c



   c  
  



 

   
   !"
#$

Sol.
The Benefits of Trade Liberalization
Policies that make an economy open to trade and investment with the rest of the world are needed for
sustained economic growth. The evidence on this is clear. No country in recent decades has achieved
economic success, in terms of substantial increases in living standards for its people, without being open
to the rest of the world. In contrast, trade opening (along with opening to foreign direct investment) has
been an important element in the economic success of East Asia, where the average import tariff has
fallen from 30 percent to 10 percent over the past 20 years.
Opening up their economies to the global economy has been essential in enabling many developing
countries to develop competitive advantages in the manufacture of certain products. In these countries,
defined by the World Bank as the "new globalizers," the number of people in absolute poverty declined by
over 120 million (14 percent) between 1993 and 1998.
There is considerable evidence that more outward-oriented countries tend consistently to grow faster than
ones that are inward-looking. Indeed, one finding is that the benefits of trade liberalization can exceed the
costs by more than a factor of 10. Countries that have opened their economies in recent years, including
India, Vietnam, and Uganda, have experienced faster growth and more poverty reduction. On average,
those developing countries that lowered tariffs sharply in the 1980s grew more quickly in the 1990s than
those that did not.
Freeing trade frequently benefits the poor especially. Developing countries can ill-afford the large implicit
subsidies, often channeled to narrow privileged interests that trade protection provides. Moreover, the
increased growth that results from free trade itself tends to increase the incomes of the poor in roughly
the same proportion as those of the population as a whole. New jobs are created for unskilled workers,
raising them into the middle class. Overall, inequality among countries has been on the decline since
1990, reflecting more rapid economic growth in developing countries, in part the result of trade
liberalization.
The potential gains from eliminating remaining trade barriers are considerable. Estimate of the gains from
eliminating all barriers to merchandise trade range from US$250 billion to US$680 billion per year. About
two-thirds of these gains would accrue to industrial countries. But the amount accruing to developing
countries would still be more than twice the level of aid they currently receive. Moreover, developing
countries would gain more from global trade liberalization as a percentage of their GDP than industrial
countries, because their economies are more highly protected and because they face higher barriers.
Although there are benefits from improved access to other countries¶ markets, countries benefit most from
liberalizing their own markets. The main benefits for industrial countries would come from the
liberalization of their agricultural markets. Developing countries would gain about equally from
liberalization of manufacturing and agriculture. The group of low-income countries, however, would gain
most from agricultural liberalization in industrial countries because of the greater relative importance of
agriculture in their economies.

%
 
 
 &
 
 !'
#$

Sol.
Advantages and Disadvantages of International Trade
Advantages to consider:
‡ Enhance your domestic competitiveness
‡ Increase sales and profits
‡ Gain your global market share
‡ Reduce dependence on existing markets
‡ Exploit international trade technology
‡ Extend sales potential of existing products
‡ Stabilize seasonal market fluctuations
‡ Enhance potential for expansion of your business
‡ Sell excess production capacity
‡ Maintain cost competitiveness in your domestic market

:(  # :

‡ You may need to wait for long-term gains
‡ Hire staff to launch international trading
‡ Modify your product or packaging
‡ Develop new promotional material
‡ Incur added administrative costs
‡ Dedicate personnel for traveling
‡ Wait long for payments
‡ Apply for additional financing
‡ Deal with special licenses and regulations
):* * &*
 
   !

#$

Sol.

The following can be looked as the various aspects of the cultural dichotomies.

In this new millennium, few executives can afford to turn a blind eye to global business opportunities.
Japanese auto-executives monitor carefully what their European and Korean competitors are up to in
getting a bigger slice of the Chinese auto-market. Executives of Hollywood movie studios need to weigh
the appeal of an expensive movie in Europe and Asia as much as in the US before a firm commitment.
The globalizing wind has broadened the mindsets of executives, extended the geographical reach of
firms, and nudged international business (IB) research into some new trajectories. One such new
trajectory is the concern with national culture. Whereas traditional IB research has been concerned with
economic/ legal issues and organizational forms and structures, the importance of national culture ±
broadly defined as values, beliefs, norms, and behavioural patterns of a national group ± has become
increasingly important in the last two decades, largely as a result of the classic work of Hofstede (1980).
National culture has been shown to impact on major business activities, from capital structure (Chui et al.,
2002) to group performance (Gibson, 1999). For reviews, see¶ Boyacigiller and Adler¶ (1991) and µEarley
and Gibson¶ (2002).
The purpose of this Unit is to provide a state-of-the-art review of several recent advances in culture and
IB research, with an eye toward productive avenues for future research. It is not our purpose to be
comprehensive; our goal is to spotlight a few highly promising areas for leapfrogging the field in an
increasingly boundary-less business world. We first review the issues surrounding cultural convergence
and divergence, and the processes underlying cultural changes. We then examine novel constructs for
characterizing cultures, and how to enhance the precision of cultural models by pinpointing when the
effects of culture are important. Finally, we examine the usefulness of experimental methods, which are
rarely employed in the field of culture and IB. A schematic summary of our coverage is given in Table 2.1,
which suggests that the topics reviewed are loosely related, and that their juxtaposition in the present
paper represents our attempt to highlight their importance rather than their coherence as elements of an
integrative framework.

1 Cultural change, convergence and divergence in an era of partial globalization

An issue of considerable theoretical significance is concerned with cultural changes and transformations
taking place in different parts of the world. In fact, since the landmark study of Haire et al. (1966) and the
publication of Industrialism and Industrial Man by Kerr et al. (1960), researchers have continued to search
for similarities in culture-specific beliefs and attitudes in various aspects of work related attitudes and
behaviours, consumption patterns, and the like. If cultures of the various locales of the world are indeed
converging (e.g., Heuer et al., 1999), IB- related practices would indeed become increasingly similar.
Standard, culture-free business practices would eventually emerge, and inefficiencies and complexities
associated with divergent
beliefs and practices in the past era would disappear. In the following section, we review the evidence on
the issue and conclude that such an outlook pertaining to the convergence of various IB practices is
overly optimistic.

2 Evolution of partial globalization

Globalization refers to a µgrowing economic interdependence among countries, as reflected in the

increased cross-border flow of three types of entities: goods and services, capital, and know- how¶
(Govindarajan and Gupta, 2001, 4). Few spoke of µworld economy¶ 25 years ago, and the prevalent term
was µinternational trade¶ (Drucker, 1995). However today, international trade has culminated in the
emergence of a global economy, consisting of flows of information, technology, money, and people, and
is conducted via government international organizations such as the North American Free Trade
Agreement (NAFTA) and the European Community; global organizations such as the International
Organization for Standardization (ISO); multinational companies (MNCs); and cross ± border alliances in
the form of joint ventures, international mergers, and acquisitions. These inter ± relationships have
enhanced participation in the world economy, and have become a key to domestic economic growth and
prosperity (Drucker, 1995, 153).
Yet, globalization is not without its misgivings and discontents (Sassan, 1998). A vivid image associated
with the G8 summits is the fervent protests against globalization in many parts of the world, as shown in
television and reported in the popular media. Strong opposition to globalization usually originates from
developing countries that have been hurt by the destabilizing effects of globalization, but in recent times
we have also seen heated debates in Western economies triggered by significant loss of professional
jobs as a result of off shoring to low ± wage countries. Indeed, workers in manufacturing and farming in
advanced economies are becoming increasingly wary of globalization, as their income continues to
decline significantly. In parallel to the angry protests against globalization, the flow of goods, services,
and investments across national borders has continued to fall after the rapid gains of the 1990s.
Furthermore, the creation of regional trade blocs, such as NAFTA, the European Union, and the
Association of Southeast Asian Nations, have stimulated discussions about creating other trade zones
involving countries in South Asia, Africa, and other parts of the world. Although it is often assumed that
countries belonging to the World Trade Organization (WTO) have embraced globalization, the fact is that
the world is only partially globalized, at best (Schaeffer, 2003). Many parts of Central Asia and Eastern
Europe, including the former republics of the Soviet Union, parts of Latin America, Africa, and parts of
South Asia, have been sceptical of globalization (Greider, 1997). In fact, less than 10% of the world¶s
population is fully globalized (i.e., being active participants in the consumption of global products and
services) (Schaeffer, 2003). Therefore, it is imperative that we analyze the issues of cultural convergence
and divergence in this partially globalized world.

µUniversal culture¶ often refers to the assumptions, values, and practices of people in the West and some
elites in non-Western cultures. Huntington (1996) suggested that it originates from the intellectual elites
from a selected group of countries who meet annually in the World Economic Forum in Davos,
Switzerland. These individuals are highly educated, work with symbols and numbers, are fluent in
English, are extensively involved with international commitments, and travel frequently outside their
country. They share the cultural value of individualism, and believe strongly in market economics and
political democracy. Although those belonging to the Davos group control virtually all of the world¶s
important international institutions, many of the world¶s governments, and a great majority of the world¶s
economic and military capabilities, the cultural values of the Davos group are probably embraced by only
a small fraction of the six billion people of the world.

Popular culture, again mostly Western European and American in origin, also contributes to a
convergence of consumption patterns and leisure activities around the world. However, the convergence
may be superficial, and have only a small influence on fundamental issues such as beliefs, norms, and
ideas about how individuals, groups, institutions, and other important social agencies ought to function. In
fact, Huntington (1996, 58) noted that µThe essence of Western civilization is the Magna Carta, not the
Magna Mac. The fact that non-Westerners may bite into the latter has no implications for their accepting
the former¶. This argument is obvious if we reverse the typical situation and put Western Europeans and
Americans in the shoes of recipients of cultural influence. For instance, while Chinese Kung Fu dominates
fight scenes in Hollywood movies such as Matrix Reloaded, and Chinese restaurants abound in the West,
it seems implausible that Americans and Europeans have espoused more Chinese values because of
their fondness of Chinese Kung Fu and food. A major argument against cultural convergence is that
traditionalism and modernity may be unrelated (Smith and Bond, 1998). Strong traditional values, such as
group solidarity, interpersonal harmony, paternalism, and feminism, can co-exist with modern values of
individual achievement and competition. A case in point is the findings that Chinese in Singapore and
China indeed endorsed both traditional and modern values (Chang et al., 2003; Zhang et al., 2003). It is
also conceivable that, just as we talk about Westernization of cultural values around the world, we may
also talk about Easternization of values in response to forces of modernity and consumption values
imposed by globalization (Marsella and Choi, 1993).
Although the argument that the world is becoming one culture seems untenable, there are some areas
that do show signs of convergence. We explore in the following the roles of several factors that
simultaneously cause cultures of the world to either converge or diverge, in an attempt to identify several
productive avenues for future research.
3 Role of multiculturalism and cultural identity

The broad ideological framework of a country, corporation, or situation is the most important determinant
of the cultural identity that people develop in a given locale (Triandis, 1994). The µmelting pot¶ ideology
suggests that each cultural group loses some of its dominant characteristics in order to become the
mainstream: this is assimilation, or what Triandis (1994) calls subtractive multiculturalism.
In contrast, when people from a cultural group add appropriate skills and characteristics of other groups, it
may be called integration, or additive multiculturalism. Both of these processes are essential for cultural
convergence to proceed. However, if there is a significant history of conflict between the cultural groups, it
is hard to initiate these processes, as in the case of Israelis and Palestinians. In general, although there
has been some research on the typology of animosity against other nations (e.g., Jung et al., 2002), we
do not know much about how emotional antagonism against other cultural groups affects trade patterns
and intercultural cooperation in a business context. The issues of cultural identity and emotional reactions
to other cultural groups in an IB context constitute a significant gap in our research effort in this area.

4 Implications of convergence and divergence issues

One message is clear: while convergence in some domains of IB activity is easily noticeable, especially in
consumer values and lifestyles, significant divergence of cultures persists. In fact, Hofstede (2001)
asserts that mental programs of people around the world do not change rapidly, but remain rather
consistent over time. His findings indicate that cultural shifts are relative as opposed to absolute. Although
clusters of some countries in given geographical locales (e.g., Argentina, Brazil, Chile) might indicate
significant culture shifts towards embracing Anglo values, the changes do not diminish the absolute
differences between such countries and those of the Anglo countries (i.e., US, Canada, UK). Huntington,
in his µThe Clash of Civilizations¶ (1996), presents the view that there is indeed a resurgence of non-
Western cultures around the world, which could result in the redistribution of national power in the
conduct of international affairs. The attempt by the Davos group to bring about uniform practices in
various aspects of IB and work culture, thereby sustaining the forces of globalization, is certainly
worthwhile. However, our analysis suggests that there is no guarantee that such convergence will come
about easily, or without long periods of resistance.

IB scholars need to understand that although some countries might exhibit strong tendencies toward
cultural convergence, as is found in Western countries, there are countries that will reject globalization,
not only because of its adverse economic impacts (Greider, 1997) but also because globalization tends to
introduce distortions (in their view) in profound cultural syndromes that characterize their national
character.

Furthermore, reactions to globalization may take other forms. Bhagat et al. (2003) have recently argued
that adaptation is another approach that could characterize the tendencies of some cultures in the face of
mounting pressures to globalize. Other approaches are rejection, creative synthesis, and innovation
(Bhagat et al., 2003). These different approaches highlight once again the complex dynamics that
underlie cultural convergence and divergence in a partially globalized world. Also, in discussing issues of
convergence and divergence, it is necessary to recognize that the shift in values is not always from
Western society to others, but can result in the change of Western cultural values as well. For example,
the emphasis on quality and teamwork in the West is partly a result of the popularity of Japanese
management two decades ago.

Scholars of IB should recognize that the issue of convergence and divergence in this era of partial
globalization will remain as a persistent and complex issue whose direction might only be assessed on a
region-by-region basis. It is also wise to adopt an interdisciplinary perspective in understanding the forces
that create both convergence and divergence of cultures in different parts of the world. For instance, in
Understanding Globalization, Schaeffer (2003) has provided an insightful discussion of the social
consequences of political, economic and other changes, which have significant implications for IB. The
cause-effect relationships of globalization and its various outcomes, especially the cultural outcomes, are
not only characterized by bi-directional arrows, but are embedded in a complex web of relationships. How
these complex relationships and processes play out on the stage of IB remains to be uncovered by IB
researchers.

5 Processes of cultural changes

In the previous section, we make the point that, through the process of globalization, cultures influence
each other and change, but whether or not these changes will bring about cultural convergence is yet to
be seen. In this section, we delineate a general model that describes and explains the complex processes
underlying cultural changes. As explained before, IB is both an
agent and a recipient of cultural change, and for international business to flourish it is important
to understand its complex, reciprocal relationships with cultural change.
In line with the view of Hofstede (2001) that culture changes very slowly, culture has been treated as a
relatively stable characteristic, reflecting a shared knowledge structure that attenuates variability in
values, behavioral norms, and patterns of behaviours (Erez and Earley, 1993). Cultural stability helps to
reduce ambiguity, and leads to more control over expected behavioural outcomes (Weick and Quinn,
1999; Leana and Barry, 2000). For instance, most existing models of culture and work behaviour assume
cultural stability and emphasize the fit between a given culture and certain managerial and motivational
practices (Erez and Earley, 1993). High fit means high adaptation of managerial practices to a given
culture and, therefore, high effectiveness. The assumption of cultural stability is valid as long as there are
no environmental changes that precipitate adaptation and cultural change. Yet, the end of the 20th
century and the beginning of the new millennium have been characterized by turbulent political and
economical changes, which instigate cultural changes. In line with this argument, Lewin and Kim (2004),
in their comprehensive chapter on adaptation and selection in strategy and change, distinguished
between theories driven by the underlying assumption that adaptation is the mechanism to cope with
change, and theories driven by the underlying assumption of selection and the survival of the fittest,
suggesting that ineffective forms of organization disappear, and new forms emerge. However, although
organizational changes as a reaction to environmental changes have been subjected to considerable
conceptual analyses, the issue of cultural change at the national level has rarely been addressed.
There are relatively few theories of culture that pertain to the dynamic aspect of culture. One exception is
the eco-cultural model by Berry et al. (2002), which views culture as evolving adaptations to ecological
and socio-political influences, and views individual psychological characteristics in a population as
adaptive to their cultural context, as well as to the broader ecological and socio-political influences.
Similarly, Kitayama (2002) proposes a system view to understanding the dynamic nature of culture, as
opposed to the entity view that sees culture as a static entity. This system view suggests that each
person¶s psychological processes are organized through the active effort to coordinate one¶s behaviours
with the pertinent cultural systems of practices and public meanings. Yet, concurrently, many aspects of
the psychological systems develop rather flexibly as they are attuned to the surrounding socio-cultural
environment, and are likely to be configured in different ways across different socio-cultural groups.
These adaptive views of culture are supported by empirical evidence. For example, Van de Vliert et al.
(1999) identified curvilinear relationships between temperature, masculinity and domestic political
violence across 53 countries. Their findings showed that masculinity and domestic violence are higher in
moderately warm countries than in countries with extreme temperatures. Inglehart and Baker (2000)
examined cultural change as reflected by changes in basic values in three waves of the World Values
Surveys, which included 65 societies and 75% of the world¶s population. Their analysis showed that
economic development was associated with shifts away from traditional norms and values toward values
that are increasingly rational, tolerant, trusting, and participatory. However, the data also showed that the
broad cultural heritage of a society, whether it is Protestant, Roman Catholic, Orthodox, Confucian, or
Communist, leaves an enduring imprint on traditional values despite the forces of modernization.
The process of globalization described before has introduced the most significant change in IB, with its
effects filtering down to the national, organizational, group and individual levels. Reciprocally, changes at
micro-levels of culture, when shared by the members of the society, culminate into macro level
phenomena and change the macro-levels of culture. In the absence of research models that can shed
light on this complex process of cultural change, Erez and Gati (2004) proposed that the general model of
multi-level analysis (Klein and Kozlowski, 2000) could be adopted for understanding the dynamics of
culture and cultural change.
6 The dynamics of culture as a multi-level, multi-layer construct

The proposed model consists of two building blocks. One is a multi-level approach, viewing culture as a
multi-level construct that consists of various levels nested within each other from the most macro-level of
a global culture, through national cultures, organizational cultures, group cultures, and cultural values that
are represented in the self at the individual level, as portrayed in Figure 2.1. The second is based on
Schein¶s (1992) model viewing culture as a multi ± layer construct consisting of the most external layer of
observed artefacts and behaviours, the deeper level of values, which is testable by social consensus, and
the deepest level of basic assumption, which is invisible and taken for granted. The present model
proposes that culture as a multi ± layer construct exists at all levels ± from the global to the individual ±
and that at each level change first occurs at the most external layer of behaviour, and then, when shared
by individuals who belong to the same cultural context, it becomes a shared value that characterizes the
aggregated unit (group, organizations, or nations).
In the model, the most macro-level is that of a global culture being created by global networks and global
institutions that cross national and cultural borders. As exemplified by the effort of the Davos group
discussed earlier, global organizational structures need to adopt common rules and procedures in order
to have a common µlanguage¶ for communicating across cultural borders (Kostova, 1999; Kostova and
Roth, 2003; Gupta and Govindarajan, 2000).

Given the dominance of Western MNCs, the values that dominate the global context are often based on a
free market economy, democracy, acceptance and tolerance of diversity, respect of freedom of choice,
individual rights, and openness to change (Gupta and Govindarajan, 2000). Below the global level are
nested organizations and networks at the national level with their local cultures varying from one nation or
network to another. Further down are local organizations, and although all of them share some common
values of their national culture, they vary in their local organizational cultures, which are also shaped by
the type of industry that they represent, the type of ownership, the values of the founders, etc. Within
each organization are sub-units and groups that share the common national and organizational culture,
but that differ from each other in their unit culture on the basis of the differences in their functions (e.g.,
R&D vs manufacturing), their leaders¶ values, and the professional and educational level of their
members. At the bottom of this structure are individuals who through the process of socialization acquire
the cultural values transmitted to them from higher levels of culture. Individuals who
belong to the same group share the same values that differentiate them from other groups and create a
group ± level culture through a bottom-up process of aggregation of shared values. For example,
employees of an R&D unit are selected into the unit because of their creative cognitive style and
professional expertise. Their leader also typically facilitates the display of these personal characteristics
because they are crucial for developing innovative products. Thus, all members of this unit share similar
core values, which differentiate them from other organizational units. Groups that share similar values
create the organizational culture through a process of aggregation, and local organizations that share
similar values create the national culture that is different from other national cultures.
Both top-down and bottom-up processes reflect the dynamic nature of culture, and explain how culture at
different levels is being shaped and reshaped by changes that occur at other levels, either above it
through top-down processes or below it through bottom-up processes. Similarly, changes at each level
affect lower levels through a top-down process, and upper levels through a bottom-up process of
aggregation. The changes in national cultures observed by Inglehart and Baker (2000) could serve as an
example for top-down effects of economic growth, enhanced by globalization, on a cultural shift from
traditional values to modernization. However, in line with Schein (1992), the deep basic assumptions still
reflect the traditional values shaped by the broad cultural heritage of a society.
Global organizations and networks are being formed by having local-level organizations join the global
arena. That means that there is a continuous reciprocal process of shaping and reshaping organizations
at both levels. For example, multinational companies that operate in the global market develop common
rules and cultural values that enable them to create a synergy between the various regions, and different
parts of the multinational company. These global rules and values filter down to the local organizations
that constitute the global company, and, over time, they shape the local organizations. Reciprocally,
having local organizations join a global company may introduce changes into the global company
because of its need to function effectively across different cultural boarders. A study by Erez-Rein et al.
(2004) demonstrated how a multinational company that acquired an Israeli company that develops and
produces medical instruments changed the organizational culture of the acquired company. The study
identified a cultural gap between the two companies, with the Israeli company being higher on the cultural
dimension of innovation and lower on the cultural dimension of attention to detail and conformity to rules
and standards as compared with the acquiring company. The latter insisted on sending the Israeli
managers to intensive courses in Six ± Sigma, which is an advanced method of quality improvement, and
a managerial philosophy that encompasses all organizational functions. Upon returning to their company,
these managers introduced quality improvement work methods and procedures to the local company, and
caused behavioral changes, followed by the internalization of quality ± oriented values. Thus, a top-down
process of training and education led to changes in work behavior and work values. Sharing common
behaviors and values by all employees of the local company then shaped the organizational culture
through bottom±up processes. The case of cultural change via international acquisitions demonstrated
the two building blocks of our dynamic model of culture: the multi-level structure explains how a lower-
level culture is being shaped by top-down effects, and that the cultural layer that changes first is the most
external layer of behaviour. In the long run, bottom ± up processes of shared behaviors and norms shape
the local organizational culture.

7 Factors that facilitate cultural change

Culture itself influences the level of resistance or acceptance of change. Harzing and Hofstede (1996)
proposed that certain cultural values facilitate change, whereas others hinder it. The values of low power
distance, low uncertainty avoidance, and individualism facilitate change. Change threatens stability, and
introduces uncertainty, and resistance to change will therefore be higher in cultures of high rather than
low uncertainty avoidance (Steensma et al., 2000). Change also threatens the power structure, and
therefore will be avoided in high power distance cultures. Finally, change breaks the existing harmony,
which is highly valued in collectivistic cultures, and therefore will not be easily accepted by collectivists
(Levine and Norenzayan, 1999).
A recent study by Erez and Gati (2004) examined the effects of three factors on the change
process and its outcomes:
· the cultural value of individualism ± collectivism;
· the reward structure and its congruence with the underlying cultural values; and
· the degree of ambiguity in the reward structure.
The change process examined was a shift from choosing to work alone to a behavioural choice of
working as part of a team, and vice versa. Working alone is more prevalent in individualistic
cultures, whereas working in teams dominates the collectivistic ones.

8 Understanding when culture matters: increasing the precision of cultural models

Beyond exploring new cultural constructs and the dynamic nature of culture, we also argue for the
importance of examining contingency factors that enhance or mitigate the effect of national culture.
Consider the following scenario. A senior human resource manager in a multinational firm is charged with
implementing an integrative training program in several of the firm¶s subsidiaries around the globe. Over
the term of her career, the manager has been educated about differences in national culture and is
sensitive to intercultural opportunities and challenges. At the same time, she understands the strategic
need to create a unified global program that serves to further integrate the firm¶s basic processes,
creating efficiencies and synergies across the remote sites. She approaches the implementation with
trepidation. A key challenge is to determine whether the program should be implemented in the same
manner in each subsidiary or modified according to the local culture at each site. Put another way, in this
complex circumstance, does culture matter?


+, 
 &
*
 &%-.!/
#$
Sol.
Structure of World Trade Organization (WTO)
The WTO¶s overriding objective is to help trade flow smoothly, freely, fairly and predictably.
It does this by:
· Administering trade agreements
· Acting as a forum for trade negotiations
· Settling trade disputes
· Reviewing national trade policies
· Assisting developing countries in trade policy issues, through technical assistance and training programs
· Cooperating with other international organizations Structure

The WTO has nearly 150 members, accounting for over 97% of world trade. Around 30 others
are negotiating membership.

Decisions are made by the entire membership. This is typically by consensus. A majority vote is also
possible but it has never been used in the WTO, and was extremely rare under the WTO¶s predecessor,
GATT. The WTO¶s agreements have been ratified in all members¶ parliaments.
The WTO¶s top level decision-making body is the Ministerial Conference which meets at least
once every two years.

Below this is the General Council (normally ambassadors and heads of delegation in Geneva, but
sometimes officials sent from members¶ capitals) which meets several times a year in the Geneva
headquarters. The General Council also meets as the Trade Policy Review Body and the Dispute
Settlement Body.

At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS)
Council report to the General Council.
Numerous specialized committees, working groups and working parties deal with the individual
agreements and other areas such as the environment, development, membership applications and
regional trade agreements.

Secretariat

The WTO Secretariat, based in Geneva, has around 600 staff and is headed by a director-general. Its
annual budget is roughly 160 million Swiss francs. It does not have branch offices outside Geneva. Since
decisions are taken by the members themselves, the Secretariat does not have the decision-making role
that other international bureaucracies are given with. The Secretariat¶s main duties are to supply technical
support for the various councils and committees and the ministerial conferences, to provide technical
assistance for developing countries, to analyze world trade, and to explain WTO affairs to the public and
media.

The Secretariat also provides some forms of legal assistance in the dispute settlement process and
advises governments wishing to become members of the WTO. The WTO is µmember-driven¶, with
decisions taken by consensus among all member governments.

The WTO is run by its member governments. All major decisions are made by the membership as a
whole, either by ministers (who meet at least once every two years) or by their ambassadors or delegates
(who meet regularly in Geneva). Decisions are normally taken by consensus.

In this respect, the WTO is different from some other international organizations such as the World Bank
and International Monetary Fund. In the WTO, power is not delegated to a board of directors or the
organization¶s head.
When WTO rules impose disciplines on countries¶ policies, that is the outcome of negotiations among
WTO members, the rules are enforced by the members themselves under agreed procedures that they
negotiated, including the possibility of trade sanctions. But those sanctions are imposed by member
countries, and authorized by the membership as a whole. This is quite different from other agencies
whose bureaucracies can, for example, influence a country¶s policy by threatening to withhold credit.

Reaching decisions by consensus among some 150 members can be difficult. Its main advantage is that
decisions made this way are more acceptable to all members. And despite the difficulty, some remarkable
agreements have been reached. Nevertheless, proposals for the creation of a smaller executive body ±
perhaps like a board of directors each representing different groups of countries ± are heard periodically.
But for now, the WTO is a member-driven, consensus-based organization.
Highest authority: the Ministerial Conference

So, the WTO belongs to its members. The countries make their decisions through various councils and
committees, whose membership consists of all WTO members. Topmost is the ministerial conference
which has to meet at least once every two years. The Ministerial

Conference can take decisions on all matters under any of the multilateral trade agreements.
Second level: General Council in three guises
Day-to-day work in between the ministerial conferences is handled by three bodies:
· The General Council
· The Dispute Settlement Body
· The Trade Policy Review Body
All three are in fact the same ± the Agreement Establishing the WTO states they are all the General
Council, although they meet under different terms of reference. Again, all three consist of all WTO
members. They report to the Ministerial Conference.
The General Council acts on behalf of the Ministerial Conference on all WTO affairs. It meets as
the Dispute Settlement Body and the Trade Policy Review Body to oversee procedures for

settling disputes between members and to analyze members¶ trade policies.

Third level: councils for each broad area of trade, and more back to top
Three more councils, each handling a different broad area of trade, report to the General Council:
· The Council for Trade in Goods (Goods Council)
· The Council for Trade in Services (Services Council)
· The Council for Trade ± Related Aspects of Intellectual Property Rights (TRIPS Council)

As their names indicate, the three are responsible for the workings of the WTO agreements dealing with
their respective areas of trade. Again they consist of all WTO members. These three also have the
subsidiary bodies.

Six other bodies report to the General Council. The scope of their coverage is smaller, so they are
³committees´. But they still consist of all WTO members. They cover issues such as trade and
development, the environment, regional trading arrangements, and administrative issues. The Singapore
Ministerial Conference in December 1996 decided to create new working groups to look at investment
and competition policy, transparency in government procurement, and trade facilitation.
Two more subsidiary bodies dealing with thep lu ral-lateral agreements (which are not signed by
all WTO members) keep the General Council informed of their activities regularly.
Fourth level: down to the nitty-gritty

Each of the higher level councils has subsidiary bodies. The Goods Council has 11 committees dealing
with specific subjects (such as agriculture, market access, subsidies, anti-dumping measures and so on).
Again, these consist of all member countries. Also reporting to the Goods Council is the Textiles
Monitoring Body, which consists of a chairman and 10 members acting in their personal capacities, and
groups dealing with notifications (governments informing the WTO about current and new policies or
measures) and state trading enterprises.
The Services Council¶s subsidiary bodies deal with financial services, domestic regulations,
GATS - Rules and specific commitments.

At the General Council level, the Dispute Settlement Body also has two subsidiaries: the dispute
settlement ³panels´ of experts appointed to adjudicate on unresolved disputes, and the Appellate Body
that deals with appeals.
Heads of Delegations and other boards: the need for informality

Important breakthroughs are rarely made in formal meetings of these bodies, least of all in the higher
level councils. Since decisions are made by consensus, without voting, informal consultations within the
WTO play a vital role in bringing a vastly diverse membership round to an agreement.

One step away from the formal meetings is informal meetings that still include the full membership, such
as those of the Heads of Delegations (HOD). More difficult issues have to be thrashed out in smaller
groups. A common recent practice is for the chairperson of a negotiating group to attempt to forge a
compromise by holding consultations with delegations individually, in twos or threes, or in groups of 20 ±
30 of the most interested delegations.
These smaller meetings have to be handled sensitively. The key is to ensure that everyone is kept
informed about what is going on (the process must be ³transparent´) even if they are not in a particular
consultation or meeting, and that they have an opportunity to participate or provide
input (it must be ³inclusive´).

One term has become controversial, but more among some outside observers than among delegations.
The ³Green Room´ is a phrase taken from the informal name of the director- general¶s conference room. It
is used to refer to meetings of 20 ± 40 delegations, usually at the level of heads of delegations. These
meetings can take place elsewhere, such as at Ministerial Conferences, and can be called by the minister
chairing the conference as well as the director- general. Similar smaller group consultations can be
organized by the chairs of committees negotiating individual subjects, although the term Green Room is
not usually used for these.

In the past delegations have sometimes felt that Green Room meetings could lead to compromises being
struck behind their backs. So, extra efforts are made to ensure that the process is handled correctly, with
regular reports back to the full membership.

The way countries now negotiate has helped somewhat. In order to increase their bargaining power,
countries have formed coalitions. In some subjects such as agriculture virtually all countries are members
of at least one coalition ± and in many cases, several coalitions. This means that all countries can be
represented in the process if the coordinators and other key players are present. The coordinators also
take responsibility for both ³transparency´ and ³inclusiveness´ by keeping their coalitions informed and by
taking the positions negotiated within their alliances.

In the end, decisions have to be taken by all members and by consensus. The membership as a whole
would resist attempts to impose the will of a small group. No one has been able to find an alternative way
of achieving consensus on difficult issues, because it is virtually impossible for members to change their
positions voluntarily in meetings of the full membership.

Market access negotiations also involve small groups, but for a completely different reason. The final
outcome is a multilateral package of individual countries¶ commitments, but those commitments are the
result of numerous bilateral, informal bargaining sessions, which depend on individual countries¶ interests.
(Examples include the traditional tariff negotiations, and market access talks in services.)
So, informal consultations in various forms play a vital role in allowing consensus to be reached,
but they do not appear in organization charts, precisely because they are informal.

They are not separate from the formal meetings, however. They are necessary for making formal
decisions in the councils and committees. Nor are the formal meetings unimportant. They are the forums
for exchanging views, putting countries¶ positions on the record, and ultimately for confirming decisions.
The art of achieving agreement among all WTO members is to strike an appropriate balance, so that a
breakthrough achieved among only a few countries can be acceptable to the rest of the membership.

 

*# &0--!/
#$

Sol.

Given its provisional nature and limited field of action, the success of GATT in promoting and securing the
liberalization of much of world trade over 47 years is incontestable. Continual reductions in tariffs alone
helped spur very high rates of world trade growth ± around 8 per cent a year on average during the 1950s
and 1960s. And the momentum of trade liberalization helped ensure that trade growth consistently out-
paced production growth throughout the GATT era. The rush of new members during the Uruguay Round
demonstrated that the multilateral trading system, as then represented by GATT, was recognized as an
anchor for development and an instrument of economic and trade reform.
The limited achievement of the Tokyo Round, outside the tariff reduction results, was a sign of difficult
times to come. GATT¶s success in reducing tariffs to such a low level, combined with a series of economic
recessions in the 1970s and early 1980s, drove governments to devise other forms of protection for
sectors facing increased overseas competition. High rates of unemployment and constant factory
closures led governments in Europe and North America to seek bilateral market-sharing arrangements
with competitors and to embark on a subsidies race to maintain their holds on agricultural trade. Both
these changes undermined the credibility and effectiveness of GATT.

Apart from the deterioration in the trade policy environment, it also became apparent by the early 1980s
that the General Agreement was no longer as relevant to the realities of world trade as it had been in the
1940s. For a start, world trade had become far more complex and important than 40 years before: the
globalization of the world economy was underway, international investment was exploding and trade in
services ± not covered by the rules of GATT ± was of major interest to more and more countries and, at
the same time, closely tied to further increases in world merchandise trade. In other respects, the GATT
had been found wanting: for instance, with respect to agriculture where loopholes in the multilateral
system were heavily exploited ± and efforts at liberalizing agricultural trade met with little success ± and in
the textiles and clothing sector where an exception to the normal disciplines of GATT was negotiated in
the form of the Multi-fibre Arrangement. Even the institutional structure of GATT and its dispute settlement
system were giving cause for concern.
Together, these and other factors convinced GATT members that a new effort to reinforce and
extend the multilateral system should be attempted. That effort resulted in the Uruguay Round.
'

0( 
    
  *  * 
 !/
#$

Sol.
Regional Economic Integration

Regional integration can take many forms, and nowhere is this more evident than in the vastly different
integration processes taking place in the regions of Europe and East Asia. The subject of this paper is
regional integration as it has developed in East Asia with a focus on the drivers of that integration. While
the paper is not intended as a direct comparison of integration in East Asia and Europe, it will include
some comparisons between the two regions.

Integration in East Asia has progressed very slowly and is still in an early stage despite that the process
has continued for decades. In fact, it could be said that the process began centuries ago ± even as far
back as the 15th century. By comparison, European integration has progressed steadily and has
gradually deepened over the last 50 years to reach an advanced stage today with a common currency
and well-developed regional institutions. Thus, the speed of progression and the level of integration
attained in the two regions are quite dissimilar.

In addition to these differences, the drivers behind the integration process in each region are different. In
Europe, the origins of integration have been institutional in nature, and the development of institutions has
been prominent throughout the process. Thus, regional institutions have been the driving force behind
integration in Europe. In East Asia, the development of regional institutions has also occurred; however,
progress in this area has been slow and the few existing institutions are fairly weak and ineffective.
Nevertheless, regional integration is taking place in East Asia, but the driving force is the market rather
than policy or institutions. Corporations and the production networks they have established are driving
integration in East Asia.

c     & &%-.!/

#$

Sol.
Ten Benefits of WTO

1. The system helps to keep the peace

2. The system allows disputes to be handled constructively
3. A system based on rules rather than power makes life easier for all
4. Freer trade cuts the cost of living
5. It gives consumers more choice and a broader range of qualities to choose from
6. Trade raises incomes
7. Trade stimulates economic growth and that can be good news for employment
8. The basic principles make the system economically more efficient, and they cut costs
9. The system shields governments from narrow interests
10. The system encourages good government
/
+,&(    
*(   !
#$

Sol.
The Five-Element Product Wave

As illustrated in Figure 4.5, the wave model employs design engineering, process engineering, product
marketing, production, and end-of-life activities as elements. The first wave is associated with the "A"
version of a product or service, and survives through the traditional PLC introduction and growth phases.
A second wave begins with the "B" version, the markedly improved second model. It starts just before the
traditional life cycle maturity stage and lives until sales decline to a point at which an EOL decision must
be made.

Note that design engineering has a peak of activity level at each upgrade. Process engineering activity
shadows that of design engineering, as system changes will be contemplated and made to facilitate the
changes made in the product or service. Product marketing also has activity level spikes that closely
match engineering design activity, lagged somewhat for product introduction. Production has one activity
peak that results from demand management and production planning through master production
scheduling.

Finally, the EOL curve peaks at each redesign. The last wave begins shortly before original production
ceases and ends when the product is no longer manufactured or supported by the EOL Company or
division. The EOL element requires that a decision be made about the preceding version at each major
redesign: continue production, make a short-term run of spares, keep blueprints active so that parts can
be made as ordered, enter into a manufacturing and support agreement with another entity, or
discontinue production.

For the sake of parsimony, Figure 4.5 shows only a two-product model ("A" and "B" versions). In reality,
there may be hundreds of significant redesigns. The wave effect comes from the fact that the process
repeats for the successful firm, forming swells in design engineering, process engineering, product
marketing, and manufacturing curves before the final crest at EOL activity. The five-element product
wave, or FPW, uses trigger points, rather than time, as the horizon over which the element curves vary.
Changes in magnitude, represented by the vertical axis, result from differing activity levels within the five
elements. Simple changes in levels of dollar or unit product sales, in and of themselves, do not
necessarily determine the trigger points. Rather, the varying activity levels are a direct result of product
introductions and redesigns that, from the outset, must take into account company strategy, core
capabilities, and the state of the competitive environment. For example, a product with strong sales may
be redesigned in a preemptive strike against competitors, further distancing that product from the
competition, such as with Caterpillar¶s innovative high-drive bulldozers.

That the five-element wave is grounded in reality becomes apparent when considering the recent
research that suggests product introduction cycles are being compressed. Bayus (1994) claims that
knowledge is being applied faster, resulting in increasing levels of new product introductions. Yet since
product removals are not keeping pace with introductions, there are an increasing number of product
variations on the market. Slater (1993) observes that product life cycles are growing shorter and shorter.
Vesey (1992) reports that the strategy for the 1990s is speed to market and discusses the pressures the
market is exerting to shorten product introduction lead times.

Regardless of whether life cycles are actually being compressed or knowledge is simply being applied
faster, it is apparent that firms are increasing the speed with which they bring their products to market.
The effect of this is a compression of the design engineering, process engineering, production, and
product marketing elements of the wave model. (The EOL curve may remain unchanged because
accelerated introductions do not necessarily affect EOL efforts.) The five-element wave clearly shows the
inefficiency of traditional "over-the-wall" systems as speed to market increases. As the elements
compress, more and more information is thrown over
the wall. Recipients find themselves with less and less time to take action. Taken to the extreme, in-
baskets, phone lines, conference rooms, desks, and floors are soon gridlocked and littered with
unanswered correspondence and things to do. Forget quality; production itself grinds to a halt. The
solution is to maximize the advantage of the relationships within the five-element wave and work in
concurrent teams, as illustrated in Figure 6. That way, responsibility is shared throughout the system.
Members from each discipline optimize the system. The method tears down barriers between
departments and speeds the introduction process, thus decreasing costs. The focal point becomes the
customer, rather than the task. The system is totally interactive and bound together. Each element is
connected to all of the others and is focused on the customer. (Note that the authors have taken a great
deal of artistic license here! No meaning should be attached to the actual measure of overlap area in
Figure 4.6.)

What is the recent experience with teams? There is evidence that using concurrent design teams speeds
the product to market and provides substantial savings. Boeing expects that concurrent design will save
some $4 billion in the development of its 777 airliner. Westinghouse recently suggested that concurrent
engineering would eliminate 200 duplicate processes in a project that consisted of 600 using traditional
over-the-wall approaches. Ford¶s Team Taurus was able to cut a full year out of model turnaround. In
addition, design changes required after initial production began were reduced by some 76 percent.

The strength of the five-element product wave is the fact that it illuminates critical decision points in the
life of a product or service. The interrelationships of the elements clearly illustrate the benefit of working
product introductions, design changes, and end-of-life decisions in teams. This is particularly true in
today¶s rapidly compressing environment of speeding products to market. Furthermore, the model is
flexible and may be expanded or contracted to include those functional areas relevant to the production
team. Thus, whether a given firm¶s product is a service or a manufactured good, the five-element wave is
a powerful tool that can be deployed to accelerate effective decision making in markets demanding ever-
increasing levels of speed and agility.

% 1  1   !

#$
Sol.

Economic "globalization" is a historical process, the result of human innovation and technological
progress. It refers to the increasing integration of economies around the world, particularly through trade
and financial flows. The term sometimes also refers to the movement of people (labor) and knowledge
(technology) across international borders. There are also broader cultural, political and environmental
dimensions of globalization that are not covered here.

At its most basic, there is nothing mysterious about globalization. The term has come into common usage
since the 1980s, reflecting technological advances that have made it easier and quicker to complete
international transactions ± both trade and financial flows. It refers to an extension beyond national
borders of the same market forces that have operated for centuries at all levels of human economic
activity ± village markets, urban industries, or financial centers.
Markets promote efficiency through competition and the division of labor ± the specialization that allows
people and economies to focus on what they do best. Global markets offer greater opportunity for people
to tap into more and larger markets around the world. It means that they can have access to more capital
flows, technology, cheaper imports, and larger export markets. But markets do not necessarily ensure
that the benefits of increased efficiency are shared by all. Countries must be prepared to embrace the
policies needed, and in the case of the poorest countries may need the support of the international
community as they do so.
"0(    ,  &*   
  *  1( 
 1(   
  
 
# !

#$

Sol.
A PERSPECTIVE OF THE NORTHEN ISLAND SOFTWARE COMPANIES, RAPD M±
UP
Within six months of announcing it would invest $4.5 million to establish its new software development
center in Northern Ireland, IMR was up and running with more than one-third its target staff.
"The fast start-up of the Belfast facility reaffirms our confidence to locate in Northern Ireland," said Sanan.
"The success to date in building a quality work force has surpassed our expectations and opens up new
ambitions for our interests in Northern Ireland."
According to Arthur "Bro" McFerran, president of IMR (NI) Ltd., the company is hiring 12 to 18
programmers a month in Northern Ireland and is well on its way to meeting its staffing goal of 300 by
1999. McFerran credited Northern Ireland¶s Training & Employment Agency (T&EA) with helping place
the company¶s staffing on the fast track.
"The T&EA not only has helped us to identify and recruit qualified software graduates from Northern
Ireland¶s universities, it is also assisting us with a unique initiative to bring additional sources of high
quality talent to the company," McFerran said.
Innovation In Training
Impressed by the number and quality of information technology graduates from the region¶s universities,
IMR recognized an untapped resource in the well-educated, versatile graduates of other fields in Northern
Ireland. Working with the T&EA, IMR developed "IMR Academy," an intensive
20-week training program at the Belfast Institute of Further and Higher Education, to expand the
skills of qualified applicants who are not computer software graduates, but who are equally well-
educated in other
Disciplines and who have demonstrated aptitude for learning computer software programming.
Tom Scott of the T&EA said IMR applicants are assessed throughout the program and those who
successfully complete the course are awarded a National Computing Certificate and full-time
employment with IMR. Approximately 40 trainees have already participated in the program.
"IMR is extremely pleased with the T&EAs ability to design and deliver a training program customized to
our needs, and one that is delivering us an impressive pool of incremental programming talent," McFerran
said.
Smart And Available
"The recent software investments by IMR and other companies provide a new opportunity for Northern
Ireland¶s computer graduates," McFerrin said. Recruitment research by IMR indicates that traditionally,
nearly half of the region¶s computer graduates have been forced to seek jobs outside Northern Ireland
due to the lack of available information technology positions.
Now IT graduates have the chance to find good jobs in Northern Ireland, and graduates from other fields
can take advantage of the IMR Academy training program to get a head start on a career in the growing
software sector.
McFerrin said. Recruitment research by IMR indicates that traditionally, nearly half of the region¶s
computer graduates have been forced to seek jobs outside Northern Ireland due to the lack of available
information technology positions.
Competitive Advantage

Northern Ireland recently has attracted information technology ± based investments from other
multinational companies such as BT, Fujitsu, Liberty Mutual Group, Seagate Technology, STB Systems
and UniComp. These companies cite Northern Ireland¶s work force and favorable cost base in their
decisions to locate in the region.

"The availability of high-quality graduates combined with the region¶s competitive operating costs and
attractive incentives made Northern Ireland the best possible location for STB," said Richard W. Cooke,
STB¶s director of engineering operations.
With salaries and fringe costs for well trained software engineers in Northern Ireland
approximately 50 percent lower than costs for US engineers, and low employee turnover and favorable
rates for office space, the overall annual per capita operational costs to develop high quality software can
be significantly less compared with these same costs in the United States. Typical starting salaries for IT
graduates in Northern Ireland are $22,000 to $25,000 annually. At less than three percent annually,
Northern Ireland¶s employee turnover rate is a fraction of the rates typically experienced in other parts of
Europe and the United States. Annual costs per square foot for office space, exclusive of property taxes
and service charges, range from as low as $5 per square foot in some development areas, to
approximately $14 in Belfast. These costs can be as much as 50 percent lower than office space costs in
other European cities.