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Global Business Environment
Pradip Chakrabarty
pradip@fsm.ac.in
Room No. 8.Ph. 4124 2499
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Changing Environment of Global
Business
Globlisation
An English princess
with her Egyptian boyfriend,
driving a German car
with a Dutch engine,
driven by a Belgian
who was drunk on Scottish whiskey,
followed closely by Italian Paparazzi,
on Japanese motorcycles, ..*
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Free movement of
Goods/ServicesCapital
Technology
Labour
across borders.
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Forces behind globalization
--25% global production sold abroad(7% in 1950).
--Import restrictions decreasing
--Foreign ownerships increasing
--Trade progressing faster than production
--Deepening relationship,
--Broadening interdependence
Wider resources, products, services, mkts
Variety, qlty, prices improve.
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Factors leading to growth in globalization :--
1.Tech growth :
-- Transportation, communication and in all
areas
2. Liberalization of trade :
Trade barriers brought down.
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3. Growth of support services:--
Banking, payment, insurance, trademissions, trade fairs, storage ,
distribution, courier, internet, personal
visits etc.
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4. Growing consumer pressure:
Rise in income
rise in demand, taste, qlty, novelty, niche.
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5. Increased competition:
Producers of diverse/ dissimilar products &
services compete for consumers
discretionary/ surplus/ disposable income
This pressure forces firms to look outside to
source/ sell
International/ global approach aids
competitiveness
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6. Changing political scenario :
--Breaking of communist bloc
-- foe to friend stories among nations.
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7. Increased international cooperation:
Treaties, agreements
reciprocal advantage, growth in mutual exim,
addressing common issues,
Travel facilities, security of investment, patents,
trademarks, copyrights,Construction & developmental projects along the
border areas for joint good,
Fight against disease, flood, calamities.**
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Global environmental Factors & Issues
(General aspects)
Cultural
-- Culture > integral part of operating envn,
--Every bsns function subject to cultural
issues
-- own culture may not be the best always
-- sensitivity to cultural differences for
decision making
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-- awareness of foreign culture
-- cultural dynamics-- behavioral practices accept, adjust,
appreciate
-- dealing with cultural differences/ culturalcollision
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Political & Legal
-- Different mkts different situations
--part of the external envn influencesmanagerial decisions
-- relation betwn Govt and bsns largely depends
on these issues
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-- intrinsic differences exist
practice, procedure, strategy
have to adapt
straight transformation
unlikely--opportunities & threats vary
due to politico-legal structure.
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-- role of Govt
-- political ideology
--political risk--legal structure
assume importance.
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Economic
--1975 2000, world economic outputdoubled
--some countries prospered faster
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-- some companies moved up
very rapidly, surpassing theGDPs of many countries
-- understanding the impact of
economic changes essentialfor wiser investment
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-- change in policy / status in one country
impacts others
(event of 9/11 in USAand the consequences there,
affected Indian IT sector)
--Economic envn of competitors countries
-- economic policies indicate Govt goals/
objectives and mkt transition
-- small economic changes can impact mkt.
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National Differences in Political, Social,
Legal Environment
-- Individualism & Collectivism
Rights & roles of individuals or community
Role of Govt to give primacy accordingly
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Individualistic socity
mkt correction by Govtpublic awareness, fair play,
monopoly issues
encourage competitionless
control.
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Collectivistic socitiesGovt agencies play
stronger role
industry structure, corporate & managerialconduct
equality, welfare, democracy in workplace.
Socities pluralisticclass oriented, linguistic grps, tribal/ ethnic/
religious grps
competing ideologies, interests
Influence political system/ conduct.
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Political system
2 extremesDemocracy free opinion, election,
judiciary, bureaucracy, property rights --.
Mkt based bsnsTotalitarianism forcibly controls bsns
envn.
Transition to open economy happenin bigway delinking politics with economy.
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Certain Political Risks :
shift in public policy
differential treatment for/ against foreign cos.
-- procedural regulations, lawlessnes etc. etc.
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Legal Envn
Common Law system tradition, judgment
based.
Civil Law systematic, codified laws.
Theocratic system base on religious,
spiritual tenets.
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Whatever system impact on investment,
repatriation, dividends, tax, duties,reporting obligations, IPR, labour laws,
working hrs, starting/ closing of bsns,
registration rules, obstacles in bsns.Some specific concerns :--
--Product safety & liability acc to local stds.
-- Mkting freedom on 4Ps (e.g. cigarettead).
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-- Country of origin differential treatment,
local content requirment.
-- Legal jurisdiction
choice of law and theforum.
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Intl Economic Envn
Change in one element of economics
Change envn.
Important indicators :
GNI (Gross National Income)total value ofall goods & services produced by a country in
a year.
GDP (Gross Domestic Product) total value
of all goods & services produced within the
borders of a country in a year, including
foreign owened companies.
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more relevant GNI per capita divided by
population.
GNI growth rate, std of living important eco
potential indicators.
Human development access to knowledge,
nutrition, food, healthcare,
employment, law and order, recreation, freedom
of expression etc.
Inflation aggregate demand> aggregatesupply prices up more than income rise.
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Inflation interest rate, exchange rate, cost
of living, eco stability, political stability.
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Balance of Payment
Inflow Credit (+)
Outflow Debit(-).
3 components of BOP :
a) Current A/c goods, services,transfers(remittance).
b) Capital A/c investment and lending
activities.c) Reserves a/cgold, forex reserves.
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Current A/c
Net flow of goods, services (may be invisiblelike shipping services), gifts, transfers etc.
Capital A/c
Portfolio (purchase of financial assets withmaturity beyond one yr).,
Short-term investment (securities maturing inless than a yr),
Direct investment (mgt control is exerted),Govt borrowing/ lending.
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Official Reserves
It measures the nations surplus or deficitbalance on its current and capital A/cs.by netting the reserve assets/ liabilities.
Surplus increase in forex, gold.BOP indicates economic health of the
currency.
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Political & Country Risks
Political decisions/ events can affect
profitability of bsns.
e.g.
Nationalization unilateral taking over
meagre/no compensation.
Civil strife/ war.Breach of contractby Govt or by domestic
cos with Govt approval.
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Imposition of tariffs, local content, export
obligations.
Kidnap, extortion, terrorism.
Profit repatriation limits.
Labour rights.Discrimination in taxes domestic vs
foreign/ favoured nation.
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Types of political risks :
Shift in public policy
In disfavour of foreign/ dominating cos
To gain greater share of the benefits
May be for the masses
shift fromindividualism to colectivism
These are systemic political risks.
--------------------
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Corruption makes operations costly.
Bureaucracy, customs assistance, speed
money bribe big riskProcedural.
------------------
Foreign investor prospers envy in host Govt
More benefits to host country desiredMonetory policies, tax structures, regulations altered
Distributive risk.
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Ethnic violence, civil disorder, war, military
upheavals, and international terrorism
affect one and allCatastrophic.
So 4 types of political risks systemic,
procedural, distributive, catastrophic.
Assessment varies from detailed
statistical reports to impressionistic tales
of recent visitors.
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Which are the countries with particular
political risks ?Russia,
Iraq,
India ?Salim ?
Posco ?
Enron ?
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Systemic
Shift in public policy
shift from individualismto collectivism.
(Change at policy level)
Distributive
Monetory policies, taxlaws, regulationsaltered
More benefits to hostcountry desired.(Change at functional
level).
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Cultural Differences : Impact on Bsns
Culture not isolated from economy,politics.
Genl expectation > people from other
cultures to respond same way as we do
leading to cultural clash.
But culture evolves, changes.
Certain traits found similar across theglobe,e.g. attitudinal difference betwn
urban & rural people, managers & workers
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How does culture form ?
Parent to child, teacher to taught, leader tofollower, ..
Basic values instilled in childhood.
Change by choice ( when newopportunities are in hand) or imposition
(mostly by masters cultural imperialism).
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Cultural stabilizers : Language, religion.
Same language culture spreads easily.
Religion provides strong values.
Bsns organisations have to care for local
beliefs on products, components,timings ..
Multi-religious countries friction to gain
religious control of political power
chaos impediment to bsns.
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Behavioural practices affecting bsns : --
1.Stratification systems of societies,
2. Work motivation
Stratification systems of societies :
a. Performance criterion (e.g. US society)employment, promotion on merit,
competence, competition no
discrimination on age, seniority, gender,
ethnicity, religion etc.
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b. Gender-based grps certain gender
prefered in sectors or in genl,
Nursing, secretarial.
c. Age based grps senior wiser
seniority promotion.Also may be, younger more productive
Opportunities for products to look younger.
d. Family-based grps family status mostimp. not much trust outside the family
memebers. ( Chinese family bsns in S.E Asia).
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Work motivation : varied motives to work
Certain societiesIncentive for work
economic development desire for material
wealth
Work to gain salvation.
Success & reward different countries
Different probabilities of success
Different rewards, different consequences offailure.
How wd u enthuse the workers ?
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High uncertainty of success with high
reward, and little or none for failure.
Values underlying behavioural differences --
Power Distance :
Relationship betwn superiors-subordinates.Hi distance??
Autocratic.
Low distance??Consultative.
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Individualism / collectivism :
Hi individualism
How wd u motivate ??
Challenging jobs
Satisfying which need ??
self actualization.Hi collectivism
How wd u motivate ??
Safe physical & emotional environmentSatisfying which need ??
Security needs.
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Ethical Issues
Foundation : -
Cultural and Legal
Teachings from family, scriptures,observation, experience, economic
condition
sense of right, wrong
deep-seated ethical beliefs.
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Sense of ethics varies grp to grp.relative
intervention unethical.
Certain other issues of ethics certainbehaviour universal.
Expected basic practice ordinary decency
honesty, fairness.Respectable conduct by foreign enterprise
Trust of the mktBusiness success.
M ltil t l t i t
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Multilateral agreements exist on
employment practice, consumer
protection, environment, human rights,political activities.
NGOs currently put pressure to behave.
Ethi l i d b l
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Ethics also imposed by law,
But unethical not necessarily, illegal.
All laws based on moral perception,experience, enforceability cannot
foresee all future issues.
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Irresponsible, unethical conduct
bad publicity
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Important contemporary issues of ethics :--
-- Global warming >
drawing natural resources need to beconcerned abt env impact.
-- Tired pricing of pharmaceuticals
Higher price in richer countries.
-- Labour conditions
Fair-wage, child labour, workhours,
conditions, union rights.
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Irresponsible, unethical conduct
bad publicity
Lower employee moralLegal action, social boycott
declining sales.
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Govt. Intervention & Trade Control
What, how much, with which country a
country shd trade ?
Shd mkt forces decide these Laissez-
faire approach ?
Shd Govt intervene ?
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Different theories to guide policies.
If no restriction, exports will take place from
low to high cost of prodctn countries.Restrictions exports hampered prodn
may happen in restricting countries.
Inter entionist Theories
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Interventionist Theories :
Theory of Mercantilism :--
Wealth is measured by treasure (gold)Export more than import
Restrict import save outbound
expenditure
Colonial practice prevent colonies from
manufacturing.
Theory of Neo-Mercantilism
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y
Generate favourable balance of trade
To gain social, political objective
Produce more than domestic demand
Export surplus
have full employment.
Free Trade Theories :
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Free Trade Theories :--
Consumers buy what best serves their needs
leads to specialization in prdctn.
Theory of Absolute Advantage
Real wealth of a nation from good s , servicesavlble to people, not just treasure.
Natural advantage climatic, minerals etc.
Acquired Adv. process, product tech.Theory of Comparative Advtge.
H M h t T d ?
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How Much to Trade ?
1)Theory of Country Size suggests
Large cntries depend less on trade thansmall ones
Varied climates, different natural resources
more chance of self-reliance
E t d i t h l f th i
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Export and import much less of their
production and consumption respectively
more distance to be coveredMore expensive logistics.
2) Si f E
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2) Size of Economy
Large economies dominant world traders
Produce enough to sell & exportGenerate hi income more purchases
by people of home goods & imported
goods.
What type of Goods to Trade ?
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What type of Goods to Trade ?
1)Factor-Proportion Theory suggests
Land, labour, capital whichever isabundant compared to the other 2 wd
decide the type of goods to be produced.
If labour abundant labour intensive
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If labour abundant labour intensive
goods.
But labour skills, productivity variesLeading to international specialization by
tasks, e.g. R&D (high education),
production (cheap workers) etc.
2) P d ti T h
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2) Production Tech
Different methods posbl, e.g. with high
labour or high tech (capital reqd).3) Product Tech
Mfg reqrs acquired advantage >
education, training, technology, R&Dfound in rich cntries.
Poor cntries mostly primary products
less product differentiation.
Dynamics of Trade
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Dynamics of Trade
1) International Product Life Cycle Theory
Production Location for certain kinds ofproducts shifts as they pass thru their life
cycle.
New prdct innovation R&D, hi-incomecntry domestic mkt introduction
stage exports to other hi-income cntries
Mkt expands, demand increases (growth)
prodction standardises, cheaper
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equipments for mass prodction appears
Competitors arrive prodctn starts other
cntries
Eventually, low cost cntries become prdn
lacales sell locally
Then exports back to original innovating
countries.
2) Porter Diamond Theory
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2) Porter Diamond Theory
4 conditions, important forcompetitive
superiority a) Demand Conditions (spurs innovation),
b) Factor Conditions (provide advntge due
to absolute or factor-proportion reasons) ,
) R l t d & S ti I d t i
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c) Related & Supporting Industries
(ancillaries, inputs etc),
d) Strategy, Structure & Rivalry(rivalry, competition force further break-
through in process/ product.
Combination of a, b, c, d affects sustenanceof competitive advantage.
Govt intervention : Economic Rationales
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Govt intervention : Economic Rationales
1)Unemployment :
Restricting imports to protect jobs can meetwith retaliation by counter restrictions by
other countries.
Small economies can less retaliate.Capital intensive prdction greater trade
loss than job loss.
2) Infant Industry :
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2) Infant Industry :
Shielding emergent industries from
international competition whole mkt todevelop competitive edge >
greater efficiency, economy of scale.
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3) Industrialization :
Protectionism to encourage faster growth
thru industrialization, luring investment,promote exports
4) E i i
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4) Economic issues :
BOP adjustment thru trade,
fairness/ access in reciprocation betwncountries,
bargaining tool, price control objective.
Non Economic Rationale for Protectionism :
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Non-Economic Rationale for Protectionism :
Essential/ strategic industries maintainance,
No shipment to unfriendly countries,*Creating a sphere of influence thru aids,
credits, grants.**
WTO REGIME
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WTO REGIME
After World War II International TradeOrgn. (50 Countries)
23 countries agreed to Trade Rules &
Tariff ConcessionsKnown as GATT.
1994 123 countries membership
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1994 123 countries membership
GATT -- 1948 to 1994, average tariff for mfgd
goods 40% to 4%
WTO currently abt 150 members 97% world
trade.
Agreements aimed by consensus
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Agreements aimed by consensus.
Agreements ratified by parliaments of membercountries.
Basic functions of WTO :--
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Basic functions of WTO :
1. Facilitate implementation, administration andoperation of trade agreements
2 forum for further negotiations on matters within
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2. forum for further negotiations on matters within
its mandate
3. dispute settlement
4. periodic review of trade policies of member
countries
5. Provide tech assistance, training programmes
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, g p g
6. Eencourage cooperation within international
orgns.
7. WTO provides foundation for multi-lateral
trading system,
Based on follg principles :--
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Based on follg principles :--
Trade Without DiscriminationMFN (Most Favoured Nation) treatment
Any favour/ concession must be to all.
Exceptions to MFN
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Exceptions to MFN
free trade agreements,
mkt access to dvlping cntries, raising barriers against specific cntries to protect
against unfair trade.
National treatment local and imported goodsget same treatment once goods are in the cntry
Gradual Move Towards More Free (less restricted)
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Gradual Move Towards More Free (less restricted)
Mkts Thru Negotiations
Progressive liberalisation,
longer period granted to dvlpg nations.
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I li ti f WTO I t ti l Mkt
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Implications of WTO on International Mktg
A. Binding concessions & commitments
Security of access to foreign mkts.
B Agreement on customs valuation
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B. Agreement on customs valuation
Importers declared value will be accepted for
customs purpose (e.g.duty calculation).
C.Agreement on pre-shipment inspection (of price)
Reduce malpractice of under/ over invoicing.
D. Agreements on import licensing procedures
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g p g p
Licenses, if reqd, for the prdct will be issued
expeditiously.
E. Rules applicable to exports
reimbursement of indirect taxes on exported
prdcts.
F. Anti-dumping & Countervailing actions
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F. Anti dumping & Countervailing actions
Exporters of subsidised prdcts expect imdt
notice if investigation begins.
INTERNATIONAL INSTITUTIONS
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INTERNATIONAL INSTITUTIONS
UNCTADUnited Nations Conference on Trade &
Development Estd.1964 with 164
members.
Objectives
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Objectives
1.Forum for dvlping cntries to discuss
problems on Econo. Dvlpmnts.
2.Formulate policies on trade, aid,
transport, technology, finance etc. for
dvlopmnt purposes.
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3. Negotiate multinational trade
agreements betwn nations for economicand overall develpmnt of the dvlping
and underdvlped cntries.
4. To prepare proposals for putting itsprinciples and policies into effect.
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3. No discrimination on differences in
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socio-economic system, and adoptionof trading methods, policies to beconsistent with this principle.
Achievements
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Achievements
GSP Implementationlow tariffs for mfgd goods from devlping &
underdevlped to devloped cntries
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Not all cntries benefited equally.
Primary agro exporting cntris
particularly.
Constraint of enough transformation i.e.
value addition.
Quota restrictions.
Obj ti f GSP
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Objectives of GSP :
-- increase export earning, promote
industrialization, accelerate economic
growth
Preference-receiving cntris adopt
measures to assist their producers/
traders / exporters
-- Identification of
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-- Identification of
export opportunities/products,
introduction of import duty drawback,trade agreements with socialist cntries,
-- Establishmnt of ancillary units to satisfyth l f i i
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the rules of origin,
rail frt subsidy,
participation in trade fairs, exihibitions,
advtsing to overseas mkts.
Non tariff barriers
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Non-tariff barriers
UNCTAD prepared members to
effectively participate in multilateralnegotiations regarding
import licensing,
import quotas,
Govt procurement stds
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Govt procurement stds.,
packing, labelling,
health & sanitary reqrmnts,
customs procedure etc.
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International Moneytory Fund (IMF)
Cooperative insttn to maintain a stable
system of buy and sell of currencies
Quick, smooth payment of foreign money.
-- Lends money to members with
conditions.
-- No authority on countrys domestic
matters.
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a) INTERNATIONAL BANK FOR
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)
RECONSTRUCTION &
DEVELOPMENT(IBRD) To combat poverty by providing loans,
advice, assistance to developingcountries to support their economic and
social growth.
b) INTERNATIONAL DEVELOPMENT ASSN(IDA)
For lending to the poorest countries.
WTO
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WTO
GATTWTO, Jan 95.
Deals with vital areas of eco
activity, incorporates enforceable
rules.**
REGIONAL ECONOMIC
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INTEGRATION
Geographical group of cntriesagreements reduce, remove tariffs,
non-tariffs free flow of goods, services,
factors of prdction. Name some.ASEAN, EU, NAFTA etc.
more rapid progress towards free trade
than thru WTO.
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Trade generation Vs Trade Diversion.
Levels of Integration (by heirarchy)Gives rise to currency union, political
union.
1. Free Trade Area > barriers removed.
2. Customs Union Barriers removed, +
common external trade policy.
3. Common Mkt customs union + freemovement of labour, capital.
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4. Economic Union Common mkt +
common currency, harmonization of taxrates, common fiscal policies
very high degree of administrative and
bureaucratic coordinating skills reqd.5. Political Union Union Parliament
elected by people of member cntries,
common defence policy.
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Why Reg. Integration ?
Acc. to eco theories
Unrestricted free trade cntries willconcentrate on their areas of efficiencies
greater world prdctn will happen.Other view
Nation may gain, individuals/ grps. in certain
sectors may loose,national sovereignty may get diluted to
some extent.
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These integrations are good only if,
trade created > trade diverted.*Some economists feel that it is not
happeing always, and hence they
oppose.**
Foreign Direct Investment
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FDI Intl capital investment
(but not always),can be by transferring mgrs, providing other
expertise,
by exchange of stocks.--whose control ? Major investors ?
Dispersed ownership small %age can
establish enough control Govt steps infor minority owners.
Controlling interest desired, because
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1.Cos self handling reduce costs
Cheaper to handle oneself,2. Deny competitors access to resources,
lessen the chance of developing
competitors,3. Easier to deal globally.
Methods of FDI :
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1.Acquire/ buy an existing facility -- no
addition to capacity --reforms across globe privatisation
lot of Cos on sale overseas invstmnt
opportunity.1.Construct new one/ green field
investment.
Benefits/ reasons of acquisition
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a. Difficulty to transfer resources, local
resources avlbl, orgn structure exists.b. Less adaptation to host culture needed.
c. Brand/ goodwill liveraged.
d. Gain access to local capital,e. Start up inefficiency eliminated,
f. Mkt may not sustain additional capacity,
g. Price of an under-performing Co less than astart-up cost
Benefits/ reasons of Greenfield
8/14/2019 GBE FDI119
115/122
a.Suitable Co for acquisition not avlbl,
b.Sectors with less competition,c.Laws hindering acquisition to promote
capacity creation, more competition, less
dominance by ltd No. of firms.
Motives/ reasons of collaboration (less than
100% hi )
8/14/2019 GBE FDI119
116/122
100% ownership):
1.Laws of host cntry on limit of ownership/repatriation of profit, strategic sectors etc.
2.Scale Allianceefficiency thru pulling of
similar assets to grow in bsns,3.Link Alliance use complimentary
resources for new bsns areas,
4.Gain location specific assets
access todistribution system, manpower, local
cultural issues,
5.Protection of copy right/ brand thru
partner
8/14/2019 GBE FDI119
117/122
partner.
6. Geographical diversity obviateseasonality/ bsns cycles problems
servicing multiple mkts.
7. Sharing of risk in host cntry, and also
globally for large MNCs
8/14/2019 GBE FDI119
118/122
Franchising :
8/14/2019 GBE FDI119
119/122
Franchising :
Particularly relevant for service sector
Healthcare, specialty retail, education ,
Brand name, trademark, prodn &
processing technics,,mktg guidelines service levels, shop
area/ layout, minm sales, ,
Intellectual property rights given over along time.
Contract Mfg:
8/14/2019 GBE FDI119
120/122
Mfg done at offshore location on contract,
Producer & mkter are separate.
Joint Venture :
8/14/2019 GBE FDI119
121/122
2 or more firms equity participation
new co formed expertise, resources,
strength shared
-- Foreign investment barrier overcome
Local contact liasion Govt taken care of
8/14/2019 GBE FDI119
122/122
Local contact, liasion, Govt taken care of
Easy, speedy way of entry.*(Often stronger partner acquires weaker
partner maruti-Suzuki, Escorts-
Yamaha).**