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INTERNATIONAL BUSINESS ENVIRONMENT

Assignment - A
Question 1: The worlds poorest countries are at a competitive
disadvantage in every sector of their economies. They have little to
export. They have no capital; their land is of poor quality; they often have
too many people given available work opportunities; and they are poorly
educated. Free trade is not in interest of these countries. Discuss.
Answer: In the onset of globalization, the third world countries were the ones who
were at a disadvantage. Their local products cannot compete with that of imported
ones which are cheaper and durable. There is also the mentality of some people
who likes to buy imported brands rather than support the local ones. Due to this,
many local manufacturers and companies either go bankrupt or shifted to another
line of business to which competition is not that fierce.
In relation to factories closing or moving to another industry, the workforce is
similarly affected. Peoples jobs are ended as the factories close and because of
the limited number of companies left, they will find it hard to look for other jobs.
The unemployment rate of the country will continue to rise if this was unchecked
by their respective local and national government.
Developing countries has yet to be considered as a market leader in a particular
form of products. Their infrastructures, agriculture and finances have yet to be
expanded. Theyre competitiveness in the international market cannot be
established yet as their products are somewhat of lesser quality.
Education is also another item to which developing countries has to contend with.
Due to limited finances and culture, most of the children go to school and then
eventually drop out after graduating from Elementary while some dont go to
school at all. Their family may think that since there is limited jobs available and
that education is a above their budget, the children are better off helping their
family with house chores and tilling farms. This will surely put a nation at an
disadvantage because it cannot progress with that kind of mentality.
To sum it all up, developing countries are indeed in a disadvantage, but they can
do something about it if they really want to be competitive. It will need however,
the cooperation and determination of the whole nation to make it work.

Question 2: How do you think the successful conclusion of the multilateral


agreement to liberalize regulations governing FDI will benefit the world
economy.
Answer: Foreign direct investment (FDI) plays an extraordinary and growing role
in global business. It can provide a firm with new markets and marketing
channels, cheaper production facilities, access to new technology, products, skills
and financing. For a host country or the foreign firm which receives the
investment, it can provide a source of new technologies, capital, processes,
products, organizational technologies and management skills, and as such can
provide a strong impetus to economic development. Foreign direct investment,
in its classic definition, is defined as a company from one country making a
physical investment into building a factory in another country. The direct
investment in buildings, machinery and equipment is in contrast with making a
portfolio investment, which is considered an indirect investment. In recent years,
given rapid growth and change in global investment patterns, the definition has
been broadened to include the acquisition of a lasting management interest in a
company or enterprise outside the investing firms home country.
In the conclusion of the liberation of regulations, In many cases, large companies
still play a dominant role in investment activities in small, high tech oriented
companies. However, unlike in the past, these larger companies are not
necessarily acquiring smaller companies outright. There are several reasons for
this, but the most important one is most likely the risk associated with such high
tech ventures. In the case of mature industries, the products are well defined.
The manufacturer usually wants to get closer to its foreign market or wants to
circumvent some trade barrier by making a direct foreign investment. The major
risk here is that you do not sell enough of the product that you manufactured.
However, you have added additional capacity and in the case of multinational
corporations this capacity can be used in a variety of ways.
High tech ventures tend to have longer incubation periods. That is, the product
tends to require significant development time. In the case of software and other
intellectual property type products, the product is constantly changing even before
it hits the marketplace. This makes the investment decision more complicated.
When you invest in fixtures and machinery, you know what the real and book
value of your investment will be. When you invest in a high tech venture, there is
always an element of uncertainty. Unfortunately, the recent spate of dot.com
failures is quite illustrative of this point.
Therefore, the expanded role of technology and intellectual property has changed
the foreign direct investment playing field. Companies are still motivated to make
foreign investments, but because of the vagaries of technology investments, they
are now finding new vehicles to accomplish their goals.

Question 3: Discuss the National Competitive Advantage Theory of


International Trade. How this theory is different from other theories.
Answer: In the early 1990s, Michael Porter, following the comprehensive study of
100 industries in 10 nations, introduced a model that allows performing analysis
on why some nations are more competitive than others, and why some industries
within nations are more competitive than others. He elaborated his findings in his
book The Competitive Advantage of Nations. The developed model, targeting the
main factors of national advantage, has become known as national diamond, or
Porter Diamond theory.
Based on the theory, competitive advantage of the company or the entire nation is
based on combination and interaction of the four main attributes:
-

Factor Conditions
Demand Conditions
Related and Support Industries
Firm Strategy, Structure and Rivalry

In addition to these four main attributes, government policies and chance can
impact any of the four reviewed diamond dimensions. Government policy can
affect demand through product standards, influence competitiveness through
business regulations and antitrust laws, and impact the availability of highly
educated workers and advanced transportation infrastructure
The main difference of National Competitive Advantage Theory versus other
suppositions is that it tackles a combination of factor, demand conditions related
to supporting industries and firm strategies, structures and rivalries. In other
theories, they try to introduce a country which is self sufficient which in this case
cannot be since; we need to have good relations with neighboring countries in
order for ours to develop. Some theories limits the development of countries by
advocating appreciation of local products which to some degree is ok but not all
the products we need are readily available locally.
Question 4: On what basis countries as classified as low income, middle
income and high income countries? Do you think economic status of a
country will influence its global business.
Answer: Generally, countries are classified based on their respective per Capita
Income. According to the World Bank, Incomes below $935 fall under low income
economies. $936 to $3,705 falls under lower middle income economies. $3706 to
$11,455 of per capita income is classified as upper middle income economies and
above $11,455 of per capita GNI qualifies as a high income economy. The World
Bank, further divides high income economies into two - OECD economies and non-

OECD economies. OECD is the Organisation for Economic Cooperation and


development.
Yes, the economic status of the country has a great deal of influence towards
global business. In relation to low income countries, their finances are limited
thereby they cannot produce as much goods with the same amount and quality as
that of high income countries. Further, their economic development is relatively
longer than high income as finances are siphoned to more important aspects of
governance.
Most low income countries rely on foreign credits and assistance for some of their
national programs. These loans and financial assistance comes with a hefty
interest or trade off. Since they are still developing, they continue to borrow
money from institution like the World Bank and other high income countries. In
return, their annual expenditures grow and when the government has earned
money thru taxes, a large part of this will be diverted to payment of debt, which
lessens the budget of the country and its intended recipients.
It is different for high income countries as they can come up with different
strategies to improve their stature. Given the amount of their finances together
with the resources of their partner countries, they have a free hand on how to
further improve their grasp in the world market. In terms of reaching many
people, the high income countries can use their cash cows to reach a lot more
people via different media available. This is different from that of low income
countries as they can only advertise or market their products locally. They can try
to export some products but is limited only to countries of close proximity.
Question 5: Explain different types of Economic System. What are the
major challenges faced by the command economies while transiting to a
market economy?
Answer: There are four different types of Economic System which have evolved
as different societies have placed different emphasis on different goals and
priorities in their efforts to answer the 3 economic questions.

Traditional Economy this economy is based on custom and rituals to make its
choices. The term may also be used for any economy that falls outside of popular
notions of market and command economies. The term tends to be used by
members
of
industrialized
societies
to
describe
societies
deemed
"underdeveloped," and often appears alongside such controversial and disparaging
terms as "primitive."
Market Economy Individual or Consumer based Economic system that relies on
the consumption choices of consumers. It is an economy that relies chiefly on
market forces to allocate goods and resources and to determine prices. The

national economy of a country that relies on market forces to determine levels of


production, consumption, investment, and savings without government
intervention.
Command Economy is a centrally controlled economy where the government
makes all the decisions. It is an economy where supply and price are regulated by
the government rather than market forces. Government planners decide which
goods and services are produced and how they are distributed. The former Soviet
Union was an example of a command economy. Also called a centrally planned
economy.
Mixed Economy is an economic system in which both the private enterprise and
a degree of state monopoly (usually in public services, defense, infrastructure,
and basic
industries)
coexist.
All
modern economies are
mixed
where means of production are shared between the private and public sectors.
Also called dual economy.

Assignment - B

Question 1: Explain the following terms


i) Tariff ii) Subsidies and
Countervailing Duties iii) Quotas iv) Voluntary Export Restraint v) Local
Content Requirement. Why do advanced countries insist on elimination of
subsidies?
Answer:
Tariff - Tariffs are usually associated with protectionism, the economic policy of
restraining trade between nations. For political reasons, tariffs are usually imposed
on imported goods, although they may also be imposed on exported goods.
In the past, tariffs formed a much larger part of government revenue than they do
today.
When shipments of goods arrive at a border crossing or port, customs officers
inspect the contents and charge a tax according to the tariff formula. Since the
goods cannot continue on their way until the duty is paid, it is the easiest duty to
collect, and the cost of collection is small. Traders seeking to evade tariffs are
known as smugglers.
Subsidies and Countervailing duties - The WTO Agreement on Subsidies and
Countervailing Measures disciplines the use of subsidies, and it regulates the
actions countries can take to counter the effects of subsidies. Under the
agreement, a country can use the WTOs dispute-settlement procedure to seek the
withdrawal of the subsidy or the removal of its adverse effects. Or the country can
launch its own investigation and ultimately charge extra duty (countervailing
duty) on subsidized imports that are found to be hurting domestic producers.
Subsidization occurs when a government provides its producer(s) with financial
contributions that give the producer(s) an advantage in the market place. This
support may, in turn, negatively affect other countries industries and trade. The
objective of the Agreement is to curb the use of such government assistance.
Quotas is the number or percentage that is required from, or is due or belongs
to, a particular district or specifications. This can also be seen as the minimum
and maximum limit of items are needed/shipped that is specified by a customer.
Voluntary Export Restraint is a government imposed limit on the quantity of
goods that can be exported out of a country during a specified period of time.
Typically VERs arises when the import-competing industries seek protection from
a surge of imports from particular exporting countries. VERs are then offered by
the exporter to appease the importing country and to deter the other party from
imposing even more explicit (and less flexible) trade barriers. Also, VERs are

typically implemented on a bilateral basis, that is, on exports from one exporter to
one importing country.
Local Content Requirement is a popular government policy in developing
countries to regulate foreign direct investment. They have been empirically
observed to protect vertically integrated domestic industries and induce inward
foreign direct investment in intermediate goods production.
Abolishing subsidies in terms of economics would help cut budget deficits of
leading countries while giving parallel and connected boost to Third World
countries which could come up with different products of their own.
Question 2: Explain the achievement of EU in integrating its member
countries. How formation of EU is beneficial for India.
Answer: An economic and political union established in 1993 after the ratification
of the Maastricht Treaty by members of the European Community and since
expanded to include numerous Central and Eastern European nations. The
establishment of the European Union expanded the political scope of the European
Economic Community, especially in the area of foreign and security policy, and
provided for the creation of a central European bank and the adoption of a
common currency, the euro. The current formalized incarnation of the European
Union was created in 1993 with 12 initial members. Since then, many additional
countries have since joined. The EU has become one of the largest producers in
the world, in terms of GDP, and the euro has maintained a competitive value
against the U.S. dollar.

The formation of EU has been advantageous to India in terms that they now have
opportunities for improving trade and investments that is now prevalent among
the EU member countries and India. The EU continues to become Indias most
important partner for trade and the development of cooperation among its
member nations. Integrating Indias economy with the global markets was one of
the key strategies when they partnered up. This enhanced Indias export
performance and improved the climate for investments globally.
The partnership brought additional jobs to India which is now considered to be one
of the prime target for outsourcing jobs. Information technology in the Indian
market has also bloomed to be an important factor in the governments money
making industries. The collaboration between the EU and India has improved the
reputation of the country as potential future market and importance in EUs overall
external relations.

Question 3: How is WTO different from GATT?. What are the main issued
in the Doha Development Agenda and what are the implications for the
developing countries?
Answer: The World Trade Organization is not a simple extension of GATT; on the
contrary, it completely replaces its predecessor and has a very different character.
Among the principal differences are the following:
- GATT was a set of rules, a multilateral agreement, with no institutional
foundation, only a small associated secretariat which had its origins in the attempt
to establish an International Trade Organization in the 1940s. The WTO is a
permanent institution with its own secretariat.
- GATT was applied on a "provisional basis" even if, after more than forty years,
governments chose to treat it as a permanent commitment. The WTO
commitments are full and permanent.
- The GATT rules applied to trade in merchandise goods. In addition to goods, the
WTO covers trade in services and trade-related aspects of intellectual property.
- While GATT was a multilateral instrument, by the 1980s many new agreements
had been added in a plurilateral, and therefore selective, manner The agreements
which constitute the WTO are almost all multilateral and, thus, involve
commitments for the entire membership.
- The WTO dispute settlement system is faster, more automatic, and thus much
less susceptible to blockages, than the old GATT system. The implementation of
WTO dispute findings will also be more easily assured.
- GATT lives on as "GATT 1994", the amended and up-dated version of GATT
1947, which is an integral part of the WTO Agreement and which continues to
provide the key disciplines affecting international trade in goods.
Agriculture has become the lynchpin of the agenda for both developing and
developed countries. Three other issues have been important. The first, now
resolved, pertained to compulsory licensing of medicines and patent protection. A
second deals with a review of provisions giving special and differential treatment
to developing countries; a third addresses problems that developing countries are
having in implementing current trade obligations.
A major topic at the Doha ministerial regarded the WTO Agreement on TradeRelated Aspects of Intellectual Property Rights (TRIPS). The issue involves the
balance of interests between the pharmaceutical companies in developed countries
that held patents on medicines and the public health needs in developing
countries. Before the Doha meeting, the United States claimed that the current

language in TRIPS was flexible enough to address health emergencies, but other
countries insisted on new language.
Developing countries claim that they have had problems with the implementation
of the agreements reached in the earlier Uruguay Round because of limited
capacity or lack of technical assistance. They also claim that they have not
realized certain benefits that they expected from the Round, such as increased
access for their textiles and apparel in developed-country markets. They seek a
clarification of language relating to their interests in existing agreements.

CASE STUDY
Question 1: What are the key mistakes Kim Woo-Choong made in
formulating and implementing Daewoos strategy and how did the
economic crisis in Korea and in rest of Asia affect that strategy?
Answer: Kim Woo-Choong decided to expand his businesses further despite the
fact that there were tell tale signs that he should concentrate more on core
competencies of his company. He aggressively asked for loans from different
organizations that are willing to grant it. The money from the loans was siphoned
off to fuel his vast expansions. Despite losing money, he still went on and
expanded his business.
In the onset of the Korean financial crisis, their president, Kim Dae Jung, ordered
the banks to stop the lending of money to Daewoo and other chaebol until they
come up with business plans to focus on their main line of business or sell those
non performing businesses. Daewoo did buckle under pressure and announced
that they will comply with the governments restructuring requirements. They
decided to do this to avert any radical moves from the government.
Due to continues economic problems, the company announced that it can no
longer sustain its business and is about to go bankrupt unless there will financial
backers. The government responded by freezing Daewoos loans and then the
company asked its foreign debtors to a temporary stop on interest payments due
to lack of finances.
Question 2: How would you describe Koreas economic system before its
economy was affected by the Asian Financial crisis? What was the role of
IMF in reforming the economic system in Korea?
Answer: The Korean economy was based on a system adopted from the
Japanese. They believed that export growth was the key towards the countrys
future. Their way of thinking was that companies should export whatever
item/products into the international market. This move was supported by different
incentives being offered by the Korean government to any organization or
company exporting their wares into the global market.
Incentives include the following: access to low cost money, lower taxes,
exemption from tariffs, tax holidays, reduced rates for public utilities and
monopoly rights to new export markets. Their chaebol was considered to be
conglomerates that enjoy the support of the government either thru funding or
legislation. In return they were loyal to the government which carries the problem
of corruption.

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The IMFs role was to help stabilize the Korean economy by initiating reforms on
their financial undertakings. They included several demands before the
organization will help the Korean governments financial woes. The demands were
as follows: raise interest rates to support its currency, reduce budget deficits,
reform its banks, restructure the chaebols, improve financial disclosure, devalue
their currency, promote export and restrict imports.
When the Korean government agreed to the terms, the IMF released funds to aid
Korea pay off its debt and to keep its banks from going bankrupt. The IMF also
suggested to Korean banks to open themselves to foreign investments in the
hopes that Korean banks will learn how to make better loans.

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Assignment - C
1. Which one of the following is not an assumption of the Ricardo Model :
i. Constant returns to scale
ii. Factors of production can be transferred easily one sector to another
iii. There is perfect competition in the market
iv. Technological innovation is a unique feature of the market structure
2. Which of the following is not a form of Non Tariff Barrier
i. Subsidies
ii. Local Content Requirement
iii. Ad valorem Duties
iv. Technical Standards
3. For
i.
ii.
iii.
iv.

a US trader a direct quote will be :


US$ 1 = 56.7 Yen
GBP 1 = 34.5 Yen
GBP 1 = 35.6 Euro
None of the above

4. Which of the following is an example of depreciation of Indian Rupee


i. Now US$ 1 = 45 INR after 3 months US$ 1 = 50 INR
ii. Now US$ 1 = 50 INR after 3 months US$ 1 = 45 INR
iii. Both i and ii above
iv. None of the above
5. A currency is said to be at a premium when :
i. Spot rate is higher then the forward rate
ii. Forward rate is higher then the spot rate
iii. Forward rate is equal to the spot rate
iv. None of the above
6. Which of the following statement describes the Heckscher-Ohlin Theory
i. Countries should export goods that are made of factors of production that
are available in abundance in the economy
ii. Countries should produce and export those goods in which they have absolute
advantage
iii. Countries should produce and export those goods in which they have comparative
advantage
iv. Increase in the endowment of one of the factors will reduce the production of goods
that intensively use the other factor
7. If US is capital rich and innovation increases the productivity of capital, then labour
intensive industries in US will get hurt is
i. Stolper-Samuelson Theorem
ii. Leontief Paradox
iii. Rybczynski Theorem
iv. Heckscher-Ohlin Theory
8. Which of the following is not part of Current Account transactions of a country?
i. Merchandise trade
ii. Unilateral Transfers
iii. Receipts from FDI abroad
iv. Change in forex reserve of a country

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9. In an economy which out of the following is not the reasons for internal debt i.e excess
of government expenses over revenue, are :
i. Poorly managed tax system
ii. Huge expenses on defense and welfare program
iii. State owned enterprises have huge losses
iv. Impressive economic growth

10. Which of the following is not an underlying principle of GATT?


i. Trade concessions by member countries will be reciprocated
ii. Countries should grant preferential treatment to other member countries
iii. Trade dispute between member countries to be settled by dispute
settlement mechanism of GATT
iv. Policies governing external trade should be transparent
11. Which of the following is not an objective of NAFTA:
i. Access to financial services
ii. To investigate environment and labour abuses
iii. No change in tariff
iv. Protection for investment
12. Which of the following is not a type of regional economic integration?
i. Free Trade Area
ii. Customs Union
iii. Common Market
iv. GATT
13. EU is an example of which type of regional economic integration?
i. Economic Integration
ii. Customs Union
iii. Free Trade Agreement
iv. Preferential Trade Agreement
14. Which of the following is an example of regional trade agreement among Asian
Countries?
i. SAPTA
ii. CARICOM
iii. EEC
iv. CACM
15. Which of the following is not founder member country of ASEAN?
i. Cambodia
ii. Singapore
iii. India
iv. Vietnam
16. GATT was formed in which year and by how many countries?
i. 1920, 15 countries
ii. 1947, 23 countries
iii. 1947, 15 countries
iv. 1935, 23 countries
17. Which of the following is not an example of Quantitative Restriction on trade?
i. Quotas
ii. Voluntary Export Restraint
iii. Embargo
iv. Subsidies

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18. India is an example of which type of Economic System


i. Mixed Economy
ii. Command Economy
iii. Market Economy
iv. Centrally Planned Economy

19. In
i.
ii.
iii.
iv.

a command economy or centrally planned economy


Government owns and controls all resources
Society owns and controls all resources
Community owns and controls all resources
Private entities owns and controls all resources

20. Which of the following economic indicator is used to rank countries in terms of their
individual wealth by World Bank?
i. GDP per capita
ii. GNI per capita
iii. PPP
iv. GNI
21. Dumping which is a type of non tariff barriers means
i. Selling products at less than fair value
ii. Selling goods that are mass produced in an economy
iii. Selling goods utilizing old technology
iv. Selling goods of inferior quality
22. Which of the following pair is wrongly matched?
i. Theory of Absolute Advantage Adam Smith
ii. Theory of Comparative Advantage David Ricardo
iii. Heckscher-Ohlin Theory Wassily Leontif
iv. Product Life Cycle Theory Raymond Vernon
23. According to Porter, which of the following factors will not help in determining the
Global Competitive Advantage of the company?
i. Monopoly market conditions i.e. Absence of Rivals
ii. Firm Strategy
iii. Presence of related and supporting industry
iv. Factor conditions
24. Observation that US exports were less capital intensive the US imports which is the
contradiction to the HO model is known as
i. Leontif Paradox
ii. Stopler-Samuelson Theorem
iii. Rybczynski Theorem
iv. New Product Life Cycle Theorem
25. In which type of trade agreement no duties are charged on imports from member
countries
i. Preferential Trade Agreement
ii. Free Trade Agreement
iii. Custom Union
iv. None of the above
26. GATT stands for
i. General Agreement on Trade and Tariffs
ii. General Agreement on Tariffs and Trade
iii. General Arrangement on Tariffs and Trade
iv. General Arrangement on Trade and Tariffs

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27. Which of the following was not an achievement of the Uruguay Round of negotiations?
i. Agreement on services
ii. Protection of Intellectual property rights
iii. 10 year phase out of MFA
iv. Agreement on Trade in Agriculture

28. Which of the following countries is not a member of ASEAN?


i. Thailand
ii. China
iii. Vietnam
iv. Singapore
29. Glasnost and Perestroika were introduced by which Soviet Leader?
i. Mikhail Gorbachev
ii. Leonid Brezhnev
iii. Yuri Andropov
iv. Konstantin Chernenko
30. Which of the following country was first to disintegrate from Soviet Republic?
i. Ukraine
ii. Lithuania
iii. Turkmenistan
iv. Tajikistan
31. Which if the following country was not the member of the European Coal and Steel
Community (ECSC)?
i. Belgium
ii. France
iii. Spain
iv. Germany

32. Neo-mercantilist theory is different from the Mercantilist theory as neo-mercantilist


theory proposes that
i. A country should have favourable balance of trade
ii. Countries should trade with each other for social and political objectives
iii. Country should promote import and restrict export
iv. Country should export those products which they can produce more
efficiently
33. WTO was formed during which round of negotiations ?
i. Uruguay Round
ii. Doha Round
iii. Singapore Round
iv. Tokyo Round
34. Which of the following is an example of cross exchange rate?
i. USD 1 = 50.6 Euro
ii. USD 1 = 45.7 GBP
iii. Yen 1 = 34.5 Euro
iv. USD 1 = 45.9 INR
35. How inflation and Exchange rate are related to each other?
i. Higher inflation leads to currency devaluations
ii. Higher inflation leads to currency appreciation
iii. High inflation leads to currency stability

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iv. There is no relation between inflation and exchange rate


36. External Debt is measured as
i. Total External Debt of a country
ii. Debt as percentage of GDP
iii. Total of Fiscal deficit and External borrowings
iv. Both i and ii above

37. What does transition to market economy means?


i. Liberalizing economic activity
ii. Control of economy by government
iii. Imposing trade restrictions
iv. All of the above
38. Which of the following countries is not a member of MERCOSUR?
i. Brazil
ii. Argentina
iii. Paraguay
iv. Mexico
39. What is a convertible currency?
i. Currency that can be freely traded with other currencies
ii. Currency that can be traded only with hard currencies
iii. Currencies of the Asian Countries
iv. Currencies of the developed countries
40. Currency Speculation is done to
i. Cover risk and earn profit
ii. Cover risk
iii. Maintain foreign currency account to earn interest
iv. None of the above

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