International Business MI COLLAGE – EYDHAFUSHI 2017

INTERNATIONAL BUSINESS
Revision Paper
1. What is the meaning of IB? (2 marks)
ANS: International business refers to business across countries. It includes any
type of business activity that crosses national boundaries.

2. Define globalization (2 marks)

ANS: Globalization means the process of integration of national economies
through cross border flow of products, services, capital, technology, man power
and information.

3. Define the term monetary policy (2 marks)

ANS: the process by which the monetary authority of a country, like the central
bank or currency board, controls the supply of money, often targeting an

Page 1 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

inflation rate or interest rate to ensure price stability and general trust in the
currency.

4. Define the term Fiscal Policy (2 marks)

ANS: the means by which a government adjusts its spending levels and tax rates
to monitor and influence a nation's economy.

5. Define the term ‘Free Trade’ (2 marks)

ANS: the trade that is free from all artificial barriers such as tariffs, quantitative
restrictions, exchange controls etc.

6. Define Absolute Cost Advantage theory (2 marks)

ANS: a country should specialize in the production of goods for which it has an
absolute advantage and then trade these goods for goods produced by another
country.

7. Define New Trade Theory (2 marks)

ANS: New trade theory suggests that the ability of firms to gain economies of
scale (unit cost reductions associated with a large scale of output) can have
important implications for international trade

8. Define balance of payment (2 marks)

ANS: The balance of payments is a record of all economic transactions conducted
between a country and the rest of the world for a given time period, usually one
year.

9. Define the term SEZ (2 marks)

ANS: Special Economic Zone (SEZ) is a special geographical region which has
different laws when compared to other regions.

10. What is the meaning of ‘first mover advantage’ (2 marks)

ANS: Economies of scale may prevent new entrants.

Page 2 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

11. Which of the trade theories view trade as a zero-sum game? (2 marks)
ANS: viewed trade as a Zero-sum game wherein one country’s gain is another
country’s loss.

12. State any one disadvantage of Absolute Cost Advantage Theory (2 marks)
ANS:
 It does not explain why productive capacities of different countries are
different
 It makes extreme predictions about specialization and direction of trade.
 The assumption of exchange ratio of 1:1 is not always true.

13. List 4 examples of Political Risk. (2 marks)

ANS:
Expropriation
The action by the state or an authority of taking property from its owner for public
use or benefit.
Confiscation
The action of taking or seizing someone's property with authority; seizure.
Domestication
Making a foreign corporation domestic.
Nationalization
The transfer of a major branch of industry or commerce from private to state
ownership or control
Operating risk
The risk not inherent in financial, systematic or market-wide risk

SECTION-B
14. Explain any three modes of entries to international business (5 marks)
ANS:
Exporting: This is the traditional and most widely used route to int. business.
A firm can export directly or through middlemen such as export houses and

Page 3 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

buying agents. Exports can be in the following forms, ◦ direct exporting ◦

Indirect exporting ◦ Intracorporate transfers.
Contract Manufacturing: The Company enters into a contract with a firm in
the foreign market to manufacture or assemble the product as per its
specifications. The Company however retains the responsibility of marketing
the product. For example, Reebok, Nike, Levis and Wrangler. Contract
manufacturing is also called outsourcing.
Licensing & Franchising: Under this form, the local firm(licensee) obtains
license (written permission) from a foreign firm (licensor) to use the latter’s
patents, trademarks, copyright, technology, know-how or marketing skills in
considerations for fee royalty. Franchising is a contractual arrangement in which
one firm (franchiser) grants to another firm (franchisee) the right for use of
technology, trademark, brand name and patent in return for the agreed payment
for a specific period of time.

15. Explain in detail the concept of franchising in international trade (5 marks)

ANS: Franchising is a contractual arrangement in which one firm (franchiser)
grants to another firm (franchisee) the right for use of technology, trademark,
brand name and patent in return for the agreed payment for a specific period of
time.
The franchising may be a hotel, a restaurant, bank, travel agency or a retailer who
has developed a unique technique for creating and marketing services under its
own name and trademark. E.g.: McDonald, Domino’s pizza, Pizza Hut
Franchisers laydown strict rules and regulations which franchisees are required
to follow while running their business.

16. Explain in detail the concept of joint ventures in international trade (5

marks)
ANS: The Company which wants to enter foreign market sets up an enterprise in
collaboration with a local firm in the host country. The two firms share the
ownership and control of the joint venture. Generally, the multinational provides
the capital and technology whereas day-to-day management is left to the local

Page 4 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

firm. For e.g., Hero Honda Motors was joint venture between Hero Cycles of India
and Honda Motors of Japan.

17. Describe any five factors to consider analyzing social environment of a

country (5 marks)
ANS:
 Consumer Lifestyle
 Religion
 Emigration
 Education
 Family System

18. Distinguish between inward and outward oriented trade strategy (5 marks)
ANS:

19. Explain reasons why a country may impose trade restrictions (5 marks)
ANS: Countries may impose trade restrictions to improve their relative
competitive positions. Their primary motivations are:
• Balance-of-payments adjustments
• Comparable access, i.e., “fairness”
• Leverage as a bargaining tool

• Price-control objectives

20. Explain the arguments against trade restrictions (5 marks)

Page 5 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

ANS:

21. Distinguish
between balance
of payment and

Page 6 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

balance of trade (5 marks)

ANS:
Basis for
Balance of Trade Balance of Payment
Comparison

Balance of Trade is a Balance of Payment is a

statement that captures the statement that keeps track of all
Meaning country's export and import economic transactions done by
of goods with the remaining the country with the remaining
world. world.

Transactions related to goods Transactions related to both

Records
only. goods and services are recorded.

Capital Are not included in the Are included in Balance of

Transfers Balance of Trade. Payment.

Which is It gives a partial view of the It gives a clear view of the

better? country's economic status. economic position of the country.

It can be Favorable, Both the receipts and payment

Result
Unfavorable or balanced. side’s tallies.

It is a component of Current
Current Account and Capital
Component Account of Balance of
Account.
Payment.

22. Explain the causes of disequilibrium in the balance of payments. (5 marks)

ANS:
 Economic factors
◦ Imbalance between exports and imports
◦ Large scale development expenditure which causes large imports
◦ High domestic prices which lead to imports
◦ Cyclical fluctuations (like recession or depression) in general business
activity
◦ New sources of supply and new substitutes.
 Political factors
◦ Political instability and disturbances cause large capital outflows and
hinder Inflows of foreign capital.

Page 7 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

23. Discuss the measures that are taken to correct disequilibrium in the
balance of payments. (5 marks)
ANS:
 Deliberate measures
◦ Monetary measures
 Reduction/expansion of money supply
 Devaluation
 Exchange control
 Reducing inflation
◦ Trade measures
 Export promotion
 Import control

24. Write a short note about WTO (5 marks)

ANS: The World Trade Organization (WTO) was established on January 1, 1995,
in order to implement the Uruguay Round Agreement of GATT.
WTO is a permanent institution with its own secretariat.
Main Objective is:
To help trade flow as freely as possible
To achieve trade liberalization gradually through negotiation
To set up an impartial means of selling disputes

25. Discuss any three economic benefits of establishing SEZs’ in Maldives (5

marks)
ANS:
 Increase Investment in the Maldives and through those Investments
increase foreign currency available in the Maldives.
 Create and expand job opportunities
 Increase and expand production of goods and services.
 Soliciting private capital to undertake large-scale investment projects of
economic significance to the country.
 SEZ investments will qualify for special tax and regulatory incentives
guaranteed under the SEZ law.

Page 8 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

26. What is globalisation? What risks do firms encounter from the globalisation
of markets and the globalisation of production today? (5 marks)
ANS: Globalization means the process of integration of national economies
through cross border flow of products, services, capital, technology, man power
and information.

27. Using examples, explain how a country’s political system can influence
how foreign firms conduct business in that country (5 marks)
ANS: Political factors have the power to change results. It can also affect
government policies at local to federal level. Changes in the government policy
make up the political factors. Increase or decrease in tax could be an example
of a political element. The government might increase taxes for some
companies and lower it for others.
Therefore, foreign firms make an in-depth study of the political conditions in
the host country before making investment, Take insurance cover against
extortion, terrorism, confiscation, expropriation, nationalization etc., Engage
specialist agencies to monitor political development in the host country and

Page 9 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

keep close watch to spot potential trouble at the earliest and react quickly to
prevent loss.

SECTION - C
28. Explain the benefits and limitations of international marketing (10 marks)
ANS:
Advantages
1. Optimal use of natural resources:
International trade helps each country to make optimum use of its natural
resources. Each country can concentrate on production of those goods for
which its resources are best suited. Wastage of resources is avoided.

2. Availability of all types of goods:

It enables a country to obtain goods which it cannot produce or which it is not
producing due to higher costs, by importing from other countries at lower
costs.

3. Specialization:
Foreign trade leads to specialization and encourages production of different
goods in different countries. Goods can be produced at a comparatively low
cost due to advantages of division of labor.

4. Stability in prices:
International trade irons out wild fluctuations in prices. It equalizes the prices
of goods throughout the world (ignoring cost of transportation, etc.)

5. Increase in efficiency:
Due to international competition, the producers in a country attempt to produce
better quality goods and at the minimum possible cost. This increases the
efficiency and benefits to the consumers all over the world.

Disadvantages
1. Political Dependence:
Page 10 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

International trade often encourages subjugation and slavery. It impairs

economic independence which endangers political dependence. For example,
the Britishers came to India as traders and ultimately ruled over India for a very
long time.

2. Mis-utilisation of Natural Resources:

Excessive exports may exhaust the natural resources of a country in a shorter
span of time than it would have been otherwise. This will cause economic
downfall of the country in the long run.

3. Import of Harmful Goods:

Import of spurious drugs, luxury articles, etc. adversely affects the economy
and well-being of the people.

4. Danger to International Peace:

International trade gives an opportunity to foreign agents to settle down in the
country which ultimately endangers its internal peace.

5. International trade also presents cultural complications.

Failing to consider the expectation a different culture may have can lead to
mistakes that damage the reputation of the brand and can be very costly to the
bottom line.

29. Explain in detail any FOUR negative impact of globalization (10 marks)
ANS:
1. Increased Child Labor and Slavery.
There are various schools of thought which argue that globalization has led to
an increase in activities such as child labor and slavery. In countries with little
or no accountability, corporations employing children can work smoothly by
bribing the officials, which may result in an increase in illegal activities. Critics

Page 11 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

opine that globalization has resulted in a fiercely-competitive global market,

and unethical practices in business is a by-product of this.

2. Rise in Terrorism and Criminal Activities.

Globalization may have inadvertently helped terrorists and criminals. At the
heart of globalization is an idea that humans, materials, food etc. be allowed to
travel freely across borders, but 9/11 was a ghastly reminder that people with
evil intentions can use it as an opportunity and cause damage.

3. Rise in Health Risk.

When the first-known case of AIDS came up in America, only few would have
traced its origin to Sub-Saharan Africa. Globalization bought people from
various countries together, and this is perhaps the reason that a virus from a
jungle was transported to almost every country in the world.

4. Environmental Degradation and Pollution.

Environmental degradation is an issue which has been debated ferociously in
various international meetings, and it has to be accepted that globalization is
one of the most important factors that has aggravated the situation. The
amount of raw materials needed to run industries and factories is taking a toll

Page 12 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

on the natural reserves of planet earth, and pollution has severely impacted the
quality of air that we need so very much for our survival.

30. Explain in detail the political risks faced by multinational corporations (10
marks)
ANS:
Political Risk of a Multinational Company such as;
• Laws that specify minimum percentage of nationals who must be employed
in various positions
• Required investment in environmental and social projects
• Restrictions on the convertibility of currencies
• Discriminatory practices (higher taxes, higher utility charges and requirement
to pay higher wages)
• Expropriation-The taking of private property for public use or in the public
interest.
Expropriation: the action by the state or an authority of taking property from
its owner for public use or benefit.
Confiscation: the action of taking or seizing someone's property with authority;
seizure.
Domestication: Making a foreign corporation domestic.
Nationalization: the transfer of a major branch of industry or commerce from
private to state ownership or control
Operating risk: the risk not inherent in financial, systematic or market-
wide risk.

31. Define the term, ‘Business Environment’. Explain the types of environment
faced by a transnational corporation (10 marks)
ANS:
International business environment is the aggregate of all the factors, forces,
institutions, etc., which influence the functioning and performance of a global
firm.
Types of environment faced by a transnational corporation
 Domestic environment

Page 13 of 14
International Business MI COLLAGE – EYDHAFUSHI 2017

 Foreign environment
 Global environment

32. Analyze how changes in international economy are impacting on Maldivian

businesses. Use relevant examples to illustrate your answer. (10 marks)
ANS: Tourism and related industries drive the Maldives’ economy, which needs
diversification to protect it from global slowdowns. Reforms to improve the
business environment have been uneven. Corporations now have additional
disclosure requirements for filing taxes, and it is harder to obtain a building
permit. The government deficit is large and growing.

Page 14 of 14