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MB0053 – International Business Management - 4 Credits Assignment Set-

1 (60 Marks)

Q.1 What is globalization? What are its benefits? How does globalization help in
international business? Give some instances?

Globalization (or globalisation) describes the process by which regional economies, societies,
and cultures have become integrated through a global network of political ideas through
communication, transportation, and trade. The term is most closely associated with the term
economic globalization: the integration of national economies into the international economy
through trade, foreign direct investment, capital flows, migration, the spread of technology, and
military presence.[1] However, globalization is usually recognized as being driven by a
combination of economic, technological, sociocultural, political, and biological factors.[2] The
term can also refer to the transnational circulation of ideas, languages, or popular culture through
acculturation. An aspect of the world which has gone through the process can be said to be

Against this view, an alternative approach stresses how globalization has actually decreased
inter-cultural contacts while increasing the possibility of international and intra-national conflict.

Globalization has various aspects which affect the world in several different ways

• Industrial - emergence of worldwide production markets and broader access to a range of

foreign products for consumers and companies. Particularly movement of material and
goods between and within national boundaries. International trade in manufactured
goods increased more than 100 times (from $95 billion to $12 trillion) in the 50 years
since 1955.China's trade with Africa rose sevenfold during 2000-07 alone.
• Financial - emergence of worldwide financial markets and better access to external
financing for borrowers. By the early part of the 21st century more than $1.5 trillion in
national currencies were traded daily to support the expanded levels of trade and
• Economic - realization of a global common market, based on the freedom of exchange of
goods and capital
• Job Market- competition in a global job market. In the past, the economic fate of workers
was tied to the fate of national economies. With the advent of the information age and
improvements in communication, this is no longer the case. Because workers compete in
a global market, wages are less dependent on the success or failure of individual
economies. This has had a major effect on wages and income distribution
• Political - some use "globalization" to mean the creation of a world government which
regulates the relationships among governments and guarantees the rights arising from
social and economic globalization. Politically, the United States has enjoyed a position of
power among the world powers, in part because of its strong and wealthy economy. With
the influence of globalization and with the help of the United States’ own economy, the
People's Republic of China has experienced some tremendous growth within the past
decade. If China continues to grow at the rate projected by the trends, then it is very
likely that in the next twenty years, there will be a major reallocation of power among the
world leaders. China will have enough wealth, industry, and technology to rival the
United States for the position of leading world power.

Most of us assume that international and global business are the same and that any
company that deals with another country for its business is an international or global
company. In fact, there is a considerable difference between the two terms.

International companies – Companies that deal with foreign companies for their business are
considered as international companies. They can be exporters or importers who may not have
any investments in any other country, apart from their home country.

Global companies – Companies, which invest in other countries for business and also operate
from other countries, are considered as global companies. They have multiple manufacturing
plants across the globe, catering to multiple markets.

The transformation of a company from domestic to international is by entering just one market or
a few selected foreign markets as an exporter or importer. Competing on a truly global scale
comes later, after the company has established operations in several countries across continents
and is racing against rivals for global market leadership. Thus, there is a meaningful distinction
between a company that operates in few selected foreign countries and a company that operates
and markets its products across several countries and continents with manufacturing capabilities
in several of these countries.

Companies can also be differentiated by the kind of competitive strategy they adopt while
dealing internationally. Multinational strategy and global competitive strategy are the two types
of competitive strategy.

· Multinational strategy – Companies adopt this strategy when each country’s market needs to
be treated as self contained. It can be for the following reasons:

° Customers from different countries have different preferences and expectations about a product
or a service.

° Competition in each national market is essentially independent of competition in other national

markets, and the set of competitors also differ from country to country.

° A company’s reputation, customer base, and competitive position in one nation have little or no
bearing on its ability to successfully compete in another nation.

Some of the industry examples for multinational competition include beer, life insurance, and
food products.

· Global competitive strategy – Companies adopt this strategy when prices and competitive
conditions across the different country markets are strongly linked together and have common
synergies. In a globally competitive industry, a company’s business gets affected by the
changing environments in different countries. The same set of competitors may compete against
each other in several countries. In a global scenario, a company’s overall competitive advantage
is gauged by the cumulative efforts of its domestic operations and the international operations

A good example to illustrate is Sony Ericsson, which has its headquarters in Sweden, Research
and Development setup in USA and India, manufacturing and assembly plants in low wage
countries like China, and sales and marketing worldwide. This is made possible because of the
ease in transferring technology and expertise from country to country.

Industries that have a global competition are automobiles, consumer electronics (like televisions,
mobile phone), watches, and commercial aircraft and so on.

Table 1.2 portrays the differences in strategies adopted by companies in international and global

Table 1.2: Differences between International and Global Strategies

Strategy International Global

Location Selected target countries and Most global businesses operate in North America, Europe,
trading areas Asia Pacific, and Latin America
Business Custom strategies to fit the Same basic strategy worldwide with minor country
circumstances of each host customisation where necessary
country situation
Product-line Adopted to local culture and Mostly standardised products sold worldwide, moderate
particular needs and customisation depending on the regulatory framework
expectations of local buyers
Production Plants scattered across many Plants located on the basis of maximum competitive
host countries, each advantage (in low cost countries close to major markets,
producing versions suitable geographically scattered to minimise shipping costs, or use
for the surrounding of a few world scale plants to maximise economies of
environment scale)
Source of supply Suppliers in host country Attractive suppliers from across the world
of raw materials preferred
Marketing and Adapted to practices and Much more worldwide coordination; minor adaptation to
distribution culture of each host country host country situations if required
Cross country Efforts made to transfer Efforts made to use almost the same technologies,
connections ideas, technologies, competencies, and capabilities in all country markets (to
competencies and promote use of a mostly standard strategy), new successful
capabilities that work competitive capabilities are transferred to different country
successfully in one country markets
to another country whenever
such a transfer appears
Company Form subsidiary companies All major strategic decisions closely coordinated at global
organisation to handle operations in each headquarters; a global organisational structure is used to
host country; each subsidiary unify the operations in each country
operates more or less
autonomously to fit host
country conditions

Benefits of globalisation

We have moved from a world where the big eat the small to a world where the fast eat the slow",
as observed by Klaus Schwab of the Davos World Economic Forum. All economic analysts must
agree that the living standards of people have considerably improved through the market growth.
With the development in technology and their introduction in the global markets, there is not
only a steady increase in the demand for commodities but has also led to greater utilization.
Investment sector is witnessing high infusions by more and more people connected to the world's
trade happenings with the help of computers. As per statistics, everyday more than $1.5 trillion is
now swapped in the world's currency markets and around one-fifth of products and services are
generated per year are bought and sold.

Buyers of products and services in all nations comprise one huge group who gain from world
trade for reasons encompassing opportunity charge, comparative benefit, economical to purchase
than to produce, trade's guidelines, stable business and alterations in consumption and
production. Compared to others, consumers are likely to profit less from globalization.

Another factor which is often considered as a positive outcome of globalization is the lower
inflation. This is because the market rivalry stops the businesses from increasing prices unless
guaranteed by steady productivity. Technological advancement and productivity expansion are
the other benefits of globalization because since 1970s growing international rivalry has
triggered the industries to improvise increasingly.
Globalization can be described as a process by which the people of the world are unified into a
single society and functioning together. This process is a combination of economic,
technological, sociocultural and political forces. Globalization, as a term, is very often used to
refer to economic globalization, that is integration of national economies into the international
economy through trade, foreign direct investment, capital flows, migration, and spread of
technology. The word globalization is also used, in a doctrinal sense to describe the neoliberal
form of economic globalization.Globalization is also defined as internationalism, however such
usage is typically incorrect as "global" implies "one world" as a single unit, while "international"
(between nations) recognizes that different peoples, cultures, languages, nations, borders,
economies, and ecosystems exist(
Globalization has two components: the globalization of market and globalization of

Some other benefits of globalization as per statistics

• Commerce as a percentage of gross world product has increased in 1986 from 15% to
nearly 27% in recent years.
• The stock of foreign direct investment resources has increased rapidly as a percentage of
gross world product in the past twenty years.
• For the purpose of commerce and pleasure, more and more people are crossing national
borders. Globally, on average nations in 1950 witnessed just one overseas visitor for
every 100 citizens. By the mid-1980s it increased to six and ever since the number has
doubled to 12.
• Worldwide telephone traffic has tripled since 1991. The number of mobile subscribers
has elevated from almost zero to 1.8 billion indicating around 30% of the world
population. Internet users will quickly touch 1 billion.
• · Promotes foreign trade and liberalisation of economies.

· Increases the living standards of people in several developing countries through capital
investments in developing countries by developed countries.

· Benefits customers as companies outsource to low wage countries. Outsourcing helps the
companies to be competitive by keeping the cost low, with increased productivity.

· Promotes better education and jobs.

· Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best
practices, and culture.

· Provides better quality of products, customer services, and standardised delivery models across

· Gives better access to finance for corporate and sovereign borrowers.

· Increases business travel, which in turn leads to a flourishing travel and hospitality industry
across the world.

· Increases sales as the availability of cutting edge technologies and production techniques
decrease the cost of production.

· Provides several platforms for international dispute resolutions in business, which facilitates
international trade.

Some of the ill-effects of globalisation are as follows:

· Leads to exploitation of labour in several cases.

· Causes unemployment in the developed countries due to outsourcing.

· Leads to the misuse of IPR, copyrights and so on due to the easy availability of technology,
digital communication, travel and so on.
· Influences political decisions in foreign countries. The MNCs increasingly use their economical
powers to influence political decisions.

· Causes ecological damage as the companies set up polluting production plants in countries with
limited or no regulations on pollution.

· Harms the local businesses of a country due to dumping of cheaper foreign goods.

· Leads to adverse health issues due to rapid expansion of fast food chains and increased
consumption of junk food.

· Causes destruction of ethnicity and culture of several regions worldwide in favour of more
accepted western culture.

In spite of its disadvantages, globalisation has improved our lives in various fields like
communication, transportation, healthcare, and education.

1. What is culture and in the context of international business environment how does it
impact international business decisions?

Answer: Culture is defined as the art and other signs or demonstrations of human customs,
civilisation, and the way of life of a specific society or group. Culture determines every aspect
that is from birth to death and everything in between it. It is the duty of people to respect other
cultures, other than their culture. Research shows that national ‘‘cultures’’ generally characterise
the dominant groups’ values and practices in society, and not of the marginalised groups, even
though the marginalised groups represent a majority or a minority in the society.

Culture is very important to understand international business. Culture is the part of

environment, which human has created, it is the total sum of knowledge, arts, beliefs, laws,
morals, customs, and other abilities and habits gained by people as part of society.

Culture is an important factor for practising international business. Culture affects all the
business functions ranging from accounting to finance and from production to service. This
shows a close relation between culture and international business.

The following are the four factors that question assumptions regarding the impact of global
business in culture:

· National cultures are not homogeneous and the impact of globalisation on heterogeneous
cultures is not easily predicted.

· Culture is not similar to cultural practice.

· Globalisation does not characterise a rupture with the past but is a continuation of prior trends.

· Globalisation is only one of many processes involved in cultural change.

Cultural differences affect the success or failure of multinational firms in many ways. The
company must modify the product to meet the demand of the customers in a specific location and
use different marketing strategy to advertise their product to the customers. Adaptations must be
made to the product where there is demand or the message must be advertised by the company.
The following are the factors which a company must consider while dealing with international

· The consumers across the world do not use same products. This is due to varied preferences and
tastes. Before manufacturing any product, the organisation has to be aware of the customer
choice or preferences.

· The organisation must manage and motivate people with broad different cultural values and
attitudes. Hence the management style, practices, and systems must be modified.

· The organisation must identify candidates and train them to work in other countries as the
cultural and corporate environment differs. The training may include language training,
corporate training, training them on the technology and so on, which help the candidate to work
in a foreign environment.

· The organisation must consider the concept of international business and construct guidelines
that help them to take business decisions, and perform activities as they are different in different
nations. The following are the two main tasks that a company must perform:

° Product differentiation and marketing – As there are differences in consumer tastes and
preferences across nations; product differentiation has become business strategy all over the
world. The kinds of products and services that consumers can afford are determined by the level
of per capita income. For example, in underdeveloped countries, the demand for luxury products
is limited.

° Manage employees – It is said that employees in Japan were normally not satisfied with their
work as compared with employees of North America and European countries; however the
production levels stayed high. To motivate employees in North America, they have come up with
models. These models show that there is a relation between job satisfaction and production. This
study showed the fact that it is tough for Japanese workers to change jobs. While this trend is
changing, the fact that job turnover among Japanese workers is still lower than the American
workers is true. Also, even if a worker can go to another Japanese entity, they know that the
management style and practices will be quite alike to those found in their present firm. Thus,
even if Japanese workers were not satisfied with the specific aspects of their work, they know
that the conditions may not change considerably at another place. As such, discontent might not
impact their level of production.

The following are the three mega trends in world cultures:

· The reverse culture influence on modern Western cultures from growing economies,
particularly those with an ancient cultural heritage.
· The trend is Asia centric and not European or American centric, because of the growing
economic and political power of China, India, South Korea, and Japan and also the ASEAN.

· The increased diversity within cultures and geographies.

The following are the necessary implications in international business:

· Avoid self reference criterion such as, one’s own upbringing, values and viewpoints.

· Follow a philosophical viewpoint that considers that many perspectives of a single observation
or phenomenon can be true.

· Discover and identify global segments and global niche markets, as national markets are diverse
with growing mobility of products, people, capital, and culture.

· Grow the total share market by innovating affordable products and services, and making them
accessible so that, they are affordable for even subsistence level consumers rather than fighting
for market share.

· Organise global enterprises around global centres of excellence.

Hofstede’s 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 1973. At that time he gathered and
analysed data from many people from several countries. Professor Hofstede established a model
using the results of the study which identifies four dimensions to differentiate cultures. 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 the nation’s 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 large upward mobility of its people. A country with low
power distance ranking depicts the society and de-emphasises the differences between its
people’s power and wealth. In these societies equality and opportunity is stressed for everyone.

· Individualism – This dimension focuses on the extent to which the society reinforces
individual or collective achievement and interpersonal relationships. A high individualism
ranking depicts that individuality and individual rights are dominant within the society.
Individuals in these societies form a larger number of looser relationships. A low individualism
ranking 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 shows the country experiences high level of gender differentiation. In
these cultures, men dominate a major part of the society and power structure, with women being
controlled and dominated by men. A country with low masculinity ranking shows the country,
having a low level of differentiation and discrimination between genders. In low masculinity
cultures, 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 that is unstructured situations. 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
minimise the amount of uncertainty. A country with low uncertainty avoidance ranking shows
that the country has less concern 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 reflects a low uncertainty avoidance ranking.

· Long-Term Orientation (LTO) – 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 are scoring high on this dimension. These countries have a long term
orientation, believe in many truths, accept change easily, and have thrift for investment. Cultures
recording little on this dimension, trust in absolute truth is conventional and traditional. They
have a small term orientation and a concern for stability. Many western cultures score
considerably low on this dimension.

In India, PDI is the highest Hofstede dimension for culture with a rank of 77, LTO dimension
rank is 61, and masculinity dimension rank is 62.

Every society has its own unique culture. Culture must not be imposed on individuals of different
culture. For example, the Cadbury Kraft Acquisition, 2009 was a landmark international deal, in
which a U.S. based company Kraft acquired the British chocolate giant, Cadbury which were in
complete extremes in terms of culture. Let us discuss the major cultural elements that are related
to business.

Cultural elements that relate business

The most important cultural components of a country which relate business transactions are:

· Language.

· Religion.

· Conflicting attitudes.
Cross cultural management is defined as the development and application of knowledge about
cultures in the practice of international management, when people involved have diverse cultural

International managers in senior positions do not have direct interaction that is face-to-face with
other culture workforce, but several home based managers handle immigrant groups adjusted
into a workforce that offers domestic markets.

The factors to be considered in cross cultural management are:

Cross cultural management skills

The ability to demonstrate a series of behaviour is called skill. It is functionally linked to

achieving a performance goal.

The most important aspect to qualify as a manager for positions of international responsibility is
communication skills. The managers must adapt to other culture and have the ability to lead its

The managers cannot expect to force members of other culture to fit into their cultural customs,
which is the main assumption of cross cultural skills learning. Any organisation that tries to
enforce its behavioural customs on unwilling workers from another culture faces conflict. The
manager has to possess the skills linked with the following:

· Providing inspiration and appraisal systems.

· Establishing and applying formal structures.

· Identifying the importance of informal structures.

· Formulating and applying plans for modification.

· Identifying and solving disagreements.

Handling cultural diversity

Cultural diversity in a work group offers opportunities and difficulties. Economy is benefited
when the work groups are managed successfully. The organisation’s capability to draw, save,
and inspire people from diverse cultures can give the organisation spirited advantages in
structures of cost, creativity, problem solving, and adjusting to change.

Cultural diversity offers key chances for joint work and co-operative action. Group work is a
joint venture where, the production of two or more individuals or groups working in cooperation
is larger than the combined production of their individual work.

Factors controlling group creativity

On complicated problem solving jobs diverse groups do better than identical groups. Diverse
groups require time to solve issues of working together. In diverse groups, over time, the work
experience helps to overcome gender, racial, and organisational and functional discriminations.
But the impact cannot be evaluated and there is always risk in creating a diverse group. A
successful group is profitable with respect to quick results and the creation of concern for the
future. Negative stereotypes are emphasised if it fails.

Factors related with the industry and company culture are also important. Diverse groups do well
when the members:

· Assist to make group decisions.

· Value the exchange of different points of view.

· Respect each other’s skills and share their own.

· Value the chance for cross-cultural learning.

· Tolerate uncertainty and try to triumph over the inefficiencies that occur when members of
diverse cultures work together.

A diverse group is known to be more creative, where the members are tolerant of differences.
The top management level provides its moral and administrative support, and gives time for the
group to overcome the usual process difficulties. They also provide diversity training, and the
group members are rewarded for their commitment.

Ignore diversity

It may be difficult to manage diversity. It is better to ignore, which is an alternative. The

management must:

· Ignore cultural diversity within the employees.

· Down-play the importance of cultural diversity.

This rejection to identify diversity happens when management:

· Fails to have sufficient awareness and skills to identify diversity.

· Identifies diversity but does not have the skill to manage the diversity.

· Recognises the negative consequences of identifying diversity probably cause greater issues
than ignoring it.

· Thinks the likely benefits of identifying and managing diversity do not validate the expected
· Identifies that the job provides no chances for drawing advantages from diversity.

Strategies to ignore diversity may be possible when culture groups are given various jobs, and
sharing required resources are independent in the workplace. Groups and group members are
equally incorporated and work together. In such cases, confusion occurs when the diverse value
systems are not identified that are held by different staff groups.

2. Cosmos Limited wants to enter international markets. Will country risk analysis help
Cosmos Limited to take correct decisions? Substantiate your answer

Answer: Country risk analysis is the evaluation of possible risks and rewards from
business experiences in a country. It is used to survey countries where the firm is
engaged in international business, and avoids countries with excessive risk. With
globalisation, country risk analysis has become essential for the international
creditors and investors

Overview of Country Risk Analysis

Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border
investment. CRA represents the potentially adverse impact of a country’s environment on the
multinational corporation’s cash flows and is the probability of loss due to exposure to the
political, economic, and social upheavals in a foreign country. All business dealings involve
risks. An increasing number of companies involving in external trade indicate huge business
opportunities and promising markets. Since the 1980s, the financial markets are being refined
with the introduction of new products.

When business transactions occur across international borders, they bring additional risks
compared to those in domestic transactions. These additional risks are called country risks which
include risks arising from national differences in socio-political institutions, economic structures,
policies, currencies, and geography. The CRA monitors the potential for these risks to decrease
the expected return of a cross-border investment. For example, a multinational enterprise (MNE)
that sets up a plant in a foreign country faces different risks compared to bank lending to a
foreign government. The MNE must consider the risks from a broader spectrum of country
characteristics. Some categories relevant to a plant investment contain a much higher degree of
risk because the MNE remains exposed to risk for a longer period of time.

Analysts have categorised country risk into following groups:

· Economic risk – This type of risk is the important change in the economic structure that
produces a change in the expected return of an investment. Risk arises from the negative changes
in fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or

· Transfer risk – Transfer risk arises from a decision by a foreign government to restrict capital
movements. It is analysed as a function of a country’s ability to earn foreign currency. Therefore,
it implies that effort in earning foreign currency increases the possibility of capital controls.
· Exchange risk – This risk occurs due to an unfavourable movement in the exchange rate.
Exchange risk can be defined as a form of risk that arises from the change in price of one
currency against another. Whenever investors or companies have assets or business operations
across national borders, they face currency risk if their positions are not hedged.

· Location risk – This type of risk is also referred to as neighborhood risk. It includes effects
caused by problems in a region or in countries with similar characteristics. Location risk includes
effects caused by troubles in a region, in trading partner of a country, or in countries with similar
perceived characteristics.

· Sovereign risk – This risk is based on a government’s inability to meet its loan obligations.
Sovereign risk is closely linked to transfer risk in which a government may run out of foreign
exchange due to adverse developments in its balance of payments. It also relates to political risk
in which a government may decide not to honor its commitments for political reasons.

· Political risk – This is the risk of loss that is caused due to change in the political structure or
in the politics of country where the investment is made. For example, tax laws, expropriation of
assets, tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also
contribute to the element of political risk.

Risk assessment requires analysis of many factors, including the decision-making process in the
government, relationships of various groups in a country and the history of the country. Country
risk is due to unpredicted events in a foreign country affecting the value of international assets,
investment projects and their cash flows. The analysis of country risks distinguishes between the
ability to pay and the willingness to pay. It is essential to analyse the sustainable amount of funds
a country can borrow. Country risk is determined by the costs and benefits of a country’s
repayment and default strategies. The ways of evaluating country risks by different firms and
financial institutions differ from each other. The international trade growth and the financial
programs development demand periodical improvement of risk methodology and analysis of
country risks.

Purpose of Country Risk Analysis

Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable information.
Country risk is composed of all the uncertainty that defines the risk of country exposure. The
assessment of country risk is used to incorporate country risk in capital budgeting and modify the
discount rate.

CRA regulates the estimated cash flows and explores the main techniques used to measure a
country’s overall riskiness. It is mainly used by MNCs, in order to avoid countries with
excessive risk. It can be used to monitor countries where the MNC is engaged in international
business. Analysing the country risk helps in evaluating the risk for a planned project considered
for a foreign country and assesses gain and loss possibility outcomes of cross-border investment
or export strategy.
Country detailed risk refers to the unpredictability of returns on international business
transactions in view of information associated with a particular country. The techniques used by
the banks and other agencies for country risk analysis can be classified as qualitative or
quantitative. Many agencies merge both qualitative and quantitative information into a single
rating. A survey conducted by the US EXIM bank classified the various methods of country risk
assessment used by the banks into four types. They are:

· Fully qualitative method – The fully qualitative method involves a detailed analysis of a
country. It includes general discussion of a country’s economic, political, and social conditions
and prediction. Fully qualitative method can be adapted to the unique strengths and problems of
the country undergoing evaluation.

· Structured qualitative method – The structured method uses a uniform format with
predetermined scope. In structured qualitative method, it is easier to make comparisons between
countries as it follows a specific format across countries. This technique was the most popular
among the banks during the late seventies.

· Checklist method – The checklist method involves scoring the country based on specific
variables that can be either quantitative, in which the scoring does not need personal judgment of
the country being scored or qualitative, in which the scoring needs subjective determinations. All
items are scaled from the lowest to the highest score. The sum of scores is then used to determine
the country risk.

· Delphi technique – The technique involves a set of independent opinions without group
discussion. As applied to country risk analysis, the MNC can assess definite employees who
have the capability to evaluate the risk characteristics of a particular country. The MNC gets
responses from its evaluation and then may determine some opinions about the risk of the

· Inspection visits – Involves travelling to a country and conducting meeting with government
officials, business executives, and consumers. These meetings clarify any vague opinions the
firm has about the country.

· Other quantitative methods – The quantitative models used in statistical studies of country
risk analysis can be classified as discriminant analysis, principal component analysis, logit
analysis and classification and regression tree method

5.4.1 Data sourcing

The basic data is important to analyse a country. The economic, financial and currency risk
components are based on the variables (quantitative and qualitative variables). The variables
must consider the particularities of each country and the needs of the model used. The standard
variables are used to maintain the regular analysis comparable with similar works of other
countries. Therefore, the first step is to make sure that the historical series of official data are
reliable, consistent and comparable. The standard economic variables that are found mainly in
the varied approach adopted by financial institutions and rating agencies, are associated with the
country’s real ability to repay its commitments. The balance of payments (summary account of
economic transactions among a country and the others nations of the world, during a period) and
its evolution through the years means a strong source of data. The exchange rate (currency risk)
is another important variable considered, as it balances the transactions (balances the prices of
goods, services, and capital) between residents and non-residents. The analysis must consider the
historical behavior of the exchange rate and the policy which made clear whether the country
follows a rational economics approach or it uses the exchange rate as a tool to maintain a forced
macroeconomic equilibrium.

Apart from the macroeconomic variables which deal with the external sector of the economy,
there are some other relevant variables such as the interest rate, level of investments, public debt
and its service, internal savings, consumption, GDP or GNP, money supply, inflation rate and so

The analysis must be accomplished with qualitative variables, which consider social aspects as
population, life expectancy, rate of birthday, rate of unemployment, level of literacy and so on.
The social-political aspects are necessary for all kind of analysis as they describe the whole
setting of the running economy.

5.4.2 Tools

The risk management demands a regular follow up regarding governmental policies, external and
internal environment, outlook provided by rating agencies, and so on. Following are the tools

· Chain of value – Includes the main countries that sustain trade relationships with the nation,
broken by sectors and products.

· Strength and weakness chart – Focus the key aspects that warn the country.

· Table of financial markets performance – Follow up the behavior of bonds and stocks
already issued and to be issued.

· Table of macroeconomic variables – Provides alert signals when the behavior of any ratio
presents a relevant change.

The content of country risk analysis mainly involves country history, corporate risk,
dependency level, external environment, domestic financial system, ratios for economic risk
evaluation and strength and weakness chart.

Country history

The historical brief helps to identify aspects that interfere in the future behavior of the country,
reducing the ability to payback any external commitment. The main historical data provides a
good understanding of the key factors which draw the behaviour of the society, the government,
the private sector, the legal environment, the economical, political, and the relationships to
neighbour nations and the world as a whole.

5.5.2 Corporate risk

Both country risk studies and business risk analysis enhances wealth from the available
resources, in terms of capital, natural resources, technology and labour forces. This clarifies that
those kind of analysis procures extensive knowledge from the business approach for companies,
including financial theory.

5.5.3 Dependency level

The next step after the history in brief, is a clear definition about how the country is positioned in
the world in terms of its wide relationships, economic block in which it belongs to, importance of
international trade and so on. All these aspects are significant to identify the dependency level of
the country. The financial dependency to meet the needs of a country is also a strong concern for
the analyst. In this case, the maturity of debts (internal and external) and the available sources of
financing also help to measure the freedom grades of the country.

5.5.4 External environment

The external trade is an important factor to the development of societies. Globalisation has
brought international business to the center of the discussions and the external environment has
become vital for all countries.

Thus, a complete vision on economic trends, the behavior of financial markets, the forecasts for
conflicts among nations, the improvement of the economic blocks, the level of openness of the
world economy, financial crisis and international liquidity is a framework over which the
analysis must start.

5.5.5 Domestic financial system

The banking sector has implemented many actions to avoid losses, after the international crisis.
Basel Committee has defined some strong measures to be followed by the financial houses and
Central Banks are trying to monitor their jurisdictions. Apart from those procedures, recently
Asia and Turkey crisis have shown that the inspection is not enough to keep the reliability of
some domestic system. The international banks had developed many tools to deal with
international crisis. When domestic banks do not have a consistent risk management policies and
adequate provisions to theirs credits, the country risk happens to be the worst. Therefore, the
analysis must consider the health of the domestic financial system, by evaluating information
provided by the Central Banks and, from the principal banks of the country. Accessing Centrals
Bank policies and supervising procedures also help to evaluate the health of the financial system.

5.5.6 Ratios for economic risk evaluation

Cross-border economic risk analysis evaluates the probable macroeconomic ratios among some
variables. They can be separated into two groups such as domestic and external. The figures
must be presented in historic series (at least five years) to provide information about its progress,
which can be real values, percentages, or relations. The mainly used ratios and variables in case
of domestic economy are the following:

· Gross domestic product (GDP) –· GDP per capita –· GDP growth rate –· Unemployment
rate –· Internal savings or GDP –· Investment or GDP –· Gross domestic fixed investment
or variation of GDP – Gini Index –· Growth domestic fixed investment or gross domestic
savings –.· Budget deficit or GDP –· Internal debt or GDP –

The monetary policy is essential as it deals with the price stability. An economy which presents
less instability in its prices of goods and services, provides huge facilities to decision makers
based on their predictions to expected returns of investments and a firm social, economical and
political environment. All these aspects request a systematic approach over price indicators such
as the following:

· Real interest rate –· Percentage increase in the money supply The mainly used ratios and
variables in case of external economy are the following:

· External debt or GDP –· Short term debts and reserves –· Exchange currency rate –·
External debt services and exports –.

5.5.7 Strength and weakness chart

In order to explain the significant aspects provided by the analysis, the strength and weakness
chart can be used to merge each strength and weakness with the related scenario. is a model of
relationships among several variables (quantitative and qualitative) to show their
interdependency and the complexity of analysis.

3. How can managers in international companies adjust to the ethical factors

influencing countries? Is it possible to establish international ethical codes?
Briefly explain?

Answer: Ethics can be defined as the evaluation of moral values, principles, and standards of
human conduct and its application in daily life to determine acceptable human behaviour.

Business ethics pertains to the application of ethics to business, and is a matter of concern in the
corporate world. Business ethics is almost similar to the generally accepted norms and principles.
Behaviour that is considered unethical and immoral in society, for example dishonesty, applies to
business as well.

Managers are influenced by three factors affecting ethical values. These factors have unique
value systems that have varying degrees of control over managers.

Religion – Religion is one of the oldest factors affecting ethics. Despite the differences in
religious teachings, religions agree on the fundamental principles and ethics. All major religions
preach the need for high ethical standards, an orderly social system, and stress on social
responsibility as contributing factors to general well-being.

Culture – Culture refers to a set of values and standards that defines acceptable behaviour
passed on to generations. These values and standards are important because the code of conduct
of people reflects on the culture they belong to. Civilisation is the collective experience that
people have passed on through three distinct phases: the hunting and gathering phase, agriculture
phase, and the industrial phase. These phases reflect the changing economic and social
arrangements in human history.

Law – Law refers to the rules of conduct, approved by the legal system of a country or state that
guides human behaviour. Laws change and evolve with emerging and changing issues. Every
organisation is expected to abide the law, but in the pursuit of profit, laws are frequently
violated. The most common breach of law in business is tax evasion, producing inferior quality
goods, and disregard for environmental protection laws.

Ethics is significant in all areas of business and plays an important role in ensuring a successful
business. The role of business ethics is evident from the conception of an idea to the sale of a
product. In an organisation, every division such as sales and marketing, customer service,
finance, and accounting and taxation has to follow certain ethics.

Public image – In order to gain public confidence and respect, organisations must ascertain that
they are honest in their transactions. The services or products of a business affect the lives of
thousands of people. It is important for the top management to impart high ethical standards to
their employees, who develop these services or products.

A company that is ethically and socially responsible has a better public image. People tend to
favour the products and services of such organisations. Investors’ trust is just as important as
public image for any business. A company that practices good ethical creates a positive
impression among its stakeholders.

Management’s credibility with employees – Common goals and values are developed when
employees feel that the management is ethical and genuine. Management’s credibility with
employees and the public are intertwined. Employees feel proud to be a part of an organisation
that is respected by the public. Generous compensations and effective business strategies do not
always guarantee employee loyalty; organisation ethics is equally significant. Thus, companies
benefit from being ethical because they attract and retain good and loyal employees.

Better decision-making – Decisions made by an ethical management are in the best interests of
the organisation, its employees, and the public. Ethical decisions take into account various social,
economic and ethical factors.

Profit maximisation – Companies that emphasise on ethical conduct are successful in the long
run, even though they lose money in the short run. Hence, a business that is inspired by ethics is
a profitable business. Costs of audit and investigation are lower in an ethical company.
Protection of society – In the absence of proper enforcement, organisations are responsible to
practice ethics and ensure mechanisms to prevent unlawful events. Thus, by propagating ethical
values, a business organisation can save government resources and protect the society from

Most countries have similar ethical values, but are practiced differently. This section deals with
the way individuals in different countries approach ethical issues, and their ethically acceptable
behaviour. With the rise in global firms, issues related to ethical values and traditions become
more common. These ethical issues create complications to Multi-National Companies (MNCs)
while dealing with other countries for business. Hence, many companies have formulated well-
designed codes of conduct to help their employees.

Two of the most prominent issues that managers in MNCs operating in foreign countries face are
bribery and corruption and worker compensation.

Bribery and corruption – Bribery can be defined as the act of offering, accepting, or soliciting
something of value for the purpose of influencing the action of officials in the discharge of their
duties. Corruption is the abuse of public office for personal gain. The issue arises when there are
differences in perception in different countries. For example, in the Middle East, it is perfectly
acceptable to offer an official a gift. In Britain it is considered as an attempt to bribe the official,
and hence, considered unlawful.

Worker compensation – Businesses invest in production facilities abroad because of the

availability of low-cost labour, which enables them to offer goods and services at a lower price
than their competitors. The issue arises when workers are exploited and are underpaid compared
to the workers in the parent country who are paid more for the same job. The disparity arises due
to the differences in the regulatory standards in the two countries.

Earlier, we believed that ethics is a prerogative of individuals, but now this perception has
immensely changed. Many companies use management techniques to encourage ethical
behaviour at an organisational level.

Code of conduct for MNCs

The code of conduct for MNCs refers to a set of rules that guides corporate behaviour. These
rules prescribe the duties and limitations of a manager. The top management must communicate
the code of conduct to all members of the organisation along with their commitment in enforcing
the code.

Some of the ethical requirements for international companies are as follows:

· Respect basic human rights.

· Minimise any negative impact on local economic policies.

· Maintain high standards of local political involvement.

· Transfer technology.

· Protect the environment.

· Protect the consumer.

· Employ labour practices that are not exploitative.

When a manager of an international firm faces an ethical problem, certain models help in solving
these ethical issues

Culture is a major factor which influences marketing decisions and practices in a foreign
country. For example, in the middle-eastern countries the prior approval of the governing
authorities should be taken if a firm plans to advertise a product related to women’s apparel, as
showcasing some aspects of women clothing is considered immodest and immoral

Q.5 Discuss the international marketing strategies. How is it different

from domestic marketing strategies?

International marketing refers to marketing of goods and products by companies overseas or

across national borderlines. The techniques used while dealing overseas is an extension of the
techniques used in the home country by the company.

Taking into account the various conditions on which markets vary and depend, appropriate
marketing strategies should be devised and adopted. Like, some countries prevent foreign firms
from entering into its market space through protective legislation. Protectionism on the long run
results in inefficiency of local firms as it is inept towards competition from foreign firms and
other technological advancements. It also increases the living costs and protects inefficient
domestic firms.

To counter this scenario firms must learn how to enter foreign markets and increase their global
competitiveness. Firms that plan to do business in foreign land find the marketplace different
from the domestic one. Market sizes, customer preferences, and marketing practices all vary;
therefore the firms planning to venture abroad must analyse all segments of the market in which
they expect to compete.

The decision of a firm to compete internationally is strategic; it will have an effect on the firm,
including its management and operations locally. The decision of a firm to compete in foreign
markets has many reasons. Some firms go abroad as the result of potential opportunities to
exploit the market and to grow globally. And for some it is a policy driven decision to globalise
and to take advantage by pressurising competitors.

But, the decision to compete abroad is always a strategic down to business decision rather than
simply a reaction. Strategic reasons for global expansion are:

· Diversifying markets that provide opportunistic global market development.

· Following customers abroad (customer satisfaction).

· Exploiting different economic growth rates.

· Pursuing a global logic or imperative to harvest new markets and profits.

· Pursuing geographic diversification.

· Globalising for defensive reasons.

· Exploiting product life cycle differences (technology).

· Pursuing potential abroad.

Likewise, there can be other reasons like competition at home, tax structures, comparative
advantage, economic trends, demographic conditions, and the stage in the product life cycle. In
order to succeed, a firm should carefully look at their geographic expansion and global
marketing strategy. To a certain extent, a firm makes a decision about its extent of globalisation
by taking a stance that may span from entirely domestic to a global reach where the company
devotes its entire marketing strategy to global competition. In the process of developing an
international marketing strategy, the firm may decide to do business in its home-country
(domestic operations) only or host-country (foreign country) only.


Firms that serve global markets can be segregated into several clusters based on their similarities.
Each such cluster is termed as a segment. Segmentation helps the firms to serve the markets in an
improved way. Markets can be segmented into nine categories, but the most common method of
segmentation is on the basis of individual characteristics, which include the behavioural,
psychographic, and demographic segmentations. The basis of behavioural segmentation is the
general behavioural aspects of the customers. Demographic segmentation considers the factors
like age, culture, income, education and gender. Psychographic segmentation takes into account:
beliefs, values, attitudes, personalities, opinions, lifestyles and so on.

Market positioning

The next step in the marketing process is, the firms should position their product in the global
market. Product positioning is the process of creating a favourable image of the product against
the competitor’s products. In global markets product positioning is categorised as high-tech or
high–touch positioning.

One challenge that firms face is to make a trade-off between adjusting their products to the
specific demands of a country and gaining advantage of standardisation such as the maintenance
of a consistent global brand image and cost savings. This is task is not easy.

International product policy

Some thinkers of the industry tend to draw a distinction between conventional products and
services, stressing on service characteristics such as heterogeneity (variation in standards among
providers, frequently even among different locations of the same firm), inseparability from
consumption, intangibility, and perishability. Typically, products are composed of some service
component like, documentation, a warranty, and distribution. These service components are an
integral part of the product and its positioning.

Firms have a choice in marketing their products across markets. Many a times, firms opt for a
strategy which involves customisation, through which the firm introduces a unique product in
each country, believing that tastes differ so much between countries that it is necessary to create
a new product for each market. On the other hand, standardisation proposes the marketing of one
global product, with the belief that the same product can be sold in different countries without
significant changes. For example, Intel microprocessors are the same irrespective of the country
in which they are sold.

Finally, in most cases firms will go for some kind of adaptation. Here, when moving a product
between markets minor modifications are made to the product. For example, in U.S. fuel is
relatively cheap, therefore cars have larger engines than the cars in Asia and Europe; and then
again, much of the design is identical or similar.

8.3.4 International pricing decisions

Pricing is the process of ascertaining the value for the product or service that will be offered for

In international markets, making pricing decisions is entangled in difficulties as it involves trade

barriers, multiple currencies, additional cost considerations, and longer distribution channels.
Before establishing the prices, the firm must know its target market well because when the firm
is clear about the market it is serving, then it can determine the price appropriately. The pricing
policy must be consistent with the firms overall objectives. Some common pricing objectives are:
profit, return on investment, survival, market share, status quo, and product quality.

The strategies for international pricing can be classified into the following three types:

· Market penetration· Market holding: · Market skimming:

The factors that influence pricing decisions are inflation, devaluation and revaluation, nature of
product or industry and competitive behaviour, market demand, and transfer pricing.

The approach taken by company towards pricing when operating in international markets are
ethnocentric, polycentric, and geocentric.

Price can be defined by the following equation:

The pricing decision enables us to change the price in many ways, some of them are:

· “Sticker” price changes –. · Change quantity –· Change quality –· Change terms –

Transfer pricing

Transfer pricing is the process of setting a price that will be charged by a subsidiary (unit) of a
multi-unit firm to another unit for goods and services, which are sold between such related units.

Transfer pricing is determined in three ways: market based pricing, transfer at cost and cost-plus
pricing. The Arm’s Length pricing rule is used to establish the price to be charged to the

Many managers consider transfer pricing as non-market based. The reason for transfer pricing
may be internal or external. Internal transfer pricing include motivating managers and
monitoring performance. External factors include taxes, tariffs, and other charges.

Transfer Pricing Manipulation (TPM) is used to overcome these reasons. Governments usually
discourage TPM since it is against transfer pricing, where transfer pricing is the act of pricing
commodities or services. However, in common terminology, transfer pricing generally refers

International advertising

International advertising is usually associated with using the same brand name all over the world.
However, a firm can use different brand names for historic reasons. The acquisition of local
firms by global players has resulted in a number of local brands. A firm may find it unfavourable
to change those names as these local brands have their own distinctive market.

The purpose of international advertising is to reach and communicate to target audiences in more
than one country. The target audience differ from country to country in terms of the response
towards humour or emotional appeals, perception or interpretation of symbols and stimuli and
level of literacy. Sometimes, globalised firms use the same advertising agencies and centralise
the advertising decisions and budgets. In other cases, local subsidiaries handle their budget,
resulting in greater use of local advertising agencies.

International advertising can be thought of as a communication process that transpires in

multiple cultures that vary in terms of communication styles, values, and consumption patterns.
International advertising is a business activity and not just a communication process. It involves
advertisers and advertising agencies that create ads and buy media in different countries. This
industry is growing worldwide. International advertising is also reckoned as a major force that
mirrors both social values, and propagates certain values worldwide.

International promotion and distribution

Distribution of goods from manufacturer to the end user is an important aspect of business.
Companies have their own ways of distribution. Some companies directly perform the
distribution service by contacting others whereas a few companies take help from other
companies who perform the distribution services. The distribution services include:

· The purchase of goods.

· The assembly of an attractive assortment of goods.

· Holding stocks.

· Promoting sale of goods to the customer.

· The physical movement of goods.

In international marketing, companies usually take the advantage of other countries for the
distribution of their products. The selection of distribution channel is helpful to gain the
competitive advantage. The distribution channel is also dependent on the way to manage and
control the channel. Selecting the distribution channel is very important for agents and

Domestic vs. International marketing

Domestic marketing refers to the practice of marketing within a firm’s home country. Whereas
International or foreign marketing is the practice of marketing in a foreign country; the
marketing is for the domestic operations of the firm in that country.

Domestic marketing finds the "how" and "why" a product succeeds or fails within the firm’s
home country and how the marketing activity affects the outcome. Whereas, foreign marketing
deals with these questions and tries to find answers according to the foreign market conditions
and it provides a micro view of the market at the firm’s level.

In domestic marketing a firm has insight of the marketing practices, culture, customer
preferences, climate and so on of its home country, while it is not totally aware of the policies
and the market conditions of the foreign country.

The stages that have led to achieve global marketing are:

· Domestic marketing – Firms manufacture and sell products within the country. Hence, there is
no international phenomenon.

· Export marketing – Firms start exporting products to other countries. This is a very basic
stage of global marketing. Here, the products are developed based on the company’s domestic
market although the goods are exported to foreign countries.
· International marketing – Now, Firms start to sell products to various countries and the
approach is ‘polycentric’, that is, making different products for different countries.

· Multinational marketing – In this stage, the number of countries in which the firm is doing
business gets bigger than that in the earlier stage. And hence, the company identifies the regions
to which the company can deliver same product instead of producing different goods for
different countries. For example, a firm may decide to sell same products in India, Sri lanka and
Pakistan, assuming that the people living in this region have similar choice and at the same time
offering different product for American countries. This approach is termed ‘regiocentric

· Global marketing – Company operating in various countries opts for a common single product
in order to achieve cost efficiencies. This is achieved by analysing the requirements and the
choice of the customers in those countries. This approach is called ‘Geocentric approach’.

The practice of marketing at the international stage does not designate any country as domestic
or foreign. The firm is not considered as the corporate citizen of the world as it has a home base.

The firm must not have a ’single marketing plan’, because there are differences between the
target markets (that is domestic or international markets). There should never be a rigid
marketing campaign. A firm that is successful internationally first obtains success locally.

Few approaches that you can consider for an international marketing are:

· Advertise as a foreign product – By doing so, the product will be considered as genuine and
original in some countries.

· Joint partnership with a local firm – finding a firm that has already established credibility
will benefit a lot. The product will be considered as a local product by following this marketing

· Licensing – You can sell the rights of your product to a foreign firm. Here the problem is that
the firm may not maintain the quality standard and therefore may hurt the image of the brand.

Culture is a major factor which influences marketing decisions and practices in a foreign
country. For example, in the middle-eastern countries the prior approval of the governing
authorities should be taken if a firm plans to advertise a product related to women’s apparel, as
showcasing some aspects of women clothing is considered immodest and immoral.

Q.6 Explain briefly the international financial management components with examples and

Answer: The term ‘Financial Management’ refers to the proper maintenance of all the monetary
transactions of the organisation. It also means recording of transactions in a standard manner that
will show the financial position and performance of the organisation. The Financial Management
can be categorised into domestic and international financial management.
The domestic financial management refers to managing financial services within the country.
International financial management refers to managing finance and share between the countries.

The main aim of international finance management is to maximise the organisation’s value that
in turn will increase the impact on the wealth of the stockholders. When the doors of
liberalisation opened, entrepreneurs capitalised the opportunity to step their foot to conduct
business in different parts of the world.

International trade gave way for the growth of international business. For a corporation to be
successful, it is vital to manage the finance and business accounts appropriately. The rise in
significance and complexity of financial administration in a global environment creates a great
challenge for financial managers. The contributions of different financial innovations like
currency derivative, international stock listing, and multicurrency bonds have necessitated the
accurate management of the flow of international funds through the study of international
financial management.

The International Financial Management (IFM) came to its existence when the countries all over
the world started opening their doors for each other. This phenomenon is also called as
liberalisation. But after the end of the Second World War, the integration in terms of foreign
activities has grown substantially. The firms of all types are now opting to operate their business
and deploy their resources abroad. Furthermore, the differences between the countries have
persisted that has given rise to the prevalence of market imperfections

Components of International Financial Management

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 immense in size and survives to serve a number of functions
ranging from the 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

· 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
· “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.

The advantage of spot dealing has resulted in a simplest way to deal with all foreign currency
requirements. It carries the greatest risk of exchange rate fluctuations due to lack of certainty of
the rate until the deal is carried out. The spot rate that is intended to receive will be set by current
market conditions, the demand and supply of currency being traded and the amount to be dealt.
In general, a better spot rate can be received if the amount of dealing is high. The spot deal will
come to an end in two working days after the deal is struck.

A forward market needs a more complex calculation. A forward rate is based on the existing spot
rate plus a premium or discounts which are determined by the interest rate connecting the two
currencies that are involved. For example, the interest rates of UK are higher than that of US and
therefore a modification is made to the spot rate to reflect the financial effect of this differential
over the period of the forward contract. The duration will be up to two years for a forward
contract. A variation in foreign exchange markets can be affected to any company whether or not
they are directly involved in the international trade or not. This is often referred to as ‘Economic’
foreign exchange and most difficult to protect a business.

The three ways of managing risks are as follows:

· Choosing to manage risk by dealing with the spot market whenever the need of cash flow rises.
This will result in a high risk and speculative strategy since one will not know the rate at which a
transaction is dealt until the day and time it occurs. Managing the business becomes difficult if it
depends on the selling or buying the currency in the spot market.

· The decision must be made to book a foreign exchange contract with the bank whenever the
foreign exchange risk is likely to occur. This will help to fix the exchange rate immediately and
will give a clear idea of knowing the exact cost of foreign currency and the amount to be
received at the time of settlement whenever this due occurs.

· A currency option will prevent unfavourable exchange rate movements in the similar way as a
forward contract does. It will permit gains if the markets move as per the expectations. For this
base, a currency option is often demonstrated as a forward contract that can be left if it is not
followed. Often banks provide currency options which will ensure protection and flexibility, but
the likely problem to arise is the involvement of premium of particular kind. The premium
involved might be a cash amount or it could also influence into the charge of the transaction.

7.3.2 Foreign currency derivatives

Currency derivative is defined as a financial contract in order to swap two currencies at a

predestined 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
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

Figure 7.1 describes the examples of currency derivatives. The derivatives can be hedged with
other derivatives. In the foreign exchange market, currency derivatives like the currency features,
currency options and currency swaps are usually traded. The standard agreement made in order
to buy or sell foreign currencies in future is termed as currency futures. These are usually traded
through organised exchanges. The authority to buy or sell the foreign currencies in future at a
specified rate is provided by currency option. These will help the businessmen to enhance their
foreign exchange dealings. The agreement undertaken to exchange cash flow streams in one
currency for cash flow streams in another currency in future is provided by currency swaps.
These will help to increase the funds of foreign currency from the cheapest sources.

Figure 7.1: Example for Foreign Currency Derivatives

Some of the risks associated with currency derivatives are:

· Credit risk takes place, arising from the parties involved in a contract.

· Market risk occurs due to adverse moves in the overall market.

· Liquidity risks occur due to the requirement of available counterparties to take the other side of
the trade.

· Settlement risks similar to the credit risks occur when the parties involved in the contract fail to
provide the currency at the agreed time.
· Operational risks are one of the biggest risks that occur in trading derivatives due to human

· Legal risks pertain to the counterparties of currency swaps that go into receivership while the
swap is taking place.

7.3.3 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 monetary systems provide the mode of payment acceptable between buyers and
sellers of different nationality, with addition to deferred payment. The global balance can be
corrected by providing sufficient liquidity for the variations occurring in trade. Thereby it can be
operated successfully.

The gold and gold bullion standards

The gold standard was the first modern international system. It was operating during the late 19th
and early 20th centuries, the standard provided for the free circulation between nations of gold
coins of standard specification. The gold happened to be the only standard of value under the
system. The advantages of this system depend in its stabilising influence. Any nation which
exports more than its import would receive gold in payment of the balance. This in turn has
resulted in the lowered value of domestic currency. The higher prices lead to the decreased
demands for exports. The sudden increase in the supply of gold may be due to the discovery of
rich deposit, which in turn will result in the increase of price abruptly.

This standard was substituted by the gold bullion standard during the 1920s; thereby the nations
no longer minted gold coins. Instead, reversed their currencies with gold bullion and determined
to buy and sell the bullion at a fixed cost. This system was also discarded in the 1930s.

The gold-exchange system

Trading was conducted internationally with respect to the gold-exchange standard following
World War II. In this system, the value of the currency is fixed by the nations with respect to
some foreign currency but not with respect to gold. Most of the nations fixed their currency to
the US dollar funds in the United States. With a view to maintain a stable exchange rate at the
global level, the International Monetary Fund (IMF) was created at the ‘Bretton Woods
international Conference’ held in 1944. The drain on the US gold reserves continued up to the
1970s. Later in 1971, the gold convertibility was abandoned by the United States leaving the
world without a single international monetary system.

Floating exchange rates and recent development

After the abundance of the gold convertibility by the US, the IMF in 1976 decided to be in
agreement on the float exchange rates. The gold standard was suspended and the values of
different currencies were determined in the market. The ‘Japanese yen’ and the ‘German
Deutschmark’ strengthened and turned out to be increasingly important in international financial
market, at the same time the US dollar diminished its significance. The Euro was set up in
financial market in 1999 as a replacement for the currencies. Hence, it became the second most
commonly used currency after the dollar in the international market. Many large companies opt
to use euro rather than the dollar in bond trading with a goal to receive better exchange rates.
Very recently the some of the members of Organisation of Petroleum Exporting Countries
(OPEC) such as Saudi Arabia, Iraq have opted to trade petroleum in Euro than in Dollar.

7.3.4 International financial markets

International foreign markets provide links connecting the financial markets of each country and
independent markets external to the authority of any one country. The heart of the international
financial market is being governed by the market of currency where the foreign currency is
denominated by the international trade and investment. Hence the purchase of goods and services
is preceded by the purchase of currency.

The purpose of the foreign currency markets, international money markets, international capital
markets and international securities markets are as follows:

· The foreign currency markets – The foreign currency market is an international market that is
familiar in structure. This means that there exists no central place where the trading can take
place. The ’market’ is actually the telecommunications like among financial institutions around
the globe and opens for business at any time. The greater part of the worlds that deal in foreign
currencies is still taking position in the cities where international financial activity is centred.

· International money markets – A money market can be conventionally defined as a market

for accounts, deposits or deposits that include maturities of one year or less. This is also termed
as the Euro currency markets which constitute an enormous financial market that is beyond the
influence and supervision of world financial and government authorities. The Euro currency
market is a money market for depositing and borrowing money located outside the country
where that money is officially permitted tender. Also, Euro currencies are bank deposits and
loans existing outside any particular country.

· International capital markets – The international capital provides links among the capital
markets of individual countries. It also comprises a separate market of their own, the capital
market that flows in to the Euro markets. The firms enjoy the freedom to raise capital, debit,
fixed or floating interest rates and maturities varying from one month to thirty years in an
international capital markets.

· International security markets – The banks have experienced the greatest growth in the past
decade because of the continuity in providing large portion of the international financial needs of
the government and business. The private placements, bonds and equities are included in the
international security market.
The following are the reasons given for the enormous growth in the trading of foreign currency:

· Deregulation of international capital flows – Without the major government restrictions, it is

extremely simple to move the currencies and capital around the globe. The majority of the
deregulation that has differentiated government policy over the past 10 to 15 years.

· Gain in technology and transaction cost efficiency – The advancements in technology is not
only taking place in the distribution of information, in addition to the performance of exchange
or trading. This has resulted greatly to the capacity of individuals on these markets to accomplish
instantaneous arbitrage.

· Market upwings – The financial markets have become increasingly unstable over recent years.
There are faster swings in the stock values and interest rates, adding to the enthusiasm for
moving further capital at faster rates.

The scope of international financial management includes management of working

capital, financing decisions and taxation.

Assignment Set- 2 (60 Marks)

1 .What is WTO? Explain its objectives, functions and structure


World Trade Organisation (WTO). WTO was established on 1st January 1995. In April 1994, the
Final Act was signed at a meeting in Marrakesh, Morocco. The Marrakesh Declaration of 15th
April 1994 was formed to strengthen the world economy that would lead to better investment,
trade, income growth and employment throughout the world. The WTO is the successor to the
General Agreement of Tariffs and Trade (GATT). India is one of the founder members of WTO.
WTO represents the latest attempts to create an organisational focal point for liberal trade
management and to consolidate a global organisational structure to govern world affairs. WTO
has attempted to create various organisational attentions for regulation of international trade.
WTO created a qualitative change in international trade. It is the only international body that
deals with the rules of trades between nations.

The WTO agreements are a set of rules that are followed by the member
governments while formulating policies and practices in the area of international
trade. The agreements mainly cover goods, services and intellectual property. The
agreements comprise the rights and obligations of the government that are
enforceable in multilateral framework. The agreement supports individual countries’
commitments to lower customs tariffs and other trade barriers, and to open services
markets. The agreements recommend governments to make their trade policies
transparent. According to the agreement, the government must notify the WTO
about the measures adopted to make their trade policies transparent

12.3.1 Objectives and functions

The key objective of WTO is to promote and ensure international trade in developing countries.
The other major functions include:

· Helping trade flows by encouraging nations to adopt discriminatory trade policies.

· Promoting employment, expanding productions and trade and raising standard of living and
income and utilising the world’s resources.

· Ensuring that developing countries secure a better share of growth in world trade.

· Providing forum for trade negotiations.

· Resolving trade disputes.

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

· Developing transitional economies – Majority of the WTO members belong to developing

countries. The developing countries such as India, China, Mexico, Brazil and others have an
important role in the organisation. The WTO helps in solving the problems of developing
economies. The developing states are provided with trade and tariff data. This depends on the
country’s individual export interest and their participation in WTO-bodies. The new members
benefit hugely from these services.

· Providing help for export promotion – The WTO provides specialised help for export
promotion to its members. The export promotion is done through the International Trade Center
established by the GATT in 1964. It is operated by the WTO and the United Nations. The center
accepts requests from member countries, usually developing countries for support in formulating
and implementing export promotion programmes. The center provides information on export
market and marketing techniques. The center also provides assistance in establishing export
promotion and marketing services. Through this WTO proves its commitment in the upliftment
of the world economy.

· Cooperating in global economic policy-making – The main function of the WTO is to

cooperate in global economic policy-making. In the Marrakesh Ministerial Meeting in April
1994, a separate declaration was adopted to achieve this objective. The declaration specifies the
responsibility of WTO as, to improve and maintain the cooperation with international
organisations such as the World Bank, International Monetary Fund (IMF) that are involved in
monetary and financial matters. WTO analyses the impact of liberalisation on the growth and
development of national economies which is the important factor in the success of the economy.

· Monitoring implementation of the agreement – The WTO administers sixty different

agreements that have the statue of international legal documents. The member-governments sign
and confirm all WTO agreements on attainment.
· Providing forum for negotiations – The WTO provides a permanent forum for negotiations
among members. The negotiations can be on matters already in the WTO agreements or matters
not addressed in the WTO law.

· Administrating dispute settlement – The important function of WTO is the administration of

the WTO dispute settlement system. It helps in settling multilateral trading dispute. A dispute
arises when a member country adopts a trade policy and other fellow members consider it as a
violation of WTO agreements. The Dispute Settlement Body (DSB) is responsible for the
settlement of disputes. The dispute settlement system is prohibited from adding or deleting the
rights and obligations provided in the WTO agreements. The WTO dispute settlement system
helps to:

° Preserve the rights and responsibilities of the members.

° Clarify the current provisions of the agreements.

12.3.2 Structure

The structure of the WTO consists of the Ministerial Conference, which is the highest authority.
This body consists of the representatives from all WTO members. The WTO members meet in
every two years and take decisions on all matters under the multilateral trade agreements. The
daily activities of the WTO are conducted by subsidiary bodies and principally by the General
Council which is composed of WTO members. The members report to the Ministerial
Conference. The General Council on behalf of the Ministerial Conference administers as the
Dispute Settlement Body to manage the dispute settlement procedures. It also acts as the Trade
Policy Review Body that conducts regular reviews of the trade policies of the individual WTO

The General Council delegates responsibility to other major bodies. They are:

· Council for Trade in Goods manages the implementation and functioning of all agreements
covering trade in goods.

· Trade in Services and Trade of Intellectual Property Rights are the two councils that have
responsibility for their respective WTO agreements and can establish their own subsidiary bodies
if required.

· The Committee on Trade and Development manages issues relating to the developing countries.

· The Committee on Balance of Payments conducts consultations between WTO members and
countries that take trade-restrictive measures to handle balance-of-payments difficulties.

· Committee on Budget and Administration manages issues relating to financing and budget of

Q.2 Explain briefly the nature of e-business and the challenges involved.
Answer: The e-business denotes a major trend in the management like any other trends such as
the supply chain management, mail order service or the service economy. The e-business is done
by many asynchronous experts across the globe. The suppliers, customers and also the
competitors coordinate the e-business.

Nature of E-Business

E-business can be defined as "the use of networks and information technology in order to
electronically design, market, buy, sell and deliver products and services worldwide". E-
business, meaning ‘electronic-business’, deals with application of information and
communication technologies, in short an electronic medium in support of all the activities of

The e-business mainly stands for the internet enabled business. There are four entities in the
internet enabled business. These four entities are as shown in the figure 11.1.

The Challenges of E-Business

In the previous section, we have studied about the e-business models. In this section let us learn
about the challenges of e-business. As the e-business is growing, there are many technical and
business trends that are associated with it. Some important trends in e-business are explained

E-business is crucial to business success. Many companies come out with changes that are
necessary for e-business to become profitable. The process of e-business is long lasting than that
of the re-engineering. There are some important trends in the e-business that are described as

· Technology focus is on e-business – The hardware, software, and network vendors, focus on
providing the tools for e-business. The e-business is mainly the extension of the products and

· E-business produces cumulative effects – E-business is long lasting. The relationship with
customers, suppliers, and employees changes as we implement e-business.
· E-business implementation effects success and failure of a business – There will be both the
success and the failures that are associated with any kind of business. The failures become
dramatic with e-business as it is more visible externally.

There are some major success factors for e-business. These factors include the strategic factors,
structural factors and the management oriented factors. These factors are explained as follows:

· Strategic factors.

° The technologies related to the internet are used as a complement for the existing technologies.

° The basis of competition that is not shifted from traditional competitive advantages such as
cost, profit, quality, service and features.

° The new competitors and market shares are tracked.

° The web centric marketing strategy.

° The strategic position of the company in the market has strengthened.

° The frequent review of the distribution and supply chain model is done in order to maximise
the company’s gain.

° The buyer’s behaviour and the customer personalisation.

° The first-mover advantage and quick time to start.

° The e-business offered good products and services.

° The innovation was allowed when risks are low.

° The customer’s and partner’s expectations from the well managed.

· Structural factors.

° Correct digital infrastructure.

° Good e-business education and training to employees, management and customers.

° Current systems expanded to cover entire supply chain.

° Good cost control.

· Management-oriented factors.

° The organisation wide commitment to e-business leadership.

° The necessary support for e-business from the top management.

° The awareness and understanding of capabilities of technology by executives.

° The top management has to communicate about the value of e-business throughout the

The e-business is facing challenges mainly in the areas of technology, logistics, and legal issues.
These areas are explained in the following sections.

11.5.1 Technology

The technology plays a major role in the concept of new economy. The technology has two
dimensions; one is the shift from manufacturing to services and second is the shift from physical
resources to the knowledge resources. There are so many mechanisms for technology innovation
and diffusion, both within and outside the countries. Many of the organisations will include
different technologies both for quantitative and qualitative terms.

Small scale enterprises play a vital role in the implementation of new technologies. They have
added more value in terms of population, employment, and services that they are offering.
Internet also plays a vital role as it helps the small and medium enterprises in providing the cost
effective possibilities to advertise their products. Internet also provides the contacts to buyers and
suppliers on a global basis. E-business is helps the radical transformation in the way that the
business is done. The introduction of technologies like the common database, electronic
networks and value added services are helpful for speeding up the transactions and these are
fundamental at the industrial level. The e-business has to undergo lot of challenges in
implementing the technologies that are helpful for the organisation since many of the people in
the organisation will not be interested to shift to the new technology and learn the new skills.

11.5.2 Logistics

The logistics is defined as the planning framework for maintaining the material, information, and
capital flow. The logistics includes the complex information, communication and control
systems required in the business environment. The logistics presents e-business with challenges
that exceeds the expectations of the customers with a reasonable cost. Now–a-day, attempt has
been made to reduce the inventory costs. In order to meet the high expectations of the customers,
an e-business needs the special infrastructure for tuning and managing the interactions. The
interactions can be in between the shippers, logistic providers, shipping companies, and also the

11.5.3 Legal concerns

As there is tremendous usage of internet, it is better to consider the legal concerns behind the
internet. This is because whatever is printed on the net will be accessed by public throughout the
world. We also have an option of going back and seeing the basics of that information. Now-–a-
day with the help of wireless phones, Personal Digital Assistants (PDAs), internet can be
accessed from anywhere in the world. As a result the customers must be provided proper security
and privacy to access internet. It becomes very difficult to trust the actual with the unethical,
illegal, internet marketing and advertising frauds and e-business email scams and hence one must
be careful while performing e-business.

It is necessary to concern the privacy and legal matters while writing a copy and maintaining a
client’s e-business.

There are uncertainties in e-business when compared with direct business. The uncertainties are
related to the security, privacy, credit and debit card handling. The security is the primary
concern in e-business. The PCI Data Security standard (PCI DSS) needs to be followed by one
who handles the credit card information. E-business is all about the trust between buyer and the
seller so one must be careful while dealing with the transactions which involve the handling of
credit and debit cards.

There will also be copyright issues that is copying something from other sites and presenting the
same content as their own. It is important to check for plagiarism when the company is
publishing their own articles. When some concepts are copyright then it is necessary to credit the
original authors. Disclaimer notice is required at the start of any business website.

If the webmasters include some unethical information about the client then that can cause
everlasting negative consequences for the client. The legal action is taken against the false
advertisements also.

The risks associated with conducting e-business over the internet are explained as follows:

· Jurisdiction – Contracting over the cyberspace is a challenge for the website owners and the
internet is the form of communication that rises above the spatial boundaries. There is a
jurisdiction problem in the disputes between the buyer and seller regarding where the contract
was formed and which state law applies for the contract.

· Contact validity – The emerging issue is the legal validity of web wrap or click on contracts.
This type of contract is mainly found on the web site that offers goods and services for the sale.
This e-business creates the legal relationship between the seller and buyer.

· Contract information – The advent of the e-business over the net is responsible for various
legal issues regarding the formation of the electronic contracts.

· There is a need for matching both the e-customers and e-merchants with the legally responsible
parties in the real world. There is a need for on cryptographic methods for reducing the risks
associated with the identification and authentication. The cryptographic methods for eliminating
the risks those are associated with the non repudiation and security.

3 Mention the relevance of these terms in International business - Letter of credit, Bill of
Lading and Factoring.
Answer: Letter of credit: A standard, commercial letter of credit (LC[1]) is a document issued
mostly by a financial institution, used primarily in trade finance, which usually provides an
irrevocable payment undertaking.

The letter of credit can also be source of payment for a transaction, meaning that redeeming the
letter of credit will pay an exporter. Letters of credit are used primarily in international trade
transactions of significant value, for deals between a supplier in one country and a customer in
another. In such cases the International Chamber of Commerce Uniform Customs and Practice
for Documentary Credits applies (UCP 600 being the latest version).[2] They are also used in the
land development process to ensure that approved public facilities (streets, sidewalks, storm
water ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is
to receive the money, the issuing bank of whom the applicant is a client, and the advising bank
of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be
amended or canceled without prior agreement of the beneficiary, the issuing bank and the
confirming bank, if any. In executing a transaction, letters of credit incorporate functions
common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present
in order to receive payment include a commercial invoice, bill of lading, and documents proving
the shipment was insured against loss or damage in transit.

Letters of credit (LC) deal in documents, not goods. The LC could be irrevocable or revocable.
An irrevocable LC cannot be changed unless both the buyer and seller agree. Whereas in a
revocable LC changes to the LC can be made without the consent of the beneficiary. A sight LC
means that payment is made immediately to the beneficiary/seller/exporter upon presentation of
the correct documents in the required time frame. A time or date LC will specify when payment
will be made at a future date and upon presentation of the required documents.[citation needed]

Negotiation means the giving of value for draft(s) and/or document(s) by the bank authorized to
negotiate, viz the nominated bank. Mere examination of the documents and forwarding the same
to the letter of credit issuing bank for reimbursement, without giving of value / agreed to give,
does not constitute a negotiation.
After a contract is concluded between buyer and seller, buyer's bank
supplies a letter of credit to seller.

All the charges for issuance of Letter of Credit, negotiation of documents,

reimbursements and other charges like courier are to the account of applicant or as
per the terms and conditions of the Letter of credit. If the letter of credit is silent on
charges, then they are to the account of the Applicant. The description of charges
and who would be bearing them would be indicated in the field 71B in the Letter of

A bill of lading (BL - sometimes referred to as BOL or B/L) is a document issued by a carrier to
a shipper, acknowledging that specified goods have been received on board as cargo for
conveyance to a named place for delivery to the consignee who is usually identified. A through
bill of lading involves the use of at least two different modes of transport from road, rail, air, and
sea. The term derives from the verb "to lade" which means to load a cargo onto a ship or other
form of transportation.

A bill of lading can be used as a traded object. The standard short form bill of lading is evidence
of the contract of carriage of goods and it serves a number of purposes:

• It is evidence that a valid contract of carriage, or a chartering contract,

exists, and it may incorporate the full terms of the contract between the
consignor and the carrier by reference (i.e. the short form simply refers to the
main contract as an existing document, whereas the long form of a bill of
lading (connaissement intégral) issued by the carrier sets out all the terms of
the contract of carriage);
• It is a receipt signed by the carrier confirming whether goods matching the
contract description have been received in good condition (a bill will be
described as clean if the goods have been received on board in apparent
good condition and stowed ready for transport); and
• It is also a document of transfer, being freely transferable but not a
negotiable instrument in the legal sense, i.e. it governs all the legal aspects
of physical carriage, and, like a cheque or other negotiable instrument, it may
be endorsed affecting ownership of the goods actually being carried. This
matches everyday experience in that the contract a person might make with
a commercial carrier like FedEx for mostly airway parcels, is separate from
any contract for the sale of the goods to be carried; however, it binds the
carrier to its terms, irrespectively of who the actual holder of the B/L, and
owner of the goods, may be at a specific moment.

The BL must contain the following information:

• Name of the shipping company;

• Flag of nationality;
• Shipper's name;
• Order and notify party;
• Description of goods;
• Gross/net/tare weight; and
• Freight rate/measurements and weighment of goods/total freight

While an air waybill (AWB) must have the name and address of the consignee, a BL may be
consigned to the order of the shipper. Where the word order appears in the consignee box, the
shipper may endorse it in blank or to a named transferee. A BL endorsed in blank is transferable
by delivery. Once the goods arrive at the destination they will be released to the bearer or the
endorsee of the original bill of lading. The carrier's duty is to deliver goods to the first person
who presents any one of the original BL. The carrier need not require all originals to be
submitted before delivery. It is therefore essential that the exporter retains control over the full
set of the originals until payment is effected or a bill of exchange is accepted or some other
assurance for payment has been made to him. In general, the importer's name is not shown as
consignee. The bill of lading has also provision for incorporating notify party. This is the person
whom the shipping company will notify on arrival of the goods at destination. The BL also
contains other details such as the name of the carrying vessel and its flag of nationality, the
marks and numbers on the packages in which the goods are packed, a brief description of the
goods, the number of packages, their weight and measurement, whether freight costs have been
paid or whether payment of freight is due on arrival at the destination. The particulars of the
container in which goods are stuffed are also mentioned in case of containerised cargo. The
document is dated and signed by the carrier or its agent. The date of the BL is deemed to be the
date of shipment. If the date on which the goods are loaded on board is different from the date of
the bill of lading then the actual date of loading on board will be evidenced by a notation the BL.
In certain cases a carrier may issue a separate on board certificate to the shipper.

Main types of bill

[edit] Straight bill of lading

In this importer/consignee/agent is named in the bill of lading, it is called straight bill of lading.
It is a document, in which a seller agrees to use a certain transportation to ship a good to a certain
location, where the bill assigned to a certain party. It details to the quality and quantity of goods.

[edit] Order bill of lading

This bill uses express words to make the bill negotiable, e.g. it states that delivery is to be made
to the further order of the consignee using words such as "delivery to A Ltd. or to order or
assigns". Consequently, it can be indorsed (legal spelling of endorse, maintained in all statute,
including Bills of Exchange Act 1909 (CTH)) by A Ltd. or the right to take delivery can be
transferred by physical delivery of the bill accompanied by adequate evidence of A Ltd.'s
intention to transfer.

[edit] Bearer bill of lading

This bill states that delivery shall be made to whosoever holds the bill. Such bill may be created
explicitly or it is an order bill that fails to nominate the consignee whether in its original form or
through an endorsement in blank. A bearer bill can be negotiated by physical delivery.

[edit] Surrender bill of lading

Under a term import documentary credit the bank releases the documents on receipt from the
negotiating bank but the importer does not pay the bank until the maturity of the draft under the
relative credit. This direct liability is called Surrender Bill of Lading (SBL), i.e. when we hand
over the bill of lading we surrender title to the goods and our power of sale over the goods.

A clean bill of lading states that the cargo has been loaded on board the ship in apparent good
order and condition. Such a BL will not bear a clause or notation which expressively declares a
defective condition of goods and/or the packaging. Thus, a BL that reflects the fact that the
carrier received the goods in good condition. The opposite term is a soiled bill of lading, which
reflects that the goods are received by the carrier in anything but good condition.

Factoring is a financial transaction whereby a business job sells its accounts receivable (i.e.,
invoices) to a third party (called a factor) at a discount in exchange for immediate money with
which to finance continued business. Factoring differs from a bank loan in three main ways.
First, the emphasis is on the value of the receivables (essentially a financial asset),[1][2] not the
firm’s credit worthiness. Secondly, factoring is not a loan – it is the purchase of a financial asset
(the receivable). Finally, a bank loan involves two parties whereas factoring involves three.

It is different from forfaiting only in the sense that forfaiting is a transaction-based operation
involving exporters in which the firm sells one of its transactions,[3] while factoring is a Financial
Transaction that involves the Sale of any portion of the firm's Receivables.[2][1]

Factoring is a word often misused synonymously with invoice discounting[citation needed] - factoring
is the sale of receivables, whereas invoice discounting is borrowing where the receivable is used
as collateral.[4]
The three parties directly involved are: the one who sells the receivable, the debtor, and the
factor. The receivable is essentially a financial asset associated with the debtor's liability to pay
money owed to the seller (usually for work performed or goods sold). The seller then sells one or
more of its invoices (the receivables) at a discount to the third party, the specialized financial
organization (aka the factor), to obtain cash. The sale of the receivables essentially transfers
ownership of the receivables to the factor, indicating the factor obtains all of the rights and risks
associated with the receivables.[2][1] Accordingly, the factor obtains the right to receive the
payments made by the debtor for the invoice amount and must bear the loss if the debtor does not
pay the invoice amount. Usually, the account debtor is notified of the sale of the receivable, and
the factor bills the debtor and makes all collections. Critical to the factoring transaction, the
seller should never collect the payments made by the account debtor, otherwise the seller could
potentially risk further advances from the factor. There are three principal parts to the factoring
transaction; a.) the advance, a percentage of the invoice face value that is paid to the seller upon
submission, b.) the reserve, the remainder of the total invoice amount held until the payment by
the account debtor is made and c.) the fee, the cost associated with the transaction which is
deducted from the reserve prior to it being paid back the seller. Sometimes the factor charges the
seller a service charge, as well as interest based on how long the factor must wait to receive
payments from the debtor. [5] The factor also estimates the amount that may not be collected due
to non-payment, and makes accommodation for this when determining the amount that will be
given to the seller. The factor's overall profit is the difference between the price it paid for the
invoice and the money received from the debtor, less the amount lost due to non-payment.[2]

In the United States, under the Generally Accepted Accounting Principles receivables are
considered sold when the buyer has "no recourse,"[6] or when the financial transaction is
substantially a transfer of all of the rights associated with the receivables and the seller's
monetary liability under any "recourse" provision is well established at the time of the sale.[7]
Otherwise, the financial transaction is treated as a loan, with the receivables used as collateral.

Factoring is a method used by a firm to obtain cash when the available cash balance held by the
firm is insufficient to meet current obligations and accommodate its other cash needs, such as
new orders or contracts. The use of factoring to obtain the cash needed to accommodate the
firm’s immediate Cash needs will allow the firm to maintain a smaller ongoing Cash Balance. By
reducing the size of its cash balances, more money is made available for investment in the firm’s
growth. A company sells its invoices at a discount to their face value when it calculates that it
will be better off using the proceeds to bolster its own growth than it would be by effectively
functioning as its "customer's bank."[8] Accordingly, Factoring occurs when the rate of return on
the proceeds invested in production exceed the costs associated with Factoring the Receivables.
Therefore, the trade off between the return the firm earns on investment in production and the
cost of utilizing a Factor is crucial in determining both the extent Factoring is used and the
quantity of Cash the firm holds on hand.

Many businesses have Cash Flow that varies. A business might have a relatively large Cash Flow
in one period, and might have a relatively small Cash Flow in another period. Because of this,
firms find it necessary to both maintain a Cash Balance on hand, and to use such methods as
Factoring, in order to enable them to cover their Short Term cash needs in those periods in which
these needs exceed the Cash Flow. Each business must then decide how much it wants to depend
on Factoring to cover short falls in Cash, and how large a Cash Balance it wants to maintain in
order to ensure it has enough Cash on hand during periods of low Cash Flow.

Generally, the variability in the cash flow will determine the size of the Cash Balance a business
will tend to hold as well as the extent it may have to depend on such financial mechanisms as
Factoring. Cash flow variability is directly related to 2 factors:

1. The extent Cash Flow can change,

2. The length of time Cash Flow can remain at a below average level.

If cash flow can decrease drastically, the business will find it needs large amounts of cash from
either existing Cash Balances or from a Factor to cover its obligations during this period of time.
Likewise, the longer a relatively low cash flow can last, the more cash is needed from another
source (Cash Balances or a Factor) to cover its obligations during this time. As indicated, the
business must balance the opportunity cost of losing a return on the Cash that it could otherwise
invest, against the costs associated with the use of Factoring.

The Cash Balance a business holds is essentially a Demand for Transactions Money. As stated,
the size of the Cash Balance the firm decides to hold is directly related to its unwillingness to pay
the costs necessary to use a Factor to finance its short term cash needs. The problem faced by the
business in deciding the size of the Cash Balance it wants to maintain on hand is similar to the
decision it faces when it decides how much physical inventory it should maintain. In this
situation, the business must balance the cost of obtaining cash proceeds from a Factor against the
opportunity cost of the losing the Rate of Return it earns on investment within its business.[9] The
solution to the problem is:



• CB is the Cash Balance

• nCF is the average Negative Cash Flow in a given period
• i is the [Discount Rate] that cover the Factoring Costs
• r is the rate of return on the firm’s assets[11]
Q.4 a) Explain the role played by EXIM bank.

Answer: Export-Import Bank of India is the premier export finance institution of the country,
set up in 1982 under the Export-Import Bank of India Act 1981.[2]

Exim Bank is managed by a Board of Directors, which has representatives from the Government,
Reserve Bank of India, Export Credit Guarantee Corporation of India, a financial institution,
public sector banks, and the business community.
The Bank's functions are segmented into several operating groups including:

• Corporate Banking Group which handles a variety of financing programmes

for Export Oriented Units (EOUs), Importers, and overseas investment by
Indian companies.

• Project Finance / Trade Finance Group handles the entire range of export
credit services such as supplier's credit, pre-shipment Agri Business Group, to
spearhead the initiative to promote and support Agri-exports. The Group
handles projects and export transactions in the agricultural sector for

• Small and Medium Enterprise: The group handles credit proposals from SMEs
under various lending programmes of the Bank.

• Export Services Group offers variety of advisory and value-added information

services aimed at investment promotion.

• Export Marketing Services Bank offers assistance to Indian companies, to

enable them establish their products in overseas markets.

• Besides these, the Support Services groups, which include: Research &
Planning, Corporate Finance, Loan Recovery, Internal Audit, Management
Information Services, Information Technology, Legal, Human Resources
Management and Corporate Affairs.

b) What are B2B and C2B business models?

Business-to-business (B2B) describes commerce transactions between businesses, such as

between a manufacturer and a wholesaler, or between a wholesaler and a retailer. Contrasting
terms are business-to-consumer (B2C) and business-to-government (B2G).

The volume of B2B (Business-to-Business) transactions is much higher than the volume of B2C
transactions. The primary reason for this is that in a typical supply chain there will be many B2B
transactions involving sub components or raw materials, and only one B2C transaction,
specifically sale of the finished product to the end customer. For example, an automobile
manufacturer makes several B2B transactions such as buying tires, glass for windscreens, and
rubber hoses for its vehicles. The final transaction, a finished vehicle sold to the consumer, is a
single (B2C) transaction.

B2B is also used in the context of communication and collaboration. Many businesses are now
using social media to connect with their consumers (B2C); however, they are now using similar
tools within the business so employees can connect with one another. When communication is
taking place amongst employees, this can be referred to as "B2B" communication
The term "business-to-business" was originally coined to describe the electronic
communications between businesses or enterprises in order to distinguish it from the
communications between businesses and consumers (B2C). It eventually came to be used in
marketing as well, initially describing only industrial or capital goods marketing. Today it is
widely used to describe all products and services used by enterprises. Many professional
institutions and the trade publications focus much more on B2C than B2B, although most sales
and marketing personnel are in the B2B sector.
Although the exploitation of Internet technologies at the business-to-business level is in its infancy, a number of models have begun to
emerge that manage transactions between buyers and suppliers:

1. Established Buyer-Supplier Relationship

This is a pre-determined one-to-one relationship between a buyer and supplier that is supported by electronic commerce technologies.
Due to the aforementioned limitations associated with EDI, companies have now turned their attention towards the Internet to support
these types of buyer-supplier relationships. Companies are now pursuing a more intensive and interactive relationship with their
suppliers, impacting upon the buyer-supplier relationship in a number of areas, including the integration of manufacturing systems and
supplier involvement in new product development. Exchanging information via extranets costs less and is more effective than through
older traditional methods such as faxes and voicemail. For example, NEC has developed an advanced information system to carry out a
large part of its procurement activities, ranging from procurement notices to settlement on the Internet.

2. Supplier-Oriented Marketplace
In this model, both organizations and consumers use the supplier-provided marketplace. This is the most common type of B2B model. In
this model, both business buyers and individual consumers use the same supplier-provided marketplace. An example of this model is RS
Components ( RS Components is a leading distributor of electronic, electrical, and mechanical components, instruments, and
tools in Europe. The marketplace provides fast search and retrieval of 100,000 products, combined with personalized customer
promotions based on the buying profiles of its major customers. A supplier-oriented marketplace may also provide an auctioning facility
to offload surplus inventory or offer discounts to customers.

3. Buyer-Oriented Marketplace
Under this model, a buyer opens an electronic market on its own server and invites potential suppliers to bid on the announced Requests
for Quotation (RFQs). One company that has successfully exploited this model is GE Lighting. The purchasing department receives
electronic requisitions from internal customers that are then sent to potential suppliers over the Internet. Within two hours of the
purchasing department starting the process, suppliers are notified of incoming RFQs and are given seven days to prepare bids and send
them back over the extranet to GE. With the transaction handled electronically, the procurement function has been able to concentrate
on more strategic activities rather than clerical and administration tasks.

4. Business-to-Business Intermediary
This model is sometimes referred to as a ‘hub’ or ‘exchange’. It is established by an electronic intermediary that runs a marketplace
where suppliers and buyers have a central point to come together. These B2B hubs tend to focus mainly on non-core items that may range
from stationery and computers to catering services and travel. There are two types of hubs:

• Vertical - focus on an industry and provide content that is specific to the industry’s value system of buyers and suppliers.
Examples include e-Steel that acts as an intermediary between steel- makers and customers, and VerticalNet that provides
intermediaries for many industries including electronics, process, telecommunications, and utilities.
• Horizontal - provide the same function for a variety of industries. An example is, which acts as an intermediary
between buyers and suppliers of used capital equipment in different industries.

An intermediary may be closed - where members and trading partners are vetted for legal and financial probity - or open to all-comers,
with the marketplace itself acting as a trusted intermediary. It is important to note that intermediaries may be biased towards either
buyers or suppliers. Supply-side intermediaries may be run by consortia of manufacturers such as Chemdex that acts as an intermediary
for suppliers to the life sciences industry. Similarly, buy-side intermediaries may be run by a consortia of customers such as Covisint for
car makers or by independent organizations such as Achilles for utilities. These intermediaries may attempt to aggregate demand for
buyers in order to obtain reduced prices and more favorable terms from suppliers. In relation to payment, some intermediaries may
charge a flat fee per transaction to both the buyer and suppliers. Alternatively, a percentage may be charged in the case of value-added
services such as auctions. In the case of large, repetitive transactions, to achieve maximum benefit the intermediary should be linked
seamlessly to the buyer’s purchasing and the suppliers’ systems so that the entire purchasing process can be executed electronically.
In the context of competitive advantage and the influence of the Internet, customer/supplier lifecycle is a useful framework for
understanding an organization’s business processes, as well as those of their customers, suppliers, and competitors. This framework
provides a way of distinguishing between buying and selling activities to better understand the interrelationships between customers and
suppliers’ business processes, and what they term ‘TouchPoints’ in the company.

A successful electronic business strategy will alter the nature of the product or service being offered, its value in the marketplace, or the
buyer-supplier relationship.
Consumer-to-business (C2B) is an electronic commerce business model in which consumers
(individuals) offer products and services to companies and the companies pay them. This
business model is a complete reversal of traditional business model where companies offer goods
and services to consumers (business-to-consumer = B2C). We can see this example in blogs or
internet forums where the author offers a link back to an online business facilitating the purchase
of some product (like a book on, and the author might receive affiliate revenue
from a successful sale.

This kind of economic relationship is qualified as an inverted business type. The advent of the
C2B scheme is due to major changes:

• Connecting a large group of people to a bidirectional network has made this

sort of commercial relationship possible. The large traditional media outlets
are one direction relationship whereas the internet is bidirectional one.
• Decreased cost of technology : Individuals now have access to technologies
that were once only available to large companies ( digital printing and
acquisition technology, high performance computer, powerful software)

C2B business models like most of C2C models like Ebay are based on 3 players: a consumer
acting as seller, a business acting as buyer and an intermediary dealing with the connection
between sellers and buyers.


A consumer in the C2B business model can be any individual who has something to offer either
a service or a good. The individual is paid for the work provided to the companies. Depending on
the model, the "consumer" can be:

• A webmaster/ blogger offering advertising service (through Google Adsense

program for example or affiliation program)
• A photographer or a designer offering stock images to companies by selling
his artwork through Fotolia or istockphoto for example
• Any individual answering a poll through a survey site
• Any individual with connections offering job hiring service by referring
someone through referral hiring sites like or


Business in the C2B business model represents any companies buying goods or services to
individual trough intermediaries. Here are some examples of potential companies which can be
such clients:

• Any company which wants to fill a job (through referral hiring sites)
• Any company needing to advertise online (through Google Adwords program
for example)
• Any advertising agency which needs to buy a stock photo (through
microstock sites)

The Intermediary is the crucial element since it creates the connection between business which
needs a service or a good and a mass of individuals. Intermediary is usually a portal both for
buyers (businesses) and seller (individuals).

The intermediary plays two roles:

• It promotes goods and services offered by individuals by proposing a

distribution channel. It offers what individuals can't do themselves : large
promotion, logistic and financial support, technical expertise
• It offers buyers a contact to a mass of individuals and takes care of money
transactions and legal aspects

We can notice that some intermediaries prefer creating two different accesses one for buyers and
one for sellers (Google Adwords for advertiser - Google Adsense for web publisher) whereas
other companies like Fotolia have only one access because buyers and sellers can be the same.

We can differentiate two kinds of intermediaries:

• Extern intermediary : they act as a extern agent within the relation between
companies and individual (ex : referral hiring site)
• Intern intermediary: they play the role both of business and intermediary. For
example, it is the case of through its affiliation program.
Amazon pays individual to promote its own products.

Few types of intermediaries

Examples What do they sell?

Advertising Google Adwords/Adsense Advertising services through

Site Tradedoubler Commission Junction search engines and websites

Microstock Stock Photos, Vectors, Flash

Fotolia Shutterstock Istockphoto
Site animations

H3 Josbster Jobmeeters Job Hiring Service
Hiring Site

September 24, 2005 in C2B Business Model | Permalink | Comments (2) | TrackBack (0)
C2B vs B2C : Graphical Representation

Q.5 What kind of impact will globalization and international business environment
create on Indian businesses? [10 marks]

Globalisation is the new buzzword that has come to dominate the world since the nineties of
the last century with the end of the cold war and the break-up of the former Soviet Union
and the global trend towards the rolling ball. The frontiers of the state with increased
reliance on the market economy and renewed faith in the private capital and resources, a
process of structural adjustment spurred by the studies and influences of the World Bank
and other International organisations have started in many of the developing countries. Also
Globalisation has brought in new opportunities to developing countries. Greater access to
developed country markets and technology transfer hold out promise improved productivity
and higher living standard. But globalisation has also thrown up new challenges like growing
inequality across and within nations, volatility in financial market and environmental
deteriorations. Another negative aspect of globalisation is that a great majority of
developing countries remain removed from the process. Till the nineties the process of
globalisation of the Indian economy was constrained by the barriers to trade and investment
liberalisation of trade, investment and financial flows initiated in the nineties has
progressively lowered the barriers to competition and hastened the pace of globalisation

Though the precise definition of globalisation is still unavailable a few definitions worth
viewing, Stephen Gill: defines globalisation as the reduction of transaction cost of
transborder movements of capital and goods thus of factors of production and goods. Guy
Brainbant: says that the process of globalisation not only includes opening up of world
trade, development of advanced means of communication, internationalisation of financial
markets, growing importance of MNC's, population migrations and more generally increased
mobility of persons, goods, capital, data and ideas but also infections, diseases and pollution

Impact on India:
India opened up the economy in the early nineties following a major crisis that led
by a foreign exchange crunch that dragged the economy close to defaulting on
loans. The response was a slew of Domestic and external sector policy measures
partly prompted by the immediate needs and partly by the demand of the
multilateral organisations. The new policy regime radically pushed forward in favour
of amore open and market oriented economy.

Major measures initiated as a part of the liberalisation and globalisation strategy in

the early nineties included scrapping of the industrial licensing regime, reduction in
the number of areas reserved for the public sector, amendment of the monopolies
and the restrictive trade practices act, start of the privatisation programme,
reduction in tariff rates and change over to market determined exchange rates.

Over the years there has been a steady liberalisation of the current account
transactions, more and more sectors opened up for foreign direct investments and
portfolio investments facilitating entry of foreign investors in telecom, roads, ports,
airports, insurance and other major sectors.

The Indian tariff rates reduced sharply over the decade from a weighted
average of 72.5% in 1991-92 to 24.6 in 1996-97.Though tariff rates went up slowly
in the late nineties it touched 35.1% in 2001-02. India is committed to reduced tariff
rates. Peak tariff rates are to be reduced to be reduced to the minimum with a peak
rate of 20%, in another 2 years most non-tariff barriers have been dismantled by
march 2002, including almost all quantitative restrictions.

India is Global:
The liberalisation of the domestic economy and the increasing integration of India
with the global economy have helped step up GDP growth rates, which picked up
from 5.6% in 1990-91 to a peak level of 77.8% in 1996-97. Growth rates have
slowed down since the country has still bee able to achieve 5-6% growth rate in
three of the last six years. Though growth rates has slumped to the lowest level
4.3% in 2002-03 mainly because of the worst droughts in two decades the growth
rates are expected to go up close to 70% in 2003-04. A Global comparison shows
that India is now the fastest growing just after China.

This is major improvement given that India is growth rate in the 1970's was very
low at 3% and GDP growth in countries like Brazil, Indonesia, Korea, and Mexico was
more than twice that of India. Though India's average annual growth rate almost
doubled in the eighties to 5.9% it was still lower than the growth rate in China,
Korea and Indonesia. The pick up in GDP growth has helped improve India's global
position. Consequently India's position in the global economy has improved from
the 8th position in 1991 to 4th place in 2001. When GDP is calculated on a purchasing
power parity basis.
Globalisation and Poverty:

Globalisation in the form of increased integration though trade and investment is an

important reason why much progress has been made in reducing poverty and
global inequality over recent decades. But it is not the only reason for this often
unrecognised progress, good national polices , sound institutions and domestic
political stability also matter.

Despite this progress, poverty remains one of the most serious international
challenges we face up to 1.2 billion of the developing world 4.8 billion people still
live in extreme poverty.

But the proportion of the world population living in poverty has been steadily
declining and since 1980 the absolute number of poor people has stopped rising
and appears to have fallen in recent years despite strong population growth in poor
countries. If the proportion living in poverty had not fallen since 1987 alone a
further 215million people would be living in extreme poverty today.

India has to concentrate on five important areas or things to follow to achieve this
goal. The areas like technological entrepreneurship, new business openings for
small and medium enterprises, importance of quality management, new prospects
in rural areas and privatisation of financial institutions. The manufacturing of
technology and management of technology are two different significant areas in the

There will be new prospects in rural India. The growth of Indian economy very much
depends upon rural participation in the global race. After implementing the new
economic policy the role of villages got its own significance because of its unique
outlook and branding methods. For example food processing and packaging are the
one of the area where new entrepreneurs can enter into a big way. It may be
organised in a collective way with the help of co-operatives to meet the global

Understanding the current status of globalisation is necessary for setting course for
future. For all nations to reap the full benefits of globalisation it is essential to
create a level playing field. President Bush's recent proposal to eliminate all tariffs
on all manufactured goods by 2015 will do it. In fact it may exacerbate the
prevalent inequalities. According to this proposal, tariffs of 5% or less on all
manufactured goods will be eliminated by 2005 and higher than 5% will be lowered
to 8%. Starting 2010 the 8% tariffs will be lowered each year until they are
eliminated by 2015.
GDP Growth rate:

The Indian economy is passing through a difficult phase caused by several

unfavourable domestic and external developments; Domestic output and Demand
conditions were adversely affected by poor performance in agriculture in the past
two years. The global economy experienced an overall deceleration and recorded
an output growth of 2.4% during the past year growth in real GDP in 2001-02 was
5.4% as per the Economic Survey in 2000-01. The performance in the first quarter
of the financial year is5.8% and second quarter is 6.1%.

Export and Import:

India's Export and Import in the year 2001-02 was to the extent of 32,572
and 38,362 million respectively. Many Indian companies have started becoming
respectable players in the International scene. Agriculture exports account for about
13 to 18% of total annual of annual export of the country. In 2000-01 Agricultural
products valued at more than US $ 6million were exported from the country 23% of
which was contributed by the marine products alone. Marine products in recent
years have emerged as the single largest contributor to the total agricultural export
from the country accounting for over one fifth of the total agricultural exports.
Cereals (mostly basmati rice and non-basmati rice), oil seeds, tea and coffee are the
other prominent products each of which accounts fro nearly 5 to 10% of the
countries total agricultural exports.

Where does Indian stand in terms of Global Integration?

India clearly lags in globalisation. Number of countries have a clear lead among
them China, large part of east and far east Asia and eastern Europe. Lets look at a
few indicators how much we lag.

•Over the past decade FDI flows into India have averaged around 0.5% of
GDP against 5% for China 5.5% for Brazil. Whereas FDI inflows into
China now exceeds US $ 50 billion annually. It is only US $ 4billion in
the case of India

•Consider global trade - India's share of world merchandise exports

increased from .05% to .07% over the pat 20 years. Over the same
period China's share has tripled to almost 4%.

•India's share of global trade is similar to that of the Philippines an

economy 6 times smaller according to IMF estimates. India under
trades by 70-80% given its size, proximity to markets and labour cost

•It is interesting to note the remark made last year by Mr. Bimal Jalan,
Governor of RBI. Despite all the talk, we are now where ever close
being globalised in terms of any commonly used indicator of
globalisation. In fact we are one of the least globalised among the
major countries - however we look at it.

•As Amartya Sen and many other have pointed out that India, as a
geographical, politico-cultural entity has been interacting with the
outside world throughout history and still continues to do so. It has to
adapt, assimilate and contribute. This goes without saying even as we
move into what is called a globalised world which is distinguished from
previous eras from by faster travel and communication, greater trade
linkages, denting of political and economic sovereignty and greater
acceptance of democracy as a way of life.


The implications of globalisation for a national economy are many. Globalisation has intensified
interdependence and competition between economies in the world market. This is reflected in
Interdependence in regard to trading in goods and services and in movement of capital. As a result domestic
economic developments are not determined entirely by domestic policies and market conditions. Rather,
they are influenced by both domestic and international policies and economic conditions. It is thus clear that
a globalising economy, while formulating and evaluating its domestic policy cannot afford to ignore the
possible actions and reactions of policies and developments in the rest of the world. This constrained the
policy option available to the government which implies loss of policy autonomy to some extent, in decision-
making at the national level.

4. Discuss any 3 regional trading agreements and its effect on international


Answer: Regional integration is bonding between nations and states through political, cultural
and economic cooperation. The cooperation is overseen by rules and regulations decided upon by
the states entering into an understanding.

Regional Trading Arrangements

The European Union (EU)

The European Union (EU) is an economic and political union established in 1993. This came
into effect because of the Treaty of Maastricht, signed on 7th February 1992 by the European
Communities. The EU comprises of 27 member states committed to regional integration.
The EU has developed a single market for all the member states and sixteen member states have
adopted a common currency called the Euro. The member states sign an agreement called
Schengen Agreement, which ensures the free movement of people, goods, capital and services,
including the abolition of passport controls. The agreement enacts legislation in justice and home
affairs, and maintains common policies on trade, agriculture, fisheries and regional development.

EU has also devised a common foreign and security policy for its member states. The EU has
established diplomatic missions around the world and they represent the member states at the
United Nations, WTO, G8 and G-20 summits. EU ambassadors head the EU delegations.

Important organisations of the EU include the European Commission, the Council of the
European Union, the European Council, the Court of Justice of the European Union, and the
European Central Bank. The EU citizens elect the European Parliament every five years.

14.4.2 European Free Trade Association (EFTA)

The European Free Trade Association (EFTA) is a free trade organisation established in 1960
between four European counties, Norway, Switzerland, Iceland and Liechtenstein. The EFTA
was formed at the Stockholm Convention between seven countries, presently only four countries
remain as the members of EFTA. The EFTA was formed as an alternative to EU, allowing
countries to join EFTA if they were not willing to join EU. It operates parallel to the EU. The
Stockholm Convention was replaced by the Vaduz Convention. This Convention provides a
framework for a free and liberal trade amongst its member states.

In 1994, three of the EFTA countries signed European Economic Area (EEA) agreement and
became a part of the European Union Internal Market. Switzerland opted to arrange bilateral
agreements with the EU. In addition, the EFTA states have jointly arranged free trade
agreements with many other countries. In 1999, Switzerland established a number of bilateral
agreements with the EU, covering a wide range of areas, including movement of persons,
transport and technical barriers to trade. This agreement prompted the EFTA states to modernise
their convention to guarantee that it will continue to provide guidelines for the expansion and
liberalisation of trade among them and with the rest of the world.

14.4.3 North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement (NAFTA) was signed in 1994 by three governments,
Canada, Mexico, and the United States. This trade agreement is the largest in the world in terms
of combined purchasing power parity Gross Domestic Product (GDP) and second largest by
nominal GDP comparison.

The NAFTA is divided into two sections, the North American Agreement on Environmental
Cooperation (NAAEC) and the North American Agreement on Labour Cooperation (NAALC).

The North American Agreement on Environmental Cooperation (NAAEC) was established in

1994. It is an environmental agreement between the United States of America, Mexico and
Canada. The agreement comprises of a declaration of objectives and principles regarding
conservation and the protection of the environment. The Commission for Environmental
Cooperation (CEC) was set up as part of the agreement.

North American Agreement on Labour Cooperation (NAALC) was also established in 1994 to
achieve the following goals:

· Improve working conditions and living standards.

· Promote a set of guiding labour principles.

· Encourage cooperation to promote innovation.

· Improve the levels of productivity and quality.

NAALC provides various means such as exchanges of information, technical assistance, and
consultations for achieving the above goals.