9. Product Life Cycle theory in international trade? The product life-cycle theory is an economic theory that was developed by Raymond Vernon to  explain  the  observed  pattern  of international  trade.  The  theory  suggests  that  early  in  a product's  life-cycle all  the parts and  labor associated with  that product come from  the area in which it was invented. After the product becomes adopted and used in the world markets, production gradually moves away  from  the point of origin.  In  some situations,  the product becomes  an  item  that  is  imported  by  its  original  country  of  invention. A  commonly  used example  of  this  is  the  invention,  growth  and  production  of  the personal  computer with respect to the United States.

In  the  new  product  stage,  the  product  is  produced  and  consumed  in  a  country;  no  export trade occurs.  In  the maturing product stage, mass-production  techniques are developed and foreign  demand  (in  developed  countries)  expands;  the  country  now  exports  the  product  to other developed countries. In the standardized product stage, production moves to developing countries, which then export the product to developed countries.

There are five stages in a product's life cycle:

Introduction

Growths

Maturity

Saturation

Decline

The location of production depends on the stage of the cycle.

The product life cycle theory was developed during the 1960s and focused on the U.S since most innovations came from that market. This was an applicable theory at that time since the U.S dominated the world trade. Today, the U.S is no longer the only innovator of products in  the world.  Today  companies  design  new  products  and modify  them much  quicker  than before. Companies are forced to introduce the products in many different markets at the same time to gain cost benefits before its sales declines. The theory does not explain trade patterns of today.

 

 

 

 

 

10. G20 and its impact on India’s foreign trade?WHAT IS THE G-20

The Group of Twenty (G-20) Finance Ministers and Central Bank Governors from 20 major economies: 19 countries plus  the European Union, which  is  represented by  the President of the European Council and  by  the European Central Bank was  established  in  1999  to  bring together  systemically  important  industrialized  and  developing  economies  to  discuss  key issues in the global economy.

The  G-20  is  an  informal  forum  that  promotes  open  and  constructive  discussion  between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities  for dialogue on national policies,  international co-operation, and  international financial institutions, the G-20 helps to support growth and development across the globe.

The G-20  thus brings  together  important  industrial and emerging-market countries  from all regions  of  the  world.  Together,  member  countries  represent  around  90  per  cent  of  global gross national product, 80 per cent of world trade (including EU intra-trade) as well as two-thirds of the world's population. 

Impact in India’s foreign trade: Market access & give some gas on some relevant points that you know.

11. Most Favored Nation (MFN) status. Boon or Bane

Boon

MFN  status  is  a  method  of  preventing  discriminatory  treatment  among  members  of  an international  trading  organization.  MFN  status  provides  trade  equality  among  partners  by ensuring  that an  importing country will not discriminate against another country's goods  in favor of those from a third. Once the importing country grants any type of concession to the third-party country, this concession must be given to all other countries.

For  example,  assume  that  the  United  States  government  negotiates  a  bilateral  trade agreement with Indonesia that provides, among other things, that a duty of $1 will be charged for imported Indonesian television sets. All countries that have MFN status will pay no more than a $1 duty to export televisions to the United States. If the United States later negotiates a duty of 75¢ with Japan for imported televisions, Indonesia and all other MFN countries will pay 75¢, despite Indonesia's original agreement to pay more duty

Trade experts consider MFN clauses to have the following benefits: 

MFN allows smaller countries,  in particular,  to participate  in  the advantages  that  larger countries often grant to each other, whereas on their own, smaller countries would often not be powerful enough to negotiate such advantages by themselves.

Granting MFN has domestic benefits: having one set of tariffs for all countries simplifies the rules and makes them more transparent. It also lessens the frustrating problem of having to establish rules of origin to determine which country a product (that may contain parts from all over the world) must be attributed to for customs purposes.

MFN  restrains  domestic  special  interests  from  obtaining protectionist measures.  For example, butter producers in country A may not be able to lobby for high tariffs on butter to prevent cheap imports from developing country B, because, as the higher tariffs would apply to every country, the interests of A's principal ally C might get impaired.

As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade in general.

Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group —   discriminating against goods from outside. Or they can give developing countries special access to their markets. Or a country can raise barriers  against  products  that  are  considered  to  be  traded  unfairly  from  specific  countries. And  in  services,  countries  are  allowed,  in  limited  circumstances,  to  discriminate.  But  the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong.

 

 

 

 

 

 

 

 

12.Country risk and Political risk studies are important before entering International Business. Explain in detail process of country and political risk analysis. PEST

Any  business  is  affected  by  its  external  environment.  The  major  macroeconomic  factors in  the external environment  that affect  the business are political,  environmental,  social and technological. 

A. POLITICAL ENVIRONMENT 

The  political  environment  of  a  country  greatly  influences  the  business  operating  in  those countries or business trading with those countries.  The success and growth of international business depends on  the  stable,  collaborative,  conducive and  secure political  system  in  the country. 

The following factors affect the political environment in a country. 

1. Tax Policy: The  tax  policy  of  a  country  affects  the  profitability  of  the  business  there.    The Corporate Taxation  laws  affect  the  profitability  directly.  The  direct  taxation  laws  also  affect  the business  because  it  influences  consumer  spending.  The  structure  of  indirect  taxation  in  a country like its excise duty structure, customs and sales tax greatly affects the input costs of a business. For e.g. Countries  like UAE have  very  low direct  taxation  levels  inducing  great  spending and hence trading and marketing based business are successful. But due to very high indirect taxation levels the manufacturing business is not very successful. 

2. Government support: One  of  the  most  important  political  factors  is  the  Government  support  to  international businesses. Business can be successful only if the local government provides support in terms o infrastructure, license clearing if required, transparent policy and quick dispute resolution mechanism.   Also the nature of  the political system i.e. democracy, communism etc.  in  the country influences the Government support. 

For e.g.  the  RBI  has  provided  single  window  clearance  for  FDI  and  hence  has  greatly increased the FDI levels in our country. 

3. Labour Laws: The labour  laws  in a country affect  the viability of a business  in  that country. The pension laws also play a critical role especially in cross border acquisitions. Many businesses had to be withdrawn or closed because of the labor unrest in the country. For e.g.:    Withdrawal  of  Premier  Automobiles  due  to  union  strikes  in  our  country.  The problems faced by doctors and nurses in UK due to the restrictive laws in that country.

4. Environmental policy: The  countries  environmental  policy  (under  the Kyoto  Protocol  or  otherwise)  affects many business like chemicals, refineries and heavy engineering.  

5. Tariffs and duty structure:  The  level  of  duties  and  tariffs  that  are  imposed  by  the  country  influence  its  imports  and exports  greatly.  Some  countries  follow  a  protectionist  policy  to  the  domestic  industry  by raising import barriers For e.g. India in the pre liberalization era, Russia.  

6. Political stability and political milieu: Political  stability  greatly  affects  the  longevity  of  the  businesses  in  a  country.  Political risk  assessment  should  be  done  to  determine  the  country  risk  on  the  basis  of  following parameters: 

a. Confiscation: The nationalization of businesses without compensation. For e.g. India during the nationalist wave during Indira Gandhi’s tenure.

b. Nationalization:  Resource  nationalization  is  a  major  risk  for  businesses  involving  local resources like oil, minerals etc. For e.g. the resource nationalization in Columbia.

c. Instability risk: The possibility of military takeovers or huge government changes. For e.g. the  coups  in Thailand or  in Fiji  has  affected  the profits  of businesses  there by  as much as 60% due to work stoppage and property destruction.

d. Domestication: The  global  company  relinquishing  control  in  favor  of  domestic  investors.   For e.g. Barclays bank in South Africa  

B. ECONOMIC FACTORS The  economic  factors  in  a  country  greatly  influence  the  business  in  that  country.  The following factors are important in the macroeconomic environment. 

1. Economic system: The  economic  system  in  a  country  i.e.  capitalism/  communism/ mixed  economy  (India)  is important  for  deciding  the  nature  of  the  businesses.  The  nature  of  the  system  decides  the allocation of resources. Due to globalization there is a gradual shift toward market forces to allocate resources even in the communist countries like China. 

2. Interest rates: The  interest  rates  in  the  country  affect  the  cost  of  capital  (if  raised  locally)  and  the operational  costs.  Interest  rates  also  determine  the  confidence  of  the  Government  in  the economy and consumer spending. 

3. Exchange rates: The exchange rates affect international trade and capital inflows in the country. 

4. Income levels and spending pattern: Though it is more of a demographic parameter has is very important bearing on the sell side of all international businesses. For e.g. In a country like India, with rising a spirer population there is a market opportunity for products like IPod (considered luxury items till now) 

C. SOCIAL FACTORS

Businesses are driven by people both as human capital and as consumers. It is necessary for an international businessman to understand the social and cultural aspects of the country they operate in.  The following are the important social factors.

1. Age distribution: The  age  distribution  of  the  population  is  important  to  consider  the  consumption  patterns in  the  markets.    Age  distribution  also  determines  the  mindset  of  the  market  and  helps 

segmentation  of  the market  accordingly.  It  also  has  a  bearing  on  the  employee  quality. A young population also determines a workforce. 

2. Family system: The family system has a bearing on the decision makers in consumption. For e.g. in Islamic countries women have a less say in making consumption decisions. In emerging economies like  India  children  are gaining  important  role  in  consumption. This helps  in positioning of products.

3. Cultural aspects: The cultural aspects influence the way the business is conducted in countries. In Japan there is a different way in which contracts are signed and executed. In Russia being a communist oriented mindset the business is conducted in a closed manner. Italians have a seemingly lazy way of doing business and hence it is very difficult to conduct business in the pacy US way. 

4. Career attitudes: The career attitude of the workforce is important social aspect. 

D. TECHNOLOGICAL FACTORS Technology  has  a  very  important  role  to  play  in  determining  the  success  of  international businesses because  technology has made  international business possible. The  following are the technological factors that influence the business. 

1. R&D: The support that the Government gives to R&D encourages setting up R&D business levels. Also the ease of a qualified local workforce influence business. For e.g. The semiconductor industry in Taiwan  

2. Technology transfer: The ease of technology transfer influences the business climate. The environment where the technology transfer is not viable gradually loses out on business from emerging countries that seek technology transfers. For e.g. in the early 40s countries like Czechoslovakia (the Czech Republic) was  a very  technologically  advanced  country but had very  low business  interest due to the less chances of technology transfers. For e.g. GE withdrew operations from a JV as there as they could not access local expertise) 

13. Foreign Exchange Risks?Foreign  exchange  risk (also  known  as exchange  rate  risk or currency  risk)  is  a financial risk posed  by  an  exposure  to  unanticipated  changes  in  the exchange  rate between two currencies. Investors  and  multinational  businesses  exporting  or  importing  goods and  services  or  making  foreign  investments  throughout  the  global  economy  are  faced with  an  exchange  rate  risk which  can  have  severe  financial  consequences  if  not managed appropriately.

The relative value between the Indian Rupee and the foreign currency may change between the time the deal  is made and the payment  is received. A devaluation or rise  in  the foreign currency against the rupee causes either a windfall or loss to one party or the other involved in the transaction.

Foreign currency exposures are generally categorized into the following three distinct types: transaction exposure, economic exposure, and translation exposure.

Transaction exposureA firm has transaction exposure whenever it has contractual cash flows (receivables and payables) whose values are subject to unanticipated changes in exchange rates due to a contract being denominated in a foreign currency. Exchange rates may move by up to 10% within any single year, which can significantly affect a firm's cash flows, meaning a 10% decline in the value of a receivable or a 10% rise in the value of a payable.

Economic exposureA  firm  has economic  exposure (also  known  as operating  exposure)  to  the  degree  that its market value is influenced by unexpected exchange rate fluctuations. Such exchange rate adjustments can severely affect the firm's position with regards to its competitors, the firm's future cash flows, and ultimately the firm's value. Economic exposure can affect the present value of future cash flows.

Translation exposureA  firm's translation  exposure is  the  extent  to  which  its  financial  reporting  is  affected by  exchange  rate  movements.  As  all  firms  generally  must  prepare consolidated financial  statements for  reporting  purposes,  the  consolidation  process  for  multinationals entails  translating  foreign assets and liabilities or  the  financial  statements  of foreign subsidiaries from foreign  to domestic currency. While  translation exposure may not affect a firm's cash flows, it could have a significant impact on a firm's reported earnings and therefore its stock price. 

How to avoid foreign exchange risk:

1. Forward Exchange Contracts :This  is  usual  hedge  extended  to  customers.  Banks  offer  forward  exchange  contracts  both for  sale  and purchase  transaction  to  customer with  a maturity date  for  a  fixed  amount  at  a determined rate of the exchange at the outset. 

2. Currency Futures :A  future  contract  is  an  agreement  to  buy  or  sell  a  standard  quantity  of  specific  financial instrument at a future rate and at an agreed priced. 

3. Currency Option :Currency  option  gives  the  right  but  no  obligation  to  the  buyer  of  the  option  to  sell  (put option) or buy (call option) a specific amount of foreign currency at a pre-determined price called strike price. As stated above there are tailor made options which can be picked up over the counters of  the banks. The buyer of a option  to pay a price premium for conferring  the above right by the option writer i.e. banks.

Q 22:NAFTA

NAFTA

The North American Free Trade Agreement (NAFTA) is a trilateral trade bloc in North America

created by the governments of the United States, Canada, and Mexico. In terms of combined

purchasing power parity GDP of its members, as of 2007 the trade bloc is the largest in the

world and second largest by nominal GDP comparison. It also is one of the most powerful,

wide-reaching treaties in the world.

The North American Free Trade Agreement (NAFTA) has two supplements, the North American

Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on

Labor Cooperation (NAALC).

Implementation of the North American Free Trade Agreement (NAFTA) began on January 1,

1994. This agreement will remove most barriers to trade and investment among the United

States, Canada, and Mexico.

Under the NAFTA, all non-tariff barriers to agricultural trade between the United States and

Mexico were eliminated. In addition, many tariffs were eliminated immediately, with others

being phased out over periods of 5 to 15 years. This allowed for an orderly adjustment to free

trade with Mexico, with full implementation beginning January 1, 2008.

The agricultural provisions of the U.S.-Canada Free Trade Agreement, in effect since 1989, were

incorporated into the NAFTA. Under these provisions, all tariffs affecting agricultural trade

between the United States and Canada, with a few exceptions for items covered by tariff-rate

quotas, were removed by January 1, 1998.

Mexico and Canada reached a separate bilateral NAFTA agreement on market access for

agricultural products. The Mexican-Canadian agreement eliminated most tariffs either

immediately or over 5, 10, or 15 years.

U.S. trade with Mexico and Canada has grown more rapidly than total U.S. trade since 1994.

The automotive, textile, and apparel industries have experienced the most significant changes

in trade flows, which may also have affected employment levels in these industries. The five

major U.S. industries that have high volumes of trade with Mexico and Canada are automotive

industry, chemicals and allied products, computer equipment, textiles and apparel, and

microelectronics.

The effects of NAFTA, both positive and negative, have been quantified by several economists.

Some argue that NAFTA has been positive for Mexico, which has seen its poverty rates fall and

real income rise (in the form of lower prices, especially food), even after accounting for the

1994–1995 economic crisis. Others argue that NAFTA has been beneficial to business owners

and elites in all three countries, but has had negative impacts on farmers in Mexico who saw

food prices fall based on cheap imports from U.S. agribusiness, and negative impacts on U.S.

workers in manufacturing and assembly industries who lost jobs. Critics also argue that NAFTA

has contributed to the rising levels of inequality in both the U.S. and Mexico.

Q24 :Explain David Ricardo’s theory of Two country Two product model of International trade theory. State in limitations

Comparative Advantage (David Ricardo, Principals of Political Economy, 1817) – Also known

as Opportunity Cost Theory

• David Ricardo, in his theory of comparative costs, suggested that countries will

specialize and trade in goods and services in which they have a comparative advantage.

• A country has a comparative advantage in the production of a good or service that it

produces at a lower opportunity cost than its trading partners.

• The theory of comparative costs argues that, put simply, it is better for a country that

is inefficient at producing a good to specialize in the production of that good it is least

inefficient at, compared with producing other goods.

Now suppose one country has an absolute advantage in both products. Table C shows what

production might be like if India had an absolute advantage at making both shoes and shirts.

TABLE C

Shoes Shirts

India 100 80

China 80 75

Total 180 155

In this case, the India can produce more of each good with the same set of resources than

China can. The India could produce either 200 units of shoes or 160 units of shirts. China could

produce either 160 units of shoes or 150 units of shirts. If the India produces only shoes, it gives

up 80 units of shirts to gain 100 units of shoes. If China produces only shoes, it gives up 75 units

of shirts to gain 80 units of shoes. For India, the opportunity cost of producing shirts is higher

and the opportunity cost of producing shoes is lower; vice-versa for China. Hence, India has a

comparative advantage in shoemaking and China has a comparative advantage in shirt making.

Table D shows what happens when each country specializes in the product in which it has a

comparative advantage.

TABLE D

Shoes Shirts

India 200 0

China 0 150

Total 200 150

By specializing in this way, the India and China have increased the production of shoes by

twenty units over what they produced before, from 180 to 200. But the world has lost five units

of shirts, going from 155 to 150.

Production in the India could be adjusted to make up the difference. For example, if the India

gave up 10 units of shoes, it could produce 8 units of shirts. Table E shows the results of such a

tradeoff.

TABLE E

Shoes Shirts

India 190 8

China 0 150

Total 190 158

In this way, the total production of both goods could be increased.

For India, the opportunity cost of choosing to produce 80 units of shirts was the 100 units of

shoes that could have been produced with the same resources. In the like manner, China's

opportunity cost of producing 80 units of shoes was 75 units of shirts.

In the terms of trade each reduce each country's opportunity cost of acquiring the good traded

for, trade will take place. In this example, China will not accept fewer than 80 units of shoes for

75 units of shirts and the India will not pay more than 100 units of shoes for 80 units of shirts.

Both countries must benefit for trade to occur.

The real world is much more complex than this two-country, two-product mode. Trade

involves many different countries and products. And it is not always clear where a country's

comparative advantage lies.

Summary

• Country should specialize in the production of those goods in which it is relatively more

productive, even if it has absolute advantage in all goods it produces.

• This extends free trade argument.

• Efficiency of resource utilization leads to more productivity.

Q 25: ASEAN

ASEAN

The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in

Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines,

Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July

1995, Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999.

OBJECTIVES

The ASEAN Declaration states that the aims and purposes of the Association are:

(i) To accelerate the economic growth, social progress and cultural development in the

region through joint endeavors.

(ii) To promote regional peace and stability through abiding respect for justice and the rule

of law in the relationship among countries in the region and adherence to the principles

of the United Nations Charter.

(iii) To maintain close cooperation with the existing international and regional organizations

with similar aims.

WORKING OF ASEAN

The member countries of ASEAN have Preferential Trading Arrangements (PTA), which reduces

tariffs on products traded among member countries. In 1992, ASEAN developed a Common

Effective Preferential Tariffs (CEPT) plan to reduce tariffs systematically for manufactured and

processed products. The members have

also established a series of co-operative efforts to encourage joint participation in industrial,

agricultural and technical development projects and to increase foreign investments in their

economies. These efforts include an ASEAN finance corporation, the ASEAN Industrial Joint

Ventures Programme (AJIV) etc. ASEAN nations have introduced some programmes for greater

diversification in their economies.

INDIA AND ASEAN :- India is interested in maintaining close economic relations with the

members of ASEAN, as these countries are closer to India. The ASEAN countries are offering

co-operation to India in the field of trade, investment, science and technology and training of

personnel. Also, India’s trade with ASEAN countries is satisfactory in recent years.

Q 23: Modes of international business

EXPORT

Exporting is the most traditional way of entering into International Business. Export can be

done in two ways:

1. Direct Export – Products are sold directly to buyers in target markets either through local

sales representatives or distributors. Sales representatives promote their company’s

products and do not take title to the merchandise. Distributors take ownership of the goods

(and the accompanying risk) and usually on-sell through wholesalers and retailers to end-

users.

Advantages of Direct Exports

o Give a higher return on your investment than selling through an agent or distributor

o Allows the exporting company to set lower prices and be more competitive

o Gives the company a close contact with its customers

Disadvantages of Direct Exports

o The company may not have the services of a foreign intermediary, so it may need more

time to become familiar with the market

o The customers or clients may take longer to get to know the company and its products,

and such familiarity is often important when doing business internationally

2. Indirect Export - Products are sold through intermediaries such as agents and trading

companies. Agents may represent one or more indirect exporters in return for commission

on sales.

FOREIGN DIRECT INVESTMENT

FDI are investments made to acquire a lasting interest by a resident entity in one economy

in an enterprise resident in another economy. FDI has come to play a major role in the

internationalization of business. This has happened due to changes in technologies, improved

trade and investment policies of governments, regulatory environment in terms of liberalization

and easing of restrictions on foreign investments and acquisitions, and deregulation and

privatization of many industries.

Advantages:

o It can provide a firm with new markets and marketing channels, cheaper production

facilities, access to new technologies, capital process, products, organizational technologies

and management skills.

o FDI can provide a strong impetus to economic development of the host country. This is all

the more true when large MNCs enter developing nations through FDI.

o FDI allows companies to avoid foreign government pressure for local production.

o It allows making the move from domestic export sales to a locally based national sales

office.

o Capability to increase total production capacity.

Depending on the industry sector and type of business, a foreign direct investment may

be an attractive and viable option. With rapid globalization of many industries and vertical

integration rapidly taking place on a global level, at a minimum a firm needs to keep abreast

of global trends in their industry. From a competitive standpoint, it is important to be aware of

whether a company’s competitors are expanding into a foreign market and how they are doing

that. Often, it becomes imperative to follow the expansion of key clients overseas if an active

business relationship is to be maintained.

New market access is also another major reason to invest in a foreign country. At some

stage, export of product or service reaches a critical mass of amount and cost where foreign

production or location begins to be more cost effective. Any decision on investing is thus a

combination of a number of key factors including:

o Assessment of internal resources

o Competitiveness

o Market Analysis

o Market expectations

LICENSING

Licensing is a legal agreement between the owner of intellectual property such as a copyright,

patent or trademark and someone who wants to use that IP. The licensee pays “rent” to the

licensor for the use of an idea/product/process that is otherwise protected by IP law. Like a

lease on a building, the license is for a specific period of time. The licensee uses that idea/

product/process to sell products or services and earns money.

Advantages:

o Licensing appeals to prospective global players because it does not require large capital

investment not detailed involvement with foreign customers. By generating royalty income,

licensing provides an opportunity to exploit research and development already conducted.

After initial costs, the licensor can reap benefits until the end of license contract period.

o It reduces the risk of expropriation because the licensee is a local company that can provide

leverage against government action.

o Helps avoid host country regulations that are more prevalent in equity ventures.

o Provides a way of testing foreign markets without significant resources.

o Can be used as a pre-emption major in new market before the entry of competition.

Limitations:

o Limited form of market entry which does not guarantee a basis for expansion.

o Licensor may create more competition in exchange of royalty.

FRANCHISING

Franchising involves granting of rights by a parent company to another (franchisee) to do

business in a prescribed manner. This right can take the form of selling the franchiser’s

products, using its name, production and marketing techniques or using its general business

approach.

It allows provides a network of interdependent business relationships that allows a number of

people to share:

o Brand identification

o Successful method of doing business

o Proven marketing and distribution system

Franchise agreement typically requires the payment of a fee upfront and then a percentage on

sales. In return, the franchiser provides assistance and at times may require the purchase of

goods or supplies to ensure the same quality of goods or services worldwide.

Franchising is adaptable to international arena and requires minor modification for the local

market. It can be beneficial to both groups. Franchiser has a new stream of income and the

franchisee gets time proven concept/product which can be quickly bought to the market.

Major Forms of Franchising:

- manufacturer-retailer system (e.g. car dealership)

- manufacturer-wholesaler system (e.g. soft-drink companies)

- service firm – retailer system (fast-food, hotel) e,g, McDonald’s, Burger King

JOINT VENTURES

A joint venture is an agreement involving two or more organizations that arrange to produce a

product or service through a collectively owned enterprise. It has been one of the most popular

way of entering a new market.

Typically, it is a 50-50 joint venture in which each of the party holds 50% ownership stake

and contributes a team of managers to share operating control. At times, this stake can be a

majority one so as to ensure tighter control.

Advantages:

o Domestic company brings in the knowledge of the domestic market.

o The risk is divided between joint-venture partners.

o Normally, foreign partner has an option to sell its stake in the venture to another entity.

Limitations:

o Limited control over business approach for foreign entity.

o Profits have to be shared.

e.g. Danone-Brittania, Hero Honda, Maruti Suzuki

WHOLLY OWNED SUBSIDIARIES

In a wholly owned subsidiary, the company owns 100% of the equity. Establishing a wholly

owned subsidiary in a foreign market can be done in 2 ways:

1. Set up of new operation

2. Acquisition of established firm.

WOS allows a foreign firm complete control and freedom to execute its business strategy in the

foreign country. This freedom is accompanied by a greater risk due to lack of knowledge of the

market. Acquisition of an established company can reduce this risk to an extent.

18. Define ‘Multinational Corporation (MNC).’ Explain the merits and demerits of MNC. Criticallyexamine the role of MNC’s in international economy.

Multinational corporations are business entities that operate in more than one country. The typical multinationalcorporation or MNC normally functions with a headquarters that is based in one country, while other facilities are based in locations in other countries. In some circles, a multinational corporation is referred to as a multinational enterprise (MBE) or a transnational corporation (TNC).The exact model for an MNC may vary slightly. One common model is for the multinational corporation is the positioning of the executive headquarters in one nation, while production facilities are located in one or more other countries. This model often allows the company to take advantage of benefits of incorporating in a given locality, while also being able to produce goods and services in areas where the cost of production is lower.Another structural model for a multinational organization or MNO is to base the parent company in one nation and operate subsidiaries in other countries around the world. With this model, just about all the functions of the parent are based in the country of origin. The subsidiaries more or less function independently, outside of a few basic ties to the parent.A third approach to the setup of an MNC involves the establishment of a headquarters in one country that oversees a diverse conglomeration that stretches to many different countries and industries. With this model, the MNC includes affiliates, subsidiaries and possibly even some facilities that report directly to the headquarters.Merits and Demerits 

Multinational Corporations no doubt, carryout business with the ultimate object of profit making like any other domestic company. According to ILO report "for some, the multinational companies are an invaluable dynamic force and instrument for wider distribution of capital, technology and employment; for others they are monsters which our present institutions, national or international, cannot adequately control, a law to themselves with no reasonable concept, the public interest or social policy can accept. MNC's directly and indirectly help both the home country and the host country.Advantages of MNC's for the host countryMNC's help the host country in the following ways1. The investment level, employment level, and income level of the host country increases due to the operation of MNC's.2. The industries of host country get latest technology from foreign countries through MNC's.3. The host country's business also gets management expertise from MNC's.

4. The domestic traders and market intermediaries of the host country gets increased business from the operation of MNC's.5. MNC's break protectionalism, curb local monopolies, create competition among domestic companies and thus enhance their competitiveness.6. Domestic industries can make use of R and D outcomes of MNC's.7. The host country can reduce imports and increase exports due to goods produced by MNC's in the host country. This helps to improve balance of payment.8. Level of industrial and economic development increases due to the growth of MNC's in the host country.Advantages of MNC's for the home countryMNC's home country has the following advantages.1. MNC's create opportunities for marketing the products produced in the home country throughout the world.2. They create employment opportunities to the people of home country both at home and abroad.3. It gives a boost to the industrial activities of home country.4. MNC's help to maintain favourable balance of payment of the home country in the long run.5. Home country can also get the benefit of foreign culture brought by MNC's.Disadvantages of MNC's for the host country1. MNC's may transfer technology which has become outdated in the home country.2. As MNC's do not operate within the national autonomy, they may pose a threat to the economic and political sovereignty of host countries.3. MNC's may kill the domestic industry by monpolising the host country's market.4. In order to make profit, MNC's may use natural resources of the home country indiscriminately and cause depletion of the resources.5. A large sums of money flows to foreign countries in terms of payments towards profits, dividends and royalty.Disadvantages of MNC's for the home country1. MNC's transfer the capital from the home country to various host countries causing unfavourable balance of payment.2. MNC's may not create employment opportunities to the people of home country if it adopts geocentric approach.3. As investments in foreign countries is more profitable, MNC's may neglect the home countries industrial and economic development.Applicability to particular businessMNC's is suitable in the following cases.1. Where the Government wants to avail of foreign technology and foreign capital e.g. Maruti Udyog Limited, Hind lever, Philips, HP, Honeywell etc.2. Where it is desirable in the national interest to increase employment opportunities in the country e.g., Hindustan Lever.

3. Where foreign management expertise is needed e.g. Honeywell, Samsung, LG Electronics etc.4. Where it is desirable to diversify activities into untapped and priority areas like core and infrastructure industries, e.g. ITC is more acceptable to Indians L&T etc.5. Pharmaceutical industries e.g. Glaxo, Bayer et

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19. ‘Rate of innovation is more in developed countries than in developing countries.’ Explain yes orno-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------20. Define International Business. State its objectives and give an overview of International Business 

What is International Business? Meaning, Features and ArticlePost : Gaurav Akrani Date : 9/01/2011 09:48:00 PM ISTNo Comments Labels : Management

 

What is International Business? Meaning

 

International Business conducts business transactions all over the world. These transactions include the transfer of goods, services, technology, managerial knowledge, and capital to other countries. International business involves exports and imports.International Business is also known, called or referred as a Global Business or an International Marketing.

Image Credits © Eliway Education.An international business has many options for doing business, it includes,

1. Exporting goods and services.

2. Giving license to produce goods in the host country.

3. Starting a joint venture with a company.

4. Opening a branch for producing & distributing goods in the host country.

5. Providing managerial services to companies in the host country.

 

Features of International Business

 

The nature and characteristics or features of international business are:-

1. Large scale operations : In international business, all the operations are

conducted on a very huge scale. Production and marketing activities are conducted on a large scale. It first sells its goods in the local market. Then the surplus goods are exported.

2. Intergration of economies : International business integrates (combines) the economies of many countries. This is because it uses finance from one country, labour from another country, and infrastructure from another country. It designs the product in one country, produces its parts in many different countries and assembles the product in another country. It sells the product in many countries, i.e. in the international market.

3. Dominated by developed countries and MNCs : International business is dominated by developed countries and their multinational corporations (MNCs). At present, MNCs from USA, Europe and Japan dominate (fully control) foreign trade. This is because they have large financial and other resources. They also have the best technology and research and development (R & D). They have highly skilled employees and managers because they give very high salaries and other benefits. Therefore, they produce good quality goods and services at low prices. This helps them to capture and dominate the world market.

4. Benefits to participating countries : International business gives benefits to all participating countries. However, the developed (rich) countries get the maximum benefits. The developing (poor) countries also get benefits. They get foreign capital and technology. They get rapid industrial development. They get more employment opportunities. All this results in economic development of the developing countries. Therefore, developing countries open up their economies through liberal economic policies.

5. Keen competition : International business has to face keen (too much) competition in the world market. The competition is between unequal partners i.e. developed and developing countries. In this keen competition, developed countries

and their MNCs are in a favourable position because they produce superior quality goods and services at very low prices. Developed countries also have many contacts in the world market. So, developing countries find it very difficult to face competition from developed countries.

6. Special role of science and technology : International business gives a lot of importance to science and technology. Science and Technology (S & T) help the business to have large-scale production. Developed countries use high technologies. Therefore, they dominate global business. International business helps them to transfer such top high-end technologies to the developing countries.

7. International restrictions : International business faces many restrictions on the inflow and outflow of capital, technology and goods. Many governments do not allow international businesses to enter their countries. They have many trade blocks, tariff barriers, foreign exchange restrictions, etc. All this is harmful to international business.

8. Sensitive nature : The international business is very sensitive in nature. Any changes in the economic policies, technology, political environment, etc. has a huge impact on it. Therefore, international business must conduct marketing research to find out and study these changes. They must adjust their business activities and adapt accordingly to survive changes.

comparing it with International Business

21. Trade Barriers

http://www.slideshare.net/ruchir1/trade-barriers-final