Name SAM. C. B.

DAVID

Role No. 520960228

L.C .No.00120

Master of Business Administration -MBA Semester IV

Subject Code – MB0037-

Subject Name – International Business Management

Assignment Set- 1

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

globalization help in international business? Give some instances.

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.

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

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 is not just a recent phenomenon. Some analysts have argued that the
world economy was just as globalized 100 years ago as it is today. But today
commerce and financial services are far more developed and deeply integrated than
they were at that time. The most striking aspect of this has been the integration of
financial markets made possible by modern electronic communication.

The 20th century saw unparalleled economic growth, with global per capita GDP
increasing almost five-fold. But this growth was not steady – the strongest
expansion came during the second half of the century, a period of rapid trade
expansion accompanied by trade – and typically somewhat later, financial –
liberalization. Chart 1 break the century into four periods. In the inter-war era, the
world turned its back on internationalism – or globalization as we now call it – and
countries retreated into closed economies, protectionism and pervasive capital
controls. This was a major factor in the devastation of this period, when per capita
income growth fell to less than 1 percent during 1913-1950. For the rest of the
century, even though population grew at an unprecedented pace, per capita income
growth was over 2 percent, the fastest pace of all coming during the post – World
War boom in the industrial countries.

The story of the 20th century was of remarkable average income growth, but it is
also quite obvious that the progress was not evenly dispersed. The gaps between
rich and poor countries, and rich and poor people within countries, have grown.
The richest quarter of the world’s population saw its per capita GDP increase
nearly six-fold during the century, while the poorest quarter experienced less than a
three-fold increase (Chart 1). Income inequality has clearly increased. But, as
noted below, per capita GDP does not tell the whole story.

Globalization means that world trade and financial markets are becoming more
integrated. But just how far have developing countries been involved in this
integration? Their experience in catching up with the advanced economies has

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

been mixed. Chart 2 shows that in some countries, especially in Asia, per capita
incomes have been moving quickly toward levels in the industrial countries since
1970. A larger number of developing countries have made only slow progress or
have lost ground. In particular, per capita incomes in Africa have declined relative
to the industrial countries and in some countries have declined in absolute terms.
Chart 2b illustrates part of the explanation: the countries catching up are those
where trade has grown strongly.

Consider four aspects of globalization:

· Trade: Developing countries as a whole have increased their share of world trade
– from 19 percent in 1971 to 29 percent in 1999. But Chart 2b shows great
variation among the major regions. For instance, the newly industrialized
economies (NIEs) of Asia have done well, while Africa as a whole has fared
poorly. The composition of what countries export is also important. The strongest
rise by far has been in the export of manufactured goods. The share of primary
commodities in world exports – such as food and raw materials – that are often
produced by the poorest countries, has declined.

· Capital movements: Chart 3 depicts what many people associate with

globalization, sharply increased private capital flows to developing countries
during much of the 1990s. It also shows that:

· the increase followed a particularly "dry" period in the 1980s;

· net official flows of "aid" or development assistance have fallen significantly

since the early 1980s; and

· the composition of private flows has changed dramatically. Direct foreign

investment has become the most important category. Both portfolio investment and
bank credit rose but they have been more volatile, falling sharply in the wake of
the financial crises of the late 1990s.

· Movement of people: Workers move from one country to another partly to find
better employment opportunities. The numbers involved are still quite small, but in
the period 1965-90, the proportion of labor forces round the world that was foreign
born increased by about one-half. Most migration occurs between developing
countries. But the flow of migrants to advanced economies is likely to provide a
means through which global wages converge. There is also the potential for skills
to be transferred back to the developing countries and for wages in those countries
to rise.
3

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

· Spread of knowledge (and technology): Information exchange is an integral,
often overlooked, aspect of globalization. For instance, direct foreign investment
brings not only an expansion of the physical capital stock, but also technical
innovation. More generally, knowledge about production methods, management
techniques, export markets and economic policies is available at very low cost, and
it represents a highly valuable resource for the developing countries.

Growth in living standards springs from the accumulation of

physical capital (investment) and human capital (labor), and through advances in
technology (what economists call total factor productivity).3 Many factors can help
or hinder these processes. The experience of the countries that have increased
output most rapidly shows the importance of creating conditions that are conducive
to long-run per capita income growth. Economic stability, institution building, and
structural reform are at least as important for long-term development as financial
transfers, important as they are. What matters is the whole package of policies,
financial and technical assistance, and debt relief if necessary.

Q.2 What is culture and in the context of international business

environment how does it impact international business decisions?

Organizational culture is the set of values, beliefs, behaviors, customs, and

attitudes that helps the members of the organization understand what it stands for,
how it does things, and what it considers important. When the people comprising
an organization represent different cultures, their differences in values, beliefs,
behaviors, customs, and attitudes reflect multiculturalism. Diversity exists in a
community of people when its members differ from one another along one or more
important dimensions.

Organization culture is an important environmental concern for managers.

Managers must understand that culture is an important determinant of how well
their organization will perform. Culture can be determined and managed in a
number of different ways.

Diversity and multiculturalism are increasing in organizations today because of

changing demographics, the desire by organizations to improve their workforce,
legal pressures, and increased globalization. There are several important
dimensions of diversity, including age, gender, and ethnicity. The overall age of
the workforce is increasing. More women are also entering the workplace,

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

although there is still a glass ceiling in many settings. In the United States, more
Hispanics are also entering the workplace as the percentage of whites gradually
declines.

Diversity and multiculturalism can impact an organization in a number of different

ways. For example, they can be a source of competitive advantage (i.e., cost,
resource acquisition, marketing, creativity, problem solving, and systems
flexibility arguments). On the other hand, diversity and multiculturalism can also
be a source of conflict in an organization.

Managing diversity and multiculturalism in organizations can be done by both

individuals and the organization itself. Individual approaches include
understanding, empathy, tolerance, and willingness to communicate. Major
organizational approaches are through policies, practices, diversity training, and
culture.

Few, if any, organizations have become truly multicultural. The major dimensions
that characterize organizations as they eventually achieve this state are pluralism,
full structural integration, full integration of the informal network, an absence of
prejudice and discrimination, no gap in organizational identification based on
cultural identity group, and low levels of inter-group conflict attributable to
diversity.

Q.3 Explain the meaning of the term ‘trade liberalization’ and

advantages. Also, identify some commonly observed mistakes in
international trade.
Integration into the world economy has proven a powerful means for countries to
promote economic growth, development, and poverty reduction. Over the past 20
years, the growth of world trade has averaged 6 percent per year, twice as fast as
world output. But trade has been an engine of growth for much longer. Since 1947,
when the General Agreement on Tariffs and Trade (GATT) was created, the world
trading system has benefited from eight rounds of multilateral trade liberalization,
as well as from unilateral and regional liberalization. Indeed, the last of these eight
rounds (the so – called "Uruguay Round" completed in 1994) led to the
establishment of the World Trade Organization to help administer the growing
body of multilateral trade agreements.

The resulting integration of the world economy has raised living standards around
the world. Most developing countries have shared in this prosperity; in some,
5

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

incomes have risen dramatically. As a group, developing countries have become
much more important in world trade – they now account for one-third of world
trade, up from about a quarter in the early 1970s. Many developing countries have
substantially increased their exports of manufactures and services relative to
traditional commodity exports: manufactures have risen to 80 percent of
developing country exports. Moreover, trade between developing countries has
grown rapidly, with 40 percent of their exports now going to other developing
countries.

Some Common Mistakes in International Trade

Common Export Mistakes Solutions

1. Failure to obtain qualified export counseling and to Obtain Export Counselling
develop a master international marketing plan before
starting an export business.

2. Insufficient commitment by top management to Determine Export Readiness

exporting.

3. Failure to have a solid agent/distributor’s Understand Agent/Distributor

agreement Contracts

4. Blindly chasing “E-orders” from around the world. Avoid Accidental Exporting

5. Failure to understand the connection Understand Export Financing

between country risk and securing export financing.

6. Failure to understand Intellectual Property Rights Understand Intellectual

Property Rights (IPR)

7. Insufficient attention to marketing and advertising Pay Attention to Overseas

requirements. Marketing and Advertising

8. Lack of attention to product preparation needs. Pay Attention to Product

Preparation Requirements

Failure to consider legal aspects of going global. Understand Licensing and

Joint Ventures

10. Failure to know the rules of trade. Understand export

regulations
6

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

Q.4 Explain the product life cycle theory.
Life cycle theory has been used since the 1970s to describe the behaviour of a
product or service from design to obsolescence.

The typical pattern of a product is represented by a curve divided into four distinct
phases: introduction, growth, maturity, and decline. Recent research in the area has
focused on its use in decision making in areas ranging from those as broad as
overall strategy to those as narrow as equipment replacement.

But does the product life cycle, or PLC, really tell the entire story? Consider the
Ford Mustang. Since its 1964 introduction, the automobile has undergone several
changes. Performance was increased with the addition of the 428 CobraJet in 1968
and Mach I styling in 1969. Another substantial change took place in 1971 with the
introduction of the high-performance Boss 351. Then a true muscle car, the
Mustang was detuned in 1974, when oil prices forced a more fuel-efficient
redesign, called Mustang II. The fourth generation Mustang, introduced as the
1994 model, has been further refined and is more aerodynamic than its immediate
predecessor. Yet it still shares roots with earlier models. A 302 V-8 is still offered,
the wheelbase is similar, and if one looks closely enough, one can see its genesis in
the 1964 model. The pattern evidenced by the life of the Mustang, then, is several
curves of introduction, growth, maturity, and decline.

Another intriguing example is the C-130 Hercules aircraft manufactured by

Lockheed. The company recently announced the sale of 25 "J" models to the Royal
Air Force, which is the fifth version of the Hercules originally produced in the
1950s. Although the aircraft resembles its older relatives, the new model features a
totally different electronics package and more powerful engines. Here again, the
Hercules PLC shows a curve with five local maximum points (swells of activity, in
effect), rather than the traditional, single maximum point, PLC curve.

The examples above suggest a PLC model represented by waves of product

introductions, growth, maturity, and decline. Design engineering, process
engineering, product marketing, production, and end-of-life decisions are key
elements within the system. Each has its own cycle consisting of varying levels of
activity. The waves are triggered by critical decision points during the life of a
product, when production, operations, and marketing managers must optimize their
collective efforts

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

Q.5 Discuss the implications of Heckscher-Ohlin theory model.

1. No barriers to trade

World trade is assumed to be free from any impediments, such as tariffs, quotas,
voluntary export restraints, and exchange control.

2. No transportation cost

Transportation costs are assumed to be zero.

In reality, transportation costs are a significant portion of the marketing costs of

most traded goods, especially in agricultural products.

Remark: This is unrealistic. However, it is not a bad assumption, because

transportation costs inhibit and reduce trade volume; it does not reverse the trade
pattern between the countries.

3. Perfect Competition (PC) + Full Employment (FE)

PC prevails in both product and factor markets. This assumption rules out
monopolistic and oligopolistic market structures. It also rules out price and wage
rigidities. In a perfectly competitive market all buyers and sellers are price takers,
i.e., each one is too small to exert market power and influence market prices. All
factors are fully employed.

4. Factors are mobile in each country but are immobile across national
borders.

Like Ricardo, HO model draws a sharp distinction between domestic and external
factor mobility. The maximum degree of factor mobility is permitted between
industries within the same country (internal factor mobility). But neither capital
nor labour can cross national borders (international factor immobility).

IFM insures that workers move from a low wage region to a high wage region, and
capital moves from a low interest country to a high interest region. The net effect is
that all factor prices are the same within a country.

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

 IFI implies that Mexican workers are not allowed to work or migrate to the US.

5. No specialization

After the introduction of free trade, neither country specializes in one commodity,
as in Ricardian model. Each country produces both goods.

6. Production functions exhibit constant returns to scale (CRS) and differ

among industries:

Such a production function is sometimes said to be homogeneous of degree 1 –

HD(1) for short here.

CRS means that a proportionate increase in all inputs increases the output by
the same percentage.

Specifically, CRS means:

If y = F (L, K), then y’ = F (2L, 2K) = 2y.

7. Identical technology between trading countries:

Production functions are the same in America and Britain. The HO model is a long
run model. Ohlin argued that "the physical conditions of production are
everywhere the same." Some countries may be slow to adopt new technology.
With the development of modern telecommunications, information travels fast.
This is a result of declining transportation and communication costs.

8. No factor intensity reversal:

Remark: The implication of (1) and (2) is that commodity trade equalizes
commodity prices between countries. That is, Americans and Britons pay the same
prices for same commodities.

Q.6 Do you think WTO is helpful for promoting international

business? Give reasons for your answer.
WTO members operate a non – discriminatory trading system that spells out
their rights and their obligations. Each country receives guarantees that its exports
will be treated fairly and consistently in other countries’ markets. Each promises to

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

do the same for imports into its own market. The system also gives developing
countries some flexibility in implementing their commitments.

Ten Benefits of WTO

1. The system helps to keep the peace

This sounds like an exaggerated claim, and it would be wrong to make too much of
it. Nevertheless, the system does contribute to international peace, and if we
understand why, we have a clearer picture of what the system actually does.

Peace is partly an outcome of two of the most fundamental principles of the trading
system: helping trade to flow smoothly and providing countries with a
constructive and fair outlet for dealing with disputes over trade issues. It is also
an outcome of the international confidence and cooperation that the system
creates and reinforces.

2. The system allows disputes to be handled constructively

As trade expands in volume, in the number of products traded, and in the numbers
of countries and companies trading, there is a greater chance that disputes will
arise. The WTO system helps resolve these disputes peacefully and constructively.

There could be a down side to trade liberalization and expansion. More trade
means more possibilities for disputes to arise. Left to themselves, those disputes
could lead to serious conflict. But in reality, a lot of international trade tension is
reduced because countries can turn to organizations, in particular the WTO, to
settle their trade disputes.

3. A system based on rules rather than power makes life easier for all

The WTO cannot claim to make all countries equal. But it does reduce some
inequalities, giving smaller countries more voice, and at the same time freeing the
major powers from the complexity of having to negotiate trade agreements with
each of their numerous trading partners

Decisions in the WTO are made by consensus. The WTO agreements were
negotiated by all members, were approved by consensus and were ratified in all
members’ parliaments. The agreements apply to everyone. Rich and poor countries
alike have an equal right to challenge each other in the WTO’s dispute settlement
procedures.
10

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

4. Freer trade cuts the cost of living

We are all consumers. The prices we pay for our food and clothing, our necessities
and luxuries, and everything else in between, are affected by trade policies.

Protectionism is expensive: it raises prices. The WTO’s global system lowers trade
barriers through negotiation and applies the principle of non-discrimination. The
result is reduced costs of production (because imports used in production are
cheaper) and reduced prices of finished goods and services, and ultimately a lower
cost of living.

5. It gives consumers more choice and a broader range of qualities to choose

from

Think of all the things we can now have because we can import them: fruits and
vegetables out of season, foods, clothing and other products that used to be
considered exotic, cut flowers from any part of the world, all sorts of household
goods, books, music, movies, and so on.

Think also of the things people in other countries can have because they buy
exports from us and elsewhere. Look around and consider all the things that would
disappear if all our imports were taken away from us. Imports allow us more
choice – both more goods and services to choose from, and a wider range of
qualities. Even the quality of locally – produced goods can improve because of the
competition from imports.

6. Trade raises incomes

Lowering trade barriers allows trade to increase, which adds to incomes –

national incomes and personal incomes. But some adjustment is necessary.

7. Trade stimulates economic growth and that can be good news for
employment

Trade clearly has the potential to create jobs. In practice there is often factual
evidence that lower trade barriers have been good for employment. But the picture
is complicated by a number of factors. Nevertheless, the alternative –
protectionism – is not the way to tackle employment problems.

8. The basic principles make the system economically more efficient, and they
cut costs
11

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

Many of the benefits of the trading system are more difficult to summarize in
numbers, but they are still important. They are the result of essential principles at
the heart of the system, and they make life simpler for the enterprises directly
involved in trade and for the producers of goods and services.

Trade allows a division of labour between countries. It allows resources to be used

more appropriately and effectively for production. But the WTO’s trading system
offers more than that. It helps to increase efficiency and to cut costs even more
because of important principles enshrined in the system.

9. The system shields governments from narrow interests

The GATT – WTO system which evolved in the second half of the 20th Century
helps governments take a more balanced view of trade policy. Governments are
better – placed to defend themselves against lobbying from narrow interest groups
by focusing on trade – offs that are made in the interests of everyone in the
economy

10. The system encourages good government

Under WTO rules, once a commitment has been made to liberalize a sector of
trade, it is difficult to reverse. The rules also discourage a range of unwise
policies. For businesses, that means greater certainty and clarity about trading
conditions. For governments it can often mean good discipline.

*********************************************

12

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

1. No barriers to trade

World trade is assumed to be free from any impediments, such as tariffs, quotas,
voluntary export restraints, and exchange control.

2. No transportation cost

Transportation costs are assumed to be zero.

In reality, transportation costs are a significant portion of the marketing costs of

most traded goods, especially in agricultural products.

Remark: This is unrealistic. However, it is not a bad assumption, because

transportation costs inhibit and reduce trade volume; it does not reverse the trade
pattern between the countries.

3. Perfect Competition (PC) + Full Employment (FE)

PC prevails in both product and factor markets. This assumption rules out
monopolistic and oligopolistic market structures. It also rules out price and wage
rigidities. In a perfectly competitive market all buyers and sellers are price takers,
i.e., each one is too small to exert market power and influence market prices. All
factors are fully employed.

4. Factors are mobile in each country but are immobile across national
borders.

Like Ricardo, HO model draws a sharp distinction between domestic and external
factor mobility. The maximum degree of factor mobility is permitted between
industries within the same country (internal factor mobility). But neither capital
nor labour can cross national borders (international factor immobility).

13

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120

IFM insures that workers move from a low wage region to a high wage region, and
capital moves from a low interest country to a high interest region. The net effect is
that all factor prices are the same within a country.

IFI implies that Mexican workers are not allowed to work or migrate to the US.

5. No specialization

After the introduction of free trade, neither country specializes in one commodity,
as in Ricardian model. Each country produces both goods.

6. Production functions exhibit constant returns to scale (CRS) and differ

among industries:

Such a production function is sometimes said to be homogeneous of degree 1 –

HD(1) for short here.

CRS means that a proportionate increase in all inputs increases the output by
the same percentage.

Specifically, CRS means:

If y = F (L, K), then y’ = F (2L, 2K) = 2y.

7. Identical technology between trading countries:

Production functions are the same in America and Britain. The HO model is a long
run model. Ohlin argued that "the physical conditions of production are
everywhere the same." Some countries may be slow to adopt new technology.
With the development of modern telecommunications, information travels fast.
This is a result of declining transportation and communication costs.

8. No factor intensity reversal:

Remark: The implication of (1) and (2) is that commodity trade equalizes
commodity prices between countries. That is, Americans and Britons pay the same
prices for same commodities.

14

SMU/MBA/ASSIGNMENT/MB0037/SET-1/L. C. CODE 0120