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- 2

Q.1 What is WTO? What is GATT? Explain both.

WTO
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. Most of the issues that the WTO focuses on
derive from previous trade negotiations, especially from the Uruguay Round (1986–1994).

The organization is currently endeavoring to persist with a trade negotiation called the
Doha Development Agenda (or Doha Round), which was launched in 2001 to enhance
equitable participation of poorer countries which represent a majority of the world's
population. However, the negotiation has been dogged by "disagreement between exporters
of agricultural bulk commodities and countries with large numbers of subsistence farmers
on the precise terms of a 'special safeguard measure' to protect farmers from surges in
imports. At this time, the future of the Doha Round is uncertain."[6]

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The WTO has 153 members, representing more than 97% of the world's population[8], and
30 observers, most seeking membership. The WTO is governed by a ministerial
conference, meeting every two years; a general council, which implements the conference's
policy decisions and is responsible for day-to-day administration; and a director-general,
who is appointed by the ministerial conference. The WTO's headquarters is at the Centre
William Rappard, Geneva, Switzerland.

GATT

General Agreement on Tariffs and Trade. Treaty organization affiliated with the United
Nations whose purpose was to facilitate international trade. The primary actions of the
organization were to freeze and reduce tariff levels on various commodities. GATT was
created in 1947, and was originally intended to become a part of the International Trade
Organization (ITO); however, the ITO failed to be created, so the GATT was left as an
independent organization. In 1994, GATT was superseded by the WTO.

Q.2 What is MNC? Explain the 3 stages of evolution.

A multinational corporation (MNC) is a corporation that manages production or delivers

services in more than one country. It can also be referred to as an international
corporation.

The International Labour Organization (ILO) has defined an MNC as a

corporation that has its management headquarters in one country, known as the home
country, and operates in several other countries, known as host countries.

The Dutch East India Company was the first multinational corporation in the world and the
first company to issue stock.[2] It was also arguably the world's first megacorporation,
possessing quasi-governmental powers, including the ability to wage war, negotiate
treaties, coin money, and establish colonies.[3]

The first modern multinational corporation is generally thought to be the East India
Company.[4] Many corporations have offices, branches or manufacturing plants in different
countries from where their original and main headquarters is located.

Three Stages of Evolution

1. Export stage
· initial inquiries Þ firms rely on export agents
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· expansion of export sales
· further 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.
· it does not require any capital expenditure
· it is not risky
· payment = a fixed % of sales
Problem: 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.
· it is risky (lack of information) (US firms tend to establish subsidiaries in Canada first.
Singer Manufacturing Company established its foreign plants in Scotland and Australia in
the 1850s)
· plants are established in several countries
· licensing is switched from independent producers to its subsidiaries.
· export 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.

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Q.3 Mention the differences between currency markets and exchange rate
markets in the context of international business environment.

The currency market is a global, worldwide decentralized over-the-counter financial

market for trading currencies. Financial centers around the world function as anchors of
trading between a wide range of different types of buyers and sellers around the clock, with
the exception of weekends. The foreign exchange market determines the relative values of
different currencies

The primary purpose of the foreign exchange is to assist international trade and investment,
by allowing businesses to convert one currency to another currency. For example, it
permits a US business to import British goods and pay Pound Sterling, even though the
business's income is in US dollars. It also supports speculation, and facilitates the carry
trade, in which investors borrow low-yielding currencies and lend (invest in) high-yielding
currencies, and which (it has been claimed) may lead to loss of competitiveness in some
countries.

The exchange rate regimes adopted by countries in today’s international monetary and
financial system, and the system itself, are profoundly different from those envisaged at the
1944 meeting at Bretton Woods establishing the IMF and the World Bank. In the Bretton
Woods system:

exchange rates were fixed but adjustable. This system aimed both to
avoid the undue volatility thought to characterize floating exchange rates and to prevent
competitive depreciations, while permitting enough flexibility to adjust to fundamental
disequilibrium under international supervision;

· private capital flows were expected to play only a limited role in

financing payments imbalances, and widespread use of controls would prevent instability
in such flows;

· temporary official financing of payments imbalances, mainly

through the IMF, would smooth the adjustment process and avoid unduly sharp correction
of current account imbalances, with their repercussions on trade flows, output, and
employment.
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 In the current system, exchange rates among the major currencies
(principally the U.S. dollar, the euro, and Japanese yen) fluctuate in response to market
forces, with short-run volatility and occasional large medium-run swings . Some medium-
sized industrial countries also have market – determined floating rate regimes, while others
have adopted harder pegs, including some European countries outside the euro area.
Developing and transition economies have a wide variety of exchange rate arrangements,
with a tendency for many but by no means all countries to move toward increased
exchange rate flexibility .

Q.4 a) Explain the role of privatization in international business.

Economists generally agreed on the need for speed in carrying out

liberalization and stabilization. But on privatization of large enterprises, there was a debate
on whether to have a rapid transfer of assets from the state to the private sector or to adopt
a more gradual approach.

Advocates of rapid privatization called for eliminating state ownership by giving assets to
citizens, for instance, through vouchers that gave their holders the right and means to
purchase state-owned companies on sale. They were motivated by considerations of
fairness, a desire to give ordinary citizens a stake in the economy. They also perceived a
need to seize the window of opportunity that had opened for privatization before the state
bureaucracies regrouped and resisted the process.

Others advocated a more gradual scaling back of state enterprises as new private sector
firms emerged in the economy. They were in favour of the privatization of enterprises
through the sale of assets to those likely to work on improving the performance of the
companies. They also stressed the imposition of ‘hard budget constraints’ on enterprises so
that chronic loss makers would be forced out, leaving the more profitable enterprises to
attract investors. Hungary followed this gradualist approach to privatization, and it appears
to have proved more conducive to genuine restructuring of enterprises.

By contrast, experience has shown some of the pitfalls of the rapid privatization approach.
In the Czech Republic, for instance, the assets transferred to millions of ordinary citizens in
the first phase of rapid privatization were sold by the recipients and ended up being
consolidated in investment funds. But there was no genuine restructuring of enterprises,
either because the investment funds lacked the capital to develop them or because the
funds were in turn controlled by state-owned banks that did not impose hard budget
constraints. The weak growth performance of the Czech Republic in the late-1990s,
relative to other CEE countries, is attributed in part to its weak enterprise reforms.
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Rapid privatization fared even worse in Russia. The country’s mass privatization
programme of 1992-94 transferred ownership of over 15,000 firms into private hands.
However, contrary to expectations, insider privatization did not lead to self-induced
restructuring of firms. It was hoped that secondary trading would introduce outside
ownership, and that transparent methods would be used in the second wave of privatization
of remaining firms still in state hands. Neither hope was fulfilled. Insiders were wary of
relinquishing control; workers feared the cost-cutting that might occur under outside
control, and managers found it easier to keep enterprises alive by lobbying the state for
subsidies than to foster competitive performance through involvement of outsiders. The
second wave of privatization, in particular the so-called "loans-for-shares" scheme, was
non-transparent and systematically excluded foreign investors and banks in favour of
parties with ties to government interests.

Overall, the experience of the transition economies suggests that privatized firms tend to
restructure more quickly and perform better than comparable firms that remain in state
ownership, but only if complementary conditions are met. These conditions include the
presence of hard budget constraints and competition, effective standards of corporate
governance, and an effective legal structure and property rights.

In contrast to the mixed experience on privatization of large enterprises, the privatization

of small – scale enterprises has been generally successful and has been completed in all but
five countries.

b) Mention the relevance of these international commercial terms: FCA,

EXW, DES, CIF and DDP

FCA {+ the named point of departure}

Free Carrier

The delivery of goods on truck, rail car or container at the specified point (depot) of
departure, which is usually the seller’s premises, or a named railroad station or a named
cargo terminal or into the custody of the carrier, at seller’s expense. The point (depot) at
origin may or may not be a customs clearance centre. Buyer is responsible for the main
carriage/freight, cargo insurance and other costs and risks.

In the air shipment, technically speaking, goods placed in the custody of an air carrier are
considered as delivery on board the plane. In practice, many importers and exporters still
use the term FOB in the air shipment.

The term FCA is also used in the RO/RO (roll on/roll off) services.
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In the export quotation, indicate the point of departure (loading) after the acronym FCA,
for example FCA Hong Kong and FCA Seattle.

EXW {+ the named place}

Ex Works

Ex means from. Works means factory, mill or warehouse, which are the seller’s premises.
EXW applies to goods available only at the seller’s premises. Buyer is responsible for
loading the goods on truck or container at the seller’s premises, and for the subsequent
costs and risks.

In practice, it is not uncommon that the seller loads the goods on truck or container at the
seller’s premises without charging loading fee.

In the quotation, indicate the named place (seller’s premises) after the acronym EXW, for
example EXW Kobe and EXW San Antonio.

The term EXW is commonly used between the manufacturer (seller) and export-trader
(buyer), and the export-trader resells on other trade terms to the foreign buyers. Some
manufacturers may use the term Ex Factory, which means the same as Ex Works.

DES {+ the named port of destination}

Delivered Ex Ship

The delivery of goods on board the vessel is at the named port of destination (discharge) at
seller’s expense. Buyer assumes the unloading fee, import customs clearance, payment of
customs duties and taxes, cargo insurance, and other costs and risks.

In the export quotation, indicate the port of destination (discharge) after the acronym DES,
for example DES Helsinki and DES Stockholm.

CIF {+ the named port of destination}

Cost, Insurance and Freight

The cargo insurance and delivery of goods is to the named port of destination (discharge)
at the seller’s expense. Buyer is responsible for the import customs clearance and other
costs and risks.

In the export quotation, indicate the port of destination (discharge) after the acronym CIF,
for example CIF Pusan and CIF Singapore.

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Under the rules of the INCOTERMS 1990, the term CIF is used for ocean freight only.
However, in practice, many importers and exporters still use the term CIF in the air
freight.

DDP {+ the named point of destination}

Delivered Duty Paid

The seller is responsible for most of the expenses, which include the cargo insurance,
import customs clearance, and payment of customs duties and taxes at the buyer’s end, and
the delivery of goods to the final point at destination, which is often the project site or
buyer’s premises. The seller may opt not to insure the goods at his/her own risks.

In the export quotation, indicate the point of destination (discharge) after the acronym
DDP, for example DDP Bujumbura and DDP Mbabane.

Q.5 Give short notes on Letter of credit and Bill of Lading

A letter of credit is a document issued mostly by a financial
institution which usually provides an irrevocable payment undertaking (it can also be
revocable, confirmed, unconfirmed, transferable or others e.g. back to back: revolving but
is most commonly irrevocable/confirmed) to a beneficiary against complying documents as
stated in the credit. Letter of Credit is abbreviated as an LC or L/C, and often is referred to
as a documentary credit, abbreviated as DC or D/C, documentary letter of credit, or simply
as credit (as in the UCP 500 and UCP 600). Once the beneficiary or a presenting bank
acting on its behalf, makes a presentation to the issuing bank or confirming bank, if any,
within the expiry date of the LC, comprising documents complying with the terms and
conditions of the LC, the applicable UCP and international standard banking practice, the
issuing bank or confirming bank, if any, is obliged to honour irrespective of any
instructions from the applicant to the contrary. In other words, the obligation to honour
(usually payment) is shifted from the applicant to the issuing bank or confirming bank, if
any. Non-banks can also issue letters of credit however parties must balance potential
risks.

Letters of credit accomplish their purpose by substituting the credit of the bank for that of
the customer, for the purpose of facilitating trade. There are basically two types:
commercial and standby. The commercial letter of credit is the primary payment
mechanism for a transaction, whereas the standby letter of credit is a secondary payment
mechanism.

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 A Bill of Lading is a type of document that is used to acknowledge
the receipt of a shipment of goods and is an essential document in transporting goods
overland to the exporter’s international carrier. A through Bill of Lading involves the use
of at least two different modes of transport from road, rail, air and sea. The term derives
from the noun "bill", a schedule of costs for services supplied or to be supplied, and from
the verb "to lade" which means to load a cargo onto a ship or other form of transport.

In addition to acknowledging the receipt of goods, a Bill of Lading indicates the particular
vessel on which the goods have been placed, their intended destination, and the terms for
transporting the shipment to its final destination. Inland, ocean, through, and airway bill
are the names given to bills of lading.

Q.6 Discuss the entry methods in international business with relevant

examples.
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. Problems 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
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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.

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