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MB0053International Business Management

1. Discuss Porters diamond model for international trade.A

The diamond model is aneconomical model developed byMichael Porter in his book The

Competitive Advantage of Nations, where he published his theory of why particular industries

becomecompetitive in particular locations. Afterwards, this model has been expanded by

other scholars.

The approach looks atclusters,a number of small industries, where the competitiveness of

one company is related to the performance of other companies and other factors tied together

in thevalue-added chain,in customer-client relation, or in a local or regional contexts. ThePorter analysis was made in two steps. First, clusters of successful industries have been

mapped in 10 important trading nations. In the second, the history of competition in particular

industries is examined to clarify the dynamic process by which competitive advantage was

created. The second step in Porter's analysis deals with the dynamic process by which

competitive advantage is created. The basic method in these studies is historical analysis. The

phenomena that are analysed are classified into six broad factors incorporated into the Porter

diamond, which has become a key tool for the analysis of competitiveness:

Factor conditions

are human resources, physical resources, knowledge resources,

capital resources and infrastructure.

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Demand conditionsin the home market can help companies create a competitiveadvantage, when sophisticated home market buyers pressure firms to innovate faster

and to create more advanced products than those of competitors.

Related and supporting industriescan produce inputs that are important forinnovation and internationalization.

Firm strategy, structure and rivalryconstitute the fourth determinant ofcompetitiveness. The way in which companies are created, set goals and are managed

is important for success.

Governmentcan influence each of the above four determinants of competitiveness.Clearly government can influence the supply conditions of key production factors,

demand conditions in the home market, and competition between firms. Government

interventions can occur at local, regional, national or supranational level.

Chanceevents are occurrences that are outside of control of a firm. They areimportant because they create discontinuities in which some gain competitive

positions and some lose.

The Porter thesis is that these factors interact with each other to create conditions where

innovation and improved competitiveness occurs.

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2. Evaluate the importance of political stability for conducting international business.

What is political risk?

Political instability may arise from revolution and insurgency, involvement in foreign wars,

changes in government, bad international relations, falling national income, high inflation and

rising foreign debt, resulting in the physical destruction of a firms assets, higher taxes,

import controls and barriers on money leaving the country.

Political risk is a type ofrisk faced byinvestors,corporations,andgovernments.It is a risk

that can be understood and managed with reasoned foresight and investment.

Broadly, political risk refers to the complications businesses and governments may face as a

result of what are commonly referred to as political decisionsor any political change that

alters the expected outcome and value of a given economic action by changing the probability

of achieving business objectives. Political risk faced by firms can be defined as the risk of a

strategic, financial, or personnel loss for a firm because of such nonmarket factors as

macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income,

labour, and developmental), or events related to political instability (terrorism,riots, coups,

civil war, and insurrection). Portfolio investors may face similar financial losses. Moreover,

governments may face complications in their ability to execute diplomatic, military or other

initiatives as a result of political risk.

A low level of political risk in a given country does not necessarily correspond to a high

degree of political freedom. Indeed, some of the more stable states are also the most

authoritarian.Long-term assessments of political risk must account for the danger that a

politically oppressive environment is only stable as long as top-down control is maintained

and citizens prevented from a free exchange of ideas and goods with the outside world.

Understanding risk partly as probability and partly as impact provides insight into political

risk. For a business, the implication for political risk is that there is a measure of likelihood

that political events may complicate its pursuit of earnings through direct impacts (such as

taxes or fees) or indirect impacts (such as opportunity cost forgone).

There are both macro- and micro-level political risks. Macro-level political risks have similar

impacts across all foreign actors in a given location. While these are included in country risk

analysis, it would be incorrect to equate macro-level political risk analysis with country risk

as country risk only looks at national-level risks and also includes financial and economic

risks. Micro-level risks focus on sector, firm, or project specific risk.

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3. Discuss the role of WTO in international trade. Explain any 2 major agreements in

WTO.

A

Role of WTO in international trade

The important functions of the WTO as stated in the WTO agreement are the following:

Developing transitional economiesMajority of the WTO members are thedeveloping countries. The developing countries such as India, China, Mexico, Brazil

and others have an important role in the organisation.

Providing help for export promotionThe WTO provides specialised help forexport promotion to its members.

Cooperating in global economic policy-makingThe main function of the WTO isto cooperate in global economic policy-making. In the Marrakesh Ministerial Meeting

in April 1994, a separate declaration was adopted to achieve this objective.

Monitoring implementation of the agreementThe WTO administers sixtydifferent agreements that have the statue of international legal documents.

Providing forum for negotiationsThe WTO provides a permanent forum fornegotiations among members.

Administrating dispute settlementThe important function of WTO is theadministration of the WTO dispute settlement system.

2 agreements of WTO

The major agreements of WTO are GATS, TRIPS, and GATT.

GATS

The creation of the GATS was one of the landmark achievements of the Uruguay Round,

whose results entered into force in January 1995. The GATS was inspired by essentially the

same objectives as its counterpart in merchandise trade, the General Agreement on Tariffs

and Trade (GATT): creating a credible and reliable system of international trade rules;

ensuring fair and equitable treatment of all participants (principle of non-discrimination);

stimulating economic activity through guaranteed policy bindings; and promoting trade and

development through progressive liberalization.

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While services currently account for over 60 percent of global production and employment,

they represent no more than 20 per cent of total trade (BOP basis). This seemingly modest

share should not be underestimated, however. Many services, which have long been

considered genuine domestic activities, have increasingly become internationally mobile.

GATT

The General Agreement on Tariffs and Trade (GATT) was a multilateral agreement

regulating international trade. According to its preamble, its purpose was the "substantial

reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal

and mutually advantageous basis." It was negotiated during the United Nations Conferenceon Trade and Employment and was the outcome of the failure of negotiating governments to

create the International Trade Organization (ITO). GATT was signed in 1947 and lasted until

1994, when it was replaced by the World Trade Organization in 1995.

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4. Write short note on:

a) Strategic planning

Strategic planning is anorganization's process of defining itsstrategy,or direction, and

makingdecisions on allocating its resources to pursue this strategy.

In order to determine the future direction of the organization, it is necessary to understand its

current position and the possible avenues through which it can pursue particular courses of

action. Generally, strategic planning deals with at least one of three key questions:[1]

1. "What do we do?"2. "For whom do we do it?"3. "How do we excel?"

The key components of 'strategic planning' include an understanding of an entity'svision,

mission,values and strategies.

Organizations sometimes summarize goals and objectives into amission statementand/or a

vision statement. Others begin with a vision and mission and use them to formulate goals

and objectives. A newly emerging approach is to use a visual strategic plansuch as is used

within planning approaches based onoutcomes theory.When using this approach, the first

step is to build a visual outcomes model of the high-level outcomes being sought and all of

the steps which it is believed are needed to get to them. The vision and mission are then just

the top layers of the visual model.

b) Ethical convergence

Ethical convergence is defined as the practice of a uniform system of ethical codes in

different countries that are culturally and socially different.

There is a growing pressure on international business to follow a uniform set of guidelines in

managing ethical behaviour and social responsibility across the countries in which they

operate. Some of the advantages of ethical convergence are:

The growth of international trading blocks, such as North American Free TradeAgreement (NAFTA) and the European Union promotes common ethical practices

across national cultures and borders to reduce institutional differences. Predictable

interaction and behaviour among trading partners from different countries makes trade

more efficient.

People from different cultural backgrounds increase their interactions and exposure tovarying ethical traditions. They adopt, adjust to, and imitate new behaviour and

attitudes which leads to acceptance of best practices.

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International businesses have employees from different cultural backgrounds. Thecompanies rely on their corporate culture to provide consistent norms and values that

govern ethical issues to set common standards for employees from different cultural

backgrounds.

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6. Explain the various modes of entry in international business which could be used a

part of strategy to enter foreign market.

A

The modes of entry adopted by foreign firms with examples

1. Exporting

Of the various methods of foreign market entry, exporting is most commonly used by small

and first time businesses as exporting involves limited start-up costs and risks and profit

under this method can be realised as early as firm gets started. The most advantageous aspect

of market entry through exporting is that it involves minimal preliminary expenditures except

some which incur on market research and product promotion. Getting through export into

international market can be by two basic ways, namely:

a. Direct export.

b. Indirect export.

2. Licensing

Licensing is also an easy, risk free and costless method to enter into international markets.

Licensing operate in a way that it permits another company in the target country to use its

property as a licensee and in exchange, pays a fee or royalty on sales so incurred. The

property of licensor is intangible, such as trademarks, patents, copy rights, technical know-

how and production techniques. The licensee has to pay the fee in exchange for the rights touse the intangible property as granted by the licensor.

3. Joint ventures

Joint ventures are market entry options whereby firm and another company or firm in target

market may join together to form a new incorporated company for business operations in that

market. In joint ventures, both the parties are supposed to provide capital and resources in the

agreed proportion and accordingly they will represent and share profits and loses. Such mode

of entry is popular in countries where there are restrictions on foreign ownership. For

example Venezuela, China, Vietnam.

4. Wholly Owned Subsidiary (WOS)

Wholly owned subsidiary, as the name suggest, is the direct ownership of production

facilities in the potential international market. It requires a long term commitment on the part

of firm as it involves transfer of resources, such as capital, technology and personnel to the

potential market. Wholly owned subsidiary can also be made through the acquisition of an

existing firm or the establishment in the target market. WOS has several advantages as it

provides high degree of administrative control in the business operations of the firm and the

firm has better chances to understand and analyse the consumers and competitiveenvironment in the target market.

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On the other hand, such entry strategy requires a high level of physical and capital resources

to run the business in the target market.