Post on 14-Apr-2018
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INTERNATIONAL BUSINESS
Unit -1
International Business Environment: International business' an
overview Concept of international business - Classification of
international business - Factors influencing international business -
Economic and policy environment - Regulation of international
business .
Unit-2
Multinational Corporations (MNCs): Concept strategy 'and
organisation - Marketing management - Technology and MNCs- UN
Code of conduct of MNCs.
Unit -3
Economic Integration and Training Blocks: Structure of various
regional economic agreements such as ASEAN, SAMC/ SAPTA,
NAFTA, EC -- their procedure and impact on the trading activities of
the member states.
Unit - 4
Foreign Collaborations and Joint Ventures: Industrial policy and
foreign direct investment - Kinds of collaboration and joint ventures
Negotiating foreign collaboration! joint venture Drafting of
agreement - Restrictive clauses in the foreign collaboration joint
venture - UN Code of conduct of transfer of technology - Indian joint
ventures abroad.
Unit- 5
World Trade Organisations: Origin and development- UNCT AD
World Trade Organisation (WTO) -- Structure, functions and areas of
operations Dispute settlement under WTO - Ami-dumping duties
Countervailing duties Environmental aspects in international trade -
Trade related aspects of intellectual property rights - Competitionand trade in services.
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Unit -6
Settlement of International Commercial Disputes: International
commercial arbitration international institutions Drafting ofarbitration agreements Procedure for International commercial
arbitration.
REFERENCES:
1) Alkhafaji A.F, Competitive Global Management: Principles and
Strategies.
2)Thakur D, International Business for Third World Countries.
3) Devendra Thakur, Globalisation and International Business.
4) Rathnaswamy Communication Management: Theory and Practice.
5)Trilok N Sindhwani, The Global Business Game. A Strategic
Perspective.
Course Material prepared by
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LESSON I
INTERNATIONAL BUSINESS ENVIRON'MENT
The important objective of this lesson is to study the factorsinfluencing international business.
1.1 International BUSINESS
International business is a process of marketing goods and'
services in the international market. Exploring marketing
opportunities in the overseas market is the primary objective of
export marketing. Exporters should study emerging markets and
adapt products to fulfill the specific needs of the overseas
customers. Alan M: Rugman and Richard M. Hodgetts have defined
International Business as "The study of transactions taking place
across national borders for the purpose of satisfying the needs of
individuals and organisations. International marketing deals with
the transactions that take place between the citizens and corporate
of different countries.
1.2 INTERNATIONAL MARKETING ENVIRONMENT
International market is a competitive market. It is influenced
by not only demand arid 'supply forces of goods' and services, but
also various marketing environmental' factors. In 'international
market consumers from different countries' buy the products they
desire and marketers from different countries sell their products
they produce Japan dominates in electronics and automobiles in the
global market. The United States have become leader in information
technology, China; Philippines and' Taiwan are potential competitors
'to textiles exporting countries: South Korean' companies have
entered into Indian market and try to capture with goods market of
India. South Korean companies do their business 'globally. In global
shipbuilding industry, Haundai Heavy Industries (HHI) of South Korea
stands first The HHI has secured a place in the Guinness Book of
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World" Records for its 'ship building activities. All countries are not
Competitive inall type of products in the international market
1.3 CONCEPT OF BUSINESS ENVIRONMENT
Business environment is the 'sum total' of forces and factors
that are external to the business and which influence the business
in a variety of spheres. Production technology, financing means,
personnel systems, marketing efforts and public relations activities,
of a business are all influenced by the environmental factors. In a
country with restriction on import of labour-saving technologies,
production technologies; remain mostly labour-intensive. With riskand venture capital available in plenty, businesses assume more
risk and enter into hi-tech unnavigated areas. With abundant
labour supply in a country businesses benefit by inexpensive
labour, but trade unionism might pose challenge t6 the'
businesses. Price restrictions, market" demareations and
distributional limitations might be suffered by businesses
operating, in a highly restrictive society.Thus business environment refers to the totality of politico-
legal systems, the socio-cultural, systems, ,the techno-
infrastructural system, the geo-natural systems, the economic
systems, the, demographic entrepreneurial systems and the
functioning of other businesses in relation ,to a particular business
as competitors, as suppliers, as consumers and the like.
Business environment can be seen bifocals - the immediate
and the distant or as the micro and the macro. The immediate' or
macro environment refers to the firm-specific environmental
factors. The 'macro or the 'distant' environment refers to 'the
general environmental factors generally, firm specific
environmental factor are due to location and, geo-natural factors.
Hotel industry in an industrial, City, has round' the year business
with occasional 'ebbs and troughs, while the same industry' in hill
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resort he has only seasonal business, with economic, cultural and
political dimensions prevailing in the international market
determine the level of competitiveness of the countries participate
in the international market. International business E.nvirol'L'i1entshould be carefully studied to assess, the role of economic, cultural
and political dimensions in international market.' the extent of
international market of a company depends upon the economic
cultural and political roots of int~rnatioria1 marketing system and
it becomes essential to study their importance in international
marketing. The various dimensions of international marketing
systems are given below. Occasional demand in the off-season.
Thus locational and go-natural forces are mostly firm specific, But
economic fiscal and monetary policies, political ideologies 'and
systems, etc are macro affecting' all businesses mostly alike. A
reduction 'in interest rate inflow of foreign capital and the like are
macro environmental factors.
Business environment is also classified 'into market and ,non-
market environment. When a business's operations are influenced
by market forces like demand, supply, consumer fashion, extent of
competition among firms in the industry, etc., it is said that market
environmental factors are dominant in so far as the business is
concerned. Non-market environment refers to governmental
policies and programmers, social values and cultural practices and
the like.
Business environment in another perspective is divided into'economic' and non-economic environment. Economic
environment refers to the economic systems, economic policies
including the fiscal, monetary, labour and sectoral policies
adopted, the trends and currents 'of the national economic
factors and variables" economic peculiarities and problems' and
prospects state of the economic developments, economic
legislations and the like that affect businesses in general and
specially. Non-economic environment refers to the rest of the
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environmental factors viz., social, cultural, political, marketing,
technological ecological and others. But economic
environmental forces and non-economic environmental factors
influence one another and the resulting environment influencesbusiness in the domestic and International market.
1.4 NATURE OF INTERNATIONAL MARKETING ENVIRONMENT
Export business environment has certain dimensions. These are
described below:
(i) International marketing environment varies from country to
country as countries differ in their economic, social, political
and other factors and factors, local political situations, law
and order factors and so on perspectives:
(ii) Within the country different regions may differ in business
environment due to differences in resource endowments,
demographic factors, cultural factors, local political,
situations, law and order factors and so on.
(iii) International marketing environment has temporal characters
as well. Past present and the future environment aren't or
won't be all alike. As economic advances are made, as social
values change as political ideologies change and so on, so
does the business environment in the world market.
(iv) Marketing environment in existing global market provides
both opportunities and challenges, both accelerators and
brakes; leverages and limitations. .pa.
(v) The different environmental dimensions, namely political
Climate, cultural diversity, etc" with different level of
influence on' different, businesses at different places and at
different times.
(vi) International marketing dimensions do not pull in the same
direction. There is conflict between governmental factors and
market forces, between economic factors and social factors
and so on, Businesses find it difficult to cope with the diverse
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demands of the diverse environmental dimensions.
(vii) Politico-government dimensions seem to dominate the
environment for political ideology and stability set the tone
and background for, businesses. Government as a regulator ofbusinesses, as a coordinator ofbusinesses, as a facilitator of
businesses, as a protector of business and as an entrepreneur
itself have assumed greater significance than other
environmental factors.
(viii) International marketing dimensions are is no longer confined
to
factors within the boundaries of a nation. Transnational factors
like international investment, trade, employment and
multilateral institutions like the World Bank, International
Monetary Fund, World Trade Organisation etc influence
international marketing environment.
(ix) International marketing system and environment is dynamic,
complex and multi - dimensional.
1.5 SIGNIFICANCE OF INTERNATIONAL MARKETING
ENVIRONMENT
What a business is partly due to its environment. In other words
every ness is a product of its environment. The influence of
environment on business is significantly significant. Take the case
of Indian business undertakings. Until 1991, they enjoyed a
protective environment. They did not Ice interest in exports, inbuilding competitive strength, in' Researeh and development and
the like. Now as economic liberalization is taking place, businesses
address issues relating to 'total quality management', 'strategic
like' to meet competition, and so on, Thus as environment changes
businesses change their perspectives, strategies, etc. There is no
choice, but compulsion.
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Environment influences international marketing in four ways -
it provides opportunities to businesses, it poses threats, it
strengthens and also it weakens businesses. Hence the significanceof business environment.
Opportunities are provided by environment. When the culture
of a society needs rites, rituals and festivals, industries catering to
these needs flourish. When home entertainment culture spreads,
businesses in home-entertainment, viz. television, tape record
players, etc make good advances. When monetary policy is relaxed
more capital at lesser cost is made available. When laws restricting
foreign investment are relaxed, businesses can raise easy capital
abroad, as some Indian businesses are doing now through issue of
global depository receipts, Euro bonds, etc. Thus it is environment
that provides opportunities. Opportunities must be seized timely
and regularly.
Threats are also. posed by environment. When finance related
laws are relaxed allowing businesses to raise capital freely, loca1
banking businesses find no takers for credit. Whim foreign
companies set up businesses, local firms find the going difficult. The
entry of foreign brands of soft drinks, TVs, etc., is a threat to local
brands. The entry of Sony and Panasonic in India in 1995: is a threat
to the local brands like BPL, Videocon, etc.
Environment also strengthens businesses. An environment that
nurtures the culture of efficiency, "competitiveness, innovation and
growth makes businesses strong. Withdrawal of agri-subsides in rich
countries, strengthens the agro-export industries in LDCs.
And, environment can also weaken businesses. A policy of the
government to protect businesses in effect makes them weak.
Withdrawal of fertilizer-subsidy has weakened both the fertilizer and
the agri-industries as they were earlier used to the comforts of
protection.
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Components of internatiec.1al marketing environmental
dimensions are listed below:
International Business Environment Factors
S
r
.
N
o
Factory Components
1 Political Environment Political system, Political Installation, Political
ideologies of parties political stability, political
culture etc.
2
.
Government
Environment
System of government, distribution of power
between national and local government culture
of civil servants government policy on business,
etc.
3
.
Legal Environment Business related laws governing competition,
consumer protection contractual obligations
regulation of foreign participation; respect fopr
judiciary efficiency of the same etc.
4
.
Economic
Environment
Size of the economy, composition of the
economy economic health, economic policies-
fiscal inventory and entrepreneurial, foreign
capital etc.
5
.
Technological
Environment
Technological orientation, Researeh &
Development Technology Import and absorption
technological obsolescence, etc.
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6
.
Ecological
Environment
Natural resources and reverses, need for
protection of fragile zones, pollution control etc.
7
.
Geographical
Environment
The geo-graphical of a region like the terrain,
vegetation cover, location, attitude, rainfall,climate etc.
8
.
Cultural Environment Cultural life of people, rites, rituals, festivals,
heritage invasion of aliem culture, business
culture, roles, etc.
9
.
Social Environment Social Practices, social classifications like case,
religion and community, social institutions like
family marriage etc.
1
0
.
Demographic
Environment
Size of population, composition of population,
family size and cycle, language, educational
attainments entrepreneurial talents, etc.
A brief description of different environmental dimensions, seen
above, is below.
Political Environment
Political dimensions consist of the political system (ie.,
democracy, autocracy, etc), the political institutions (the national
and regional party., their structure and their style of functioning,
etc), the political ideologies of the pardes (ie., commitment to
socialism, 'capitalism, large industries, domestic industries vis--vis
multinationals; etc) . Political stability (continuance of same party in
power, continuance of saine policies perused by the party in powerpreviously by the new party in power, etc), strength' of opposition
and political culture of parties.
Political dimension E. a basic reason for the delay in privatizing
insurance sector in India Even in the liberaIised environment
Communist Parties do not accept permitting International
enterprises to do business in India.
Needless to say, political dimension influences the legal and
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governmental environmental factors, which in turn affect
businesses. It is the political ideologies of Smt Indira Gandhi that
resulted in vast role for public sector, bank nationalization, etc.
Political stability and opposition unity affect business environmentInvestment policies of businesses, etc depend on political stability.
With political stability foreign capital can be wooed. Politics-business
nexus is always there throughout the world, through election
funding, etc.
GOVERNMENTAL ENVIRONMENT
In theory, at least, there is difference between Government and
ruling political party. Hence a separate discussion of Governmental
environment is made.
The factors include the system of government (parliament,
presidential. etc), power distribution between Union Government
and State Governments and the local bodies, the culture of the civil
servants (their ability, straightforwardness, speed of action, etc),Governmental institutions like the Parliament, Council of Ministers,
Ministries, etc and their relative role and efficacy, the Governmental
Policy on Business (laissez-faire policy or control), etc.
Stable governmental policies, efficiency of and timely action by
the civil servants, greater understanding among different ministries,
etc have a definite influence on export business. A responsive
government, is a boon to businesses and vice-versa.
Economic environment influences export business and
investment opportunities. India and Mauritius have entered into
Double Taxation Avoidance Agreement (DTAA). As per the
agreement, a resident company of Mauritius investing in India will
pay income tax and other taxes as per the taxation rules of the
Mauritius. Many global enterprises invest in India though Mauritius
because tax rate in Mauritius is less than the tax rate in India. Tax
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policy of Mauritius
Government influences investment in India.
Importing countries may levy anti-dumping duties on a specific
commodity, if the import of such commodity damages domesticindustry producing the same commodity. Anti-dumping duty is
levied to reduce cheaper imports. Removing quantitative
restrictions, reducing /increasing import duties etc., influence
export business. The prosperity of the export business is based on
the Export-Import Policy of the Government Export incentives and
concessions provided by the Government influence export business.
The European' Union provides enormous incentives to the dairyindustry. So their share in global dairy market is on increasing trend.
Unilateral, bilateral and multilateral agreements will, influence
export business. The GSP Globalised System of Preferences), and
GSTP (Glob a System of Trade Preferences) concessions influence
export business Under GSP importing countries give concessions in
import duty for the products importee from the listed countries inGSP. It is unilateral agreement. Under this, duty concession is given
by the developed countries to developing countries. Under GSTP
countries entering into agreement should exchange duty
concession: mutually. It is bilateral agreement.
Investment and exchange rate policies of the Government
influence export opportunities of a business. Currency depreciationmakes exports competitive and imports costly. South Korean
companies are permitted to invest in automobile sector in India that
will pave the way to increase automobile exports in India in the
near future.
Legal Environment
The legal system (the Supreme Court, High Court. District and
Taluk Courts, Ombudsman Organisations, Labour Courts and
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Tribunals, Consumer Courts and Tribunals), the legislative
frameworks (the different economic and commercial legislations,
the provisions and interpretations), the speed of disposal of case,
the independence of the judicial system, etc in India and emergingmarkets constitute the legal environmental factors for export
business.
Legal procedures relating to' import of goods, packaging,
export price regulations (minimum export price), anti-dumping and
international advertising are discussed under legal environment of
export business.
A clear-cut legislative frame work reduces the scope for diverse
interpretations and needless dragging of cases. An efficient judiciary
disposes of pending cases sooner than later. Too much of business
legislations instead of creating ground for orderly relations among
businesses, curtail freedom of enterprise. Hence the influence of
legal system on businesses.
Legal environment influences export business greatly. The WTO
insists the member countries to adopt labour standard and
environment standard. The United States put ban on the import of
products made by child labour. The US insists to avoid child labour.
We have to give provision in our Labour Law to avoid child labour in
Indian industries whether small scale or large scale. Environmental
aspects and Law also are seriously considered in export -business.
The Government of India has stated that the industrial units of
foreign countries getting permission to establish their industries in
Special Economic Zones (SEZ) Should follow Indian Labour Law.
Foreign companies may hesitate to establish their units in SEZ.
Because they prefer hire and fire labour policy and not the protected
one like Indian Labour Policy. This may reduce exports of SEZs.
Hence labour policy 'influences export business.
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Legal procedures for payments in the importing countries,
and dispute settlement mechanism in the importing countries
also have a bearing on international business.
Economic Environment
The economic dimensional factors are indeed numerous and
more influenced. The gross national product and its composition
arid trend, the gross national savings and investment, the sizeand scope of public sector, the economic policy of the land
consisting of control on big businesses, tax policy, policy in fiscal
deficit, interest rate policy, policy on foreign finance for
development; monetary policy, trade policy, reservation of
industries for small businesses, incentives for selected
industries/regions etc influence export businesses vastly.
The economic system, nature of the economy, compositionof the economy, functioning of the economy, health of the
economy, economic policy, strategy, programs and procedures
adopted, economic 'controls and regulatio:1s, economic trends,
economic problems arid prospects influence businesses in the
international market.
Economic factors of a country will influence export business.
The, economic factors such as, standard of living of the people,
progress in economic development, rate of foreign exchange,
trade-barriers, trade blocks, bilateral and multilateral agreements
with multinational agencies and other developed and developing
countries influence international business bf a country.
In a capitalistic society private enterprises develop. In an
industrial economy the economic health is better than in an
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agrarian economy the structural pattern and .interface among
various sectors of the economy mean much for individual
businesses. Structural rigidities are being reduced through
liberalization giving increased scope for innovativebusinesses inthe global market.
Technological Environment
Technology is the invisible input in domestic and export
business. Science and Technology make lot of differences in
economic arid social life. Industrial and agrarian development in the
present era are technology driven. Technology is all pervasive. Small
and big industries, agricultural and secondary sectors, service and
infrastructural sectors, rural and urban sectors an need technology.
Availability of appropriate technology, technology
development, technology absorption and technology up gradation
influence export businesses very much. Import of technology and
development of indigenous technology are the two eyes forindustrial and business development. Businesses must manage
technology, instead of being dictated by technology. That is
technology should be used for human and business development
together. Modemisation of businesses through planned
obsolescence is one aspect of technology management.
Development hinges on technology. Hence the relevance of
technological environment. Technology forecasting is needed so that
businesses can plan for future in a firm way. If in a country
technology is not given' due importance, its businesses will stand no
ground in the competitive world.
Technology development in 'food processing industry will
increase processed foods exports. Software technology contributes
to increase in software exports in India. Technology will create
alternatives' for the scared or limited resources. Technology is' aweapon to fight in the global market and it is a stepping stone to
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maximize export business in the global market.
Ecological Environment
Businesses including international business are influenced, by
the natural resources available in the regions and balanced
exploitation of the natural resources. Lopsided or over exploitation
of one 'or other resources, beyond the balancing or regeneration
capacity of the l!~ture, will sp,elldoom for the businesses.' Large
dams via-a-vis small dams,bio-fertiliseis via':'a-v'is chemical
fertilizers, ,conventional energy vis-a-vis non-conventional energy
and the like issues are nothing but intimately woven with the
ecology. Uniess fuel 'efficiency is ensured right from the village
homes using firewoods to big industries using fossil fuels, the world,
would suffer serious ecological hazard with alround pollutions.
Businesses, have to, therefore, be concerned with the ecology and
natural environment. Now, ecological audit is made part of project
appraisal. Stem ecological laws ,are in vogue nowadays.
Geographical Environment
International businesses are affected by the kind of terrain, the
soil and
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become leaders in the specific product in the world market. Hence
geographical environment influences export business. Cold
countries will import leather garments. it is the opportunity to the
other countries to export leather garments to the cold countries.Cotton industry is concentrated in Bombay region, which is
due to the hinterland soil-type and climate suited for cotton
cultivation and spinning. Bombay is the business capital'of India.
This is again due to its geographical features. A natural sea-port,
good rainfall, the rich soil, etc make Bombay a unique land of
businesses.
Cultural Environment
Warren J. Keegan, in his book 'Global Marketing Management'
has expressed the concept culture as "the ways of living built up by
a group of human beings that are transmitted from one generation
to another, culture includes both conscious and unconscious values,
ideas, attitudes and symbols that shape human behavior and that
are transmitted from one generation to the next". Cultural [actorsare important influences of the export marketing of goods, and
services. Religion, family set-up, education and language are
important Cultural factors influencing export marketing.
Businesses are social sub-systems. Businesses exist to cater to
people's needs. People's needs depend on their culture. Rites,
rituals values, beliefs, norms, symbols, festivals, leisure activities,
works preferred, etc are all cultural or culture-dependent. Culture
changes, but basic characters remain the same as" ever. Culture
varies from region to region and society to society. Depending on
the cultural heritage of the people, people economic, social,
educational, work and leisure needs differ. Businesses try to meet
these needs of different people. As Cultural changes, the businesses
have to change themselves now a days cultural change is taking
place on a large scale due to exposure to alien Cultures through
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media or movement. This has enormous business implications in the
export market
'Ready to use' products are popular in the world market.
Exporters should supply ready to use food products to maximisetheir export business. In some countries consumer may prefer
neatly packed products in small quantities, rather than in bulk form.
Exporters have to observe colour preference of the buyers in
textiles and other products in the world market and important
festivals in the emerging markets to capitalise the cultural
environment' and to maximising export business. Changes are
witnessed in Indian cultural environment. Industrial and consumerproducts of western world are marketed in India and is market goes
on increasing trend.
Social Environment
Social environment refers to the social classification of people,
upper, middle and lower classes on economic basis, caste based
classification and community based classification, social institutionslike family, marriage, societal values like honesty and cleanliness in
public life, various tolerances, etc.
Again, as businesses serve and get served by the society,
social environment affects businesses. In family life the purchase
decisions are generally made by the elders who consider value for
money as the most important criterion of buying decision.
Businesses have to keep this in mind. At the same time, as social
changes are common, youngsters have been now taking purchase
and investn1.ent decisions. Now businesses articulations have to be
different.
The middle class is the burgeoning one in most countries. Two
bed room houses flats, TV s, VCRs, Washing Machines, Electronic
Typewriters etc are the status symbol of this social group. Indian
and multinational companies mostlycater to this social group.
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Demographic Environment
The size of population, age, education, linguistic and religious
composition of population, trend in these factors, entrepreneurialaspiration of the people, educational and, skill levels of population,
political ideologies and awareness of the people, values and attitude
of the people, etc constitute demographic environment.
Growing population has both positive and negative impacts on
the nation and its businesses. Baby boom in a land would mean
more hay days for baby food and health business similarly,
burgeoning old age people in a land will lead to more hay days for
health-care industry, home for the elders like crche for children
and so on. If people are entrepreneurial more innovative businesses
will come up. Job providers will increase and unemployment will
decrease or vanish. Small family norms are nowadays stressed. In
China 'one-family-one child' norm is enforced. This, it is reported,
leads to much more "pampered childhood". It may have social
repercussions later. Business opportunities and challenges, indomestic and international markets are, thus influenced by the
demographic factors and the trend in them.
Largest educated population; largest uneducated (illiteracy)
population, and largest middle income group population in the world
are in India. It attracts multinational companies to enter into Indian
consumer goods market. The Hindustan Lever, Nestle, Smith lime
Beecham etc., have exploited consumer goods market in India.
Hence demographic environment influences international business.
Computer literacy is on increasing in India. It increase number of
computer training institutes and India becomes leader in the world
software market. Growth of computer literacy creates opportunities
to Indian Information Technology companies to penetrate in the
world market.
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1.6 QUESTIONS
6) What is economic environment in International Business?
1) What do you understand
by cultural environment?7) Explain the importance of political environment in international
business.
8) Discuss international business environment and the impact on
international business.
1.7 FURTHER READINGS
Francis Cherunilam, "Global Economy and Business
Environment". Himalaya Publishing House, Bombay.
S. Neelamegam (Editor), "Competing Globally Challenges
and
Opportunities", Allied Publishers Limited, New Delhi.
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LESSON II
MULTINATIONAL CORPORATIONS
Objectives of the lesson are,
(i) to study the concept, strategy and organisation of MNCs,
(ii) to study the marketing management and
(iii) to study the importance of technology in the business of
MNCs.
2.1 MULTINATIONAL CORPORATION
Multinational Corporation is defined by Leonard Gomes, as, "a
corporation that controls production facilities in more than one
country, such facilities having been acquired through the process of
foreign direct investment. Firms that participate in international
business, however large they may be, solely by exporting or by
licensing technology are not multinational enterprises".
MNC is explained by ILO in its report (Multinational Enterprisesand Societal Policy as ''the essential nature of the multinational
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enterprises lies in the fact that its managerial headquarters are
located in one country (home country) while the enterprises carries
out operations in a number of other countries (host countries) as
well.MNC is defined by Jacques Maisonrogue, President of IBM World
Trade Corporation as, "an MNC as a company that meets five criteria
(i) it operates in many countries at different levels of economic
development, (ii) its local subsidiaries are managed by nationals,
(iii) it maintains complete industrial organisations, including R & D
and manufacturing facilities in several countries, (iv) it has
multinational central management and (v) it has multinational stockownership.
Alan C. Shapiro, in his book Multinational Financial Management
has defined MNC as, "a company engaged in producing and selling
goods or services in more than one country. It ordinarily consists of
a parent company located in the home country and at least five or
six foreign subsidiaries, typically with a high degree strategic
interaction among the units".
James C. Baker has defined MNC as. "a company (i) Which has
a direct investment base in several countries, (ii) which generally
derives from 20 percent to 30 percent or more of its net profits
from foreign operations and (ill) whose management makes policy
decision based on the alternatives available anywhere in the
world".
Different scholars have used different attributes to characterize
the MNE Such attributes include the geographic scope of the firm's
value chain (that is, the sequence of value-adding activities or
functions within the firm), management styles, ownership of
productive assets, communality of strategy formulation and
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implementation worldwide, and organizational structure:
-:- A distinction is made between "global" and "multi
domestic" MNEs based on coordination and geographic
configuration of the firm's value chain. MNEs with highcoordination among and concentrated configuration of the
different parts of the value chain are called "global", while
those with low coordination among and dispersed
configuration of the different parts of the value chain are
called "multi domestic".
-:- A distinction is made on the basis of management styles in
the MNE geocentric (world oriented), polycentric (host-
country oriented), or ethnocentric (home-country oriented).
A firm's true degree of multi nationality is measured by the
extent to which its top executives think geometrically.
-:- The MNE is defined as an organisation that owns productive
assets in "different countries, and has common strategy
formulation and implementation across borders.
-:-The MNE is defined as any firm that "owns" outputs of goods
and services originating in more than one country.
-:- A distinction is made based on organisational structure:
"global" (tightly controlled with a centralized hub structure),
"multinational" (decentralized federations), and
"transnational" (structures that permit retaining localflexibility while simultaneously achieving global
integration).
MNE is defined as "any enterprise that carries out transactions
in or between two sovereign entities, operating under a system of
decision making permitting influence over resources and
capabilities, where the transactions are subject to influence by
factors exogenous to the home country environment of theenterprise.
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2.2 Organising F. amework for MNE Definitions
S
o
u
r
c
e
Attribute Global Transnational Multi
Domestic
P
e
rim
e
t
e
r
Manageme
nt style
Ethnoce
ntric
Geocentric Geocentric Polycentric
K
in
d
l
e
b
e
r
g
e
r
(
1
9
7
3
Various
Functionaland
attitudinal
attributes
National
Corporation with
region
operatio
ns
International - Multinationa
l
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)
P
o
rte
r
(
1
9
8
6)
Coordinati
on
configuration
Global Complex Global - Multi
domestic
B
a
rl
e
tt
a
n
d
G
h
o
s
a
s
(
1
9
8
9
)
Network/in
terorganiz
ational
Global Transactional International Multi
National
G Organisati Centraliz Networks Net works Ceneralized
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l
o
b
al
B
a
rt
l
e
nt
(
1
9
9
0
)a
n
d
on and
structure
ed
H
e
d
i
u
m
(
1
9
8
6
)
Organisati
onal
Structure
Hierachy
( H-
Form)
Heterar city Heterar city Hierarehy
(M-form)
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___________________________________________________________________________________
Source : Alert Stewart and Sundaram, International Business
Environment Prentice Hall India, New Delhi.
The company will across the following four stages to becometransnational company. The stages are: (i) Domestic company, (ii)
international company, (iii) multinational company, (iv) global
company" After crossing the status of global company, companies
will become transnational companies. Warren J. Keegans, in his
book Global Marketing Management has explained the above four
stages that a company has to cross to achieve the sta:'J.5 of
transnational. The explanation is given below.
The stage one company is domestic company. It concentrates
and focuses on domestic market, suppliers and competitors. It does
not consider the alternative of going global.
The stage two company is known as international company. It
attempts to extend its manufacturing marketing and other activities
outside the home country. International companies adopt
ethnocentric approach. The style of doing business in domestic or
home market is followed in the foreign market also by the
international companies. They are home market oriented
International companies adopt the same marketing mix in foreign
market which has been followed in the domestic market
The stage three company is known as multinational company.
Over a period of time the stage two company will try to observe the
differences in market in home country and foreign country and
markets around the world. Then it will change its marketing mix
suitable to the changes observed. The company which responds
market differences in the global market becomes multinational
company. Warren J. Keegan has rightly pointed out that
multinational company formulates a unique strategy for each
country in which it conducts business.' Multinational companies
follow polycentric approach. It means that they try to change their
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marketing mix suitable to meet buying preferences and practice of
consumers in the foreign market. Consumer durables are designed
by the multinational company, based on the needs and
requirements of the consumers and designs will vary country tocountry, Electrical goods and automobiles are manufactured in
different designs in order to adopt the local conditions.
The stage, four company - global company follows either a
global marketing strategy or global sourcing strategy. Global
company will produce products in the home country and market the
products in the global market. It will invest in foreign markets to
create marketing infrastructure. On the other hand some globalcompanies will procure required raw materials and components
from the global market and produce finished output in homecountry
and supply to the consumers of the home country. The business of
global company will be either selling the products produced in the
home country in the global market or procuring materials from the
global market for domestic production.
The stage five company-transnational company will do its
business in many countries. It's sales, investments, production, R &
D activities and other business related operations are carried out in
many countries. Transnational company will dominate in the world
market. It is an integrated company integrating global sourcing and
global marketing. Its marketing approach is geocentric. It considers
the prevailing similarities and differences in the various centers of
the global market and takes steps to supply goods and services
matching the requirements of the global market. Transnational
companies do not adapt for the sake of adaptation. They will not
react to the exact requirements of the market immediately. They
make attempts to adapt in order to add value to their offer and their
aim is value addition and providing value added products to
customers.
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Stages of Development of domestic company, international
company, multinational company, global company and
transnational company as explained by Warren J. Keegan are given
below:2.3 Stages of Development I
Stage and Domestic Inter Multi Global "- Trans
Company national National national
Strategy Domestic Internation Multidomes Global Global
Model NA Coordi t Decen Centralised Integrated
nated tralised Hub Network
Federation Federation
View of Home Extension National Global Global
World Country Markets Markets Market
or Markets
Resources Resources
Orientatio
Ethnocen Ethnocentr Polycentric Mixed Geocentric
tric IC
Source: Warren J. Keegan, Global Marketing Management, p. 52.
2.4 Stages of Development 11t
Organisational Characteristics
State
and
Compan
y
Domesti
c
International Multi
national
Global Transnational
Key
Assets
Located
in home
Core
Centralized
others
disposed
Decentral
ized and
self
sufficient
All in
home
Country
except
Dispersed
inter
dependent
and
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marketin
g of
Source
specialized
Role ofcountry
units
Singlecountry
Adaptingand
leveraging
competencie
s
Exploitinglocal
opportuni
ties
Marketing of
sourcing
Contributionsto company
worldwide
Knowle
dge
Home
Country
Created at
center and
transferred
Retained
within
operating
units
Marketin
g
develope
d jointly
and
shared
All function
developed
jointly shared
Source Warren J. Keegan, Global Marketing Management, p.52,
2.5 Multinational Corporation
Hitachi Japan
Mitsubishi Japan
Fujitsu Japan
Toshiba Japan
Sanyo Japan
Suzuki Japan
Rollys Roycee UK
Ansaldo Italy
Fanuc Italy
Jaguar UK
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General Motors US
General Electric US
AT & T US
Nestle Switzerland
Reebok US (Boston)
2.6 The Worlds Largest Corporations
Ran
k
199
7
Corporation Country Revenu
e ($
Billion)
Profits
($
billion
)
Employee
s
1 General
Motors
US 178.2 6.78 608,000
2 Ford Motor US 153.6 6.92 363,892
3 Mitusi Japan 142.7 0.27 40,000
4 Mitsubishi Japan 128.9 0.39 36,0005 Royal
Dutch/Shell
Group
UK/The
Netherland
s
128.1 7.76 105,000
6 Itochu Japn 126.6 -7.76 6.675
7 Exxon US 122.4 8.46 80,000
8 Wall Mart
Stores
US 119.3 3.53 825,000
9 Marubeni Japan 111.1 0.14 64.000
10 Sumitomo Japan 102.4 0.20 29,000
11 Toyota
Motor
Japan 95.1 3.70 159,035
12 General
electric
US 90.8 8.20 276,000
13 Nissbo Lwai Japan 81.9 0.02 18,158
14 IBM US 78.5 6.09 269,46515 Nippon Japan 77.0 2.36 226,000
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Telegraph &
Telephone
16 AXA France 76.9 -1.36 80,613
17 Daimler Benz
Germany 71.6 4.64 300,068
18 Daewoo Japan 71.5 0.53 265,044
19 Nippon Life
Insurance
Japan 71.4 2.11 75,851
20 British
Petroleum
UK 71.2 4.04 56,450
287 Indian Oil India 14.2 0.46 33,832
Source Business Today, September 7-21, 1998 give by Francis
Cherunilam in his book Global Economy and Business
Environment.
Indicators of FDI, International Production and Exports
Item Annual Growth Rate (Per cent)
1986-90 1991-95 1996-99
FDI Inflow 24.0 20.0 31.9
Gross Product of Foreign
Affiliates
16.4 7.1 15.3
Assets of Foreign Affiliates 18.0 13.7 16.5
Exports of Foreign Affiliates 13.2 13.9 8.3
Employment of Foreign
Affiliates
5.6 5.0 8.3
GDP 11.7 6.3 0.6
Exports of Good and Services 15.0 9.5 1.5
Source: World Investment Report, 2000, given by Francis
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Cherunilam in his book 'Global Economy and Buinsess
Environment'.
Perlmutter has suggested that firms involved in overseas
business can be driven by a specific philosophical approach.Traditionally firms who are either small or unfamiliar with overseas
marketing pursue an ethnocentric approach to international
business. This implies that they see foreign markets as identical to
their domestic markets. There is no necessity to change the design
of the product nor any of the associated marketing activities. The
whole of the marketing mix can be standardised allowing a
company to reap the rewards of economies of scale and tominimise the amount of time and expertise devoted to individual
markets.
As firms become more committed to overseas markets they
realize that individual countries may require a degree of
customization which the ethnocentric approach does not permit.
Firms then frequently move to the other end of the spectrum and
become polycentric in orientation. Each individual market is seenas distinctive and so products and marketing activities
(distribution, promotion and price) are all individually customised.
This usually results in sales increases but often at the expense of
profit. Customization inevitably results in increased costs, as there
is a limited application for scale economies here. (In reality few
organisation are totally polycentric but many do have a multiplicity
of foreign operations, which do curtail their profitability. There is atendency in certain literature to describe organisations which are
pokycentric in philosophy as multinational companies. This is a
more specific description of what was originally a generic concept.
There obviously needs to be a 'happy medium' where
customisation can sit comfortably with standardisation. The popular
slogan 'think global act local' springs to mind. Kenichi Ohmae has
argued that firms that cannot amortise their capital costs over a
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large volume of customers are unlikely to be able to survive in the
long-term. Firms need to be able to take advantage of economies of
scale. Firms need to be regiocentric (that is, focused on a specific
geographic are such as Europe or Latin America, or geocentricwhere the market is seen to be global). According to Ohmae, a
geocentric company will centralise functions where localisation is
inappropriate and will customise those areas where localisation is a
benefit
Functions suitable for centralisation may include
manufacturing, R&D. some marketing areas such as branding where
a global brand name may be advantageous and certain financialoperations such as investment and retrenchment where localised
decision-making may be biased. However, certain functions may still
need to be localised. For example, the design of certain products
and advertising may have to reflect local needs and customs.
Similarly sales promotions may need to be localised.
By being geocentric, the company obtains the benefits of
economies of scale whilst also being able to respond to local needs.Furthermore, unlike ethnocentrically oriented companies, a
geocentric company is seen to be demand-given whereas the
former style (ethnocentric) is more supply-driven.
The move towards standardisation in a geocentric company is
encouraged by a market convergence increasingly; transnational
segments are being developed, whereby consumers in different
countries may have similar tastes which are more convergent than
those of different segments within the same geographic market. For
example, the youth segment has similar tastes in music and fashion
goods. The youth markets in Tokyo. Munich, New York and London
have almost certainly, a closer affinity with each other than they do
with their parents or with segments of that older age group. These
geocentric companies are now frequently referred to as global
companies.
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2.8 Why firms are moving towards globalisation
Kenichi Ohmae, in his book The Borderless World, has identified
a number of reasons which might encourage a firm to act
geocentrically (globally). He has listed these under a simple 5 Csmodel. The first C is the customer. As has just been noted there has
been a movement towards market conversion. More and more
customers throughout a variety of countries are looking for products
with similar characteristics. Where there has always been a financial
incentive to standardize products there is now often a demand-led
requirement. This leads to a second C - the company. By selling
identical products to a number of markets, a company can spreadits fixed costs over a larger volume of sales, enabling that company
to lower its costs and become more competitive, which brings us to
the third C - competition. If other competitors are already reaping
the benefits of global commitment, then the company must
compete the same 'playing field' otherwise it will operate with a
serious disadvantage. It must also become a global player. If it is
seen as only a regional or local player its image may be degraded.
Furthermore, the costs of operating on a global scale can be
enormous, It could be advantageous to attempt to reduce costs by
forming strategic alliances with the previously considered dangerous
competitors. The fourth C is currency. With the current volatility of
exchange rates it may be sensible for a company to set up
manufacturing or assembly operations overseas rather than to rely
entirely on exporting products. A slight variation in a currency valuecould more than cancel out any profit from exporting. Additionally,
such a move also eradicates the dangers which trade barriers can
pose to an exporting company, .
The final C is country. If a company seeks to locate its business
activities (other than exporting) overseas, it can gain several
benefits - access to cheap labour, raw materials or even finance. It
can also be seen to operate as a local company so attracting the
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goodwill of host governments as well as the goodwill of customers
who often prefer to buy from what they consider to be local
companies.
These five Cs can all be seen as persuasive factors ininfluencing organisations to become more global in their philosophy.
These factors should not be considered to be the seen as the
influences that encourage companies to operate overseas. A global
company is generally more committed to overseas markets and its
commitment is usually more long-term and expensive than those
which are mainly export-driven. (Source: The Hindu Business Line
various issues).
2.9 Global and multinational company strategies
Because of their differing orientations it is not surprising that
the two types of companies use different approaches to implement
strategies or pursue objectives. Now, a strategy is identified to show
the difference in the ways they are likely to be implemented.
Maximise world-wide performance: MNC by using local
competitive advantage to gain profits: Global: through the
application of corporate sharing and integration.
Seek to benefit from the location of value-added activities: MNC:
all or most aspects of the value chain will be reduced in each
country: Global: costs will be reduced by breaking up the value
chain so that each activity may be produced optimally in different
countries.
Which countries will be participants in a world wide trading
enterprise?
1. MNC: countries are selected for their individual potential for
generating profit
2. Global. countries are chosen to reflect their integrative abilities
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and their potential contribution for globalization benefit.
3. Product offering: MNC: products are tailored to suit local
preferences;
4. Global: core products are standardized to minimise need forlocal
daptation.
5. Marketing approach: MNC: this function is fully tailored for
each country being locally and individually developed;
6. Global: there is a uniform approach to marketing with only minor
changes.
7. Competitive approach: MNC: the managers decide on a strategicresponse without considering other markets:
8. Global: the competitive strategy is integrated across the various
countries.
2.10 Competitiveness of MNCs
How does one measure the competitiveness of a company?
Incremental capital-output ratio? Growth in labour productivity?
Profitability ratios or the market capitalization?
They all help to measure the competitiveness. But most
important probably is the extent of net value a company adds over
and above the raw materials used in the production. That is, the net
value added. A company's competitive power can be measured by
estimating the share of net value added in its value of output. This
share will indicate the productivity of raw materials and will
measure the net value addition of per unit output generated.
This is important for while the magnitude of input -output ratio
is influenced largely by the size of the capital (much of which may
not be in use) or the size of the market capitalization by exogenous
factors, the magnitude of this share will almost exclusively depend
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on the working efficiency of the company.
The empirical results are not surprising. An Economic Times
survey of 250 large private sector companies finds that during the
last five years, between 1996-97 to 2000-01, their share of netvalue added in output has declined from 23.11 per cent to 21.32 per
cent.
But, of course, the story was different for the MNCs. Like in
many other indicators of corporate excellence, here too the MNCs
have managed to in1prove their own performance despite a general
deceleration. The "hare of net value added in output of the 48 MNCs
in the list has increased from 21.47 per cent in 1996-97 to 23.18 per
cent in 2000-01.
Their Indian counterparts in contrast witnessed a sharp decline
- down from 23.11 per cent in 1996-97 to 20.92 per cent in 2000-
01.
In actual terms, aggregate net value added of the sample MNCs
increased by about 55 per cent during the period compared to 43
per cent of 202 sample Indian companies. In contrast, the aggregate
value of output of the MNCs during the same period increased by 43
per cent as against 61 per cent increase of the Indian companies.
This was probably due to the sharp rise in capacity after the
liberalisation. Most of our big companies added to their capacity in
the early nineties and their production increased rapidly, often at
the expense of higher inventory accumulation
2.11 MNCs AND TECHNOLOGY
MNCs are technology driven enterprises. Their production
strength and cost cutting exercises are depend upon their
technology strength. The extent of technology strength paves the
way to them to introduce value added products providing addedconsumer value. Electr0nics products are standardised worldwide of
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late, consumer durables are also standardised. MNCs are heavily
concentrating to penetrate their market in the world electronic
market and consumer durables market. Product standardisation
needs ever cost reducing and productive oriented technology. MNCscannot survive without updated and sophisticated technology. So it
can be concluded that their core strength and con: competency is
technology. Korean companies are building its technology strength
and productivity and come forward to provide colour television at
the price of black and white television. It shows their inbuilt strength
in technology that paves the way to reduce cost of output. "LG now
claims to have attained the top slot in the semi-automatic washing
machines segment. Mr. Jogesh Jaitly, product group head, washing
machines, LG says, "our continued efforts to .PA
provide new and technologically superior products has boosted
sales manifold and is responsible for LG's leadership position in the
semi-automatic washing machine category". (The Economic Times,
22nd October 2002). It has been observed that technology is the
accelerator for increasing market share of LG in wasi1ing machinemarket in India.
2.12 UN Code of Conduct of MNCs
As the Brandt Commission observes, there is now much
interest in trying to formulate international codes of conduct for the
transfer of technology, for restrictive business practices and
transnational corporations. Definite progress has been made in
some of these negotiations. Any code, of course will only work if it
can influence the actual behavior of home and host governments,
and of investors.
The major elements of any effective code should be capable of
being eventually translated into agreements between Governments.
Such an overall regime will have to have elements of both
persuasion and effective implementation, with flexible approaches
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and attitudes on all sides. The participating governments will have
to consult with labour and business to rind the means to reconcile
interests and to monitor and implement the agreements. The ILO
has created a committee for consultation and monitoring the codeor conduct relating to multinational enterprises. This offers one
model.
According to the Brandt Commission, the principal elements of
an international regime for investment should include:
9) A framework to allow developing countries as well as
transnational corporations to benefit from direct investments on
terms contractually agreed upon. Home countries should not
restrict investment or the transfer of technology abroad, and
should desist from other restrictive practices such as export
controls; not restrict current transfers such as profits, royalties
and dividends, or the repatriation of capital, so long as they are
on terms which were agreed top when the investment was
originally approved or subsequently negotiated.
10) Legislation promoted and co-coordinated in home and host
countries to regulate the activities of transnational corporations
in such matters as ethical behavior, disclosure of information,
restrictive business practices, cartels, anti-competitive practices
and labour standards. International codes and guidelines are a
useful step in that direction.
11)Co-operation by governments in their tax policies to monitor
transfer pricing and to eliminate the resort to tax havens.
12) Fiscal and other incentives and policies toward, foreign
investment to be harmonized along host developing countries,
particularly at regional and sub-regional levels to avoid the
undermining of the tax base and competitive position of host
countries.
13)An international procedure for discussions and consultations' onmeasures affecting Correct L'1Vestment and the activities of
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transnational corporations. (Source: Francis Cherunilcam, Global
Economy and Business Environment).
2.13 QUESTIONS14)Define 'Multinational Corporation'.
15)Explain organising framework for multinational enterprises.
16) Explain the business prospects of a selected multinational
enterprises In India.
17)What are the four stages a company has to cross to become a
transnational company? And explain the stages of development.
18) Why firms are moving towards globalisation? Explain.19)What are the strategies followed by multinational companies in
maximising 'their market share?
2.14 FURTHER- HEADINGS
20) Fracis Cherunilam, 'Global Economy and Business
Environment', Himalaya Publishing House, Bombay.
21) Warren J. Keegan, 'Global Marketing Management', Prentice
Hall of India Pvt. Ltd., New Delhi.
3) Alan M.Rugman and Richard M.Hodgetts, 'international Business
A Strategic Management Approach', McGraw Hill Inc., New York.
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LESSON - III
ECONOMIC INTEGRATION AND TRADING LOCKS
Objective of this lesson are:
(i) To study economic integration and regional arrangements,
(ii) To understand the concept of Free Trade Area,
(iii) To learn the importance of Customs Union and Common Market
in International trade.
(iv) To understand the concept of Economic Union and
(v) To study the procedure and impact of Economic Integration and
Trading Blocks on the trading activities of the member states.
3.1 INTRODUCTION
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Economic Integration and regional groupings are created In
different forms or degree of integration between the members of
the group.
The urge for a liberalised trading regime compelled nations toform regional trading arrangements. Repeatedly it has been pointed
out that the slow progress of the multilateral trade liberalisation
process led to the increased popularity of the regional trading
arrangements.
Regional trading arrangements, being agreements among a
limited number of nations and having mostly common interests are
a safer process for liberalising trade within a small arena.
A regional trading arrangement (RT A) gives increased market
access to the member countries of the same. This increased market
access comes through lowering of tariff and non-tariff measures for
the members. This leads to a decrease in the protection level for the
domestic producers, ultimately leading to an increase in the market
share of the R T A member countries in the domestic market. Thus,
some inefficient producers give space to efficient producers, a
movement toward" efficient allocation, thereby increasing the
welfare. This creates trade c imports coming from RT A members
into the domestic economy replacing the inefficient domestic
production - the trade creation aspect ofall RTA. As is seen, this is
welfare increasing.
The increased market access to members comes through the
decreased tariff and non-tariff measures; however, the same are
left untouched for the non members of the RTA, members of WTO
majority cases. So, a distortion sets in the trading scenario. The
non-members of the RTA are thrown into a disadvantageous
position; their competitiveness in the domestic markets of the RT A
members gets eroded away to a certain extent because of the
discriminatory treatment. There arise incidences where the
comparative competitiveness of the RTA member countries in the
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region's market increases visa-a- is. the non-members only
because of the preferential market access received by the
members. This leads to an increased penetration of the members
in the region's' market, displacing the non-members - the case oftrade diversion. Trade diversion is thus the displacement of the
more efficient producers by the lesser efficient ones. This is the
welfare decreasing aspect of an RTA.
Paragraph 4 of Article XXIV of GAIT 1994 reads
"The contracting parties recognise the desirability of increasing
freedom ' of trade by the development, through voluntary
agreements, of closer integration between the economies ofthe countries parties to such agreements. They also recognise
that the purpose of a customs union or a free-trade area should
be to facilitate trade between the constituent territories and
not to raise barriers to the trade of other contracting parties
with such territories".
Paragraph 5 of Article XXIV of GATT 1994 reads
"Accordingly, the provisions of this Agreement shall not prevent.
as between the territories of contracting parties, the formation
of a customs union or of a free-trade area or the adoption of an
interim agreement necessary for the formation of a customs
union or of a free-trade area Provided that:
(a) With respect to a customs union, or an interim agreement
leading to a formation of a customs union, the duties and other
regulations of commerce imposed at the institution or any such
union or interim agreement in respect trade with contracting
parties not parties to such union or agreement shall not on the
whole be higher or more restrictive than the general incidence
of the duties and regulations of commerce applicable in the
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constituent territories prior to the formation of such union or
the adoption of such interim agreement, as the case may be,
(b) With respect to a free-trade area, or an interim agreement
leading to the formation of a free-trade area, the duties andother regulations of commerce maintained in each if the
constituent territories are applicable at the formation of such
free-trade area or the adoption of such interim agreement to
the trade of contracting parties not included in such area or
not,
(c) Parties to such agreement shall not be higher or more
restrictive than the corresponding duties and other regulationsof commerce existing in the same constituent territories prior
to the formation of the free-trade area, or interim agreement as
the case may be; and
(d) Any interim agreement referred to in sub-paragraphs (a) and
(b) shall include a plan and schedule for the formation of such a
customs union or of such a free-trade area within a reasonable
length of time".
Paragraph 8 of Article XXIV of GAIT 1994 reads
"For the purposes of this Agreement:
(a) A customs union (CD) shall be understood to mean the
substitution of a single customs territory for two or more customsterritories, so 'that
(i) duties and other restrictive regulations of commerce (except,
where necessary, those permitted under Articles XI, XII, XIII,
XIV, XV and XX) are eliminated with respect to substantially all
the trade between the constituent territories of ~he union or
at least with respect to substantially all the trade in products
originating ill such territories, and
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(ii) subject to the provisions of paragraph 9, substantially the
same duties and other regulations of commerce are applied by
each 0:- the members of the unit to the trade of territories not
included in the union;(b) A free-trade area shall be understood to mean a group of two or
more customs territories in which the duties and other restrictive
regulations of commerce (except, where necessary,
those permitted under Articles XL XII, XIII, XIV, XV' arid XX) are
eliminated all substantially all the trade between the constituent
territories in products originating in such territories".
Thus the main conditions discussed above imply that
(1) Free Trade Areas and Customs Unions should cover
"substantially all trade".
(2) Free Trade Areas and Customs Unions should not raise the
average level of protection against excluded countries.
(3) In case of an interim arrangement, the member countries
should reduce internal tariffs to zero and remove internal
quantitative restrictions other than those justified by other
GAIT Articles within a reasonable timeframe.
Paragraph 8 of Article XXIV of GAIT 1994 reads
"(a) Any contracting party deciding to enter into a customsunion or free trade area, or an interim agreement leading to
the formation of such a union or area, shall promptly notify the
CONTRACTING PARTIES and shall make available to them such
information regarding the proposed union or area as will enable
them to make such reports and recommendations to
contracting parties as they may deem appropriate".
The multilateral body retains the right to judge thecompatibility of the RTA; in case it is found incompatible to
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Article XXIV, recommended changes have to get incorporated
into the regional trading agreements.
As has been pointed out by the WTO report (1995), three broad
trends can be traced in the RTAs formed during the post-war period.In the first place, the RTAs have been primarily centred around
Western Europe. Among the 109 regional trading agreements
notified under GAIT between 1948 to 1994, 76 are between Western
European countries. The trend continues and going by the latest
data available, around 50 per cent of the RTAs currently in force are
situated in the Euro-Mediterranean region. However, at present, it is
worth noting that the number of RTAs coming up in America is notfar behind that of the European region.
Even for non-European countries, preferential trading
arrangements featured in their trade policy. Consequently, when the
World Trade Organisation came into operation on January 1995,
majority of its members were parties to at lease one regional
trading arrangement notified under GAIT. The notable exceptionturned out to be Japan. (Source: WTO occasional papers, 11FT).
There are several forms of economic integration representing
different degrees of trade discrimination against the outside
members. Vaish M.C. and Sudama Singh have explained that
"economic integration is a process and a state of affairs also. As a
result it covers measures aiming at abolishing the discrimination
between economic units belonging to the different national states.As a state of affairs, it can be treated as an area or region
comprising different national states marked by the absence of
different forms of discrimination between member states".
3.2Regional Arrangements
Regional arrangement refers a trade block created by two or
mort' countries for their mutual benefit in World trade. These
countries will be member countries of the regional arrangement.
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The member countries will abolish all tariff duties on their mutual
trade and maintain their individual tariffs against tl1e non-member
countries (i.e. rest of the world). Regional arrangement is created
for the purpose of trade maximisation, import liberalisation, tariffunitisation reduction and free flow of goods, services and capital
among the member countries. There are four types of regional
arrangements. They are given below:
(i) Free Trade Area
(ii) Customs Union
(iii) Common Market and
(iv) Economic Union
3.3 FREE TRADE AREA
A free trade area consists of a group of countries which
criminate all tariffs lli'1d qUlli'1titative restrictions anl0ng
themselves but each members can impose tariffs and quantitative
restrictions against the non-member countries of the free trade area
(countries in the rest of the union). Two or more countries join
together and form a free trade association or area. The member
countriesthe free trade area abolish all tariffs on their mutual trade
in all goods and services but retain their individual tariff against the
non-member- countries.
There are four types of regional arrangements. They are given below
22) European Free Trade Area
23) Latin American Free Trade Area.
European Free Trade Area (EFTA) was formed in November
1959 after the Stockholm Treaty. It was formed by the England with
six other nations. Member countries of the European Free Trade Area
are, England, Denmark, Norway, Sweden, Austria, Switzerland and
Portugal. At the time of formation of the European Economic
Community (EEC), the UK did not join the community and attempted
to form EFT A as arrival association. The member countries of EFT Awere not closely located with the EEC and scattered in an enormous
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circle around the EEC, so they were called "outer seven". The
purpose of forming European Free Trade Area was to eliminate tariffs
on trade in all goods and services among the member countries. But
member countries are permitted freely to retain their own tariffsagainst the rest of the world. In 1973, the UK, Ireland and Denmark
withdrew their membership in EFT A and joined European Economic
Community.
Latin American Free Trade Association (LAFTA)
Latin American Countries initiated negotiation in 1954 for the
purpose of stimulating intra-area trade and contributing to regionaleconomic development. In 1960 (February 18) Treaty of Monte Video
was signed and this Treaty came into operation in 1961 (July 1).
Seven Latin American Countries such as Argentina, Brazil, Chile,
Paraguay, Peru and Urugway in South America and Mexico in North
America signed the Monte Video Treaty. Later Colombia, Bolivia and
Eq'lador joined later with the seven countries. The important
purposes of the Monte Video Treaty are. (i) To liberalise intra-LatinAmerican trade, (ii) to promote complimentarity or industrial
production, (iii) and to coordinate agricultural development and
trade among the member countries. Monte Video Treaty paved the
way for the formation of a common market for all Latin American
Countries
Central American Common Market (CACM)Central American Common Market is a regional group
established in 1966. CACM comprises of Costa Rica, EI Salvador,
Guatema, Honduras and Nicargua. CACM is a free trade area
which established common tariff among the members and free
trade prevailed among the member countries of this free trade
area. Free trade among them increased intra-regional trade.
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Economic Community of West African States (WCOW AS)
It is a regional arrangement established in 1975. This was
formed to create a customs union among the Anglophone and
Francophone member states.
Andean Group
The member countries of the Andean Group are, Bolivia,
Colombia, Ecuador, Peru and Venezuela. The objective of this
group is to accelerate harmonious development of its member
countries through economic and social integration. Warren J.
Keegan in his book 'Global Marketing Management' has given the
objectives of Andean Group. They are, (i) development of member
countries through economic and social integration and
cooperation, (ii) elimination of interregional trade barriers through
gradual tariff reductions and a common external tariff, (iii)
approval of a common approach to foreign investment, (iv)
creation of Andean multinational enterprises and (v)
establishment of basic agreements for industrial programs PA
Andean group became the first sub regional free trade zone in
Latin America in 1992. In accordance with the Andean Pact financial
and foreign exchange incentives and trade subsidies were
eliminated in the year 1992 Unfair trade practices were curtailed
among the member countries and in 1995 it was planned to unifythe customs systems of the member countries it was also planned
to adopt common external tariffs at different levels depending upon
the nature and type of products
ASSOCIATION OF SOUTH EAST ASIAN .NATIONS (ASEAN)
ASEAN was formed in 1967 by Bangkok Declaration. There
are six member countries in ASEAN. They are, Brunei, Indonesia,
Malaysia, Philippines, Singapore and Thailand. ASEAN is an
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organisation for economic, political, social and cultural
cooperation among the six member nations.
North American Free Trade Area (NAFT A)
In the year 1988, the US signed a free trade agreement with
Canada. It was known as Canada Free Trade Agreement (CFTA). In
1993 Mexico was included and it was enlarged to a North American
Free Trade Area (NAFTA). The NAFTA enabled its member countries
to face any type of economic challenges in the world market.
Elimination of trade and tariff barriers and strengthening free trade
in goods and services and free flow of investments helped itsmember countries to achieve prosperity in trade and overall
economy. Canada and Mexico are the important trading partners
with the US.
South African Development Coordination Conference
(SADCC)
It was formed in the year 1980 by the region's black-ruled
states. The important objective of the free trade area is to promote
trade and cooperation among the member countries. Black-ruled
'States,' Angola, Botswana, Lesotho, Malawi; Mozambique, Namibia,
Swaziland, Tanzania, Zambia andZimbabwe.
Cooperative Council for the Arab States of the Gulf or Gulf
COOPERATION COUNCIL FOR THE ARAB STATES OF THE GULF
OR GULF COOPERATION COUNCIL
It was established in the year 1981. The member countries of
the Council are, Bahrain "Kuwait, Oman, Qatar, Saudi Arabia and
United Arab Emirates The Europe Year Book reveals that Gulf
Cooperation Council provides a means of realising coordination,
integration and cooperation in all economic, social and cultural
affairs. This council has prepared a detailed agreement on economic
cooperation covering investment, petroleum, abolition of customs
duties. harmonization of banking activities and regulations and
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financial and monetary coordination. Various committees have been
constituted by the Gulf Cooperation Council to monitor trade
development, industrial strategy and uniform prices and policies
among the member nations.European Union (E.U)
It was established by the Treaty of Rome in January 1958.
Belgium. Francl:, Holland, Italy, Luxembourg and West Germany
were the founder members of the European Union. Britain, Denmark
and Ireland joined the union in 1973, Greece in 1981 and Spain and
Portugal joined the European Union in 1986. All these countries of
the union created a single market for goods, services and capital.
The European Union has created a single European Currency and
bank. It is popularly known as Euro dollar. In 1991, the European
Community (EC) and European Free Trade Association (EFTA)
entered into an agreement on t!)e creation of European Economic
Area. It's aim was to achieve free movement of goods, services,
capital and Iabour between the EU and EFT A from 1993.
Czechoslovakia. Hungary and Poland joined European Union in 1991
as associate members and systematic arrangements were made to
eliminate tariffs and quantitative restrictions or bilateral trade in
industrial goods. European Community has created single market in
1992 and it was a major programme of the European Community.
3.4 COMMON MARKET
A Common Market is created when two or more nations
establish a customs union for free and unrestricted trade
(movement of all factors of production) among the member nations.
Tariffs are eliminated for the trade among the member countries
and trade related quantitative restrictions are also removed.
Central American Common Market (CACM)
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Central American Common Market was established in 1960s.
It dismantled in 1969 due to war between Honduras and El
Salvador. The five member countries of the CACM, Costa Rica,
Honduras, Guatemala, Nicaragua and EI Salvador have takenefforts to reestablish Central American Common Market. The
important objective of this common ml1Iket is to achieve economic
integration and regional development.
Caribbean Community and Common Market (CARICOM)
Caribbean Community and Common Market was established
in the year 1973. It was formed as a movement establishing unityamong the Caribbean Countries. Caribbean Free Trade Association
established in 1965 is replaced as Caribbean Community and
Common Market. Member countries of this common market are
Antigua and Barbuda. Bahamas, Barbados, Belize, Dominica.
Grenada Guyana, Jamaica, Montserrat. Saint Christopher and
Nevis, Saint Lucia., Saint Vincent and the Grenadines, Trinidad and
Tobago. Establishing economic integration, among the Caribbeancountries through common ma