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Master of Business Management (Semester IV) MB0053 - International Business Management Assignment Set- 1 Q 1 - What is globalization and what

are its benefits? Ans - Globalization is a process where businesses are dealt in markets around the world, apart from the local and national markets. According to business terminologies, globalization is defined as the worldwide trend of businesses expanding beyond their domestic boundaries. It is advantageous for the economy of countries because it promotes prosperity in the countries that embrace globalization. In this section, we will understand globalization, its benefits and challenges. Benefits of globalization The merits and demerits of globalization are highly debatable. While globalization creates employment opportunities in the host countries, it also exploits labor at a very low cost compared to the home country. Let us consider the benefits and ill-effects of globalization. Benefits of globalization are as follows: 1. Promotes foreign trade and liberalization of economies. Increases the living standards of people in several developing countries through capital investments in developing countries by developed countries. Benefits customers as companies outsource to low wage countries . Outsourcing helps the companies to be competitive by keeping the cost low, with increased 2. Productivity. Promotes better education and jobs. Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, and best practices and culture. Provides better quality of products, customer services, and standardized delivery models across countries. Gives better access to finance for corporate and sovereign borrowers. Increases business travel, which in turn leads to a flourishing travel and hospitality industry across the world. Increases sales as the availability of cutting edge technologies and production techniques decrease the cost of production. Provides several platforms for international dispute resolutions in business, which facilitates international trade. Q2 - Discuss in brief the Absolute and comparative cost advantage theories. Ans Absolute Advantage: Adam Smith (a social philosopher and a pioneer of political economics) argued that nations differ in their ability to manufacture goods efficiently and he saw that a country gains by trading. If the two countries exchanged two goods at ratio of 1:1, country I gets one unit of goods B by sacrificing only 10 units of labor, whereas it has to give up 20 units of labor if it produced the goods itself. In the same manner country II gives up only 10 units of labour to get one units of
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goods A, whereas it has to give 20 units of labour if it was made by itself. Hence it was understood that both countries had large amount of both goods by trading. Comparative Advantage: Ricardo (English political economist) questioned Smiths theory stating if one country is more productive than the other in all lines of production and if country I can produce all goods with less labour costs, will there be a need for the countries to trade. The reply was affirmative. He used England and Portugal as examples in his demonstration the two goods they produced being wine and cloth. This case is explained using following table: Labour cost of production (in hours) 1 unit of wine Portugal 70 England 110 1 unit of cloth 80 90

According to him Portugal has an advantage in both areas of manufacture. To demonstrate that trade between both countries will lead to gains, the concept of opportunity cost (OC) is introduced. 3. How is culture an integral part of international business. What are its elements? Ans - Culture is defined as the art and other signs or demonstrations of human customs, civilization, and the way of life of a specific society or group. Culture determines every aspect that is from birth to death and everything in between it. It is the duty of people to respect other cultures, other than their culture. Research shows that national cultures generally characterize the dominant groups values and practices in society, and not of the marginalized groups, even though the marginalized groups represent a majority or a minority in the society. Culture is very important to understand international business. Culture is the part of environment, which human has created, it is the total sum of knowledge, arts, beliefs, laws, morals, customs, and other abilities and habits gained by people as part of society. Culture is an important factor for practicing international business. Culture affects all the business functions ranging from accounting to finance and from production to service. This shows a close relation between culture and international business. Cultural elements that relate business The most important cultural components of a country which relate business transactions are: Language. Religion. Conflicting attitudes. Cross cultural management is defined as the development and application of knowledge about cultures in the practice of international management, when people involved have diverse cultural identities. International managers in senior positions do not have direct interaction that is face-to-face with other culture workforce, but several home based managers handle immigrant groups adjusted into a workforce that offers domestic markets.
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The factors to be considered in cross cultural management are: Cross cultural management skills The ability to demonstrate a series of behavior is called skill. It is functionally linked to achieving a performance goal. The most important aspect to qualify as a manager for positions of international responsibility is communication skills. The managers must adapt to other culture and have the ability to lead its members. The managers cannot expect to force members of other culture to fit into their cultural customs, which is the main assumption of cross cultural skills learning. Any organization that tries to enforce its behavioral customs on unwilling workers from another culture faces conflict. The manager has to possess the skills linked with the following: Providing inspiration and appraisal systems. Establishing and applying formal structures. Identifying the importance of informal structures. Formulating and applying plans for modification. Identifying and solving disagreements. Handling cultural diversity Cultural diversity in a work group offers opportunities and difficulties. Economy is benefited when the work groups are managed successfully. The organizations capability to draw, save, and inspire people from diverse cultures can give the organization spirited advantages in structures of cost, creativity, problem solving, and adjusting to change Cultural diversity offers key chances for joint work and co-operative action. Group work is a joint venture where, the production of two or more individuals or groups working in cooperation is larger than the combined production of their individual work. 4. Describe the tools and methods of country risk analysis. Ans - Country risk analysis is the evaluation of possible risks and rewards from business experiences in a country. It is used to survey countries where the firm is engaged in international business, and avoids countries with excessive risk. With globalization, country risk analysis has become essential for the international creditors and investors. Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border investment. CRA represents the potentially adverse impact of a countrys environment on the multinational corporations cash flows and is the probability of loss due to exposure to the political, economic, and social upheavals in a foreign country. All business dealings involve risks. An increasing number of companies involving in external trade indicate huge business opportunities and promising markets. Methods of Country risk Analysis: Fully qualitative method The fully qualitative method involves a detailed analysis of a country. It includes general discussion of a countrys economic, political, and social conditions and prediction. Fully qualitative method can be adapted to the unique strengths and problems of the country undergoing evaluation. Structured qualitative method The structured method uses a uniform format with predetermined scope. In structured qualitative method, it is easier to make comparisons between
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countries as it follows a specific format across countries. This technique was the most popular among the banks during the late seventies. Checklist method The checklist method involves scoring the country based on specific variables that can be either quantitative, in which the scoring does not need personal judgment of the country being scored or qualitative, in which the scoring needs subjective determinations. Delphi technique The technique involves a set of independent opinions without group discussion. As applied to country risk analysis, the MNC can assess definite employees who have the capability to evaluate the risk characteristics of a particular country. Inspection visits Involves travelling to a country and conducting meeting with government officials, business executives, and consumers. These meetings clarify any vague opinions the firm has about the country. Other quantitative methods The quantitative models used in statistical studies of country risk analysis can be classified as discriminate analysis, principal component analysis, and logic analysis and classification and regression tree method. Tools of country risk analysis: The risk management demands a regular follow up regarding governmental policies, external and internal environment, outlook provided by rating agencies, and so on. Following are the tools recommended: Chain of value Includes the main countries that sustain trade relationships with the nation, broken by sectors and products. Strength and weakness chart Focus the key aspects that warn the country. Table of financial markets performance Follow up the behavior of bonds and stocks already issued and to be issued. Table of macroeconomic variables Provides alert signals when the behavior of any ratio presents a relevant change. 5. Write short notes on: a. Spot and forward contracts A spot contract is a binding obligation to buy or sell a certain amount of foreign currency at the current market rate, for settlement in two business days' time. To enter into a spot deal you advise us of the amount, the two currencies involved and which currency you would like to buy or sell. For a company to use only the spot market for its foreign currency requirements may be a high risk strategy because exchange rates could move significantly in a short period of time. Forward contracts A forward exchange contract (or forward contract) is a binding obligation to buy or sell a certain amount of foreign currency at a pre-agreed rate of exchange, on a certain future date. To take out a forward contract you need to advise us of the amount, the two currencies involved, the expiry date and whether you would like to buy or sell the currency. It can be possible to build in some flexibility to allow the purchase or sale of the currency between two pre-defined dates rather than a single maturity date. b. Foreign currency derivatives

Currency derivative is defined as s financial as a financial contract in order to swap two currencies at a predestined rate. It can also be termed as the agreement where the value can be determined from the rate of exchange of two currencies at the spot. The currency derivative trades in markets correspond to the spot (cash) market. Hence, the spot market exposures can be enclosed with the currency derivatives. The main advantage from derivative hedging is the basket of currency available. Some of the risks associated with currency derivatives are: Credit risk takes place, arising from the parties involved in a contract. Market risk occurs due to adverse moves in the overall market. Liquidity risks occur due to the requirement of available counterparties to take the other side of the trade. Settlement risks similar to the credit risks occur when the parties involved in the contract fail to provide the currency at the agreed time. 6. Discuss the importance of transfer pricing for MNCs. Ans - Transfer pricing is the process of setting a price that will be charged by a subsidiary (unit) of a multi-unit firm to another unit for goods and services, which are sold between such related units. Transfer pricing is a critical issue for a firm operating internationally. Transfer pricing is determined in three ways: market based pricing, transfer at cost and cost-plus pricing. The Arms Length pricing rule is used to establish the price to be charged to the subsidiary. Transfer pricing can also be defined as the rates or prices that are utilized when selling goods or services between a parent company divisions and departments that may be across many countries. The price that is set for the exchange in the process of transfer pricing may be a rate that is reduced due to internal depreciation or the original purchase price of the goods in question. When properly used, transfer pricing helps to efficiently manage the ratio of profit and loss within the company. Transfer pricing is a relatively simple method of moving goods and services among the overall corporate family. Many managers consider transfer pricing as non-market based. The reason for transfer pricing may be internal or external. Internal transfer pricing include motivating managers and monitoring performance. External factors include taxes, tariffs, and other charges. Transfer Pricing Manipulation (TPM) is used to overcome these reasons. Governments usually discourage TPM since it is against transfer pricing, where transfer pricing is the act of pricing commodity or services. However, in common terminology, transfer pricing generally refers TPM. TPM assists in saving the organizations tax by shifting accounting profits from high tax to low tax jurisdictions. It also enables to fix transfer price on a non-market basis and thus enables to save tax. This method facilitates in moving the tax revenues of one country to another. A similar trend can be observed in domestic markets where different states try to attract investment by reducing the Sales tax rate, and this leads in an outflow from one state to another. Therefore, the Government is trying to implement a taxing system in order to curb tax evasion.