1.

The world economy is globalizing at an accelerating pace:

The world economy is globalising at an accelerating pace. Countries that were previously closed to
foreign companies have now opened up their markets. Internet has made the world a smaller place. All
these factors have contributed to the growth of international business. International business operates
under different economic, political, and legal environments. There are various theories that are considered
when companies deal with business internationally. When a company deals internationally, it interacts
with people from various cultures across the world. Hence, culture is an important aspect in international
business and a company must handle the cultural diversity in international business. International
business has improved the quality of life of people around the world and has made life simple and easier.
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.
Some of the benefits of globalization are as follows:
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 productivity.
Promotes better education and jobs.
Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best
practices and culture.
Provides better quality of products, customer services, and 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.
2.
Adam Smiths theory/ Absolute advantage theory:

Adam Smith attacked the mercantilism and argued that countries differ in their ability to produce goods
and services efficiently due to variety of reasons. At that time, England, by virtue of their superior
manufacturing processes, were the worlds most efficient textile manufacturers of the world. This was due
to combination of several factors such as favorable climate, good soils, skilled manpower and
accumulated experience and expertise in textile production. On the other hand, the French had one of the
most efficient wine industries of the world. Thus, England had an absolute advantage in the
manufacturing of textiles and France had an absolute advantage in the production of wine. Adam Smith
argued that a country has an absolute advantage if it has one of the most efficient and cost effective
product in comparison to any other country producing it. Smith argued that countries should specialize in
production and manufacturing of goods and services in which they have an absolute advantage. Such cost
effective and efficient products can be traded with goods from other countries in which that country has
an absolute advantage. According to Smith, England should specialize in the production of textiles and
France should specialize in the production of wine. Countries should exchange such products of absolute
advantage with each other, i.e. England should sell textiles to France and France should sell wine to
England.
The crux of Smiths absolute advantage theory is that a country should not produce goods at home in
which it does not have cost advantage; instead it should import from other countries.

David Ricardos theory/ Comparative advantage theory:

David Ricardo, in his notable book Principles of Political Economy published in 1817 came up with an
improvement on Adam Smiths absolute advantage theory. Ricardo argued what might happen if one
country has an absolute advantage in the production of all goods. Adam Smiths theory suggests that such
a country might not have benefitted from international trade as trade is positive sum game and countries
prosper only if they exchange the goods in which they have absolute advantage. Ricardo argued that it
was not the case and showed that countries should trade goods with each other where they have
comparative cost advantage. For a sustainable economic system, Ricardo argued that a country should
specialise in the production of those goods that it can produce most efficiently and import the goods
which it produces less efficiently even if it has absolute cost advantage in the production of those goods.

3.

Regional integration
Regional integration can be defined as the unification of countries into a larger whole. It also reflects a
countrys willingness to share or unify into a larger whole. The level of integration of a country with other
countries is determined by what it shares and how it shares. Regional integration requires some
compromise on the part of participating countries. It should aim to improve the general quality of life for
the citizens of those countries. Regional integration can be achieved with different approaches. To some
extent, each country and region will find its own way. But typically there are some common ideas/reasons
for achieving regional integration.
Types of Integration
A whole range of regional integrations exist today. Different types of regional integration are:
1. Preferential trading agreement
Preferential trading agreement is a trade pact between countries. It is the weakest type of economic
integration and aims to reduce taxes on few products to the countries who sign the pact. The tariffs are not
abolished completely but are lower than the tariffs charged to countries not party to the agreement.
2. Free trade area
Free Trade Area (FTA) is a type of trade bloc and can be considered as the second stage of economic
integration. It comprises of all countries that are willing to or agree to reduce preferences, tariffs and
quotas on services and goods traded between them. Countries choose this kind of economic integration if
their economical structures are similar. If countries compete among themselves, they are likely to choose
customs union.
3. Custom union
Custom Union is an agreement among two or more countries having already entered into a free trade
agreement to further align their external tariff to help remove trade barriers. Custom union agreement
among negotiating countries may encompass to reduce or eliminate customs duty on mutual trade. Under
customs union agreement, countries generally impose a common external -tariff (CTF) on imports from
non-member countries.
4. Common market

Common market is a group formed by countries within a geographical area to promote duty free trade and
free movement of labor and capital among its members. European community is an example of common
market. Common markets levy common external tariff on imports from non-member countries.
5. Economic union
Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of a common
market with a customs union. The countries that are part of an economic union have common policies on
the freedom of movement of four factors of production, common product regulations and a common
external trade policy.
6. Political union
A political union is a type of country, which consists of smaller countries/nations. Here, the individual
nations share a common government and the union is acknowledged internationally as a single political
entity. A political union can also be termed as a legislative union or state union.

4.
a) General Agreement on Trade in Services (GATS)
It encourages countries to modify their domestic regulations. This modification results in elimination of
restrictions applied to service products entering the country and is applicable to international service
suppliers who are carrying out business in various modes. According to the GATS, MFN status and
transparency is applicable to all services. Other commitments such as national treatment and market
access are only applicable to services that are opened according to the specified negotiated commitments.
GATS covers services known as consumption abroad where services such as e-commerce are used by
the consumers in a host country and citizens of a country travel overseas to consume products such as
tourism or education. GATS is a framework agreement defining the rules under which trade in services
must occur. GATS aim at extending the rules covering trade in goods to trade in services. A detailed rule
has been included to take into account the differences between goods and services and the way in which
trade in services is conducted. Trade in services covers a wide range of activities in the area of
telecommunication, information, banking, insurance and education. WTO has recognized over 150
service sub-sectors.
b) International Labor Organisation (ILO)

International Labor Organisation (ILO) is a specialised agency of the United Nations which deals with
labour issues. The headquarters is situated in Geneva, Switzerland. The secretariat comprises of the
people employed by the organisation throughout the world. The secretariat is known as the International
Labour Office. The ILO manages work through three main bodies. They are:
International Labour Conference The members of the ILO meet at the International Labour Conference
every year in June, in Geneva. Two government delegates along with an employer delegate and a worker
delegate represents their respective member state. The technical advisors also accompany the delegates.
Governing Body The executive council of the ILO is known as the Governing Body. It meets thrice a
year in Geneva and takes decisions on the ILO policies. It forms programmes and budgets which are
submitted to the Conference for adoption. The Governing Body has 28 government members, 14
employer members and 14 worker members. Ten government seats are permanently held by states of
chief industrial importance. Taking into consideration the geographical distribution, representatives of
other member countries are elected at the Conference once in every three years. The representatives are
elected by the employers and workers.
International Labour Office The permanent secretariat of the International Labour Organisation is the
International Labour Office. It is the central point for all activities that are administered by the governing
body. The Office is a center for administration, research and documentation. It employs more than 1,700
officials from 110 nationalities. The Office also organizes certain programmes to extend technical help to
all member nations. Under this programme of technical cooperation, around 600 experts undertake
missions in all regions of the world.

5.
Difference between domestic and international accounting:
The management of finance in domestic and international business is considerably different. The four
major aspects which distinguish international management from domestic financial management are the
introduction of foreign exchange, political risks, market imperfection and enhanced opportunity set. They
are explained as follows:

Foreign exchange risks The foreign exchange risks states the fluctuation or variation in the prices of
currency which will have a tendency to convert a profitable deal to a loss making one. This creates a
situation of additional risk to the finance manager.
Political risks The political risks may include any changes that will impact the economic environment of
the country. For example, Taxatio rules, Contract Act and so on. This pertains to the management of the
country which can alter the rules of the game in an unanticipated manner.
Market imperfection The integration of countries in the world economy, has resulted in differences in
transportation costs and different tax rates. Inadequate markets can force a finance manager to struggle for
best opportunities across the countrys border.
Enhanced opportunity set When business is undertaken in a country other than native country, it will
help expand their chances in business. In addition, it will enhance the opportunity for the business and
diversify The goal of international financial management is to increase the wealth of shareholders just like
in domestic financial management. The goals are not only limited to the shareholders, but also to the
suppliers, customers and employees. It is also understood that any goal cannot be achieved without
achieving the welfare of the shareholders. Increasing the price of the share would mean maximizing
shareholders wealth. The management of the organisation must decide the currency in which the value of
the shares is maximized.
The international trade is being promoted and shaped by international institutions called the Bretton
Woods Institutions: International Monetary Fund (IMF), World Bank and World Trade Organisation
(WTO) through its legal initiatives such as the General Agreement of Trade and Tariffs (GATT),
General Agreement on Trade in Services (GATS) and so on. Multi-National Corporations (MNC) have
come into existence due to liberalisation and international agreements. The MNCs enjoy greater freedom
when compared to the normal companies because of international setting and best opportunities. Without
the knowledge in International Financial Management, it can be hard for MNCs let alone any
international business entity, to continue in the market because international financial markets have a
totally diverse shape and analytics in contrast to the domestic financial markets. A sound knowledge in
International Financial Management can assist an organisation to accomplish similar competence and
effectiveness in all markets.
6.
Various payment terms and payment methods in international trade

Since international trade deals with exchange of goods, there are various ways in which the payment
terms (finance) will be handled. Bothe seller and trader should be careful about the method of payment as
they are at different locations and transactions happen without face-to-face interaction. There are four
methods of payment for the international transactions. This includes the Cash-in-advance method, Letter
of Credit, Documentary collections and the Open Account.
, there is uncertainty during the time when payment transactions happen between importer and exporter.
The figure compares and contrasts the most suitable methodology from the perspective of importer and
exporter. Apparently the most secure methodologies that work for the exporter is not safe for the importer.
These terms are explained as follows.
Cash-in-advance
Cash-in-advance helps in removing the risks of credit by the exporter. By this method, exporter receives
the payment before the transfer of goods. The options that are available with the cash-in-advance method
include wire transfers and credit cards. This is the least attractive method for many of the buyers as it
creates cash flow problems. The buyers are concerned about the quality/quantity and delivery of the
goods that are not sent if the payment is made in advance.
Letters of credit
The letter of credit is the most secure instrument available for international traders. This is the
commitment made by the bank that the payment will be made to the exporter if the terms and conditions
are met. The terms and conditions of the payment are explained in the required documents.
Documentary collections
Documentary collection is a transaction in which, the exporter's bank (remitter bank) sends the documents
to the importer's bank (collecting bank).
Open account
The open account transaction involves the shipping and delivery of goods in advance. The payment is due
usually from 30 to 90 days. This is advantageous for the importer in cash flow and cost terms, but at the
same time it is very risky for the exporters.
Safest mode of payment

Letter of credit
Letter of credit assumes significance since it can be used to mitigate risk. It is a document that is issued
by the bank that guarantees payment to a beneficiary. It is written by the financial institution in favor of
the importer of goods to the seller. In the letter, the bank promises that it will honor the drafts drawn on it
if the seller confirms to the specific conditions that are set forth in the letter of credit.