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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


25/207

)

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


26/207

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)


27/207

___________________________________________________________________________________

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


28/207

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.


29/207

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


30/207

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


32/207

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


33/207

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


34/207

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.


35/207

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


36/207

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


37/207

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


38/207

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


39/207

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


40/207

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


41/207

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.


42/207

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


43/207

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


44/207

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


45/207

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".


"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


46/207

(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.


"(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


47/207

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

24 International Business 2

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