MB0037 - International Business Management

Master of Business Administration-MBA Semester 4
MB0037 ± International Business Management
Assignment Set- 1 (60 Marks)
Q.1 What is globalization? What are its benefits? How does

globalization help in international business? Give some instances. [10
marks]
Sol.
Economic "globalization" is a historical process, the result of human innovation and

technological progress. It refers to the increasing integration of economies around the
world, particularly through trade and financial flows. The term sometimes also refers to the
movement of people (labor) and knowledge (technology) across international borders.
There are also broader cultural, political and environmental dimensions of globalization
that are not covered here.
At its most basic, there is nothing mysterious about globalization. The term has come
into common usage since the 1980s, reflecting technological advances that have made it
easier and quicker to complete international transactions ± both trade and financial flows.
It refers to an extension beyond national borders of the same market forces that have
operated for centuries at all levels of human economic activity ± village markets, urban
industries, or financial centers.
Markets promote efficiency through competition and the division of labor ± the
specialization that allows people and economies to focus on what they do best. Global
markets offer greater opportunity for people to tap into more and larger markets around the
world. It means that they can have access to more capital flows, technology, cheaper
imports, and larger export markets. But markets do not necessarily ensure that the benefits
of increased efficiency are shared by all. Countries must be prepared to embrace the
policies needed, and in the case of the poorest countries may need the support of the
international community as they do so.
Globalization refers to a µgrowing economic interdependence among countries, as

reflected in the increased cross-border flow of three types of entities: goods and services,
capital, and know-how¶ ( Govindarajan and Gupta, 2001, 4 ). Few spoke of µworld
economy¶ 25 years ago, and the prevalent term was µinternational trade¶ (Drucker, 1995).
However today, international trade has culminated in the emergence of a global economy,
c

consisting of flows of information, technology, money, and people, and is conducted via
government international organizations such as the North American Free Trade Agreement
(NAFTA) and the European Community; global organizations such as the International
Organization for Standardization (ISO); multinational companies (MNCs); and cross ±
border alliances in the form of joint ventures, international mergers, and acquisitions.
These inter ± relationships have enhanced participation in the world economy, and have
become a key to domestic economic growth and prosperity (Drucker, 1995, 153).
Yet, globalization is not without its misgivings and discontents (Sassan, 1998). A
vivid image associated with the G8 summits is the fervent protests against globalization in
many parts of the world, as shown in television and reported in the popular media. Strong
opposition to globalization usually originates from developing countries that have been
hurt by the destabilizing effects of globalization, but in recent times we have also seen
heated debates in Western economies triggered by significant loss of professional jobs as a
result of off shoring to low ± wage countries. Indeed, workers in manufacturing and
farming in advanced economies are becoming increasingly wary of globalization, as their
income continues to decline significantly. In parallel to the angry protests against
globalization, the flow of goods, services, and investments across national borders has
continued to fall after the rapid gains of the 1990s. Furthermore, the creation of regional
trade blocs, such as NAFTA, the European Union, and the Association of Southeast Asian
Nations, have stimulated discussions about creating other trade zones involving countries
in South Asia, Africa, and other parts of the world. Although it is often assumed that
countries belonging to the World Trade Organization (WTO) have embraced globalization,
the fact is that the world is only partially globalized, at best (Schaeffer, 2003). Many parts
of Central Asia and Eastern Europe, including the former republics of the Soviet Union,
parts of Latin America, Africa, and parts of South Asia, have been sceptical of
globalization (Greider, 1997). In fact, less than 10% of the world¶s population is fully
globalized (i.e., being active participants in the consumption of global products and
services) (Schaeffer, 2003). Therefore, it is imperative that we analyze the issues of
cultural convergence and divergence in this partially globalized world.
µUniversal culture¶ often refers to the assumptions, values, and practices of people in
the West and some elites in non-Western cultures. Huntington (1996) suggested that it
originates from the intellectual elites from a selected group of countries who meet annually
in the World Economic Forum in Davos, Switzerland. These individuals are highly
educated, work with symbols and numbers, are fluent in English, are extensively involved
with international commitments, and travel frequently outside their country. They share the
cultural value of individualism, and believe strongly in market economics and political
democracy. Although those belonging to the Davos group control virtually all of the
world¶s important international institutions, many of the world¶s governments, and a great
majority of the world¶s economic and military capabilities, the cultural values of the Davos
group are probably embraced by only a small fraction of the six billion people of the
world.
c

copular culture, again mostly Western European and American in origin, also
contributes to a convergence of consumption patterns and leisure activities around the
world. However, the convergence may be superficial, and have only a small influence on
fundamental issues such as beliefs, norms, and ideas about how individuals, groups,
institutions, and other important social agencies ought to function. In fact, Huntington
(1996, 58) noted that µThe essence of Western civilization is the Magna Carta, not the
Magna Mac. The fact that non-Westerners may bite into the latter has no implications for
their accepting the former¶. This argument is obvious if we reverse the typical situation
and put Western Europeans and Americans in the shoes of recipients of cultural influence.
For instance, while Chinese Kung Fu dominates fight scenes in Hollywood movies such as
Matrix Reloaded, and Chinese restaurants abound in the West, it seems implausible that
Americans and Europeans have espoused more Chinese values because of their fondness
of Chinese Kung Fu and food. A major argument against cultural convergence is that
traditionalism and modernity may be unrelated (Smith and Bond, 1998). Strong traditional
values, such as group solidarity, interpersonal harmony, paternalism, and feminism, can
co-exist with modern values of individual achievement and competition. A case in point is
the findings that Chinese in Singapore and China indeed endorsed both traditional and
modern values (Chang et al., 2003; Zhang et al., 2003). It is also conceivable that, just as
we talk about Westernization of cultural values around the world, we may also talk about
Easternization of values in response to forces of modernity and consumption values
imposed by globalization (Marsella and Choi, 1993).
Although the argument that the world is becoming one culture seems untenable,
there are some areas that do show signs of convergence. We explore in the following the
roles of several factors that simultaneously cause cultures of the world to either converge
or diverge, in an attempt to identify several productive avenues for future research.
c

Q.2 What i culture and in the context of international business
environment how does it impact international business decisions? [10
marks]
Sol.
Ñ lli l

t itt ltli ti

Ñ l:Cltli ti
t i illi ti t t li t l l
i titi tti it ll t t i
tit t i tti i li t C i t
t
ti ll ititi t li i
ii it iittÑ l li ii
t it ti tt il i
ittil i !B it tjti "
tjt i t it til lt # titil B
it i$ ll i i til tt t
ittillt% li l li il
tttil% iilittit ltt
llltt li
t!&'()*+tillt
tit j iti iti itltt !C i tl,)),*t
!-i &'''*. i/Biilll/!&''&*0l
-i /!,)),*
Ñ t i it i t i ttt t i l t
i lt B it t ti t
t i t t i ; l it tli t i l
iilit iliiil l il
# it i t i i ltl i t
li ltl # t i l tt
ti i lt t t ii ltl l
iiti t tltitt.ill it l
itl t i l l i t il lt B
ti i i iÑ l ,& i tt tt ti
illltt tt ijtitiit tt
c
attempt to highlight their importance rather than their coherence as elements of an
integrative framework.
1 Cultural change, convergence and divergence in an era of partial

globalization
An issue of considerable theoretical significance is concerned with cultural changes
and transformations taking place in different parts of the world. In fact, since the landmark
study of Haire et al. (1966) and the publication of Industrialism and Industrial Man by
Kerr et al. (1960), researchers have continued to search for similarities in culture-specific
beliefs and attitudes in various aspects of work related attitudes and behaviours,
consumption patterns, and the like. If cultures of the various locales of the world are
indeed converging (e.g., Heuer et al., 1999), IB-related practices would indeed become
increasingly similar. Standard, culture-free business practices would eventually emerge,
and inefficiencies and complexities associated with divergent beliefs and practices in the
past era would disappear. In the following section, we review the evidence on the issue and
conclude that such an outlook pertaining to the convergence of various IB practices is
overly optimistic.
c

Q.3 Explain the meaning of the term µtrade liberalization¶ and
advantages. Also, identify some commonly observed mistakes in
international trade. [10 marks]
Sol.
The Benefits of Trade Liberalization

colicies that make an economy open to trade and investment with the rest of the
world are needed for sustained economic growth. The evidence on this is clear. No country
in recent decades has achieved economic success, in terms of substantial increases in
living standards for its people, without being open to the rest of the world. In contrast,
trade opening (along with opening to foreign direct investment) has been an important
element in the economic success of East Asia, where the average import tariff has fallen
from 30 percent to 10 percent over the past 20 years.
Opening up their economies to the global economy has been essential in enabling
many developing countries to develop competitive advantages in the manufacture of
certain products. In these countries, defined by the World Bank as the "new globalizers,"
the number of people in absolute poverty declined by over 120 million (14 percent)
between 1993 and 1998.
There is considerable evidence that more outward-oriented countries tend
consistently to grow faster than ones that are inward-looking. Indeed, one finding is that
the benefits of trade liberalization can exceed the costs by more than a factor of 10.
Countries that have opened their economies in recent years, including India, Vietnam, and
Uganda, have experienced faster growth and more poverty reduction. On average, those
developing countries that lowered tariffs sharply in the 1980s grew more quickly in the
1990s than those that did not.
Freeing trade frequently benefits the poor especially. Developing countries can ill-
afford the large implicit subsidies, often channeled to narrow privileged interests that trade
protection provides. Moreover, the increased growth that results from free trade itself tends
to increase the incomes of the poor in roughly the same proportion as those of the
population as a whole. New jobs are created for unskilled workers, raising them into the
middle class. Overall, inequality among countries has been on the decline since 1990,
reflecting more rapid economic growth in developing countries, in part the result of trade
liberalization.
The potential gains from eliminating remaining trade barriers are considerable.
Estimate of the gains from eliminating all barriers to merchandise trade range from
US$250 billion to US$680 billion per year. About two -thirds of these gains would accrue
to industrial countries. But the amount accruing to developing countries would still be
more than twice the level of aid they currently receive. Moreover, developing countries
would gain more from global trade liberalization as a percentage of their GDc than
industrial countries, because their economies are more highly protected and because they
face higher barriers.
c

Although there are benefits from improved access to other countries¶ markets,
countries benefit most from liberalizing their own markets. The main benefits for industrial
countries would come from the liberalization of their agricultural markets. Developing
countries would gain about equally from liberalization of manufacturing and agriculture.
The group of low-income countries, however, would gain most from agricultural
liberalization in industrial countries because of the greater relative importance of
agriculture in their economies.
c

Q.4 Explain the product life cycle theory. [10 marks]
Answer-
+ÑR"CÑ"+
llt i tililÑ liltt i
t t/itl itt
ttilitilit litiliti
i t i i iiit i t t t t t i
i it t
t i it lti i t l t t t t
itititt
t iiiitit jl
t t it t it
t t t/ li l t i
itt ittilit llt ilt
it li l t t l1 lt Ñ ti t/ li
l l t t li1 it i ti t it
it t
tititiit
tttit
t t/ il . t ll t t
llt/lilt lttit li
i ilt

RÑ&: R"CÑ2.C C2M"2 CR Ñ"+
Ñ t/lililliti jt :
t lt titti tt ttit
ill tliÑ itli ltllt
iti
t iltltiillilllit tl
ttitÑ lititlli
t tt i tit itit

tit ittt t/l
.i&: t2iCl-

& R"CÑ32" M+Ñ
t lt i i l
t i Ñ i i l tlti i i iti iti
c
them into a new product. A product is usually undergoing several changes involving a lot
of money and time during development, before it is exposed to target customers via test
markets. Those products that survive the test market are then introduced into a real
marketplace and the introduction phase of the product begins. During the product
development phase, sales are zero and revenues are negative. It is the time of spending
with absolute no return.
2. INTRODUCTION cHASE
The introduction phase of a product includes the product launch with its
requirements to getting it launch in such a way so that it will have maximum impact at the
moment of sale. A good example of such a launch is the launch of ³Windows Xc4 by
Microsoft Corporation. This period can be described as a money sinkhole compared to the
maturity phase of a product. Large expenditure on promotion and advertising is common,
and quick but costly service requirements are introduced. A company must be prepared to
spent a lot of money and get only a small proportion of that back. In this phase
distribution arrangements are introduced. Having the product in every counter is very
important and is regarded as an impossible challenge. Some companies avoid this stress by
hiring external contractors or outsourcing the entire distribution arrangement. This has
the benefit of testing an important marketing tool such as outsourcing.
cricing is something else for a company to consider during this phase. croduct
pricing usually follows one or two well structured strategies. Early customers will pay a lot
for something new and this will help a bit to minimize that sinkhole that was mentioned
earlier. Later the pricing policy should be more aggressive so that the product can become
competitive. Another strategy is that of a pre-set price believed to be the right one to
maximize sales. This however demands a very good knowledge of the market and of what
a customer is willing to pay for a newly introduced product.
A successful product introduction phase may also result from actions taken by the
company prior to the introduction of the product to the market. These actions are included
in the formulation of the marketing strategy. This is accomplished during product
development by the use of market research. Customer requirements on design, pricing,
servicing and packaging are invaluable to the formation of a product design. A customer
can tell a company what features of the product are appealing and what are the
characteristics that should not appear on the product. He will describe the ways of how the
product will become handy and useful. So in this way a company will know before its
product is introduced to a market what to expect from the customers and competitors. A
marketing mix may also help in terms of defining the targeted audience during promotion
and advertising of the product in the introduction phase.
3. GROWTH cHASE
The growth phase offers the satisfaction of seeing the product take-off in the
marketplace. This is the appropriate timing to focus on increasing the market share. If the
product has been introduced first into the market, (introduction into a ³virgin41market or
c

into an existing market) then it is in a position to gain market share relatively easily. A
new growing market alerts the competition¶s attention.
The company must show all the products offerings and try to differentiate them from
the competitors ones. A frequent modification process of the product is an effective policy
to discourage competitors from gaining market share by copying or offering similar
products. Other barriers are licenses and copyrights, product complexity and low
availability of product components. cromotion and advertising continues, but not in the
extent that was in the introductory phase and it is oriented to the task of market leadership
and not in raising product awareness. A good practice is the use of external promotional
contractors. This period is the time to develop efficiencies and improve product
availability and service. Cost efficiency and time-to-market and pricing and discount
policy are major factors in gaining customer confidence. Good coverage in all
marketplaces is worthwhile goal throughout the growth phase. Managing the growth stage
is essential. Companies sometimes are consuming much more effort into the production
process, overestimating their market position. Accurate estimations in forecasting
customer needs will provide essential input into
4. MATURITY cHASE
When the market becomes saturated with variations of the basic product, and all
competitors are represented in terms of an alternative product, the maturity phase arrives.
In this phase market share growth is at the expense of someone else¶s business, rather than
the growth of the market itself. This period is the period of the highest returns from the
product. A company that has achieved its market share goal enjoys the most profitable
period, while a company that falls behind its market share goal, must reconsider its
marketing positioning into the marketplace. During this period new brands are introduced
even when they compete with the company¶s existing product and model changes are more
frequent (product, brand, model). This is the time to extend the product¶s life. cricing and
discount policies are often changed in relation to the competition policies i.e. pricing
moves up and down accordingly with the competitors one and sales and coupons are
introduced in the case of consumer products. cromotion and advertising relocates from the
scope of getting new customers, to the scope of product differentiation in terms of quality
and reliability. The battle of distribution continues using multi distribution channels 2 A
successful .product maturity phase is extended beyond anyone¶s timely expectations. A
good example of this is ³Tide4 washing powder, which has grown old, and it is still
growing.
5. DECLINE cHASE
The decision for withdrawing a product seems to be a complex task and there a lot of
issues to be resolved before with decide to move it out of the market. Dilemmas such as
maintenance, spare part availability, service competitions reaction in filling the market
gap are some issues that increase the complexity of the decision process to withdraw a
product from the market. Often companies retain a high price policy for the declining
c

products that increase the profit margin and gradually discourage the ³few4 loyal
remaining customers from buying it. Such an example is telegraph submission over
facsimile or email. Dr. M. Avlonitis from the Economic University of Athens has
developed a methodology, rather complex one that takes under consideration all the
attributes and the subsequences of product withdrawal process.
Sometimes it is difficult for a company to conceptualize the decline signals of a
product. Usually a product decline is accompanied with a decline of market sales. Its
recognition is sometimes hard to be realized, since marketing departments are usually too
optimistic due to big product success coming from the maturity phase.
This is the time to start withdrawing variations of the product from the market that
are weak in their market position. This must be done carefully since it is not often
apparent which product variation brings in the revenues. The prices must be kept
competitive and promotion should be pulled back at a level that will make the product
presence visible and at the same time retain the ³loyal4 customer. Distribution is
narrowed. The basic channel is should be kept efficient but alternative channels should be
abandoned. For an example, a 0800 telephone line with shipment by a reliable delivery
company, paid by the customer is worth keeping.
c

Q.5 Discuss the implications of Heckscher-Ohlin theory model. [10
marks]
Answer-
The Heckscher±Ohlin model (H±O model) is a general equilibrium mathematical

model of international trade, developed by Eli Heckscher and Bertil Ohlin at theStockholm
School of Economics. It builds on David Ricardo's theory of comparative advantage by
predicting patterns of commerce and production based on the factorendowments of a
trading region. The model essentially says that countries will export products that use their
abundant and cheap factor(s) of production and import products that use the countries'
scarce facto
Features of the model

Relative endowments of the factors of production (land, labor, and capital) determine
a country's comparative advantage. Countries have comparative advantages in
those goods for which the required factors of production are relatively abundant locally.
This is because the profitability of goods is determined by input costs. Goods that require
inputs that are locally abundant will be cheaper to produce than those goods that require
inputs that are locally scarce.
For example, a country where capital and land are abundant but labor is scarce will
have comparative advantage in goods that require lots of capital and land, but little labor
grains. If capital and land are abundant, their prices will be low. As they are the main
factors used in the production of grain, the price of grain will also be low and thus
attractive for both local consumption and export. Labor intensive goods on the other hand
will be very expensive to produce since labor is scarce and its price is high. Therefore, the
country is better off importing those goods.
Theoretical development of the model

The Ricardian model of comparative advantage has trade ultimately motivated by
differences in labour productivity using different m . Heckscher and Ohlin didn't
require production technology to vary between countries, so (in the interests of simplicity)
c

the ½
m
m m . Ricardo considered a
single factor of production (labour) and would not have been able to produce comparative
advantage without technological differences between countries (all nations would
become autarkic at various stages of development, with no reason to trade with each
other). The H-O model removed technology variations[2] but introduced variable capital
endowments, recreating endogenously the inter-country variation of labour productivity
that Ricardo had imposedexogenously. With international variations in the capital
endowment (i.e. infrastructure) and goods requiring different factor m, Ricardo's
comparative advantage emerges as a profit-maximizing solution of capitalist's choices
from m the model's equations. (The decision capital owners are faced with is between
investments in differing production technologies: The H-O model assumes capital is
privately held.)
Original publication
Bertil Ohlin published the book which first explained the theory in 1933. Although
he wrote the book alone, Heckscher was credited as co-developer of the model, because of
his earlier work on the problem, and because many of the ideas in the final model came
from Ohlin's doctoral thesis, supervised by Heckscher.
m

m
m

itself was verbose, rather than being pared
down to the mathematical, and appealed because of its new insights.
The 2×2×2 model

The original H-O model assumed that the only difference between countries was the
relative abundances of labor and capital. The original Heckscher±Ohlin model contained
two countries, and had two commodities that could be produced. Since there are two
(homogeneous) factors of production this model is sometimes called the "2×2×2 model".
The model has

m m between countries: Highly developed
countries have a comparatively high ratio of capital to labor in relation to developing
countries. This makes the developed country capital-abundant relative to the developing
nation, and the developing nation labor-abundant in relation to the developed country.
With this single difference, Ohlin was able to discuss the new mechanism
of comparative advantage, using just two goods and two technologies to produce them.
(One technology would be a capital intensive industry, the other a labor intensive business
- see "assumptions" below).
Extensions
The model has been extended since the 1930s by many economists. These
developments did not change the fundamental role of variable factor proportions in driving
international trade, but added to the model various real-world considerations (such
as tariffs) in the hopes of increasing the model's predictive power, or as a mathematical
way of discussing macroeconomic policy options.
c

Notable contributions came from caul Samuelson, Ronald Jones, and Jaroslav
Vanek, so that variations of the model are sometimes called the Heckscher-Ohlin-
Samuelson model or the Heckscher-Ohlin-Vanek model in the neo-classical economics.
[edit]Assumptions of the theory
The original, 2x2x2 model was derived with restrictive assumptions, partly for the
sake of mathematical simplicity. Some of these have been relaxed for the sake of
development. These assumptions and developments are listed here.
Both countries have identical production technology

This assumption means that producing the same output of either commodity be
done with the same level of capital and labour in either country. Actually, it would be
inefficient to actually use the same balance in either country (because of the relative
availability of either input factor) but, in principle this would be possible. Another way of
saying this is that the per-capita productivity is the same in both countries in the same
technology with identical amounts of capital.
Countries have natural advantages in the production of various commodities in
relation to one another, so this is an 'unrealistic' simplification designed to highlight the
effect of variable factors. (This meant that the original HO-model produced an alternative
explanation for free trade to Ricardo's, rather than a complementary one). In reality, both
effects may occur (differences in technology and factor abundances).
In addition to natural advantages in the production of one sort of output over another
(wine vs. rice, say) the infrastructure, education, culture, and 'know-how' of countries
differ so dramatically that the idea of identical technologies is a theoretical notion. Ohlin
said that the HO-model was a long run model, and that the conditions of industrial
production are "everywhere the same" in the long run. [3]
Production output must have constant Return to Scale

Both of the countries in the simple HO model produced both commodities, and both
technologies have constant returns to scale (CRS). (CRS production has twice the output if
both capital and labour inputs are doubled, so the two production functions must be
'homogeneous of degree 1').
These conditions are required to produce a mathematical equilibrium. With
increasing returns to scale it would likely be more efficient for countries to specialize, but
specialization is not possible with the Heckscher-Ohlin assumptions.
The technologies used to produce the two commodities differ

The CRS production functions must differ to make trade worthwhile in this model.
For instance if the functions are Cobb-Douglas technologies the parameters applied to the
inputs must vary. An example would be:
Arable industry: = 1 $ 3 2 $ 3
Fishing industry: = 1 $ 2 1 $ 2
c

Where is the output in arable production, is the output in fish production,
and , are capital and labour in both cases.
In this example, the marginal return to an extra unit of capital is higher in the fishing
industry, assuming units of F(ish) and A(rable) output have equal value. The more capital-
abundant country may gain by developing its fishing fleet at the expense of its arable
farms. Conversely, the workers available in the relatively labour-abundant country can be
employed relatively more efficiently in arable farming.
Labor mobility within countries

Jm countries, capital and labor can be reinvested and re-employed to produce
different outputs. Like the comparative advantage argument of Ricardo, this is assumed to
happen costlessly.
If the two production technologies are the arable industry and the fishing industry it
is assumed that farmers can shift to work as fishermen with no cost, and vice versa.
Capital mobility within countries

It is further assumed that capital can shift easily into either technology, so that the
industrial mix can change without adjustment costs between the two types of production.
For instance, if the two industries are farming and fishing it is assumed that farms
can be sold to pay for the construction of fishing boats with no transaction costs.
Capital immobility between countries

The basic Heckscher±Ohlin model depends upon the relative availability of capital
and labour differing internationally, but if capital can be freely invested
anywherecompetition (for investment) will make relative abundances identical throughout
the world. (Essentially, Free Trade in capital would provide a single worldwide investment
pool.)
Differences in labour abundance would not produce a difference in
m factor
abundance (in relation to mobile capital) because the labour$capital ratio would be
identical everywhere. (A large country would receive twice as much investment as a small
one, for instance, maximizing capitalist's return on investment).
As capital controls are reduced, the modern world has begun to look a lot less like
the world modelled by Heckscher and Ohlin. It has been argued that capital mobility
undermines the case for Free Trade itself, see: Capital mobility and comparative advantage
Free trade critique. Capital is mobile when:
There are limited exchange controls
Foreign Direct Investment (FDI) is permitted between countries, or foreigners are
permitted to invest in the commercial operations of a country through a stock orcorporate
bond market
Labour immobility between countries
c

Like capital, labor movements are not permitted in the Heckscher-Ohlin world, since
this would drive an equalization of relative abundances of the two production factors, just
as in the case of capital immobility above. This condition is more defensible as a
description of the modern world than the assumption that capital is confined to a single
country.
Commodities have the same price everywhere

The 2x2x2 model originally placed no barriers to trade, had no tariffs, and
no exchange controls (capital was immobile, but repatriation of foreign sales was costless).
It was also free of transportation costs between the countries, or any other savings that
would favour procuring a local supply.
If the two countries have separate currencies, this does not affect the model in any
way (curchasing cower carity applies). Since there are no transaction costs or currency
issues the law of one price applies to both commodities, and consumers in either country
pay exactly the same price for either good.
In Ohlin's day this assumption was a fairly neutral simplification, but economic
changes and econometric research since the 1950s have shown that the local prices of
goods tend to be correlated with incomes when both are converted at money prices
(although this is less true with traded commodities). See: cenn effect.
Perfect internal competition

Neither labour nor capital has the power to affect prices or factor rates by
constraining supply; a state of perfect competition exists.
Conclusions of the model

The results of this work has been the formulation of certain named conclusions
arising from the assumptions inherent in the model. These are known as:
Heckscher±Ohlin theorem
?

m ½ m
The exports of a capital-abundant country will be from capital-intensive industries,
and labour-abundant countries will import such goods, exporting labour intensive goods in
return. Competitive pressures within the H±O model produce this prediction fairly
straightforwardly. Conveniently, this is an easily testable hypothesis.
Rybczynski theorem
?

m m
When the amount of one factor of production increases, the production of the good
which uses that particular factor of production intensively increases relative to the increase
in the factor of production, (as the H-O model assumes perfect competition where price is
equal to the costs of factors of production). This theorem is useful in explaining the effects
of immigration, emigration and foreign capital investment. However, Rybczynski suggests
that a fixed quantity of the two factors of production are required. This could be expanded
c

to consider factor substitution, in which case the increase in production would be more
than proportional.
Stolper±Samuelson theorem
?

m
m
m
Relative changes in mm goods prices will drive the relative prices of the factors
used to produce them. If the world price of capital-intensive goods increases, it will
increase the relative rental rate as well as decreasing the relative wage rate (the return on
capital as against the return to labour). Also if the price of labour intensive goods
increases, it will increase the relative wage rate as well as decreasing the
relative rental rate .
Factor±Price equalization theorem
?

m
m

m
Free and competitive trade will make factor prices converge along with traded goods
prices. The FcE theorem is the most significant conclusion of the HO-model, but it is also
the theorem which has found the least agreement with the economic evidence. Neither
the rental return to capital, nor the wage rates seem to consistently converge between
trading partners at different levels of development.
The implications of factor-proportion changes
The
m
m concerns nominal rents and wages. The

Magnification effect on prices considers the effect of output-goods price-changes on the
real return to capital and labour. This is done by dividing the nominal rates with a price
index, but took thirty years to develop completely because of the theoretical complexity
involved.
The Magnification effect shows that trade liberalization will actually make the
locally-scarce factor of production (because increased trade makes the price
index fall by less than the drop in returns to the scarce-factor induced by the
m
m ).
The Magnification effect on production quantity-shifts induced by endowment
changes (via the m ) predicts a larger proportionate shift in output-
quantity than in the corresponding endowment factor shift which induced it. This has
implications to both labour and capital:
Assuming fixed capital, population growth will dilute the scarcity of labour
in relation to capital. If the population growth outpaces the growth in capital by 10% this
may translate into a 20% shift in the balance of employment to the labour-intensive
industries.
In the modern world, money tends to be much more mobile than labour, so
import of capital to a country will almost certainly shift the relative factor-abundances in
favour of capital. The magnification effect says that a 10% increase in national capital may
lead to a redistribution of labour amounting to a fifth of the entire economy (towards
capital-intensive, high-tech production). Notably, employment patterns in very poor
countries can be dramatically affected by a small amount ofFDI, in this model. (See
also: Dutch disease.)
c

[edit]Econometric testing of H±O model theorems
Heckscher and Ohlin considered the Factor-crice Equalization theorem an
econometric success because the large volume of international trade in the late 19th and
early 20th centuries coincided with the convergence of commodity
factor prices
worldwide.
Modern econometric estimates have shown the model to perform poorly, however,
and adjustments have been suggested, most importantly the assumption that technology is
not the same everywhere. (This change would mean abandoning the pure H±O model.)
The Leontief paradox
In 1954, an econometric test by Wassily W. Leontief of the H±O model found that
the US, despite having a relative abundance of capital, tended to export labor intensive
goods and import capital intensive goods. This problem became known as the Leontief
paradox. Alternative trade models and various explanations for the paradox have emerged
as a result of the paradox. One such trade model, the Linder hypothesis, suggests that
goods are traded based on similar demand rather than differences in supply side factors
(i.e.. H±O's factor endowments).
The Vanek formula
Various attempts in 1960's and 1970s to "solve" the Leontief paradox and save the
Heckscher-Ohlin Theory failed. From 1980's a new series of statistical tests had been tried.
The new tests depended on the Vanek's formula.[4] It takes a simple form
Fc = Vc í sc V
where Fc is the net trade of factor service vector for country c, Vc the factor
endowment vector for country c, and sc the country c's share of the world consumption and
V the world total endowment vector of factors. For many countries and many factors, it is
possible to estimate the left hand sides and right hand sides independently. To put it
another way, the right hand side tells the direction of factor service trade. Thus it is
possible to ask how this system of equations holds. The results obtained by Bowen,
Leamer and Sveiskaus (1987) was disastrous.[5] They examined the cases of 12 factors and
27 countries for the year 1967. They found that the both sides of the equations had the
same sign only for 61 percent out of 324 cases. For the year 1983, the result was more
disastrous. Both sides had the same sign only for 148 cases out of 297 cases (or the rate of
correct predictions was 49.8%). A random coin-tossing would predict rightly for 50 % of
the cases. The results of Bowen, Leamer and Sveiskaus (1987) mean that the Hecksher±
Ohlin±Vanek theory has no predictive power concerning the directions of trade.
Criticism against the Heckscher±Ohlin model
Although H-O model is normally thought to be basic for the international trade
theory, there are many points of criticism against the model.[6]
Poor predictive power
The original Heckscher±Ohlin model and extended model such as the Vanek model
performs poorly, as it is shown in the section "Econometric testing of H-O model
theorems". Daniel Trefler and Susan Chun Zhu summarises their paper that "It is hard to
c

believe that factor endowments theory [editor's note: in other words, Heckscher±Ohlin±
Vanek Model] could offer an adequate explanation of international trade patterns."[7]
A common understanding exists that in the national level HOV model fits well. In
fact, Davis and others found that HOV model fitted extremely well with the regional data
of Japan.[8] Even when the HOV formula fits well, it does not mean that Heckscher±Ohlin
theory is valid. Indeed, Heckscher±Ohlin theory claims that the state of factor endowments
of each country (or each region) determines the production of each country (respectively of
each region) but Bernstein and Weinstein found that the factor endowments have little
predictive power. The factor-endowments-driven model (FED model) has errors much
greater than HOV model.[9]
Factor equalization theorem
The factor equalization theorem (FET) applies only for most advanced countries.
The average wage in Japan was once as big as 70 times the wage in Vietnam. These wage
discrepancies are not normally in the scope of the H-O model analysis.[10]
Heckscher±Ohlin theory is badly adapted to the analyze South-North trade problems.
The assumptions of HO are unrealistic with respect to North-South trade. Income
differences between North and South is the concern that third world cares most. The factor
price equalization theorem has not shown a sign of realization, even for a long time lag of
a half century.[11]
Identical production function
The standard Heckscher±Ohlin model assumes that the production functions are
identical for all countries concerned. This means that all countries are in the same level of
production and have the same technology. This is highly unrealistic. Technological gap
between developed and developing countries is the main concern for the development of
poor countries. The standard Heckscher±Ohlin model ignores all these vital factors when
one wants to consider development of less developed countries in the international
context.[11] Even between developed countries, technology differs from industry to
industry and firm to firm base. Indeed this is the very basis of the competition between
firms, inside the country and across the country. See the New Trade Theory in this article
below.
Capital as endowment
In the modern production system, machines and apparatuses play an important role.
What is named capital is nothing other than these machines and apparatuses, together with
materials and intermediate products which will be consumed in the production process.
Capital is the most important of factors, or one should say as important as labor. By the
help of machines and apparatuses, the human being got a tremendous production
capability. These machines, apparatuses and tools are classified as capital, or more
precisely as durable capital, for one uses these items for many years. Their quantity is not
changed at once. But the capital is not an endowment given by the nature. It is composed
of goods manufactured in the production and often imported from foreign countries. In this
sense, capital is internationally mobile and the result of past economic activity. The
c

concept of capital as natural endowment distorts the real role of capital. Capital is a
production power accumulated by the past investment.
Homogeneous capital
Capital goods take different forms. It may take the form of a machine-tool such as
lathe, the form of a transfer-machine, which you can see under the belt-conveyers. It may
take the form of oil or iron core. Despite these facts, capital in the Hechscher±Ohlin Model
is assumed as homogeneous and transferable to any form if necessary. This assumption is
not only far from the reality, but also it includes logical flaw. Capital has a measure, just
like anything has weight. How can an amount of various goods be measured?[10]
Usually by a system of prices. But prices are dependent of profit rate. In the
Heckscher±Ohlin model, the rate of profit is determined according to how abundant capital
is. If capital is scarce, it has a high rate of profit. If it is abundant, the profit rate is low.
Here is a logical circle. Before the profit rate is determined, the amount of capital is not
measured. This logical difficulty was the subject of academic controversy which took
place many years ago. In fact, this is sometimes namedCambridge Capital Controversies.
The conclusion of the controversies was that the concept of homogeneous capital was
untenable. Heckscher±Ohlin theorists ignore all these stories without providing any
explanation how capital is measured theoretically.[12]
No unemploymnent
Unemployment is the vital question in any trade conflict. Heckscher±Ohlin theory
excludes unemployment by the very formulation of the model, in which all factors
(including labour) are employed in the production. [13]
No room for firms
Standard Heckscher±Ohlin theory assumes the same production function for all
countries. This implies that all firms are identical. The theoretical consequence is that there
is no room for firms in the HO model. By contrast, the New Trade Theory emphasizes that
firms are heterogeneous. [14][15]
Political background for HO-Model
From the middle of the 19th century to 1930s, giant flow of immigration took place
from Europe to North America. It is estimated that more than 60 million people crossed
the Atlantic Ocean. Some politicians worried if these immigrants may cause various
troubles (including cultural conflicts). For those politicians HO-theory provided a good
reason ³in support of both restrictions on labor migration and free trade in goods.4[16]
Alternatives to Heckscher±Ohlin model
New Trade Theory
?

m

New Trade theorists challenge the assumption of diminishing returns to scale, and
some argue that using protectionist measures to build up a huge industrial base in certain
industries would then allow those sectors to dominate the world market, via a network
effect.
c

Q.6 Do you think WTO is helpful for promoting international
business? Give reasons for your answer. [10 marks] February 2011
Sol.
The World Trade Organization (WTO) is an organization that intends to supervise

and liberalize international trade. The organization officially commenced on January 1,
1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and
Trade (GATT), which commenced in 1948. The organization deals with regulation of trade
between participating countries; it provides a framework for negotiating and formalizing
trade agreements, and a dispute resolution process aimed at enforcing participants'
adherence to WTO agreements which are signed by representatives of member
governments and ratified by their parliaments.[4][5] Most of the issues that the WTO
focuses on derive from previous trade negotiations, especially from the Uruguay
Round (1986±1994).
m
Among the various functions of the WTO, these are regarded by analysts as the most
important:
It oversees the implementation, administration and operation of the covered

agreements.
It provides a forum for negotiations and for settling disputes.
Additionally, it is the WTO's duty to review and propagate the national trade
policies, and to ensure the coherence and transparency of trade policies through
c

surveillance in global economic policy-making.[29][31] Another priority of the WTO is the
assistance of developing, least-developed and low-income countries in transition to adjust
to WTO rules and disciplines through technical cooperation and training.[32]
The WTO is also a center of economic research and analysis: regular assessments of
the global trade picture in its annual publications and research reports on specific topics
are produced by the organization.[33] Finally, the WTO cooperates closely with the two
other components of the Bretton Woods system, the IMF and the World Bank.[30]
Principles of the trading system
The WTO establishes a framework for trade policies; it does not define or specify
outcomes. That is, it is concerned with setting the rules of the trade policy games.[34] Five
principles are of particular importance in understanding both the pre-1994 GATT and the
WTO:
1. Non-Discrimination. It has two major components: the most favoured

nation (MFN) rule, and the national treatment policy. Both are embedded in the main
WTO rules on goods, services, and intellectual property, but their precise scope and nature
differ across these areas. The MFN rule requires that a WTO member must apply the same
conditions on all trade with other WTO members, i.e. a WTO member has to grant the
most favorable conditions under which it allows trade in a certain product type to all other
WTO members.[34] "Grant someone a special favour and you have to do the same for all
other WTO members."[35] National treatment means that imported goods should be treated
no less favorably than domestically produced goods (at least after the foreign goods have
entered the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical
standards, security standards et al. discriminating against imported goods).[34]
2. Reciprocity. It reflects both a desire to limit the scope of free-riding that
may arise because of the MFN rule, and a desire to obtain better access to foreign markets.
A related point is that for a nation to negotiate, it is necessary that the gain from doing so
be greater than the gain available from unilateralliberalization; reciprocal concessions
intend to ensure that such gains will materialise.
3. Binding and enforceable commitments. The tariff commitments made by
WTO members in a multilateral trade negotiation and on accession are enumerated in a
schedule (list) of concessions. These schedules establish "ceiling bindings": a country can
change its bindings, but only after negotiating with its trading partners, which could mean
compensating them for loss of trade. If satisfaction is not obtained, the complaining
country may invoke the WTO dispute settlement procedures.[35][36]
4. Transparency. The WTO members are required to publish their trade
regulations, to maintain institutions allowing for the review of administrative decisions
affecting trade, to respond to requests for information by other members, and to notify
changes in trade policies to the WTO. These internal transparency requirements are
supplemented and facilitated by periodic country-specific reports (trade policy reviews)
through the Trade colicy Review Mechanism (TcRM).[37] The WTO system tries also to
c

improve predictability and stability, discouraging the use of quotas and other measures
used to set limits on quantities of imports.[35]
5. Safety valves. In specific circumstances, governments are able to restrict
trade. There are three types of provisions in this direction: articles allowing for the use of
trade measures to attain noneconomic objectives; articles aimed at ensuring "fair
competition"; and provisions permitting intervention in trade for economic
reasons.[37] Exceptions to the MFN principle also allow for preferential treatment
of developed countries, regional free trade areas and customs unions
Ten Benefits of WTO
1. The system helps to keep the peace

2. The system allows disputes to be handled constructively
3. A system based on rules rather than power makes life easier for all
4. Freer trade cuts the cost of living
5. It gives consumers more choice and a broader range of qualities to choose from
6. Trade raises incomes
7. Trade stimulates economic growth and that can be good news for employment
8. The basic principles make the system economically more efficient, and they cut
costs
9. The system shields governments from narrow interests
10. The system encourages good government
***
c

Master of Business Administration-MBA Semester 4
MB0037 ± International Business Management - 3 Credits
Assignment Set- 2 (60 Marks)
Q.1 What is WTO? What is GATT? Explain both. [10 marks]

Answer-
J m m m
m

m

It does this by:
· Administering trade agreements
· Acting as a forum for trade negotiations
· Settling trade disputes
· Reviewing national trade policies
· Assisting developing countries in trade policy issues, through technical assistance
and training programs
· Cooperating with other international organizations
Structure
c

Ñ #Ñ" l&5) ti '67lt
8)t titi i
ii t ti i Ñ i i till
jit tili l tit it #Ñ"tl
t #Ñ"/ -ÑÑÑ #Ñ"/t tii i
ll /lit
Ñ #Ñ"/ t l l ii
i i t ?inisterial Conference i
ttlt t
Blt i it General Council !ll lti
i - t ti iil t / itl* i t l
ti i t - 9t Ñ -l Cil l t t Ñ
liR iBt it ttltB
tt tl lt Goods Council Services Council and Intellectual Property
(T IPS) Councilttt -lCil
+speciali ed committees, working groupsworking partieslit
t ii il t t t it lt
ilitiiltt
Secretariat
Ñ #Ñ" tit i - :)) t i
itl t l t i l &:) illi i t t
iti- iiit
t t l t
tit t t ii
i l t t t ittil i
i it Ñ tit/ititlt iltt i
il itt t iitil t i t il it
lititl1lttli#Ñ"itt li
i
Ñ titl illitit itttlt
i ti it t #Ñ"

Figure: Structure of WT
c
The WTO is µmember-driven¶, with decisions taken by consensus among all member
governments.
The WTO is run by its member governments. All major decisions are made by the
membership as a whole, either by ministers (who meet at least once every two years) or by
their ambassadors or delegates (who meet regularly in Geneva). Decisions are normally
taken by consensus.
In this respect, the WTO is different from some other international organizations
such as the World Bank and International Monetary Fund. In the WTO, power is not
delegated to a board of directors or the organization¶s head.
When WTO rules impose disciplines on countries¶ policies, that is the outcome of
negotiations among WTO members, the rules are enforced by the members themselves
under agreed procedures that they negotiated, including the possibility of trade sanctions.
But those sanctions are imposed by member countries, and authorized by the membership
as a whole. This is quite different from other agencies whose bureaucracies can, for
example, influence a country¶s policy by threatening to withhold credit.
Reaching decisions by consensus among some 150 members can be difficult. Its
main advantage is that decisions made this way are more acceptable to all members. And
despite the difficulty, some remarkable agreements have been reached. Nevertheless,
proposals for the creation of a smaller executive body ± perhaps like a board of directors
each representing different groups of countries ± are heard periodically. But for now, the
WTO is a member-driven, consensus-based organization.
Highest authority: the Ministerial Conference
So, the WTO belongs to its members. The countries make their decisions through
various councils and committees, whose membership consists of all WTO members.
Topmost is the ministerial conference which has to meet at least once every two years. The
Ministerial Conference can take decisions on all matters under any of the multilateral trade
agreements.
Second level: General Council in three guises
Day-to-day work in between the ministerial conferences is handled by three bodies:
· The General Council
· The Dispute Settlement Body
· The Trade colicy Review Body
All three are in fact the same ± the Agreement Establishing the WTO states they are
all the General Council, although they meet under different terms of reference. Again, all
three consist of all WTO members. They report to the Ministerial Conference.
The General Council acts on behalf of the Ministerial Conference on all WTO
affairs. It meets as the Dispute Settlement Body and the Trade colicy Review Body to
oversee procedures for settling disputes between members and to analyze members¶ trade
policies.
Third level: councils for each broad area of trade, and more back to top
Three more councils, each handling a different broad area of trade, report to the
General Council:
c

· The Council for Trade in Goods (Goods Council)
· The Council for Trade in Services (Services Council)
· The Council for Trade ± Related Aspects of Intellectual croperty Rights (TRIPS
Council)
As their names indicate, the three are responsible for the workings of the WTO
agreements dealing with their respective areas of trade. Again they consist of all WTO
members. These three also have the subsidiary bodies.
Six other bodies report to the General Council. The scope of their coverage is
smaller, so they are ³committees4. But they still consist of all WTO members. They cover
issues such as trade and development, the environment, regional trading arrangements, and
administrative issues. The Singapore Ministerial Conference in December 1996 decided to
create new working groups to look at investment and competition policy, transparency in
government procurement, and trade facilitation.
Two more subsidiary bodies dealing with the plural-lateral agreements (which are
not signed by all WTO members) keep the General Council informed of their activities
regularly.
Fourth level: down to the nitty-gritty
Each of the higher level councils has subsidiary bodies. The Goods Council has 11
committees dealing with specific subjects (such as agriculture, market access, subsidies,
anti-dumping measures and so on). Again, these consist of all member countries. Also
reporting to the Goods Council is the Textiles Monitoring Body, which consists of a
chairman and 10 members acting in their personal capacities, and groups dealing with
notifications (governments informing the WTO about current and new policies or
measures) and state trading enterprises.
The Services Council¶s subsidiary bodies deal with financial services, domestic
regulations, GATS rules and specific commitments.
At the General Council level, the Dispute Settlement Body also has two
subsidiaries: the dispute settlement ³panels4 of experts appointed to adjudicate on
unresolved disputes, and the Appellate Body that deals with appeals.
Heads of Delegations and other boards: the need for informality
Important breakthroughs are rarely made in formal meetings of these bodies, least of
all in the higher level councils. Since decisions are made by consensus, without voting,
informal consultations within the WTO play a vital role in bringing a vastly diverse
membership round to an agreement.
One step away from the formal meetings is informal meetings that still include the
full membership, such as those of the Heads of Delegations (HOD). More difficult issues
have to be thrashed out in smaller groups. A common recent practice is for the chairperson
of a negotiating group to attempt to forge a compromise by holding consultations with
delegations individually, in twos or threes, or in groups of 20 ± 30 of the most interested
delegations.
These smaller meetings have to be handled sensitively. The key is to ensure that
everyone is kept informed about what is going on (the process must be ³transparent4) even
c

if they are not in a particular consultation or meeting, and that they have an opportunity to
participate or provide input (it must be ³inclusive4).
One term has become controversial, but more among some outside observers than
among delegations. The ³Green Room4 is a phrase taken from the informal name of the
director-general¶s conference room. It is used to refer to meetings of 20 ± 40 delegations,
usually at the level of heads of delegations. These meetings can take place elsewhere, such
as at Ministerial Conferences, and can be called by the minister chairing the conference as
well as the director-general. Similar smaller group consultations can be organized by the
chairs of committees negotiating individual subjects, although the term Green Room is not
usually used for these.
In the past delegations have sometimes felt that Green Room meetings could lead to
compromises being struck behind their backs. So, extra efforts are made to ensure that the
process is handled correctly, with regular reports back to the full membership.
The way countries now negotiate has helped somewhat. In order to increase their
bargaining power, countries have formed coalitions. In some subjects such as agriculture
virtually all countries are members of at least one coalition ± and in many cases, several
coalitions. This means that all countries can be represented in the process if the
coordinators and other key players are present. The coordinators also take responsibility
for both ³transparency4 and ³inclusiveness4 by keeping their coalitions informed and by
taking the positions negotiated within their alliances.
In the end, decisions have to be taken by all members and by consensus. The
membership as a whole would resist attempts to impose the will of a small group. No one
has been able to find an alternative way of achieving consensus on difficult issues, because
it is virtually impossible for members to change their positions voluntarily in meetings of
the full membership.
Market access negotiations also involve small groups, but for a completely different
reason. The final outcome is a multilateral package of individual countries¶ commitments,
but those commitments are the result of numerous bilateral, informal bargaining sessions,
which depend on individual countries¶ interests. (Examples include the traditional tariff
negotiations, and market access talks in services.)
So, informal consultations in various forms play a vital role in allowing consensus to
be reached, but they do not appear in organization charts, precisely because they are
informal.
They are not separate from the formal meetings, however. They are necessary for
making formal decisions in the councils and committees. Nor are the formal meetings
unimportant. They are the forums for exchanging views, putting countries¶ positions on the
record, and ultimately for confirming decisions. The art of achieving agreement among all
WTO members is to strike an appropriate balance, so that a breakthrough achieved among
only a few countries can be acceptable to the rest of the membership.
c

GATT.
Given its provisional nature and limited field of action, the success of GATT in
promoting and securing the liberalization of much of world trade over 47 years is
incontestable. Continual reductions in tariffs alone helped spur very high rates of world
trade growth ± around 8 per cent a year on average during the 1950s and 1960s. And the
momentum of trade liberalization helped ensure that trade growth consistently out-paced
production growth throughout the GATT era. The rush of new members during the
Uruguay Round demonstrated that the multilateral trading system, as then represented by
GATT, was recognized as an anchor for development and an instrument of economic and
trade reform.
The limited achievement of the Tokyo Round, outside the tariff reduction results,
was a sign of difficult times to come. GATT¶s success in reducing tariffs to such a low
level, combined with a series of economic recessions in the 1970s and early 1980s, drove
governments to devise other forms of protection for sectors facing increased overseas
competition. High rates of unemployment and constant factory closures led governments
in Europe and North America to seek bilateral market-sharing arrangements with
competitors and to embark on a subsidies race to maintain their holds on agricultural trade.
Both these changes undermined the credibility and effectiveness of GATT.
Apart from the deterioration in the trade policy environment, it also became apparent
by the early 1980s that the General Agreement was no longer as relevant to the realities of
world trade as it had been in the 1940s. For a start, world trade had become far more
complex and important than 40 years before: the globalization of the world economy was
underway, international investment was exploding and trade in services ± not covered by
the rules of GATT ± was of major interest to more and more countries and, at the same
time, closely tied to further increases in world merchandise trade. In other respects, the
GATT had been found wanting: for instance, with respect to agriculture where loopholes
in the multilateral system were heavily exploited ± and efforts at liberalizing agricultural
trade met with little success ± and in the textiles and clothing sector where an exception to
the normal disciplines of GATT was negotiated in the form of the Multi-fibre
Arrangement. Even the institutional structure of GATT and its dispute settlement system
were giving cause for concern.
Together, these and other factors convinced GATT members that a new effort to
reinforce and extend the multilateral system should be attempted. That effort resulted in
the Uruguay Round.
c

Q.2 What is MNC? Explain the 3 stages of evolution. [10 marks]
Answer-
MNCs or ³multinational corporations4 are businesses that operate in more than one
country. Usually these companies have a center of operations or some head office in one
country, with sub-offices and$or other facilities located in other countries. These facilities
may be connected to the head office or parent company through a merger or as some form
of subsidiary company. Multinational Corporations are large companies that can do
business locally and internationally.
Most multinational corporations operating today come from the US, Japan, and
Western Europe. copular brands we know today are products of multinational
corporations. These brands include Coca-Cola ± the best known softdrink brand in many
countries, Nike ± known worldwide for quality shoes and apparel, Honda ± car and
motorcycle maker from Japan, and many others.
Multinational corporations penetrate new markets or countries through business
mergers or acquisitions, sequential market entry, and$or joint ventures with other smaller
businesses. Coming in as a foreign investment, MNCs capitalize on their size and
resources to take over companies in a new country. With tightening competition, many
MNCs are in the lookout for companies to acquire or merge with, not only to boost sales
but also to gain market share from other industry players. Sequential Market Entry is also
one option for MNCs to gain presence in a new market. In this way, one MNC may opt to
start small and invest in one product at a time. Little by little, the product line will be
increased to boost presence in the area. MNCs also do joint ventures with existing players
in a particular country. In this way, the venture partner may retain some autonomy from
the µparent¶ MNC while enjoying the benefits of technology and$or expertise transfer.
Three Stages of Evolution
1. Export stage
ºinitial inquiries => firms rely on export agents
ºexpansion of export sales
ºfurther expansion þ foreign sales branch or assembly operations (to save transport
cost)
2. Foreign Production Stage
There is a limit to foreign sales (tariffs, NTBs)
DFI versus Licensing
Once the firm chooses foreign production as a method of delivering goods to foreign
markets, it must decide whether to establish a foreign production subsidiary or license the
technology to a foreign firm.
Licensing
Licensing is usually first experience (because it is easy)
e.g.: Kentucky Fried Chicken in the U.K.
ºit does not require any capital expenditure
c

ºit is not risky
ºpayment = a fixed % of sales
croblem: the mother firm cannot exercise any managerial control over the licensee
(it is independent)
The licensee may transfer industrial secrets to another independent firm, thereby
creating a rival.
Direct Investment
It requires the decision of top management because it is a critical step.
ºit is risky (lack of information) (US -> Canada)
ºplants are established in several countries
ºlicensing is switched from independent producers to its subsidiaries.
ºexport continues
3. Multinational Stage
The company becomes a multinational enterprise when it begins to plan, organize
and coordinate production, marketing, R&D, financing, and staffing. For each of these
operations, the firm must find the best location.
Rule of Thumb
c

Q.3 Mention the differences between currency markets and
exchange rate markets in the context of international business
environment. [10 marks]
Sol.
The IMF is an international organization of 185 member countries. It was established
to promote international monetary cooperation, exchange stability, and orderly exchange
arrangements; to foster economic growth and high levels of employment; and to provide
temporary financial assistance to countries to help ease balance of payments adjustment.
The International Monetary Fund (IMF) is the intergovernmental organization
that oversees the global financial system by following the macroeconomic policies of its
member countries, in particular those with an impact on exchange rate and the balance of
payments. It is an organization formed with a stated objective of stabilizing international
exchange rates and facilitating development through the enforcement of liberalising
economic policies[1][2] on other countries as a condition for loans, restructuring or aid.[3] It
also offers highly leveraged loans, mainly to poorer countries. Its headquarters is in
Washington, D.C., United States.
Organization and purpose
IMF "Headquarters 1" in Washington, D.C.
The International Monetary Fund was created in July 1945, originally with 45
members,[4] with a goal to stabilize exchange rates and assist the reconstruction of the
world's international payment system. Countries contributed to a pool which could be
borrowed from, on a temporary basis, by countries with payment imbalances (Condon,
2007). The IMF was important when it was first created because it helped the world
stabilize the economic system. The IMF works to improve the economies of its member
countries.[5]
The IMF describes itself as "an organization of 187 countries (as of July 2010),[6][7]
working to foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable economic growth, and
reduce poverty". With the exception of Cuba (left in 1964), [8] Taiwan (expelled in 1980), [9]
North Korea, Andorra, Monaco, Liechtenstein, Tuvalu and Nauru, all UN member states
participate directly in the IMF. Member states are represented on a 24-member Executive
Board (five Executive Directors are appointed by the five members with the largest quotas,
nineteen Executive Directors are elected by the remaining members), and all members
appoint a Governor to the IMF's Board of Governors. [1
c

Data dissemination systems
In 1995, the International Monetary Fund began work on data dissemination

standards with the view of guiding IMF member countries to disseminate their economic
and financial data to the public. The International Monetary and Financial Committee
(IMFC) endorsed the guidelines for the dissemination standards and they were split into
two tiers: The GDDS and the SDDS.
The International Monetary Fund executive board approved the SDDS and GDDS in
1996 and 1997 respectively and subsequent amendments were published in a revised
"Guide to the General Data Dissemination System". The system is aimed primarily at
statisticians and aims to improve many aspects of statistical systems in a country. It is also
part of the World Bank Millennium Development Goals and coverty Reduction Strategic
capers.
The IMF established a system and standard to guide members in the dissemination to
the public of their economic and financial data. Currently there are two such systems:
General Data Dissemination System (GDDS) and its superset Special Data Dissemination
System (SDDS), for those member countries having or seeking access to international
capital markets.
The primary objective of the GDDS is to encourage IMF member countries to build
a framework to improve data quality and increase statistical capacity building. This will
involve the preparation of meta data describing current statistical collection practices and
setting improvement plans. Upon building a framework, a country can evaluate statistical
needs, set priorities in improving the timeliness, transparency, reliability and accessibility
of financial and economic data.
c

Q.4 a) Explain the role of privatization in international business. [05
marks]
Answer-
crivatization is the transfer of government owned assets to the private sector. As a

result of changing economic policies, privatization took place at a significant pace around
the world during the last decade of the 20th century. Ranging from the desire to downsize
government in developed countries, to the demise of communism in Eastern and Central
Europe, and to the opening of the economies of various Latin American countries,
privatization has significant direct and indirect effects on international business
and international law.
crivatization opens unprecedented opportunities for investment throughout the
world. Thus, it is a major force in the globalization of business, and it is of great interest
to investors and businesses around the world.
crivatization is taking place in various kinds of economies. crior to revolutions
during the late 1980s and early 1990s, private ownership of property was not allowed in
the communist countries of Eastern and Central Europe. In accordance with Marxist
theory, communist governments owned virtually everything. crivatization is, therefore, a
necessary tool for those countries converting to market-based economies. As a result, in
the 1990s, the formerly communist countries of Central and Eastern Europe have been
engaged in an unprecedented number of transfers of assets to private persons and entities.
In Latin America, a parallel movement has taken place. As early as the 1930s and
again during the 1960s and 1970s, huge segments of the economies of various Latin
American countries were nationalized. Segments of the economy that were reserved to
government included electric power, telecommunications, and development of natural
resources. One result was that international investors were kept out of major segments of
the economies of Latin American countries. Yet, from the perspective of the Latin
American countries, nationalization was not a success. A majority of the nationalized
industries were inefficient and caused a severe drain on the countries' finances. Latin
American governments were compelled to subsidize the industries, which, in turn, caused
the governments to fall more deeply in debt internationally. For example, the World
Bank calculates that in the early 1990s, state-owned businesses were responsible for about
60 percent of the external debt of Latin American countries. As a result of heavy debt
loads, various Latin American countries defaulted on their loans to
international banks. Huge restructuring programs and bailout programs were negotiated.
In turn, international lenders were hesitant to extend additional credit to Latin American
countries. As a result, Latin American economies became stagnant; they could not attract
significant amounts of long-term capital investment. In response, in the 1990s, Latin
American governments turned to privatization and actively sought investment by foreign
businesspeople and organizations.
In Latin American countries, privatization plans are, generally, more simple in their
design and implementation than in formerly communist countries. Firms are sold by the
c

government to private investors and the funds are returned to the government. For
example, the 252 companies privatized by Mexico between 1989 and 1994 were sold to
private individuals and firms; some of them were Mexican-owned and others were foreign-
owned. The sales produced more than US$23 billion that went into government reserves.
In addition, the government was able to reduce or eliminate its massive subsidies to those
firms.
Not all privatization in Mexico has been of privately owned businesses. Under
Mexico's 1917 constitution, peasants, their children, and their grandchildren, have lived on
cooperative farms called Under the constitution, the farmers had lifelong rights to
use of the property; those rights could not be sold, leased, or rented. Under reforms
designed to facilitate domestic and foreign investment, the Mexican government amended
the constitution in 1992 to allow for sale, rental, or lease of the properties. This
privatization is good for investors who need land for industrial projects or large-scale
farming. It is also viewed as a positive step by those economists who believe
that have resulted in inefficient use of land. Families that have lived on lands,
however, are being compelled to move elsewhere, and the compensation they receive is
usually insufficient to buy land or homes elsewhere. Thus, privatization of is highly
controversial.
c

Q.4-b) Mention the relevance of these international commercial terms: FCA,
EXW, DES, CIF and DDP [05 marks]
Answer-
FCA ( FREE CARRIER ACCEcTANCE... named place. )

FCA means that the seller fulfills his obligation to deliver the goods when he has
cleared the goods for export and handed them into the charge of the carrier named by the
buyer at the designated delivery point. If no precise "acceptance" point is indicated by the
buyer, then the seller may choose, within the place or range stipulated, where the carrier
shall take the goods into his charge. When, according to commercial practice, the sellers
assistance is required in making the contract with the carrier ( such as in rail or air
transport ) the seller may act at the buyers risk and expense, which includes any costs for
arranging the transport. This term may be used for any mode of transport, paid by the
buyer, including multimodal transport. "Carrier" means any person who, in a contract of
carriage, undertakes to perform or to procure the performance of carriage by rail, road, air,
sea, inland waterway or by a combination of such modes. If the buyer instructs the seller to
deliver the goods to a person, eg a freight forwarder, who is not a carrier, the seller is
deemed to have fulfilled the obligation to deliver the goods when they arrive into the
custody of that nominated person.
"Transport Terminal" means a railway terminal, a freight station,a container terminal
or yard, a multipurpose cargo terminal or any similar receiving point. "Container" includes
any equipment used to unitize cargo, eg. all types of containers and$or flats, ISO accepted
or not, trailers, swap bodies, roll-on roll-off equipment, igloos etc and it applies to all
modes of transport
EXW ( EX WORKS... named place )

EXW means that the seller fulfills his obligation to deliver the goods when he has
made the goods available at his premise's ( ie works, factory, warehouse etc ), to the
buyer. In particular, he is not responsible for loading of the goods onto any vehicle
provided by the buyer, or for clearing the goods across any customs borders for export,
unless otherwise agreed. The buyer bears all costs and risks involved in taking the goods
from the sellers premises to the desired destination. EXW thus represents the minimum
obligation for the seller. This term should not be used if the buyer is incapable of or cannot
carry out the export formalities. In such cases the term FCA should be used.
DES ( DELIVERED EX SHIc ... named port of destination )

DES means that the seller has fulfilled his obligation to deliver when the goods have
been made available to the buyer on board the ship but, uncleared for import, at the named
port of destination. The seller has to bear all costs and risks involved in bringing the goods
to the named port of destination. The buyer must pay for unloading, customs clearance at
destination etc. This term can only be used for sea and inland waterway transport.
c

. CIF (COST INSURANCE FREIGHT ... named port of destination )
CIF means that the seller has the same obligations as under the CFR term but with
the additional responsibility that he must procure marine insurance against the buyers risk
of loss of or damage the goods during the period of carriage. The seller contracts for the
insurance and also pays the premium. The buyer should note that under the CIF term the
seller is only required to obtain insurance on minimum coverage. The CIF term requires
the seller to clear the goods for export. This term can only be used for sea freight or inland
waterway transport. When the ships rail serves no practical purpose, such as in the case of
roll-on roll-off or any LCL or FCL container traffic, the CIc term is more appropriate to
use.
DDP ( DELIVERED DUTY cAID ... named port of destination )

This term replaces and supersedes" Franco or Free Domicile" and " Free Into Store"
( FIS). DDc means that the seller has fulfilled his obligation to deliver when the goods
have been made available at the named place and point in the country of importation. The
seller has to bear the costs and risks involved in bringing the goods thereto ( including
duties, taxes and other official charges payable upon importation) as well as other charges
of delivering the goods thereto, cleared for importation. Whilst the EXW term represents
the minimum obligation for the seller, the term DDc represents the maximum obligation.
This term should not be used if the seller is unable, either directly or indirectly, to obtain
an import license. If the parties wish the buyer to clear the goods for importation and to
pay the duty, the term DDU should be used. If the parties wish to exclude from the sellers
obligations, some of the costs payable upon importation of the goods, ( such as value
added tax ( VAT) ), this should be made clear by adding the words to the effect: "
Delivered Duty caid, VAT Unpaid ( ... named port o f destination ). The term DDc may be
used irrespective of the mode of transport.
c

Q.5 Give short notes on Letter of credit and Bill of Lading [10 marks]
Sol.
A bill of lading (sometimes referred to as a 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 m 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:
ºIt 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 (
mm
) issued by the carrier sets
out all the terms of the contract of carriage);
ºIt 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
if the
goods have been received on board in apparent good condition and stowed ready for
transport); and
ºIt 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.
ºA standard, commercial letter of credit is a document issued mostly by a financial
institution, used primarily in trade finance, which usually provides an irrevocable payment
undertaking.
ºThe 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. 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
c

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. However,
the list and form of documents is open to imagination and negotiation and might contain
requirements to present documents issued by a neutral third party evidencing the quality of
the goods shipped, or their place of origin.
c

Q.6 Discuss the entry methods in international business with
relevant examples. [10 marks
Sol.
Entry Strategies
Methods of entry
With rare exceptions, products just don¶t emerge in foreign markets overnight ± a
firm has to build up a market over time. Several strategies, which differ in aggressiveness,
risk, and the amount of control that the firm is able to maintain, are available:
· Exporting is a relatively low risk strategy in which few investments are made in the
new country. A drawback is that, because the firm makes few if any marketing
investments in the new country, market share may be below potential. Further, the firm, by
not operating in the country, learns less about the market (What do consumers really want?
Which kinds of advertising campaigns are most successful? What are the most effective
methods of distribution?) If an importer is willing to do a good job of marketing, this
arrangement may represent a "win-win" situation, but it may be more difficult for the firm
to enter on its own later if it decides that larger profits can be made within the country.
· Licensing and franchising are also low exposure methods of entry ± you allow
someone else to use your trademarks and accumulated expertise. Your partner puts up the
money and assumes the risk. croblems here involve the fact that you are training a
potential competitor and that you have little control over how the business is operated. For
example, American fast food restaurants have found that foreign franchisees often fail to
maintain American standards of cleanliness. Similarly, a foreign manufacturer may use
lower quality ingredients in manufacturing a brand based on premium contents in the home
country.
· Contract manufacturing involves having someone else manufacture products while
you take on some of the marketing efforts yourself. This saves investment, but again you
may be training a competitor.
· Direct entry strategies, where the firm either acquires a firm or builds operations
"from scratch" involve the highest exposure, but also the greatest opportunities for profits.
The firm gains more knowledge about the local market and maintains greater control, but
now has a huge investment. In some countries, the government may expropriate assets
without compensation, so direct investment entails an additional risk. A variation involves
a joint venture, where a local firm puts up some of the money and knowledge about the
local market.
***
c

MB0037 - International Business Management

Загружено:

Сведения о документе

Исходное описание:

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

MB0037 - International Business Management

Загружено:

Авторское право:

Доступные форматы

Master of Business Administration-MBA Semester 4

MB0037 ± International Business Management

Assignment Set- 1 (60 Marks)

Q.1 What is globalization? What are its benefits? How does

Economic "globalization" is a historical process, the result of human innovation and

Globalization refers to a µgrowing economic interdependence among countries, as

Ñ lli  l

1 Cultural change, convergence and divergence in an era of partial

The Benefits of Trade Liberalization

The Heckscher±Ohlin model (H±O model) is a general equilibrium mathematical

Features of the model

Theoretical development of the model

The 2×2×2 model

Both countries have identical production technology

Production output must have constant Return to Scale

The technologies used to produce the two commodities differ

Labor mobility within countries

Capital mobility within countries

Capital immobility between countries

Labour immobility between countries

Commodities have the same price everywhere

Perfect internal competition

Conclusions of the model

 m  concerns nominal rents and wages. The

The World Trade Organization (WTO) is an organization that intends to supervise

It oversees the implementation, administration and operation of the covered

Principles of the trading system

1. Non-Discrimination. It has two major components: the most favoured

Ten Benefits of WTO

1. The system helps to keep the peace

MB0037 ± International Business Management - 3 Credits

Assignment Set- 2 (60 Marks)

Q.1 What is WTO? What is GATT? Explain both. [10 marks]

Organization and purpose

IMF "Headquarters 1" in Washington, D.C.

In 1995, the International Monetary Fund began work on data dissemination

crivatization is the transfer of government owned assets to the private sector. As a

FCA ( FREE CARRIER ACCEcTANCE... named place. )

EXW ( EX WORKS... named place )

DES ( DELIVERED EX SHIc ... named port of destination )

DDP ( DELIVERED DUTY cAID ... named port of destination )

A bill of lading (sometimes referred to as a BOL,or B/L) is a document issued by a

Вам также может понравиться

Ñ lli l

m concerns nominal rents and wages. The