DRIVE

PROGRAM
SEMESTER
SUBJECT NAME
SUBJECT CODE
STUDENT NAME
ROLL NO.

ASSIGNMENT
WINTER 2015
MBA
FOURTH
MB0053
INTERNATIONAL BUSINESS
MANAGEMENT
CHETAN ANAND
1405003452

Q1. Why is Comparative Cost Theory considered as an improvement upon

Absolute Cost
Advantage Theory?
Explain Porters Diamond Model
Answer:
David Ricardo, in his notable book Principles of Political Economy published in 1817
came up with an improvement on Adam Smiths absolute advantage theory.
Ricardo argued what might happen if one country has an absolute advantage in the
production of all goods. Adam Smiths theory suggests that such a country might
not have benefitted from international trade as trade is positive sum game and
countries prosper only if they exchange the goods in which they have absolute
advantage.
The Heckscher-Ohlin Trade Theory
The Heckscher-Ohlin (H-O) theory further improvises on the absolute cost
advantage and comparative cost advantage theory. It tries to explain the crucial
question of why countries trade goods and services with each other. The theory is
based on the hypotheses that countries trade with each other as they differ with
respect to the availability of the factors of production i.e. land, labour and capital.
For example, US is a capital rich country hence its exports basket will be dominated
by capital intensive products like, aeroplanes, submarines, tanks, space system,
nuclear plants, super computer, high-end servers etc. Whereas India has labour
abundance, so its export basket is dominated by product with labour contents like
gems and jewellery, textiles, handicrafts, sports toys, handlooms, apparel,
electronics and information technology services.
Basic assumptions of H-O theory
a. Countries worldwide are endowed with different factors of production, i.e. land,
labour and capital may not be in equal proportion in all countries. Some are
abundant with land, some capital and some with labour.
b. Production of goods either requires relatively more capital or land or labour.
c. Factors of production do not move between two countries.
d. Theory has assumption that there is no transport cost for trade between two
countries.
e. The consumers and users in two trading countries may have the same needs.

Porters diamond model

In 1990, Michael Porter analysed the reason behind some nations success and
others failure in international competition. His thesis outlined four broad attributes
that shape the environment in which local firms compete and these attributes
promote the creation of competitive advantage. They are explained as follows:
Factor endowments Characteristics of production were analysed in detail.
There are basic actors like natural resources, climate, and location and so on and
advanced factors like communications infrastructure, research facilities.
Demand conditions The role of home demand in improving competitive
advantage is emphasised since firms are most sensitive about the needs of their
closest customers. For example, the Japanese camera industry which caters to a
sophisticated and knowledgeable
local market.
Relating and supporting industries The presence of suppliers or related
industries is advantageous since the benefits of investment in advanced factors of
production spill over to these supporting industries.
Successful industries within a country tend to be grouped into clusters of related
industries. For example Silicon Valley.
Firm strategy, structure and rivalry Domestic rivalry creates pressure to
innovate, improve quality, and reduce costs which in turn helps create world-class
competitors.
He said that these four attributes constituted the diamond and he argued that firms
are most likely to succeed in industries where the diamond is most favorable. He
also stated that the diamond is a mutually reinforcing system and the effect of one
attribute depends on the state of others. For example, favorable demand conditions
will not result in a competitive advantage
unless the state of rivalry is enough to elicit a response from the firms.

Q2. Explain Hofstedes Cultural dimension.

Answer:
Hofstedes cultural dimensions
According to Dr. Geert Hofstede, Culture is more often a source of conflict than of
synergy. Cultural differences are a trouble and always a disaster. Professor Hofstede
carried out a detailed study of how values in the workplace are influenced by
culture. He worked as a psychologist in IBM from 1967 to 973. At that time he
gathered and analysed data from many people in several countries.
Later, a fifth dimension called long-term outlook was added. The following are the
five cultural dimensions:
> Power Distance Index (PDI) This focuses on the level of equality or inequality
between individuals in a nations society. A country with high power distance
ranking depicts that inequality of power and wealth has been allowed to grow within
the society. These societies follow caste system that does not allow upward mobility
of its people. A country with low power distance ranking depicts a society which de-

emphasises the differences between its peoples power and wealth. In these
societies equality and opportunity is stressed for everyone. Countries with high PDI
index are Arab countries, Russia, India and China. Those with low score are Australia
and Japan.
>Individualism This dimension focuses on the extent to which the society
reinforces individual or collective achievement and interpersonal relationships. A
high individualism ranking (western countries, Canada, Hungary) depicts that
individuality and individual rights are dominant within the society. Individuals in
these societies form a larger number oflooser relationships. A low individualism
ranking (Asian and African countries like Indonesia and Colombia) characterises
societies of a more collective nature with close links between individuals. These
cultures support extended families and collectives where everyone takes
responsibility for fellow members of their group.
>Masculinity This focuses on the extent to which the society supports or
discourages the traditional masculine-work role model of male achievement, power,
and control. A country with high masculinity ranking (like Japan, Venezuela,
Hungary) shows the country experiences high level of gender differentiation. In
these cultures, men dominate the society and power structure, with women being
controlled and dominated by men. A country with low masculinity ranking (like
Norway and Sweden) shows a low level of differentiation and discrimination
between genders women are treated equal to men in all aspects of the society.
> Uncertainty Avoidance Index (UAI) This focuses on the degree of tolerance
for uncertainty and ambiguity within the society. A country with high uncertainty
avoidance ranking shows that the country has low tolerance for uncertainty and
ambiguity. A rule-oriented society that incorporates rules, regulations, laws, and
controls is created to minimize the amount of uncertainty. A country with low
uncertainty avoidance ranking shows that the country has fewer concerns about
ambiguity and uncertainty and has high tolerance for a variety of opinions. A
society which is less rule-oriented, readily agrees to changes, and takes greater
risks. Latin American countries, Germany, Belgium, Japan and Eastern Europe score
high on this. Countries with low UAI score are Sweden,
Denmark and China.
> Long-Term Orientation (LTO) It describes the range at which a society
illustrates a pragmatic future oriented perspective instead of a conventional historic
or short term point of view. The Asian countries
(China, Japan, Honk Kong) score high on this dimension. These countries have a
long term orientation, believe in many truths, accept changes easily, and have thrift
for investment. Cultures recording little on this dimension, trust in absolute truth,
are conventional and traditional. They have a small term orientation and a concern
for stability. Many western cultures score considerably low on this dimension.
Q3. An economic union comprises of a common market and a custom
union. Explain
Answer.
Economic union is a type of trade bloc and is instituted through a trade pact. It
comprises of a common market with a customs union. The countries that are part of
an economic union have common policies on the freedom of movement of four
factors of production, common product regulations and a

common external trade policy.

The purpose of an economic union is to promote closer cultural and political ties
while increasing the economic efficiency between the member countries.
Economic unions are established by means of a formal intergovernmental legal
agreement among independent countries with the intention of fostering greater
economic integration. The members of an economic union share some elements
associated with their national economic jurisdictions.
These include the free movements of:
Goods and services within the union along with a common taxing method for
imports from non-member countries.
Capital within the economic union.
Persons within the economic union. Some forms of cooperation usually exist while
framing fiscal and monetary policies.
> Custom union
Custom Union is an agreement among two or more countries having already
entered into a free trade agreement to further align their external tariff to help
remove trade barriers. Custom union agreement among negotiating countries may
encompass to reduce or eliminate customs duty on mutual
trade. Under customs union agreement, countries generally impose a common
external -tariff (CTF) on imports from non-member countries. Such common external
tariff helps the member countries to reap the benefits of trade expansion, trade
creation and trade diversification. In the absence of common external tariff, there is
a possibility that countries with lower custom duties may become conduits for
members which has higher custom duty. Custom union is third stage in level of
economic integration and is followed only after free trade agreement among
participating countries.
> Common market
Common market is a group formed by countries within a geographical area to
promote duty free trade and free movement of labour and capital among its
members. European community is an example of common market.
Common markets levy common external tariff on imports from non-member
countries.
A single market is a type of trade bloc, comprising a free trade area with common
policies on product regulation, and freedom of movement of goods, capital, labour
and services, which are known as the four factors of production. This agreement
aims at making the movement of four factors of production between the member
countries easier. The technical, fiscal and physical barriers among the member
countries are eliminated considerably as these barriers hinder the freedom of
movement of the four factors of production. The member countries must come
forward to eliminate these barriers, have a political will and formulate common
economic policies. A common market is the first step towards a single market. It
may be initially limited to a FTA with moderate free movement of capital and
services, but it is not capable of removing the other trade barriers.

Q4. Explain the components of International Financial Management.

Answer:
Components of International Financial Management
The components like foreign exchange market, foreign currency derivatives,
international monetary markets and international financial markets which are
essential to the international financial management, are discussed in this section.
> Foreign exchange market
The foreign exchange or the forex markets facilitates the participants to obtain,
trade, exchange and speculate foreign currency. The foreign exchange market
consists of banks, central banks, commercial companies, hedge funds, investment
management firms and retail foreign exchange
brokers and investors. It is considered to be the leading financial market in the
world. It is vital to realise that the foreign exchange is not a single exchange, but is
created from a global network of computers that connects the participants from all
over the world. The foreign exchange market is quite big and includes various
functions including funding of cross-border investment, loans, trade in goods, trade
in
services and currency speculation. The participant in a foreign exchange market will
normally ask for a price.
The trading in the foreign exchange market may take place in the following forms:
Outright cash or ready foreign exchange currency deals that take place on the
date of the deal.
Next day foreign exchange currency deals that take place on the next working
day.
Swap Simultaneous sale and purchase of identical amounts of currency for
different maturities.
Spot and Forward contracts A spot contract is a binding obligation to buy
or sell a definite amount of foreign currency at the existing or spot market rate. A
forward contract is a binding obligation to buy or sell a definite amount of foreign
currency at the pre-agreed rate of exchange, on or before a certain date.
> Foreign currency derivatives
Currency derivative is defined as a financial contract that seeks to swap two
currencies at a predetermined rate. It can also be termed as the agreement where
the value can be determined from the rate of exchange of two currencies at the
spot. The currency derivative trades in markets that
correspond to the spot (cash) market. Hence, the spot market exposures can be
enclosed with the currency derivatives. The main advantage from derivative
hedging is the basket of currency available.
> International monetary systems
the international monetary systems represent the set of rules that are agreed
internationally along with its conventions. It also consists of set of rules that govern
international scenario, supporting institutions which will facilitate the worldwide
trade, the investment across cross-borders and the reallocation of capital between
the states.
International financial markets
Independent markets that are not under the authority of any one country and the
financial markets of each country are linked by international foreign markets. What
governs the heart of the international financial market is the market where
international trade and investment dominates foreign

currency As a result the purchase of currency proceeds the purchase of services and
goods.

Q5. What are the differences between International Accounting Standards

and Domestic
Accounting Standards?
Answer:
Domestic vs. international accounting
Different countries whether domestic or international, have different accounting
standards. A common belief is that these differences reduce the quality and
importance of accounting information. Accounting standards determine the financial
reporting quality and provides separately verified information about an
organizations financial performance to investors creditors.
Though there are differences in accounting methods, domestic businesses are not
affected. The accounting system of a domestic organization must meet the
specialized and regulatory standards of its home country. But, an MNC and its
subsidiaries must meet differing accounting and auditing
standards of all the countries in which it operates. This leads to a need for
comparability between businesses in the group. In order to successfully manage
and organize their operations, local managers require accounting information, which
should be prepared according to the local accounting
concepts and denomination in the local currency. Yet, for financial controllers, to
measure the foreign subsidiarys performance and worth, the subsidiarys accounts
must be translated into the organizations home currency. This translation is done
using accounting concepts and measures, which are detailed by the organization.
Investors worldwide look for the highest possible returns on their capital, in order to
interpret the track record, though they use a currency and an accounting system of
their own. The organization also has to pay taxes to the countries where it does
business, based on the accounting statements prepared in these countries. Besides
this, when a parent corporation tries to combine the accounting records of its
subsidiaries to produce consolidated financial statements, extra complexities occur
because of the changes in the value of the host and home currencies.
Measurement of differences between IAS and DAS
we can measure the differences between IAS and DAS in the following way:
> Literature on international accounting differences Referring to earlier
reports on international accounting could give more information about the subject.
Most of the earlier reports understand international accounting differences as
various options adopted by nations for the similar accounting problems, which
correspond to divergence concept.
> Framework of analysis Links between variations in accounting standards and
financial reporting quality of various countries could be clearly seen from the
reports published earlier. We should consider the institutional determinants of

accounting differences such as legal origin,

governance structure, economic development, and equity market.

Q6. Explain the key component of International Strategic management.

Answer:
Strategic planning involves the structured efforts of an organisation to effectively
recognise its purposes for existing, the direction that the organisation will pursue,
and how that direction will allow the entity to achieve its short-term and long-term
goals. Strategic planning is an important element in all kinds of organisations and is
applied by governments, non-profit agencies, individuals and businesses.
A simple approach to strategic planning is as discussed below:
1. The first step is to accurately assess where the entity is today, with respect to its
ability and resources.
2. The second step is to recognize where the organization would like to reach at
some specific point of time in the future, by efficiently setting goals and objectives
that it needs to accomplish.
3. The third and final step engages choosing how to successfully progress from the
conditions of today and methodically work toward those goals in a structured and
logical manner.
During the strategic planning process, experts employ many ways, and sometimes
break down each process into a series of steps. The complexity of the exact
approach used frequently comprises of the nature of the organization, the kind of
goals laid down and the resources needed to attain those goals.
Types of planning
Strategic planning process involves allocation of resources to firms to fulfil their
long-term goals. Any business plan can be classified into three types. They are:
Strategic planning: This planning process is the best among the three business
planning processes. It is a long-term process that the business owners utilize to
unveil their business vision and mission. It also
determines a gateway for business owners for achieving their goals. Strategic
planning fulfills the mission and the overall goals of the firm. Whereas, the other
two are rather more short-term and are used
Sometimes without any relation to the long-term business goals. However these
three kinds of planning work well when used within a strategic plan.
Intermediate planning: This planning process is for six months to two years.
They outline the manner in which the strategic plan is pursued. Intermediate plans

are often used for campaigns with the purpose and goal of supporting the trades
long-term goals.
Short-term planning: This planning process involves planning for few weeks or
at least for a year. It involvesdetailing out the functioning of a strategic plan on a
daily basis. Resources are allocated for business management and development
that takes place daily within the strategic plan.