International Business

Unit- 3

By- K.R.Ansari

Economic Cooperation
International economic cooperation is cooperation in the economic field which exists
between one country to another. This cooperation can be realized if there is a good
relationship with each other. International economic cooperation for both parties
intended to benefit, not just in the economic field, but also in other fields, such as
politics and security.Cooperation in the economic field to the form of bilateral,
multilateral, regional, and international. Below are descriptions of these forms:a.
Bilateral cooperation
Bilateral economic cooperation is the economic cooperation between the
two countries. This cooperation exists because there are good relations between the
two countries, which have the same interests. Bilateral cooperation can be realized
due to many factors, both because both have historical value and because of the many
similarities which is owned by the people. Examples of bilateral cooperation is
cooperation Indonesia and Japan.b.
Multilateral cooperation
Multilateral cooperation is a cooperation between many countries (more than
2 countries). This cooperation is intended to ensure the interests of member countries.
An example of multilateral cooperation is the ASEAN, OPEC, and APEC.c.
Regional cooperation
Regional economic cooperation is cooperation between countries in specific regions.
This cooperation can occur between two or more countries. For example, ASEAN is a
regional cooperation in Southeast Asia..
International cooperation
International economic cooperation is a form of cooperation between countries in the
economic field, without being restricted by region or other similarity. International
economic cooperation can take the form of bilateral or multilateral cooperation.
Forms of Economic Groupings:
Forms of economic groupings are diverse, involving different levels of economic
integration. Economic literature generally envisages four types of economic
groupings:
1.
Free
Trade
Area
2.
Customs
Union
3.
Common
Market
4. Economic union
The progression is from free trade area to economic union, each stage representing a
higher degree of economic integration. The elements to be integrated in various forms
can be seen from the matrix given below:
Free Trade Area (FTA)
FTA consists of a number of countries within which trade is free in the sense that
customs duties are not levied at the frontier on trade but, in practice, it is limited to
specified products with specified exceptions. Exceptions arise out of the typical
national needs of protecting specific sectors from international competition. Though
tariff barriers on intra-trade are removed, each country maintains its separate customs
barriers on trading with non-member countries. This causes serious problems in
administering the free trade arrangement. Suppose there are two countries, A and B
which are members of FTA. C is a non-member which exports garments to A and B.
the import duty on imports of garments is 20 percent in A and 30 percent in B.
Exporters in C, faced with this situation, would attempt to ship the garments to A and
once the goods are cleared through customs, reship the consignment to B, provided

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the re-routing costs are lower than the differential in customs duties. To avoid this
problem, FTA introduces the system of rules of origin, whereby only goods
originating wholly or substantially in the number countries would be eligible for free
trade within the area. The most important experiment in this field had been the
European Free Trade Area (EFTA) which, however, lost its significance when some
EFTA members joined the European Economic Community. Since 1977, there is free
trade in Europe for trade in Europe for industrial products.
Customs Union:
Like FTA, there are no internal tariff barriers on intra-union trade. But, in addition,
the members countries give up their individual tariff schedules and erect a common
external tariff barrier for trade with non-union members.
A customs union is like a single nation, not only in internal trade, but also in
presenting a common front to the rest of the world with its common external tariff.
A customs union is more difficult to achieve than a free trade area because each
member must yield its sovereignty in commercial policy matters, not just with
members nations but with the whole world.
Its advantages are: (i) stronger economic integration and (ii) elimination of
administrative problems of a free trade area.
Common Market:
Common market is the succeeding stage of economic integration. In addition to the
characteristics of a customs union, a common market also allows free movement of
labor and capital within the member countries. A common market goes beyond a
customs union because it seeks to standardize all Government regulations affecting
trade. The European Economic Community is the most successful experiment, so far,
as a common market. There are other examples of common market:
(i) Central American Common Market consisting of Costa Rica, EI Salvador,
Guatemala,
Honduras
and
Nicaragua.
(ii) Andean Common Market comprising Peru, Venezuela, Colombia, Ecuador and
Bolivia
Ecconomic Union
It involves the free flow of products and factors of production between members, the
adoption of a common external trade policy, and in addition, a common currency,
harmonization of the member countries tax rates, and a common monetary and fiscal
policy
This level of integration involves sacrificing a significant amount of national
sovereignty
Examples include
the European Union (EU)
Regional
Economic
Co-operations
in
Europe
Europe has two trade blocs
the European Union with 28 members
the European Free Trade Association with 4 members
The European Free Trade Association (EFTA) is an intergovernmental organisation
set up for the promotion of free trade and economic integration to the benefit of its
four Member States.
Evolution of the European Union
The European Union (EU) is the result of

International Business

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the devastation of two world wars on Western Europe and the desire
for a lasting peace
the desire by the European nations to hold their own on the worlds
political and economic stage
The forerunner of the EU was the European Coal and Steel Community
(formed in 1951)
The Treaty of Rome established the European Economic Community in 1957
The name was changed to the EU in 1994
Political Structure of the European Union
The four main institutions of the EU are
1. the European Commission - proposes EU legislation, implements it, and
monitors compliance
2. the European Council - the ultimate controlling authority within the EU
3. the European Parliament - debates legislation proposed by the commission
and forwarded to it by the council
4. the Court of Justice - the supreme appeals court for EU law
European Free Trade Association (EFTA)
The European Free Trade Association (EFTA) is a free trade organisation between
four European countries that operates in parallel with and is linked to
the European Union (EU). The EFTA was established on 3 May 1960 as a trade blocalternative for European states who were either unable or unwilling to join the thenEuropean Economic Community (EEC) which has now become the EU. The
Stockholm Convention, establishing the EFTA, was signed on 4 January 1960 in the
Swedish capital by seven countries (known as the "outer seven").
Today's EFTA members are Iceland, Liechtenstein and Norway and Switzerland,
of which the latter two were founding members.
South Asian Free Trade Area or SAFTA
The South Asian Free Trade Area or SAFTA is an agreement reached on 6 January
2004 at the 12th SAARC summit in Islamabad, Pakistan. It created a free trade area of
1.6 billion people in Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri
Lanka (as of 2011, the combined population is 1.8 billion people). The seven foreign
ministers of the region signed a framework agreement on SAFTA to reduce customs
duties of all traded goods to zero by the year 2016.
South Asian Association for Regional Cooperation (SAARC
The South Asian Association for Regional Cooperation (SAARC) is an organisation
of South Asian nations, which was established on 8 December 1985 when the
government
of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan,
and Sri
Lanka formally adopted its charter providing for the promotion of economic and
social progress, cultural development within the South Asia region and also for
friendship and co-operation with other developing countries. It is dedicated to
economic, technological, social, and cultural development emphasising collective
self-reliance.
Its
seven
founding
members
are Sri
Lanka, Bhutan, India, Maldives, Nepal, Pakistan, and Bangladesh. Afghanistan joined
the organisation in 2007. Meetings of heads of state are usually scheduled annually;

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meetings of foreign secretaries, twice annually. It is headquartered in Kathmandu,

Nepal.
Association of Southeast Asian Nations (ASEAN)
The Association of Southeast Asian Nations (ASEAN) is a geo-political and
economic organisation of ten countries located in Southeast Asia, which was formed
on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and
Thailand. Since then, membership has expanded to include Brunei, Burma
(Myanmar), Cambodia, Laos, and Vietnam. Its aims include accelerating economic
growth, social progress, cultural development among its members, protection of
regional peace and stability, and opportunities for member countries to discuss
differences peacefully.
North American Free Trade Agreement (NAFTA)
The North American Free Trade Agreement (NAFTA)is an agreement signed
by Canada, Mexico, and the United States, creating a trilateral trade bloc in North
America. The agreement came into force on January 1, 1994. It superseded
the CanadaUnited States Free Trade Agreement between the U.S. and Canada.
The goal of NAFTA was to eliminate barriers to trade and investment between the
U.S., Canada and Mexico. The implementation of NAFTA on January 1, 1994 brought
the immediate elimination of tariffs on more than one-half of Mexico's exports to the
U.S. and more than one-third of U.S. exports to Mexico. Within 10 years of the
implementation of the agreement, all U.S.-Mexico tariffs would be eliminated except
for some U.S. agricultural exports to Mexico that were to be phased out within 15
years. Most U.S.-Canada trade was already duty free. NAFTA also seeks to eliminate
non-tariff trade barriers and to protect the intellectual property right of the products.

International Financial Environment

A financial environment is a part of an economy with the major players being firms,
investors, and markets. Essentially, this sector can represent a large part of a welldeveloped economy as individuals who retain private property have the ability to
grow their capital. Firms are any business that offers goods or services to consumers.
Investors are individuals or businesses that place capital into businesses for financial
returns. Markets represent the financial environment that makes this all possible.
An international financial environment represents the conditions for activity in the
economy or in the financial markets around the world. It can be influenced by
something major, such as the credit worthiness of one country's debt. Governments,
corporations, and other investors around the world participate in purchasing the debt
of other nations as profit opportunities arise. A downgrade of a country's debt by a

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rating's agency could damage the value of that country's debt and suggest that a
default might be imminent. These conditions have the potential to trigger a sell-off,
which is when there are more sellers than buyers of risky debt in the markets.
Just as an international financial environment can be influenced in a negative way, it
can also be impacted in a positive fashion. An attractive international financial
environment is one where investment and economic growth are ripe or already
happening. When an economy is growing, it leads to greater infrastructure
development and often a greater number of available jobs. Subsequently, international
investors might recognize an opportunity to allocate capital to these growth initiatives
in an attempt to profit, while corporations could develop partnerships or create new
locations in the overseas markets. All of this activity is likely to create a good
international financial environment.
International Financial System
Sometimes referred to as the global financial system, this is the collective name for
the various official and legal arrangements that govern international financial flows in
the form of loan investment, payments for goods and services, interest and profit
remittances. The main elements are the surveillance and monitoring of economic and
financial stability, and provision of multilateral finance to countries with balance of
payments difficulties. The organization at the centre of the system is the International
Monetary Fund (IMF), which has the mandate to ensure its effective running.
The international financial system (IFS) constitutes the full range of interest and
returnbearing assets, bank and nonbank financial institutions, financial markets that
trade and determine the prices of these assets, and the nonmarket activities (e.g.,
private equity transactions, private equity/hedge fund joint ventures, leverage buyouts
whether bank financed or not, etc.) through which the exchange of financial assets can
take place. The IFS lies at the heart of the global credit creation and allocation
process.
International Financial Institutions
The purpose and working of International Financial institutions is to promote
economic and social progress in poor or developing countries by helping raise
standards of living and productivity to the point at which development becomes selfsustaining.
Toward this common objective, these institutions have have three interrelated
functions and these are to lend funds, to provide advice and to serve as a catalyst in
order to stimulate investments by others. In the process, financial resources are
channelled from developed countries to the developing world with the hope that
developing countries, through this assistance, will progress to a level that will permit
them, in turn, to contribute to the development process of other less fortunate
countries.
ASIAN DEVELOPMENT BANK (ADB)
The Asian Development Bank is a multilateral developmental finance institution
founded in 1966 by 31 member governments to promote social and economic
progress of Asian and the Pacific region. The Bank gives special attention to the needs

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of smaller or less developed countries and gives priority to regional/non-regional

national programmes.
The multilateral investment guarantee agency (MIGA)
The MIGA was established in 1988 to encourage equity investment and other direct
investment flows to developing countries by offering investors a variety of different
services. It offers guarantees against noncommercial risks; advises developing
member governments on the design and implementation of policies, programmes and
procedures related to foreign investments; and sponsors a dialogue between the
international business community and host governments on investment issues.
Types of Foreign Investment
There are four different types of foreign investment. These are Foreign Direct
Investment (FDI), Foreign Portfolio Investment (FPI), official flows, and
commercial loans. These types of foreign investment differ primarily in who gives
the loan and how engaged the investor is with the receiver of the loan.
FDIs occur when a company invests in a business that is located in another country.
In order for a private foreign investment to be considered an FDI, the company that is
investing must have no less than 10% of the shares belonging to the foreign company.
In these international business relationships, the company that is investing is known
as the parent company, whereas the foreign company is known as a subsidiary of the
parent company. Multinational corporations, which spread among several nations,
often begin with FDIs.
FPIs also occur when foreign investments are made by a company. They may also be
made by an individual who has mutual funds. Whereas an FDI allows the investing
company to own shares of the subsidiary company, an FPI may be more temporary.
Investment instruments, such as stocks and bonds, are normally traded in FPIs. Stocks
and bonds are examples of investments that are easily traded. A company that has
stocks and bonds from a foreign company does not necessarily have a share in that
company in which it is investing.
The foreign investment known as official flow occurs between nations instead of
between companies. In cases of official flow, a more developed or economically
prosperous nation will invest money in a nation that is less developed. A recipient
nation of an official flow investment will typically receive financial support, as well
as higher grade technology and aid in government and economic management.
A commercial loan is a type of foreign investment that normally occurs in the form
of a bank loan. This kind of investment may occur between nations or between
businesses that are in different countries. While a commercial loan may be made by
an individual, it would normally occur between a larger organizations.
Commercial loans were the most common kind of foreign investment until the 1980s,
especially in cases in which investments were going to the companies and
governments of economically developing countries. Since then, FPIs and FDIs have
been much more common. The term globalization is normally used to describe the
phenomenon of an increased use of FPIs and FDIs. Whereas commercial loans are

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issued by banks and backed by a government, FPIs and FDIs are private investments.
Foreign Investment in India
Foreign Direct Investment (FDI) is permited as under the following forms of
investments

Through financial collaborations.

Through joint ventures and technical collaborations.

Through capital markets via Euro issues.

Through private placements or preferential allotments.

Forbidden Territories
FDI is not permitted in the following industrial sectors:

Arms and ammunition.

Atomic Energy.

Railway Transport.

Coal and lignite.

Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper,

zinc

Foreign Investment through GDRs (Euro Issues)

Indian companies are allowed to raise equity capital in the international
market through the issue of Global Depository Receipt (GDRs). GDR
investments are treated as FDI and are designated in dollars and are not
subject to any ceilings on investment. An applicant company seeking
Government's approval in this regard should have consistent track record for
good performance (financial or otherwise) for a minimum period of 3 years.
This condition would be relaxed for infrastructure projects such as power
generation, telecommunication, petroleum exploration and refining, ports,
airports and roads.

1. Clearance from FIPB There is no restriction on the number of Euro-issue

to be floated by a company or agroup of companies in the financial year. A
company engaged in the manufacture of items covered under Annex-III of the
New Industrial Policy whose direct foreign investment after a proposed Euro
issue is likely to exceed 51% or which is implementing a project not contained
in Annex-III, would need to obtain prior FIPB clearance before seeking final
approval from Ministry of Finance.

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2. Use of GDRs The proceeds of the GDRs can be used for financing capital
goods imports, capital expenditure including domestic purchase/installation of
plant, equipment and building and investment in software development,
prepayment or scheduled repayment of earlier external borrowings, and equity
investment in JV/WOSs in India.

3. Restrictions However, investment in stock markets and real estate will not
be permitted. Companies may retain the proceeds abroad or may remit funds
into India in anticiption of the use of funds for approved end uses. Any
investment from a foreign firm into India requires the prior approval of the
Government of India.

Foreign direct investments in India are approved through two routes

1. Automatic approval by RBI The Reserve Bank of India accords

automatic approval within a period of two weeks (subject to compliance of
norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74%
and 100% is allowed depending on the category of industries and the sectoral
caps applicable. The lists are comprehensive and cover most industries of
interest to foreign companies. Investments in high-priority industries or for
trading companies primarily engaged in exporting are given almost automatic
approval by the RBI.

2. The FIPB Route Processing of non-automatic approval cases FIPB

stands for Foreign Investment Promotion Board which approves all other cases
where the parameters of automatic approval are not met. Normal processing
time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of
proposals, and rejections are few. It is not necessary for foreign investors to
have a local partner, even when the foreign investor wishes to hold less than
the entire equity of the company. The portion of the equity not proposed to be
held by the foreign investor can be offered to the public