a longer period of time. 1 Economic risk This type of risk is the important change in the economic structure that produces a change in the expected return of an investment. Risk arises from the negative changes in fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or creation). 2 Transfer risk Transfer risk arises from a decision by a foreign government to restrict capital movements. It is analyzed as a function of a country's ability to earn foreign currency. Therefore, it implies that effort in earning foreign currency increases the possibility of capital controls. 3 Exchange risk This risk occurs due to an unfavourable movement in the exchange rate. Exchange risk can be defined as a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. 4 Location risk This type of risk is also referred to as neighborhood risk. It includes effects caused by problems in a region or in countries with similar characteristics. Location risk includes effects caused by troubles in a region, in trading partner of a country, or in countries with similar perceived characteristics. 5 Sovereign risk This risk is based on a governments inability to meet its loan obligations. Sovereign risk is closely linked to transfer risk in which a government may run out of foreign exchange due to adverse developments in its balance of payments. It also relates to political risk in which a government may decide not to honor its commitments for political reasons. 6 Political risk This is the risk of loss that is caused due to change in the political structure or in the politics of country where the investment is made. For example, tax laws, expropriation of assets, tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also contribute to the element of political risk. Risk assessment requires analysis of many factors, including the decision-making process in the government, relationships of various groups in a country and the history of the country. Country risk is due to unpredicted events in a foreign country affecting the value of international assets, investment projects and their cash flows. The analysis of country risks distinguishes between the ability to pay and

the willingness to pay. It is essential to analyze the sustainable amount of funds a country can borrow. Country risk is determined by the costs and benefits of a countrys repayment and default strategies. The ways of evaluating country risks by different firms and financial institutions differ from each other. The international trade growth and the financial programs development demand periodical improvement of risk methodology and analysis of country risks.

Purpose of country risk analysis. Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable information. Country risk is composed of all the uncertainty that defines the risk of country exposure. The assessment of country risk is used to incorporate country risk in capital budgeting and modify the discount rate. CRA regulates the estimated cash flows and explores the main techniques used to measure a countrys overall risk iness. It is mainly used by MNCs, in order to avoid countries with excessive risk. It can be used to monitor countries where the MNC is engaged in international business. Analyzing the country risk helps in evaluating the risk for a planned project considered for a foreign country and assesses gain and loss possibility outcomes of cross-border investment or export strategy.

Contents of Analysis
The content of country risk analysis mainly involves country history, corporate risk, dependency level, external environment, domestic financial system, ratios for economic risk evaluation and strength and weakness chart. Country history The historical brief helps to identify aspects that interfere in the future behavior of the country, reducing the ability to payback any external commitment. The main historical data provides a good understanding of the key factors which draw the behavior of the society, the government, the private sector, the legal environment, the economical, political, and the relationships to neighbor nations and the world as a whole. The organization of the government and its features like political and administrative organization are also relevant aspects to be approached. The political forces which act in the country, their representatives and the main national issues must be focused. The other considerations include social aspects and their key-indicators like population growth rate, unemployment ratio, infant mortality rate, composition of the population and life expectancy. The geographic positioning and its related strengths and weaknesses are also critical aspects. Corporate risk Both country risk studies and business risk analysis enhances wealth from the available resources, in terms of capital, natural resources, technology and labor forces. This clarifies that those kind of analysis procures extensive knowledge from the business approach for companies, including financial theory. Dependency level The next step after the history in brief, is a clear definition about how the country is positioned in the world in terms of its wide relationships, economic block in which it belongs to, importance of international trade and so on. All these aspects are significant to identify the dependency level of the country. The financial dependency to meet the needs of a country is also a strong concern for the analyst. In this case, the maturity of debts (internal and external) and the available sources of financing also help to measure the freedom grades of the country.

In case of output spread throughout the economy, the analyst can break the GDP`s economic sector, evaluate its composition in terms of values of participation of each one and the level of regional concentration. It is similar to corporate approach when analyzing the income structure. The same approach can be made in case of the international trade where the analyst must break up each part of the trade balance in sectors, countries and economic blocks, goods, identifying its composition and level of concentration (percent and value). It would be convenient to get the ratio between the trade balance and the GDP (sum of imports and exports over the GDP).

Q5. Write a brief note on international human resource management

Answer: In the previous section you learned about international business organizational structures. In this section, you will learn about the ways in which HRM deals with workforce management and its relationship with the organization. The purpose of HRM is to make the most use of the firms human resources so that both employer and employee benefit from their association. The following are some of the functions of HRM: 1 Plan, recruit and terminate employees. 2 Educate and train employees for career development. 3 Provide compensation and terms of employment for employees. 4 Facilitate communication between employers and employees. 5 Settle disputes and negotiate on wages and working conditions. International Human Resource Management (IHRM) is the process of recruiting and managing the services of an organizations personnel across the globe, to achieve its goals. 1 The structure of an organization plays a vital role in HRM. Internal and external environment contribute the structure of an organization. Business strategy plays an important role in the structure of an organization. 2 The different types of international organizational structures are export structure, international division structure, functional structure, regional structure, international subsidiary structure, product structure, and international matrix structure. 3 IHRM is a vital component in the functioning of a multinational enterprise. IHRM helps deal with the factors that make the workforce more efficient and the organization more competitive. 4 Though there are many strategies and policies regarding the deployment of personnel across various countries, the one that best aligns the needs of the parent country and employees in foreign subsidiaries is the one that yields the best results. 5 International staffing policies depend on the approach adopted by an organization. The four approaches are ethnocentric, polycentric, region-centric, and geocentric approach.

Scope of International Human Resource Management

In the previous section we studied the role and other aspects of selecting expatriate employees. In this section, we will discuss the scope of IHRM. The three main dimensions of international human resources management are as follows: 1 Human resource activities. 2 Countries of operation. 3 Origin of employees. Human resource activities - HR activities in an IHRM context involves procurement, allocation, and utilization of workforce. These functions in turn cover all the six activities of human resources

management, that is, human resource planning, hiring, training and development, remuneration, performance management, and employee relations. Countries of operation - The countries of operation in an IHRM perspective involves the host country in which the overseas operation is located, the home country that houses the headquarters of the company, and other countries that supply labor and finance. Origin of employees - The origin of the workforce of an international business can be classified into three types - parent country nationals, host country nationals, and third country nationals. 6.4.1 National differences in HRM practices In this section, let us discuss the factors that determine human resources management practices in each country. The different factors are economic, social, cultural, legal, labor market, business

Stakeholders, role of the state, the workforce and so on. Differences that arise at a national level are as follows: 1 Degree of employee participation in decision-making by the management. 2 Legal regulations of employee relations and rights of employees. 3 The importance of market forces when deciding remuneration and employment conditions. 4 Cultural background of the key people involved in human resources management.

Across various countries, the same jobs can vary with respect to motivation, commitment, pay scale, skill set, and education. Other factors that determine national differences are length of employment that has an effect on the attitude of personnel towards the organization, age and gender, expectation regarding working hours, and so on. The attitude of managers from different countries also varies in many aspects. Some of these aspects include the following: 1 Management style. 2 Values and ethics. 3 Approach to decision making. 4 Approach to problem solving. 5 Expectations in relation to remuneration. 6 Importance given to management models and techniques. 7 Attitude to risk.

Q6. Describe foreign currency derivatives Answer:

Foreign currency derivatives Currency derivative is defined as a financial contract in order to swap two currencies at a predestined rate. It can also be termed as the agreement where the value can be determined from the rate of exchange of two currencies at the spot. The currency derivative trades in markets correspond to the spot (cash) market. Hence, the spot market exposures can be enclosed with the currency derivatives. The main advantage from derivative hedging is the basket of currency available. The derivatives can be hedged with other derivatives. In the foreign exchange market, currency derivatives like the currency features, currency options and currency swaps are usually traded. The standard agreement made in order to buy or sell foreign currencies in future is termed as currency futures. These are usually traded through organized exchanges. The authority to buy or sell the foreign currencies in future at a specified rate is provided by currency option. These will help the businessmen to enhance their foreign exchange dealings. The agreement undertaken to exchange cash flow streams in one currency for cash flow streams in another currency in future is provided by currency swaps. These will help to increase the funds of foreign currency from the cheapest sources.

Example for Foreign Currency Derivatives

Some of the risks associated with currency derivatives are: 1 Credit risk takes place, arising from the parties involved in a contract. 2 Market risk occurs due to adverse moves in the overall market. 3 Liquidity risks occur due to the requirement of available counterparties to take the other side of the trade. 4 Settlement risks similar to the credit risks occur when the parties involved in the contract fail to provide the currency at the agreed time. 5 Operational risks are one of the biggest risks that occur in trading derivatives due to human error. 6 Legal risks pertain to the counterparties of currency swaps that go into receivership while the swap is taking place.