ASSIGNMENT

Course/Drive/Semester Subject code & name Student Regd No, & Name MBA / Fall 2013 / Sem-IV MB0053 International Business Management 311234915 Debasish Pradhan

1. Discuss Porters diamond model for international trade. Ans.: In 1990, Michael Porter analyzed 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: 1. Factor endowments Characteristics of production were analyzed in detail. There are basic factors like natural resources, climate, and location and so on and advanced factors like communications infrastructure, research facilities. 2. Demand conditions The role of home demand in improving competitive advantage is emphasized 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. 3. 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. 4. 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.

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Course/Drive/Semester Subject code & name Student Regd No, & Name

MBA / Fall 2013 / Sem-IV MB0053 International Business Management 311234915 Debasish Pradhan

2. Evaluate the importance of political stability for conducting international business. What is political risk? Ans.: Political instability: - 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 stability is important for conducting international business because political instability arises from revolution and insurgency, involvement in foreign wars, changes in government, bad international relations, falling national income, high inflation and rising foreign debt Political risk: It may emerge from social unrest due to unevenly distributed income, competing political ideologies or ethnic groups within a nation, rise or fall of individual leaders or from international relations. In the modern world, a countrys economic prospects depend heavily on foreign investment and goodwill of the business community. There are two types of political risks, namely macro and micro risks as explained below: Macro risk affects all foreign firms operating in the country equally and may include the imposition of exchange controls, special taxes, and local-content rules and so on. Micro risk applies to a particular company industry or project. For example, import restrictions on specific products, compulsory breaking up of a firm into smaller parts, cancellation of contracts and so on.

3. Discuss the role of WTO in international trade. Explain any 2 major agreements in WTO. Ans.: With waves of globalization taking place in global economy with the formation of World Trade Organization (WTO), developed and developing nations are competing for foreign investment in their respective economies. Foreign investment is said to have played an important factor for spurring the development of a nation. This is particularly more important in the context of a developing country like India which has abundance of other two factors of production i.e. land and labor. However it lacks the capital to tap the innate potential of its physical resources. Following are some of the advantages due to which nations give emphasis to their economic development. a. Easier integration into global economy: A developing country like India is keenly interested to have foreign investment in their economy as it can gain greater access and foothold in other economies of the world. Foreign investor may manufacture the products that may be meant for global markets resulting in greater exports of the country and improving the employment scenario in the country. b. Up-gradation in technology and advancement in technical knowhow: Foreign investment facilitates the transfer of advanced level of technology mainly from developed countries to developing countries. Thus, less developed countries and developing countries can have world-level 2|Page

Course/Drive/Semester Subject code & name Student Regd No, & Name

MBA / Fall 2013 / Sem-IV MB0053 International Business Management 311234915 Debasish Pradhan

technology and technical know-how to process their physical and non physical resources. Foreign expertise mainly coming from developed countries can be of immense use in upgrading the existing technical processes in the least developed or developing countries. For example India has got access to nuclear technology by signing the deal with Nuclear Supplier Group; thus having an access to advanced nuclear technology form countries like France, USA, Russia, Britain, Germany and Japan. India has also been benefited with advanced technology in areas of ports, ship building, power sector, energy sector and telecommunication in the recent year. c. Increased competition improved productivity: Foreign investment from the foreign players brings in advances in technology, technical knowhow and processes. This helps in increasing competition and resultant productivity in the domestic economy of the developing country. As a catalyzing effect, its competitors in the domestic markets also start improving their technology or start tying up with foreign players in search of technology. It acts as a spillover effect in improving the productivity in a particular sector or sub sectors of the industry. Each company tries to stay competitive so as to retain the market share and sales turnover. d. Improvement in human development skills: There comes a significant improvement in human resources skills of the country that attracts foreign investment as its employees get exposure to globally valued skills. Foreign investors come with improved skill set to perform in a particular industry. Thus the host country is benefitted from the training and skills up-gradation of the foreign investor. For example in the automobile sector in India, Japan has contributed various aspects on quality improvement of the employee. Some of the other advantages of foreign investment are access to a larger market for foreign investor in the host country. Foreign investor also has other advantages of tapping the potential of a cheap and skilled labor, making effective use of raw material and other physical resources in the host country. Foreign investor also has the benefit of expansion in capacity thus generating economies of scale and optimization in costs along with gaining diversification in different product categories.

4. Write short note on: a) Strategic planning. b) Ethical convergence Ans.: Strategic planning: Strategic planning process involves allocation of resources to firms to fulfill 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. 3|Page

Course/Drive/Semester Subject code & name Student Regd No, & Name

MBA / Fall 2013 / Sem-IV MB0053 International Business Management 311234915 Debasish Pradhan

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 involves detailing 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.

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 behavior 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 Trade Agreement (NAFTA) and the European Union promotes common ethical practices across national cultures and borders to reduce institutional differences. Predictable interaction and behavior among trading partners from different countries makes trade more efficient. People from different cultural backgrounds increase their interactions and exposure to varying ethical traditions. They adopt, adjust to, and imitate new behavior and attitudes which leads to acceptance of best practices. International businesses have employees from different cultural backgrounds. The companies 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.

5. Explain in various modes of payment in international trade. Discuss the role of letter of credit in the same. Ans.: For successfully conducting international trade in todays competitive international environment, it is essential for the exporters to offer attractive sales terms and payments to importers so as to woo them for business. One of the major concerns for en exporter is to choose the appropriate payment method in order to minimize risks related to payments of trade transaction. Payment should be done after understanding the economic scenario of importers country, importer credit worthiness and to certain extent accommodating the needs of the importer. Exporter can choose any mode of payment depending on risk perception, size of deal, importer credit worthiness and economic situation in importers country. Since international trade deals with exchange of goods, there are various ways in which the payment terms (finance) will be handled. Bothe seller and trader should be careful about the method of payment as they are at different locations and transactions happen without face-to-face interaction. There are four methods of payment for the 4|Page

Course/Drive/Semester Subject code & name Student Regd No, & Name

MBA / Fall 2013 / Sem-IV MB0053 International Business Management 311234915 Debasish Pradhan

international transactions. This includes the Cash-in-advance method, Letter of Credit, Documentary collections and the Open Account Cash-in-advance: Cash-in-advance helps in removing the risks of credit by the exporter. By this method, exporter receives the payment before the transfer of goods. The options that are available with the cashin-advance method include wire transfers and credit cards. This is the least attractive method for many of the buyers as it creates cash flow problems. The buyers are concerned about the quality/quantity and delivery of the goods that are not sent if the payment is made in advance. Letters of credit: The letter of credit is the most secure instrument available for international traders. This is the commitment made by the bank that the payment will be made to the exporter if the terms and conditions are met. The terms and conditions of the payment are explained in the required documents. Documentary collections: Documentary collection is a transaction in which, the exporter's bank (remitter bank) sends the documents to the importer's bank (collecting bank). The document contains information about the payment. The funds are collected from the importer and paid to the exporter through the banks involved in the collection, in exchange for the documents. Open account: The open account transaction involves the shipping and delivery of goods in advance. The payment is due usually from 30 to 90 days. This is advantageous for the importer in cash flow and cost terms, but at the same time it is very risky for the exporters. Buyers from abroad stress on open accounts since the extension of credit from the seller to the buyer are more common in many countries. Exporters who avoid extending credit may face loss in the sale because of competitors in the market. Letter of credit: International Trade is affected by distance, laws, political instability and lack of familiarity by the transacting parties. Letter of credit assumes significance since it can be used to mitigate risk. It is a document that is issued by the bank that guarantees payment to a beneficiary. It is written by the financial institution in favor of the importer of goods to the seller. In the letter, the bank promises that it will honor the drafts drawn on it if the seller confirms to the specific conditions that are set forth in the letter of credit. The process of letter of credit works as shown under:

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Course/Drive/Semester Subject code & name Student Regd No, & Name

MBA / Fall 2013 / Sem-IV MB0053 International Business Management 311234915 Debasish Pradhan

6. Explain the various modes of entry in international business which could be used a part of strategy to enter foreign market. Ans.: Having scanned the best potential international markets which meet the corporate competitiveness criteria of the firm, it has to evaluate the most profitable way of market entry so as to sell its products and services to potential customers in these markets. There are several methods used in globalised era for international market entry, such as exporting, franchising, licensing, joint venture and wholly owned subsidiary. The entry method suitable to firm requirement shall depend on a variety of factors, such as the nature of firm product or service, the conditions for market penetration, entry and exit barriers and financial commitment required for getting into international markets. Exporting, which is widely used for the first time traders is accomplished by selling the products or services directly to a foreign firm or customer. Alternatively, firm can export through an export intermediary, such as a commissioned agent, an export management company or a trading company. International joint ventures are very effective means of entry into potential markets as it provides the firm to share domestic knowledge with the aligned firm and can use partner strengths effectively and hedge its risks. Joint ventures are good means for market entry in those markets where there are entry barriers like capital limit requirement. Licensing, another wieldy used method by firm getting started involves a contractual agreement whereby firm assign the rights to distribute or manufacture its product or service to a foreign company. Wholly owned subsidiary requires either setting up its own production or manufacturing facility or sub-contracting the manufacturing of its product to an assembly operator, such as Coca Cola which uses fobo method for bottling in india. 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: Direct export. Indirect export.

The direct exporting requires the firm/company to find a potential foreign buyer and then the firm is supposed to make all necessary arrangements for transporting the products into destined market. The firms which cannot locate the direct buyers for the product can export indirectly by using an export intermediary. Several types of export intermediaries whom the firm can use are as follows. commissioned agents. export management companies (EMCS). export trading companies (ETCS). foreign trading companies. 6|Page

Course/Drive/Semester Subject code & name Student Regd No, & Name

MBA / Fall 2013 / Sem-IV MB0053 International Business Management 311234915 Debasish Pradhan

export merchants/export agents/buying houses. piggyback exporting.

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 to use the intangible property as granted by the licensor. Licensing is very preferred way of market entry into international market in globalised era as it requires little investment on the part of the licensor. Licensing, if effectively used as an entry mode, has the potential to provide good return to the licensor, but usually it has been seen that licensee who produces and markets the product takes away returns from manufacturing and marketing activities due to vague regulatory law in developing countries. 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. Joint venture is also a preferred way of market entry as it is good tradeoff between potential risks and returns and usually joint ventures is manifested with the following common objectives for market entry in globalised era. They are: Market entry into potential market. Risk/reward sharing between parties. Technology sharing between parties. Joint product development between parties. Conforming to government regulations. Possible advantages from political connections.

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