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Ans:
• Exporting
• Licensing
• Joint Venture
• Direct Investment
Exporting
• Exporter
• Importer
• Transport provider
• Government
Licensing
The key issues to consider in a joint venture are ownership, control, length
of agreement, pricing, technology transfer, local firm capabilities and
resources, and government intentions.
Conditions Favoring
Mode Advantages Disadvantages
this Mode
Exporting Limited sales potential in Minimizes risk and Trade barriers &
target country; little investment. tariffs add to costs.
product adaptation
required Speed of entry Transport costs
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2. What are various environmental factors that affect
International Business?
Ans:
A company that chooses to implement an international project is obligated
to conduct a thorough research in order to understand if such project is
viable and can be brought to life in a certain country. Numerous factors
have to be taken into consideration and investigated; it has to be done
objectively from the point of view of the host country in which business
will be performed. Thus the home company can ensure the realization of
the project in specified terms with regards to projected profits and
spending funds.
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3. Give ten reasons why FDI is beneficial to developing
Economy?
Ans:
an individual;
a group of related individuals;
an incorporated or unincorporated entity;
a public company or private company;
a group of related enterprises;
a government body;
an estate (law), trust or other societal organisation; or
any combination of the above.
Foreign direct investment (FDI) policies play a major role in the economic
growth of developing countries around the world. Attracting FDI inflows
with conductive policies has therefore become a key battleground in
the emerging markets.
Developed countries also seek to bring in more FDI and use various
policies and incentives to attract overseas investors, particularly for
capital-intensive industries and advanced technology.
IN INDIA
(FDI) in India has played an important role in the development of the
Indian economy. FDI in India has - in a lot of ways - enabled India to
achieve a certain degree of financial stability, growth and development.
This money has allowed India to focus on the areas that may have needed
economic attention, and address the various problems that continue to
challenge the country.
India has continually sought to attract FDI from the world’s major
investors. In 1998 and 1999, the Indian national government announced
a number of reforms designed to encourage FDI and present a favorable
scenario for investors.
For all sectors, excluding those falling under Government approval, NRIs
(which also
includes PIOs) and OCBs (an overseas corporate body means a company
or other entity owned directly or indirectly to the extent of at least 60% by
NRIs) are eligible to bring investment through the automatic route of RBI.
All other proposals, which do not fulfil any or, all of the criteria for
automatic approval are considered by the Government through the FIPB
(Foreign Investment Promotion Board).
The NRIs and OCBs are allowed to invest in housing and real estate
development sector, in which foreign direct investment is not permitted.
They are allowed to hold up to 100 percent equity in civil aviation sector
in which otherwise foreign equity only up to 40 per cent is permitted.
BENEFITS OF FDI:
DISADVANTAGES OF FDI:
At times it has been observed that certain foreign policies are adopted
that are not appreciated by the workers of the recipient country. Foreign
direct investment, at times, is also disadvantageous for the ones who are
making the investmentthemselves.
IAF Vice Chief Air Marshal P K Barbora said that private industry's
participation be increased in the defence sector and India should be "bold
enough" to allow more FDI in the area.
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Ans:
FDI Climate between India, China and Vietnam
PARAMETER India
• Through private
placements or
preferential allotments
Sectors in which
FDI or
100% equity is • Hotel & tourism
allowed • Trading companies Foreign
• Power generation/ Direct
transmission/distrib
Investment
ution
• Drugs & Pharma is any form
• Shipping of
• Deep Sea Fishing
• Oil Exploration investment
• Housing and Real that earns
Estate
Development interest in
• Highways, Bridges enterprises
and Ports
which
• Sick Industrial Units
• Industries Requiring function
Compulsory outside of
Licensing
• Industries Reserved the
for Small Scale domestic
Sector
100% is not • Private banking territory of
allowed (49%) the investor
• Insurance (26%)
• Telecommunication Types:
(49% / 74 %)
• Retail (51% in 1) Out
single brand) war
FDI not at all • Arms and d
allowed ammunition FDI:
• Atomic Energy An
• Coal and lignite
• Rail Transport
• Mining of metals
like iron, manganese,
chrome, gypsum, sulfur,
gold, diamonds, copper,
zinc
outward-bound FDI is backed by the government against all types
of associated risks. This form of FDI is subject to tax incentives as
well as disincentives of various forms
2) Inward FDI: Here, investment of foreign capital occurs in local
resources.
3) Vertical FDI: It takes place when a multinational corporation
owns some shares of a foreign enterprise, which supplies input for
it or uses the output produced by the MNC.
4) Horizontal FDI: It happens when a multinational company carries
out a similar business operation in different nations.
The growth rate of foreign direct investment (FDI) into China accelerated
to 23% in 2008 to $92.3 billion, according to Ministry of Commerce
statistics. According to the United Nations Conference on Trade and
Development (UNCTAD), in 2007, mainland China was the world’s sixth
largest FDI recipient, after the United States, the United Kingdom, France,
Canada, and the Netherlands. China also received the most votes in a
2007 UNCTAD poll of attractive investment destinations, followed by India,
the United States, Russia, Brazil, and Vietnam.
Investment Guidelines
Dispute Settlement
As the economy has slowed, there have been anecdotal reports of local
governments singling out foreign investors, clients, and partners of
Chinese businesses to repay debts incurred by local businesses
Vietnam has seen a vertical surge in its FDI inflows in the recent years,
thus becoming the third most popular investment destination after China
and India. The Vietnamese government is also trying its best to mould the
existing policies and laws, so as to keep the capital flow coming.
Statistically speaking, the FDI pledges in Vietnam have galloped from a
meager $ 11.3 billion in 2005 to $ 50 million in 2008. This year though the
FDI flows have taken a drubbing because of the volatile economic
prevalence and thus the reluctance of the foreign majors to part with the
cash, but the experts feel that Vietnam’s identity as an investor’s heaven
is here to stay. The major factors in the country which have led,
multinationals park huge investments in the country can be tabulated as
follows-
Construction
High-tech areas
Production of electronics
Telecommunications
thus turning Vietnam into a manufacturing hub in Asia.
In 2009, the expected inflows in the country in the form of FDI pledges are
reported to plunge drastically on account of the skepticism, on the part of
the global investors, due to the ongoing slowdown. Experts have
forecasted a figure of $ 20-25 billion for this financial year in terms of the
FDI pledges, which is a fall of above 60%. Apart from the slowdown, the
various reasons that can be attributed to the same are doubts of
Vietnam’s capability to digest such huge investment sums. The various
factors that play a role here are
inadequate infrastructure
Management problems
Shortage of adequately trained human resource
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5. Discuss various international trade theories.
Ans:
1. Theory of Mercantilism
Swedish economists Eli Heckscher (in 1919) and Bertil Ohlin (in 1933)
argued that comparative advantage arises from differences in national
factor endowments. By factor endowments they meant the extent to
which a country is endowed with such resources as land, labor, and
capital Nations have varying factor endowments, and different factor
endowments explain differences in factor costs. The more abundant a
factor, the lower its cost. The Heckscher-Ohlin theory predicts that
countries will export those goods that make intensive use of factors that
are locally abundant, while importing goods that make intensive use of
factors that are locally scarce. Thus, the Heckscher-Ohlin theory attempts
to explain the pattern of international trade that we observe in the world
economy. Like Ricardo’s theory the Heckscher-Ohlin theory argues that
free trade is beneficial. Unlike Ricardo’s theory, however, the Heckscher-
Ohlin theory argues that the pattern of international trade is determined
by differences in factor endowments, rather than differences in
productivity. The Heckscher-Ohlin theory also has commonsense appeal.
For example, ‘United States has long been a substantial exporter of
agricultural goods, reflecting in part its unusual abundance of arable land.
In contrast, China excels in the export of goods produced in labor-
intensive manufacturing industries, such as textiles and footwear. This
reflects China’s relative abundance of low-cost labor. The United States,
which lacks abundant low-cost labor, has been a primary importer of
these goods. Note that it is relative, not absolute, endowments that are
important; a country may have larger absolute amounts of land and labor
than another country, but be relatively abundant in one of them.
Using the Heckscher Ohlin theory, Wassily Leontief postulated that since
the United States was relatively abundant in capital compared to other
nations, the United States would be an exporter of capital-intensive goods
and an importer of labor-intensive goods. To his surprise, however, ‘he
found that U.S. exports were less capital intensive than U.S. imports.
Since this result was at variance with the predictions of the theory, it has
become known as the Leontief paradox. No one is quite sure why we
observe the Leontief paradox. One possible explanation is that the United
States has a special advantage in producing new products or goods made
with innovative technologies. Such products may be less capital intensive
than products whose technology has had time to mature and become
suitable for mass production. Thus, the United States may be exporting
goods that heavily use skilled labor and innovative entrepreneurship,
such as computer software, while importing heavy manufacturing
products that use large amounts of capital.
As per Heckscher- Ohlin theory Leontief postulated that since the united
States was relatively abundant in capital compared to other nations, the
united States would be an exporter of capital-intensive goods and an
importer of labor-intensive goods. To his surprise, however, ‘he found
that U.S. exports were less capital intensive than U.S. imports. Since this
result was at variance with the predictions of the theory, it has become
known as the Leontief paradox.
No one is quite sure why we observe the Leontief paradox. One possible
explanation is that the United States has a special advantage in
producing new products or goods made with innovative technologies.
Such products may be less capital intensive than products whose
technology has had time to mature and become suitable for mass
production. Thus, United States may be exporting goods that heavily use
skilled labor and innovative entrepreneurship, such as computer
software, while importing heavy manufacturing products that use large
amounts of capital.
Consequently, firms can charge relatively high prices for new products,
which obviate the need to look for low cost production sites in other
countries. Vernon went on to argue that early in the life cycle of a typical
new product, demand is starting to grow rapidly in the United States,
demand in other advance countries is limited to highincome groups. The
limited initial demand in other advanced countries does not make it
worthwhile for firms in those countries to start producing the new
product, but it does necessitate some exports from the United States to
those countries.
Over time, demand for the new product starts to grow in other advanced
countries (e.g., Great Britain, France, Germany, and Japan). As it does, it
becomes worthwhile for foreign producers to begin producing for their
home markets. In addition, U.S.firms might set up production facilities in
those advanced countries where demand is growing. Consequently,
production within other advanced countries begins to limit the potential
for exports from the United States. As the market in the United States
and other advanced nations matures, the product becomes more
standardized, and price becomes the main competitive weapon. As this
occurs, cost considerations start to play a greater role in the competitive
process. Producers based in advanced countries where labor costs are
lower than in the United States (e.g., Italy, Spain) might now be able to
export to the United States. If cost pressures become intense, the process
might, not stop there. The cycle by which the United States lost its
advantage to other advanced countries might be repeated once more, as
developing countries (e.g., Thailand) begin to acquire a production
advantage over advanced countries. Thus, the locus of global production
initially switches from the United States to other advanced nations and
then from those nations to developing countries.
The consequence of these trends for the pattern of world trade is that is
over time the United States switches, from being an exporter of the
Product to an importer of product as production becomes concentrated in
lower-cost foreign locations.
Figure 2.5 shows the growth of production and consumption over time in
the United States, other advanced countries, and developing countries.
Implication:
• The econometric evidence for NTT was mixed, and again, highly
technical. Due to the time-scales required and the particular nature
of production in each 'monopolizable' sector, statistical judgements
have been hard to make. In many ways, there is too limited a
dataset to produce a reliable test of the hypothesis which doesn't
require arbitrary judgements from the researchers.
Japan is cited as evidence of the benefits of "intelligent" protectionism,
but critics of NTT have argued that the empirical support post-war Japan
offers for beneficial protectionism is unusual, and that the NTT argument
is based on a selective sample of historical cases. Although many
examples (like Japanese cars) can be cited where a 'protected' industry
subsequently grew to world status, regressions on the outcomes of such
"industrial policies" (including the failures) have been less conclusive
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6.Discuss the impact of WTO on India’s trade policy.
Ans:
Agreement Provisions Impact Policy issue
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Ans:
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