Q1 - International business comprises all commercial transactions

(private and governmental, sales, investments, logistics, and

transportation) that take place between two or more regions, countries
and nations beyond their political boundaries.

1. The exchange of goods and services among individuals and

businesses in multiple countries.
2. A specific entity, such as a multinational corporation or
international business company that engages in business among
multiple countries.
2. International business comprises all commercial transactions
(private and governmental, sales, investments, logistics,
and transportation) that take place between two or
more regions, countries and nations beyond their political
boundaries. Usually, private companies
undertake transactions for profit; governments undertake them for
profit and for politicalreasons.

Difference between Domestic Business and

International Business
Dimension Domestic Business IB
1. Environment Pest (known) PEST (not fully
known). Certain
factors could change at any
time
which could effect business

2) Plan and strategy Can be worked out Only long term

for short term and carried planning and strategy will
forward to work
long term
3) Competition Many domestic and International
some international players and competitive forces
one can understand their play a vital role and it is very
movement. difficult
to understand the
motive and movement
 4) Currency Local Different currencies.
Fluctuations in
currencies can cause
problems.
5) Legal aspects Only local regulations International
are fully applicable to regulations and host
conduct business country regulations
are applicable

6) marketing mix Local in scope Have to adapt to host country

requirements.
e.g certain countries have PAL
and certain countries have
NTSC/SECAM for TV.
Certain countries have left
hand driving and
certain countries have right hand
driving.
Certain countries have 240 v as
electric input, certain
countries have 110v.
Certain countries have banned
advertisements for liquor
and cigarettes.
Certain countries the retail
environment is different.
The ads have to be changed to
suit international tastes.
Packaging also needs
to be changed.
 7) culture and Fully understood Takes a lot of time to
language understand and adapt
to it. Also colours and Brand
names have to
be proper for the host country.
8) Investment One can start with minimum Except exports every other
investment. Also regulatory kind of overseas operation
bodies are less involved calls for huge investments.
Also special regulatory
bodies are involved
since foreign currency is
involved.
9) Business risk One can predict the Difficult to predict.
risk
10) Research Reasonable cost and easy to Very expensive and difficult to
conduct research conduct business research.

Q2-

The theory of International Product life cycle

Raymond Vernon.
This theory elaborates on the stages of production of a
product with a new know-how

Such a product is first introduced by the parent firm ,

then by its foreign subsidiaries and finally anywhere in
the world where costs are the lowest.

This theory helps to explain why a product that begins as

a nations export ends up becoming an import.

Stage 1 : the introduction stage :

The company launches the product in the home country.

The theory of International Product life cycle
Raymond Vernon.
Price is inelastic , profits are high and the company
seeks to sell to those willing to pay premium price.

As production increase and exceeds local consumption ,

export start taking place.

Thus in the growth phase (Stage 2) the company

experiences higher sales in home country.

Simultaneously , it also exports in a big way. Also at this

stage competitors begin to eat into the innovators market
share.

The theory of International Product life cycle

Raymond Vernon.
Price is inelastic , profits are high and the company
seeks to sell to those willing to pay premium price.

As production increase and exceeds local consumption ,

export start taking place.

Thus in the growth phase (Stage 2) the company

experiences higher sales in home country.

Simultaneously , it also exports in a big way. Also at this

stage competitors begin to eat into the innovators market
share.
The theory of International Product life cycle
Raymond Vernon.
As a result exports from US declined and users in US began to buy
some of their photocopiers from lower cost foreign sources
/comparable technology sources like Japan.

More recently Japanese companies are finding manufacturing costs

are too high in their country.

So they have began to switch production bases to Thailand,

Malaysia and Singapore.

As a result , U.S and other advanced countries have switched from

being exporters to importers of photocopiers.

The evolution in the international trade in photocopiers is consistent

with the prediction of the product life cycle.theory.

The theory of International Product life cycle

Raymond Vernon.
This theory thus predicts that initially , the comparative
advantage will exist in the innovating country.
Over time , as the product becomes standardised , the
country of comparative advantage will shift to lower
factor cost locations .
Also the theory points out that the innovative firm will
start out as exporter and increasingly move towards
direct investment abroad.
Q3-

1) Economic environment :
p Before entering any country, the economic study is of vital
importance

p A) Size of the market :

most companies are looking at India
because of the huge potential.
p A case in point is HP which is now focusing on India to sell
their range of laptops and printers in India.
p Indias middle class and upper class population is more
then the population of Europe.

p B) Gross Domestic Product (GDP) :

If a constant good rate is maintained ,
MNCs would definitely look at such countries.
p India is maintaining around 7-8% growth rate. In the
1990s it was Malaysia and Indonesia.

1) Economic environment :

p C) Purchasing Power: Higher PP leads to a highly

potential market.
p D) Banking :
is the only channel through which
remittances take place and hence is a major
infrastructure for IB.
p Europe and American and the Far east
economies have a highly effective banking
system.
p On the other hand, Africa and CIS are not able to
provide good banking services to the
International business community.
1) Economic environment :

p E) Foreign exchange :
countries with sufficient foreign
exchange reserves, a liberal policy on
repatriation and which have demand for
the products and services are an ideal
destination for any company to do IB

1) Economic environment :

p F) Income levels:
Economies are classified into low and high
income economies.
p Industrialised nations are high income economies
and enjoy a high per capita income.
p Companies marketing premium quality or high
technology products have an easy entry into such
advanced economies with the proper strategy e.g
IPOD and Playstations.
p Similarly developing countries which are low
income economies are price sensitive.
p Accordingly foreign companies will think of
cheaper or middle level products for these
economies.
2) Social Environment:

p 1) national taste:
In Thailand , people prefer black shampoo.
p Nestle brews different varieties of instant coffee as people
in different countries have different taste.
p Green is a favourite colour in Middle east countries.
p 2) Language
p 3) demographic profile:
A number of demographic factors such as age,
sex ratio, family size and occupation influence the business
of many companies.
p Different companies concentrate on different segments.
e.g Barbie generates huge revenues through the childrens
segment of affluent countries. Also brands like Osh Kosh
BGosh and Jini and Joni can do well in India considering
the huge children population.

2) Social Environment:

p 4) Literacy rate:
Countries with a high literacy rate experience
a better standard of living .
p Here the need is for standardised goods,
supported by technical services.
p For a country with an educated population , the
amount of training required for the staff will be
far less than in the case of a country which has a
low literacy rate.
p This is an important parameter as it influences
the costs incurred.
 2) Social Environment:

p 5) Female workforce:
With economic independency in countries like
China, India , women no longer depend on men to make
decisions about what to buy.
p As they have the required purchasing ability, they make
decisions on their own.
p In India , china , Thailand and Russia, there is a huge
demand for categories like Jewellery, Cosmetics, vehicles,
ready to eat foods, primarily because of the working
women.
p 6) Double Income families (from to nuclear families):_ As
the household income increase the demand for the number
of products, increases proportionately.

Q4-

Political Environment :

p Host country political environment :

The political parities in each country
have different ideologies.
p It is imperative to know these ideologies before
entering any country.
p Both Coke and IBM had to leave India , when in
1977 , Janata party came to power in India.

p Global Political environment :

formation of strategic alliances like EU helps
companies in that region to enter any country in
that alliance as it benefits them more than
companies form non EU.
The political environment is perhaps among the least predictable
elements in the business environment. A cyclical political environment
develops, as democratic governments have to pursue re-election every
few years. This external element of business includes the effects of
pressure groups. Pressure groups tend to change government policies.
As political systems in different areas vary, the political impact differs. The
countrys population democratically elects open government system. In
totalitarian systems, governments power derives from a select group.

Corruption is a barrier to economic development for many countries.

Some firms survive and grow by offering bribes to government officials.
The success and growth of these companies are not based on the value
they offer to consumers.

Below, is a list of political factors affecting business:

Bureaucracy
Corruption level
Freedom of the press
Tariffs
Trade control
Education Law
Anti-trust law
Employment law
Discrimination law
Data protection law
Environmental Law
Health and safety law
Competition regulation
Regulation and deregulation
Tax policy (tax rates and incentives)
Government stability and related changes
There are 4 main effects of these political factors on business
organizations. They are:
Impact on economy
Changes in regulation
Political stability
Mitigation of risk

1) Avoiding Investment:

The simplest way to manage political risks is to avoid investing in a

country ranked high on such risks. Where investment has already

been made, plants may be wound up or transferred to some other

country which is considered to be relatively safe.

2) Adaptation:

Another way of managing political risk is adaptation. Adaptation

means incorporating risk into business strategies. MNCs incorporate

risk by means of the following three strategies: local equity and

debt, development assistance, and insurance.

3) Threat:

Political risk can also be managed by trying to prove to the host

country that it cannot do without the activities of the firm. This may

be done by trying to control raw materials, technology, and

distribution channels in the host country. The firm may threaten the

host country that the supply of materials, products, or technology

would be stopped if its functioning is disrupted.

4) Lobbying:

Influencing local politics through lobbying is another way of

managing political risks. Lobbying is the policy of hiring people to

represent a firms business interests as also its views on local

political matters. Lobbyists meet with local public officials and try to

influence their position on issues relevant to the firm. Their ultimate

 goal is getting favourable legislation passed and unfavourable ones

rejected.
5) Terrorism Consultants:

To manage terrorism risk, MNCs hire consultants in counterterrorism

to train employees to cope with the threat of terrorism.

6) Invaluable Status:

Achieving a status of indispensability is an effective strategy for

firms that have exclusive access to high technology or specific

products. Such companies keep research and development out of

the reach of their politically vulnerable subsidiaries and, at the same

time, enhance their bargaining power with host governments by

emphasizing their contributions to the economy.
ADVERTISEMENTS:

When Texas Instruments wanted to open an operation in Japan more

than a decade ago, the company was able to resist pressures to

take on a local partner because of its unique advanced technology.

This situation occurred at a time when many other foreign

companies were forced to accept local partners. The appearance of

being irreplaceable obviously helps reduce political risk.

7) Vertical Integration:

Companies that maintain specialized plants, each dependent on the

others in various countries, are expected to incur fewer political

risks than firms with fully integrated and independent plants in each

country. A firm practicing this form of distributed sourcing can offer

economies of scale to a local operation. This strategy can become

crucial for success in many industries.

If a host government were to take over such a plant, its output level

would be spread over too many units, products, or components,

thus, rendering the local company uncompetitive because of a cost

 disadvantage. Further risk can be reduced by having atleast two

units engage in the same operation, thus, preventing the company

itself from becoming hostage to over- specialization. Unless multiple

sourcing exists, a company could be shut down almost completely if

only one of its plants were affected negatively.

8) Local Borrowing:

One of the reasons why Cabot Corporation prefers local partners is

that, it can then borrow locally instead of adding an additional level

of risk with the investment funds being in a currency which is

different from the currency of all the sales and costs of the venture.

Financing local operations from indigenous banks and maintaining a

high level of local accounts payable maximize the negative effect on

the local economy if adverse political actions were taken.

Typically, host governments do not expropriate themselves, and

they are reluctant to cause problems for their local financial

institutions. Local borrowing is not always possible, however,

because of restrictions placed on foreign companies, which

otherwise crowd local companies out of the credit markets.

9) Minimizing Fixed Investments:

Political risk, of course, is always related to the amount of capital at

risk. Given equal political risk, an alternative with comparably lower

exposed capital amounts is preferable. A company can decide to

lease facilities instead of buying them, or it can rely more on outside

suppliers, provided they exist. In any case, companies should keep

exposed assets to a minimum to limit the damage posed by political

risk.
10) Political Risk Insurance:

As a final recourse, global companies can purchase insurance to

cover their political risk. With the political developments in Iran and
 Nicaragua and the assassinations of President Park of Korea and

President Sadat of Egypt all taking place between 1979 and 1981,

many companies began to change their attitudes on risk insurance.

Political risk insurance can offset large potential losses. For example,

as a result of the UN Security Councils worldwide embargo on Iraq

until it withdrew from Kuwait, companies collected $100-$200

million from private insurers and billions from government-owned

insurers.

Q5. A MNC is favorable to the host country as well as the home

country? Give suitable examples?
an MNC is a company incorporated outside India having a place
of business in India. According to ILO, a multinational enterprise is
one whose managerial headquarter is located in one country (referred
to as home country) while the enterprise carries out operations in
a number of other countries (called host countries).

ROLE OF MNC IN ECONOMIC DEVELOPMENT

1. makes resources available
2. improves technology
3. increases productivity
4. creates infrastructure
5. sophisticated managerial techniques
6. integrates economies
7. stimulates economy
8. increases competition
ADVATAGES TO HOST COUNTRY
1. increase industrial activities
2. increase economic activities
3. improve the level technology
4. improve managerial expertise
5. competition increases competitive strength
6. improve bop condition
7. greater variety of goods available
8. better utilization of domestic resources
9. generate employment
DISADVATAGES TO HOST COUNTRY
1. technology may not be appropriate
2. monopolistic practices kill domestic industry
3. indiscriminate use of resources
4. interference in political activities
5. pollute environment
6. Huge outflow through royalty, dividend etc.
7. distort economic structure
8. influence on culture
9. evasion of taxes through transfer pricing
10. kill small scale industries
ADVANTAGES TO HOME COUNTRY
1. create demand for home product
2. create employment
3. increase economic activities
4. save domestic environment
5. conserve domestic resources
6. profit is used for capital accumulation
7. help to improve bop condition
8. help to earn foreign exchange
 9. MNCs work for social welfare and improvement of health
facilities in the host countries.
DISADVANTAGES TO HOME COUNTRY
1. transfer technology
2. if geocentric, it may not generate employment
3. resources in host country may be preferred
4. development of industrial development may be neglected
5. may not help to increase productivity at home
Example
clear vision optical, a manufacturer & distributor of eyewear was
started by David glassman in the USA. its an MNC with production
in three continents & customers around the world. when its revenue
was $20 million, US $ was very strong. so, clear vision started
importing from independent overseas manufacturers. however, not
satisfied by the quality, clear vision decided to shift manufacturing
operations overseas. it opened manufacturing facilities in Hong Kong
with a Chinese partner. Clear vision was a majority shareholder. It
adopted low-cost strategy.
low labour cost & skilled workforce along with tax-break given by
HK govt., the location proved to be appropriate. however, after a
few years, due to industrialization in HK & growing shortage of
labour, wage-rate started rising. in response, glassman and his
partner shifted a part of their manufacturing plant in china. Again,
the goal was to lower production cost.
the part manufactured in china were shipped to HK for final
assembly & then distributed in north and south America. Now HK
employed 80 people & china 300 400 people. At the same time the co.
was looking for opportunities to invest in foreign eyewear firms with
reputation for fashionable design & high quality. the objective was
not to reduce cost, but to launch a line of highly differentiated
designer eyewear. clear vision did not have design capability in-
house to support such a line. glassman invested in factories in
japan, France & Italy holding minority shareholding in each case.
these factories now supply clear visions status eye division which
markets high-priced designer eyewear. Its revenue crossed over $100
million.

Q6. What are the pressures faced by MNCs in the competitive

global market? What different strategies are adopted by them to
deal with these pressures?
companies attempting global expansion, face two types of pressure;
1. pressure to be locally responsive
 2. pressure for cost reduction
depending on the relative strength of these two opposite pressures,
the strategy is adopted.
2] in case of international strategy there is no pressure for local
customization nor for cost reduction. For ex. in 1960s when Xerox
invented photocopier, it did not face any competition. The product
served universal need. It enjoyed monopoly. Similarly, P&G and Microsoft.
p & g developed innovative products in Cincinnati & transferred
elsewhere, but when retailers like Walmart, Carrefour, Tesco
developed, there was cost reduction pressure. Microsofts
development work takes place at Redmond, Washington where it is
headquartered. however, some localization work is done in the form
of foreign language version of its programs.
3] in localization strategy pressure for local responsiveness is high.
it is due to various following factors;
1. Local taste and preference.
2. Important role of culture
3. govt. Policy with respect to local content
4. Technical STD. May be GSM in Europe, CDMA in US
5. electric system may be based on 110 volts or 240 volts
6. in this strategy more autonomy is given to affiliates.
4] This is the most difficult strategy. company tries to produce at
selected locations in large quantities, but final assembling in
respective host countries incorporates local features

Q7. Different Pros and Cons of different modes of entry into

international Business?
The different modes of entry into international business are as follows
1. export
2. turnkey projects
3. licensing agreement
4. franchising agreement
5. joint venture
6. foreign acquisition
7. green field entry

Export
Advantages
Low initial investment
Reach customers quickly
Complete control over production
Benefit of learning for future expansion
Disadvantages
Potential costs of trade barriers
Transportation cost
Tariffs and quotas
Foregoes potential location economies
 Difficult to respond to customer needs well

Turnkey projects
Under this system, a foreign company is given the contract to set
Up the entire plant or a project including the training of operating
personnel. After the completion of the contract the foreign client is
handed the key to the plant that is ready for the operation.
Turnkey projects are common in chemical, pharmaceutical and refinery
industry. Even setting up of aerodrome could be a turnkey project.

ADVANTAGES
1. High returns
2. If FDI is restricted
3. Technology not leaked
4. Host country is benefitted

DISADVANTAGES
1. No technology transfer
2. Company no long term interest

Advantages
Low initial investment
Avoids trade barriers
Potential for utilizing location economies
Access to local knowledge
Easier to respond to customer needs
Disadvantages
Lack of control over operations
Difficulty in transferring tacit knowledge.
Potential for creating a competitor

Franchising Agreement
Franchising is a form of licensing in which a company (franchisor)
allows other independent company (franchisee) in a foreign target
country to conduct business under the franchisors trade name,
policies and procedures.
the main growth period of franchising was after the second
world war. Nowadays, franchising is common in business fields such
as fast-food restaurants, car rental chains, soft drinks, hotel chains
and many other service businesses.

ADVANTAGES
Overseas expansion with a minimum investment
Franchisees profit tied to their efforts
Franchisees knowledge about local mkt. Available
DISADVANTAGES
Revenues may not be adequate limited overseas opportunity
Lack of effective control
Problem in performance standard
Physical proximity

Advantages
Access to partners local knowledge
Reduction of concern about overpayment
Both parties have some performance incentives
Significant control over operation
Disadvantages
Potential loss of proprietary knowledge
Potential conflicts between partners
Neither partner has full performance incentive
Neither partner has full control
Advantages
Access to targets local knowledge
Control over foreign operations
Control over own technology
Disadvantages
Uncertainty about targets value
Difficulty in absorbing acquired assets
Infeasible if local market for corporate control is underdeveloped

Advantages
Normally feasible
Avoids risk of overpayment
Avoids problem of integration
Still retains full control
Disadvantages
Slower startup
Requires knowledge of foreign management
High risk and high commitment

Q8. Explain different types of FDI? What are their relative merits
and demerits?
CHARACTERISTICS OF FDI
Its basic intention is to participate in the management of the
target company.
It involves a long term commitment.

Generally it is accompanied by technology transfer & access

to new market.
It involves new market, raw material etc. For the foreign
company and access to technology for the target company.
It creates physical assets that increases productive capacity of
the target company as well as growth & employment in the
host country.
It involves fresh issue of capital or sale of shares held by
promoters in the target company. Such transactions are primary
market operations.
ADVANTAGES
1 inflow of funds through FDI translates into productive capacity,
hence it leads to growth.
2 It transfers technology to the host country.
3 It generates employment
4 FDI inflows are long term in nature, therefore they do not create
volatility in the capital market of the host country.
5 It transfers risk to the foreign investor.
6 It creates linkage effects.
7. It equalizes marginal productivity of capital in different countries.
8. it helps MNCs to buy assets at a lower cost when the currency
of the host country is depreciated.
9. it enables the MNCs to overcome trade barriers imposed by the
host country.
10. it enables the MNCs to retain total control on their technology
11. it ensures an uninterrupted supply of the needed raw-material
the lowest possible cost through vertical integration.
12. It improves BoP condition of the host country.

DISADVANTAGES
1] excessive dependence on FDI leads to loss of control over the
business entity.
2] cultural differences between foreign investor & local work-force
leads to frictions and hostility.
3] FDI often leads to misallocation of resources.
4] technology brought by FDI may not be appropriate for the host
country.

TYPES OF FDI
FDI may be inward (inbound) or outward (outbound)
It may be WOS (Greenfield), JV or M & A
FDI can also be classified on the basis of the motive;
Resource-seeking / market- seeking / efficiency-seeking

DISTINCTION BETWEEN FDI AND FPI

FDI is investment by non-resident in a domestic company
with the intention of participating in the management of the
 company. FPI is investment by non-resident in a domestic
company with the intention of getting quick capital gains.
FDI involves long term association. FPI involves short term
association.
FDI is a primary market transaction. FPI is a secondary market
transaction
FDI leads to economic growth. FPI makes foreign currency
available
FDI involves investment in physical assets. FPI involves investment
in financial assets.
FDI involves transfer of technology, expertise. FPI is associated with
the problem of hot money.

Q9. What is globalization? Has globalization led to increase in

income inequality?
Globalization means the coming together of different societies and
economies via cross border flow of ideas, finances, capital,
information, technologies, goods and services.
GLOBALISATION CAN BE
SOCIAL
CULTURAL
ECONOMIC
POLITICAL
SOCIAL GLOBALISATION
It is the integration of societies. the social dimension of globalization
refers to the impact on employment, working conditions, social
protection cohesiveness of families and communities.
CULTURAL GLOBALISATION
It refers to convergence of values, social norms, and entertainment.
it is the world where the symbols of material and popular culture
are global, from coca cola to McDonalds, from apple cell phone to
MTV shows.
ECONOMIC GLOBALISATION
It is the integration of national economy with the global economy. The
concept of world economy has emerged. The entire world becomes the
economic unit. raw materials, labour, capital are acquired from
anywhere in the world. Standardised products are manufactured with
economies of scale
POLITICAL GLOBALISATION
Different political systems start borrowing each others features.
International laws and agencies start playing dominant roles. china has
adopted some of the characteristics of market economy, while
America regulates business units in the country.
There are different facets of globalisation;
 globalisation of market

globalisation of production

globalisation of investment

globalisation of technology

FEATURES OF GLOBALISATION
1. Transnational economy is shaped by money flows rather than by
trade in goods & services.
2. Market maximisation rather than profit maximisation becomes the
prime objective.
3. Trade follows investment the decision power is shifted from
national states to
4. International agencies.
5. There is autonomous flow of money, credit & investment. It is
organized by information which knows no boundaries.
6. The entire world is a single market for production. Spread of free
market ideology
7. Liberalisation & privatisation of national economies.
8. Centre of gravity shifting from developed countries to developing
countries.
9. Speedy growth of Asian tigers, china & India.
10. Deregulation of worldwide capital market.
11. Rapid growth of technology.
12. Dip in transport costs.
13. Enhancement in global communication.
ROLE OF THE GLOBAL MANAGER
1. He should be cross-culture literate
2. He should be adaptable.
3. He has to be highly innovative and be able to identify new
avenues.
4. He must understand & implement all organisational policies.
5. Cost management must be perfect.
6. He should understand strategies of rival companies,
7. He should be acceptable to the staff as well as to institutions
like
8. Banks, relevant government departments in the host country.

ADVANTAGES
1. Increased trade between nations.
2. Corporations have greater flexibility to operate across borders.
3. Greater ease & speed of transportation of goods and people.
4. Reduction of cultural barriers.
5. Greater interdependence among nation states.
6. Increase in flow of communication.
7. Global mass media ties the world together.
 8. Reduction in likelihood of war.
9. Spread of democratic ideals.
10. Technological advancement has led to tremendous rise in
productivity.
DISADVANTAGES
1. Economic disruption in one country affects the whole world
2. Greater risk of transmission of diseases from one nation to others.
3. Total dominance of developed countries in the world.
4. Exploitation of labour from labour-rich countries.
5. Shift of unskilled jobs to developing countries.
6. Sovereignty of developing countries is undermined
7. Encroachment on local culture by world media.
8. Spread of materialistic life-style and consumerism.
9. Mega MNCs are responsible for poor working condition, pollution,
10. And reckless use of scarce natural resources.

SHORT NOTE ON NAFTA

The North American Free Trade Agreement (NAFTA) is a treaty entered into
by the United States, Canada, and Mexico; it went into effect on January 1,
1994. (Free trade had existed between the U.S. and Canada since 1989;
NAFTA broadened that arrangement.) On that day, the three countries
became the largest free market in the world-;the combined economies of
the three nations at that time measured $6 trillion and directly affected
more than 365 million people. NAFTA was created to eliminate tariff
barriers to agricultural, manufacturing, and services; to remove
investment restrictions; and to protect intellectual property rights. This
was to be done while also addressing environmental and labor concerns
(although many observers charge that the three governments have been
lax in ensuring environmental and labor safeguards since the agreement
went into effect). Small businesses were among those that were expected
to benefit the most from the lowering of trade barriers since it would make
doing business in Mexico and Canada less expensive and would reduce
the red tape needed to import or export goods.

SHORT NOTE ON TRANSFER PRICING

Transfer pricing or intercompany pricing refers to the pricing of goods

transferred from operations sales unit in one country to the companys
unit elsewhere.

The important objectives of transfer pricing are

1) To maximize the total profits of the company.
 2) To facilitate parent-company control
3) To offer management at all levels, both in the product divisions and
in the international divisions, an adequate basis for maintaining,
developing and receiving credit for their own profitability.

The four main types of transfer pricing methods are

1 Sales at local manufacturing cost plus a standard mark up
2 Sales at the cost of most efficient producer in the company plus a
standard markup
3 Sales at negotiated prices
4 Arms length sales using the same prices as quoted to independent
customers.

SHORT NOTE ON WTO

The World Trade Organization (WTO) is a global organization that helps

countries and producers of goods deal fairly and smoothly with conducting
their business across international borders. It mainly does this through
WTO agreements, which are negotiated and signed by a large majority of
the trading nations in the world. These documents act as contracts that
provide the legal framework for conducting business among nations.
There are several groups within the WTO, with the highest decision-
making authority going to a group known as the Ministerial Conference,
which can make decisions on all matters and trade disputes among
members.

SHORT NOTES ON STRATEGIC ALLAINCE

A strategic alliance in business is a relationship between two or more

businesses that enables each to achieve certain strategic objectives
neither would be able to achieve on their own. The strategic partners
maintain their status as independent and separate entities, share the
benefits and control over the partnership, and continue to make
contributions to the alliance until it is terminated. Strategic alliances are
often formed in the global marketplace between businesses that are
based in different regions of the world.

Short note on counter Trade

Counter trade means exchanging goods & services, in whole or
part, with other goods & services, rather than with money.
counter trade deals are more prevalent in large scale govt.
Procurement projects. For ex. In South Korea, counter trade is mandated
for govt. Telecommunication & defense procurement exceeding US $1
million.
Indonesia led the way by requiring counter trade for large scale
public sector purchases.
eastern European countries & Russia have practiced counter trade
transaction for quite some time.
Counter trade occurs due to two main factors;
one, is the chronic shortage of hard currency in developing
countries.
two, it is the lack of marketing expertise, adequate quality
standards & knowledge of western mkts. By developing economies.
Counter trade enables these enterprises to access mkts. That might
otherwise be inaccessible & at the same time, generate hard
currency.
Different forms of counter trade
1. Barter : it is the exchange of goods or services directly for
other goods or services without the use of money.
2. counter purchase : a company sells goods & services to a
country with a promise to make a future purchase of a specific
product from that country.
3. Buyback : it occurs when a firm sets up a plant in a country
or supplies technology, equipment, training or other service to
the country & agrees to take a certain percentage of plants
output as a partial payment.
4. Offset : - agreement by one nation to buy a product subject to
the purchase of some or all the components or raw-material of
the finished product or the assembly of such product in the
buyers nation. Agreement that a company will offset a hard
currency purchase of an unspecified product from that nation.
5. Tolling: sometimes manufacturers lack foreign currency to buy raw-
material. In tolling deal a supplier provides raw-material. The
payment is made by the customer of the finished product.
Throughout this process, the ownership of the raw-material
remains with the supplier.
6. switch trading: imbalance in long-term trading agreements
sometimes lead to the accumulation of uncleared credit
surpluses. For ex. Brazil on one time had a large credit surplus
with Poland. Exports of UK to brazil could be financed from the
sale of polish goods to UK.
Need for counter trade
It is the requirement of a foreign govt. Or customer.
It is an effective way of expanding export.
Keeps away liquidity problem.
Maintains foreign market.
Cleans up debt situations.
Builds up customer relationship.
Keeps from losing markets to competitors.
 Gains foreign contracts for future sales.
Repatriates blocked funds.

SHORT NOTE ON FOREIGN EXCHANGE RISK

Foreign-exchange risk refers to the potential for loss from exposure to

foreign exchange rate fluctuations.

Foreign-exchange risk is similar to currency risk and exchange-rate risk.

Foreign-exchange risk is the risk that an asset or investment denominated
in a foreign currency will lose value as a result of unfavourable exchange
rate fluctuations between the investment's foreign currency and the
investment holder's domestic currency.
Holders of foreign bonds face foreign-exchange risk, because those types
of bonds make interest and principal payments in a foreign currency.

For example, let's assume XYZ Company is a Canadian company and

pays interest and principal on a $1,000 bond with a 10% coupon rate in
Canadian dollars (CAD). If the exchange rate at the time of purchase is $1
CAD: $1 USD, then the 10% coupon payment is equal to $100 Canadian,
and because of the exchange rate, it is also equal to US$100.
Now let's assume a year from now the exchange rate is 1:0.85. Now the
bond's 10% coupon payment, which is still $100 Canadian, is worth only
US$85. Despite the issuer's ability to pay, the investor has lost a portion
of his return because of the fluctuation of the exchange rate.

Transfer Prices
Funds can be moved out of a particular country by setting high
transfer prices for goods and services supplied to a subsidiary in
that country and by setting low transfer prices for goods and
services sourced from that subsidiary.
There are four gains that can be derived by adjusting transfer
prices;
1. the firm can reduce its tax liabilities by using transfer prices to
shift earnings from a high tax country to a low tax country.
2. they can be used to move funds out of a country where a
significant currency devaluation is expected. Thus, exposure to foreign
currency risk can be reduced.
3. transfer prices can be used to move funds from a subsidiary to
the parent company or a tax haven when financial transfer in the
form of dividends are restricted or blocked by host country
government.
4. they can be used to reduce import duties when ad - valorem tariff
is in force.

Short Notes on PPP theory

Theory formulated during period when inflation was very high.The
theory puts forward the idea that when currencies are exchanged
among nations, their purchasing power is only transferred. This
means that a person should be able to buy the same amount of
goods in either country, when expressed in either countrys
currency. The theory suggests that the principle determinant of
exchange rate is the difference in National Inflation Rates. This
means, a country where costs and prices are relatively less than
another country will find its currency appreciating.
The law of one price is usually the basis to interpret this theory.
According to this law, after making allowances for tariff and
transport costs, the price of goods in one country should not
significantly differ from that in another country.
P= EP*. Where P is the price of the product in domestic country. P* is
the price of same product in a foreign country. E= domestic currency
price of the foreign currency.
If P and P* can be interpreted as the domestic and foreign price
index, representing the respective inflation figures , the exchange
rates becomes the ratio of relative price levels in the two countries.
An important application of the PPP theory is that the nominal
exchange rate must adjust significantly and sufficiently so as to
reflect /compensate the underlying inflation difference.
Once this happens, the international competitiveness of any
countrys product I the world market shall be maintained.
As per PPP theory The real Exchange rate= Nominal exchange rate *
Foreign price index/ domestic price index.
= 44 *100/110= 40

where 44= exchange rate

100= foreign price index and 110= domestic price index which has
increased to 110 due to inflation. The real exchange rate
appreciates to 40. This adversely affects the exporters ability to
 compete globally due to the fact that if a US importer pays $ 1 for a
product , the Indian exporter will get Rs 44 , which is the nominal
exchange rate, which is worth only Rs 40 because of effect of
inflation in India. Thus to maintain the real exchange rate as 44, the
nominal exchange rate should depreciate by 10% i.e 48.4 in this
example. Then the exporter get the true value of 44 (which is the
real exchange rate)

Porter's Diamond of National Advantage

Classical theories of international trade propose that comparative advantage resides

in the factor endowments that a country may be fortunate enough to inherit. Factor
endowments include land, natural resources, labor, and the size of the local
population.

Michael E. Porter argued that a nation can create new advanced factor endowments
such as skilled labor, a strong technology and knowledge base, government support,
and culture. Porter used a diamond shaped diagram as the basis of a framework to
illustrate the determinants of national advantage. This diamond represents the
national playing field that countries establish for their industries.

Porter's Diamond of National Advantage

Firm Strategy,
Structure,
and Rivalry

Factor Demand
Conditions Conditions
 Related and
Supporting
Industries

The individual points on the diamond and the diamond as a whole affect four
ingredients that lead to a national comparative advantage. These ingredients are:

1. the availability of resources and skills,

2. information that firms use to decide which opportunities to pursue with those
resources and skills,

3. the goals of individuals in companies,

4. the pressure on companies to innovate and invest.

The points of the diamond are described as follows.

I. Factor Conditions

A country creates its own important factors such as skilled resources and
technological base.

The stock of factors at a given time is less important than the extent that they
are upgraded and deployed.

Local disadvantages in factors of production force innovation. Adverse

conditions such as labor shortages or scarce raw materials force firms to
develop new methods, and this innovation often leads to a national
comparative advantage.

II. Demand Conditions

When the market for a particular product is larger locally than in foreign
markets, the local firms devote more attention to that product than do foreign
 firms, leading to a competitive advantage when the local firms begin exporting
the product.

A more demanding local market leads to national advantage.

A strong, trend-setting local market helps local firms anticipate global trends.

III. Related and Supporting Industries

When local supporting industries are competitive, firms enjoy more cost
effective and innovative inputs.

This effect is strengthened when the suppliers themselves are strong global
competitors.

IV. Firm Strategy, Structure, and Rivalry

Local conditions affect firm strategy. For example, German companies tend to
be hierarchical. Italian companies tend to be smaller and are run more like
extended families. Such strategy and structure helps to determine in which
types of industries a nation's firms will excel.

In Porter's Five Forces model, low rivalry made an industry attractive. While at
a single point in time a firm prefers less rivalry, over the long run more local
rivalry is better since it puts pressure on firms to innovate and improve. In fact,
high local rivalry results in less global rivalry.

Local rivalry forces firms to move beyond basic advantages that the home
country may enjoy, such as low factor costs.

The Diamond as a System

The effect of one point depends on the others. For example, factor
disadvantages will not lead firms to innovate unless there is sufficient rivalry.

The diamond also is a self-reinforcing system. For example, a high level of

rivalry often leads to the formation of unique specialized factors.

Government's Role

The role of government in the model is to:

Encourage companies to raise their performance, for example by enforcing

strict product standards.

Stimulate early demand for advanced products.

 Focus on specialized factor creation.

Stimulate local rivalry by limiting direct cooperation and enforcing antitrust

regulations.