MB0037

MB0037 – International Business Management Assignment Set- 1
1a. How has liberalizing trade helped international business? Answer: 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
inwardlooking. 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
MB0037 – International Business Management
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1990, reflecting more rapid economic growth countries, in part the result of trade liberalization.
in
developing
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. 1b. What are the
merits and demerits of international trade? Answer: 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
Disadvantages to keep in mind: • 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 MB0037 – International Business Management -2-
••••
Dedicate personnel for traveling Wait long for payments Apply for additional financing Deal with
special licenses and regulations
2. Discuss the impact of culture on International Business. Answer: The following can be looked as
the various aspects of the cultural dichotomies.
Table 2.1 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).
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
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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 ‘growing 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 ‘world economy’ 25 years ago, and the prevalent
term was ‘international 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).
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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. ‘Universal 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
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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 ‘The 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 ‘melting 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
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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 ‘The 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
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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
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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 sociopolitical 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
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(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
multilevel 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
‘language’ for communicating across cultural borders (Kostova, 1999; Kostova and Roth, 2003; Gupta
and Govindarajan, 2000).
Figure 2.1: The dynamic of top-down–bottom-up processes across levels of culture. 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). MB0037 – International
Business Management - 10 -
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 topdown 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.
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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 behavioural changes, followed by the
internalization of quality – oriented values. Thus, a top-down process of training and education led
to changes in work behaviour and work values. Sharing common behaviours 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 behaviours 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;
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••
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. 3a. Explain
the brief structure of WTO. Answer: 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 MB0037 – International Business
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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.
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Figure 3.1: Structure of WTO The WTO is ‘member-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
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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.
- 16 -
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
“committees”. 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 the plural-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 “panels” 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.
- 17 -
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 “transparent”) 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 “inclusive”). One term has become controversial, but more among some outside
observers than among delegations. The “Green 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
“transparency” and “inclusiveness” 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.)
- 18 -
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. 3b. Highlight the drawbacks of GATT. Answer: 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
- 19 -
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. 4a. Give a short note on the regional economic integration. Answer: 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. 4b. Mention the benefits of WTO. Answer: Ten Benefits of WTO 1. The system helps to
keep the peace
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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 5a. Explain five-element product
wave model. Answer: The Five-Element Product Wave
As shown in Figure 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
- 21 -
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 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
- 22 -
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 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.
- 23 -
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. 5b. What do you mean by
globalization? Answer: 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. 6. Give some examples of companies doing
international business and discuss how they have they have managed their business in the
international markets.
- 24 -
Answer: 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 welleducated 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
- 25 -
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.
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MB0037 – International Business Management Assignment Set- 2
1. Evaluate the monetary system and currency markets in international business management.
Asnwer: The exchange rate regimes adopted by countries in today’s international monetary and
financial system, and the system itself, are profoundly different from those envisaged at the 1944
meeting at Bretton Woods establishing the IMF and the World Bank. In the Bretton Woods system: •
exchange rates were fixed but adjustable. This system aimed both to avoid the undue volatility
thought to characterize floating exchange rates and to prevent competitive depreciations, while
permitting enough flexibility to adjust to fundamental disequilibrium under international
supervision; private capital flows were expected to play only a limited role in financing payments
imbalances, and widespread use of controls would prevent instability in such flows; temporary
official financing of payments imbalances, mainly through the IMF, would smooth the adjustment
process and avoid unduly sharp correction of current account imbalances, with their repercussions
on trade flows, output, and employment.
In the current system, exchange rates among the major currencies (principally the U.S. dollar, the
euro, and Japanese yen) fluctuate in response to market forces, with short-run volatility and
occasional large medium-run swings. Some medium-sized industrial countries also have market –
determined floating rate regimes, while others have adopted harder pegs, including some European
countries outside the euro area. Developing and transition economies have a wide variety of
exchange rate arrangements, with a tendency for many but by no means all countries to move
toward increased exchange rate flexibility. This variety of exchange rate regimes exists in an
environment with the following characteristics: • partly for efficiency reasons, and also because of
the limited effectiveness of capital controls, industrial countries have generally abandoned such
controls and emerging market - 27 -

economies have gradually moved away from them. The growth of international capital flows and
globalization of financial markets has also been spurred by the revolution in telecommunications and
information technology, which has dramatically lowered transaction costs in financial markets and
further promoted the liberalization and deregulation of international financial transactions; •
international private capital flows finance substantial current account imbalances, but the changes in
these flows appear also sometimes to be a cause of macroeconomic disturbances or an important
channel through which they are transmitted to the international system; developing and transition
countries have been increasingly drawn into the integrating world economy, in terms of both their
trade in goods and services and of financial transactions.
Lessons from the recent crises in emerging markets are that for such countries with important
linkages to global capital markets, the requirements for sustaining pegged exchange rate regimes
have become more demanding as a result of the increased mobility of capital. Therefore, regimes
that allow substantial exchange rate flexibility are probably desirable unless the exchange rate is
firmly fixed through a currency board, unification with another currency, or the adoption of another
currency as the domestic currency (dollarization). Flexible exchange rates among the major
industrial country currencies seem likely to remain a key feature of the system. The launch of the
euro in January 1999 marked a new phase in the evolution of the system, but the European Central
Bank has a clear mandate to focus monetary policy on the domestic objective of price stability rather
than on the exchange rate. Many medium-sized industrial countries, and developing and transition
economies, in an environment of increasing capital market integration, may also continue to
maintain market-determined floating rates, although more countries could may adopt harder pegs
over the longer term. Thus, prospects are that: • exchange rates among the euro, the yen, and the
dollar are likely to continue to exhibit volatility, and schemes to reduce volatility are neither likely to
be adopted, nor to be desirable as they prevent monetary policy from being devoted consistently to
domestic stabilization objectives; several of the transition countries of central and eastern Europe,
especially those preparing for membership in the European Union, are likely to seek to establish
over time the
- 28 -
policy disciplines and institutional structures required to make possible the eventual adoption of the
euro. The approach taken by the IMF continues to be to advise member countries on the
implications of adopting different exchange rate regimes, to consider the choice of regime to be a
matter for each country to decide and to provide policy advice that is consistent with the
maintenance of the chosen regime Q.2 a. Mention the different entry strategies to enter
international markets. Answer: Entry Strategies With rare exceptions, products just don’t emerge in
foreign markets overnight – a firm has to build up a market over time. Several strategies, which
differ in aggressiveness, risk, and the amount of control that the firm is able to maintain, are
available: • Exporting is a relatively low risk strategy in which few investments are made in the new
country. A drawback is that, because the firm makes few if any marketing investments in the new
country, market share may be below potential. Further, the firm, by not operating in the country,
learns less about the market (What do consumers really want? Which kinds of advertising campaigns
are most successful? What are the most effective methods of distribution?) If an importer is willing
to do a good job of marketing, this arrangement may represent a "win-win" situation, but it may be
more difficult for the firm to enter on its own later if it decides that larger profits can be made within
the country. Licensing and franchising are also low exposure methods of entry – you allow someone
else to use your trademarks and accumulated expertise. Your partner puts up the money and
assumes the risk. Problems here involve the fact that you are training a potential competitor and
that you have little control over how the business is operated. For example, American fast food
restaurants have found that foreign franchisees often fail to maintain American standards of
cleanliness. Similarly, a foreign manufacturer may use lower quality ingredients in manufacturing a
brand based on premium contents in the home country. Contract manufacturing involves having
someone else manufacture products while you take on some of the marketing efforts yourself. This
saves investment, but again you may be training a competitor.
- 29 -
•
Direct entry strategies, where the firm either acquires a firm or builds operations "from scratch"
involve the highest exposure, but also the greatest opportunities for profits. The firm gains more
knowledge about the local market and maintains greater control, but now has a huge investment. In
some countries, the government may expropriate assets without compensation, so direct
investment entails an additional risk. A variation involves a joint venture, where a local firm puts up
some of the money and knowledge about the local market.
b. How has E-commerce helped in international marketing? (6 marks) Sol. Electronic Commerce 1.
Prospects for electronic commerce Electronic commerce – usually in the form of sales, promotion, or
support through the Internet – is a hot topic at the moment, evidenced by the high market
capitalization of firms involved in this kind of business. Growth rates have been considerable over
the last two years and are expected to persist, at least to some extent, for at least the next several
years. Yet, it should be recognized that so far, sales over the Internet account for only a small
portion of sales – especially outside the U.S. 2. Obstacles to diffusion Obstacles to the diffusion of
Internet trade come both from enduring sources and temporary roadblocks which may be overcome
as consumer attitudes change and technology is improved. Currently, Internet connections are
slower than desired so that downloading pictures and other information may take longer than
consumers are willing to wait. "Glitches" in online ordering systems may also frustrate consumers,
who are unable to place their orders at a given time or have difficulty navigating through a
malfunctioning site. The lack of non-English language sites in some areas may also be offputting to
consumers, and registering domain names in some countries is difficult. Further, shipping small
packages across countries may be inefficient due to high local postage rates and inefficiencies in
customs processing. Most of these obstacles may be overcome within next few years. Other
obstacles may, however, have considerably greater staying power. First, there are legal problems, as
several different countries may seek to impose their jurisdiction on advertising and laws of product
assortment and business practices. Further, the maintenance of databases, which are essential to
delivering on the
- 30 -
promises of e-commerce, may conflict with the privacy rules of some countries – this is currently a
hot issue of contention between the United States and the European Union. Finally, there are issues
of taxation and collection. While the Clinton Administration has sought to get the WTO to go along
with a three year tax "moratorium" on Internet purchases much like the one observed in the U.S.,
strong opposition is expected. A great attraction of ecommerce in Europe is that people may order
from other countries and thus evade local sales taxes, which can be prohibitive (e.g., 25% in
Denmark and 16% in Germany). Some firms will ship to customers in neighbouring countries without
collecting sales taxes or duties, with the responsibility of paying falling on the consumer. Although
most consumers who order and do not arrange to pay for these taxes get away with it, fines for
those caught through random checks can be severe. 3. Locus of the site Some firms have chosen to
maintain a global site, with reference only to local sales or support offices; others, in contrast, have
unique sites for each country. In some cases, global sites will hyperlink surfers to a country or region
relevant to the site. Note that some confusion exists since many sites outside the U.S. maintain the
".com" designation rather than their countries’ respective suffix (e.g., ".de" for Germany, ".se" for
Sweden, and ".au" for Australia). Some firms have experienced problems getting their banks to
accept credit card charges in more than one currency, and thus it may be difficult to indicate precise
prices in more than one denomination (one site based in Britain offered its American customers to
be as accurate as possible, based on current exchange rates, although the charge could be off "by a
few pennies.") 4. Lifecycle stages across the World It has been suggested that Europe runs some five
years behind the U.S. in electronic commerce, but some sources dispute this, suggesting that lack of
success among American retailers may have other origins, such as inadequate adaptation (for
example, some British users are put off by American English). There are, however, some factors
which cause most countries run behind. Even in Europe, Internet access penetration rates are lower
than they are in the U.S., and the slower speed associated with downloading Asian characters is
discouraging. In some countries, credit card penetration is lower, and even in European countries
with high penetration rates, consumers are reluctant to use them. Further, the fact that consumers
in most countries have to pay a per minute phone charge discourages the essential casual and
relaxed
- 31 -
browsing common in the U.S. so long as unlimited cable or hardwired access is not offered. 3a.
Explain Bill of Lading and Letters of credit. Answer: A bill of lading (sometimes referred to as a BOL,or
B/L) is a document issued by a carrier to a shipper, acknowledging that specified goods have been
received on board as cargo for conveyance to a named place for delivery to the consignee who is
usually identified. A thorough bill of lading involves the use of at least two different modes of
transport from road, rail, air, and sea. The term derives from the verb "to lade" which means to load
a cargo onto a ship or other form of transportation. A bill of lading can be used as a traded object.
The standard short form bill of lading is evidence of the contract of carriage of goods and it serves a
number of purposes: • It is evidence that a valid contract of carriage, or a chartering contract, exists,
and it may incorporate the full terms of the contract between the consignor and the carrier by
reference (i.e. the short form simply refers to the main contract as an existing document, whereas
the long form of a bill of lading (connaissement intégral) issued by the carrier sets out all the terms
of the contract of carriage);
It is a receipt signed by the carrier confirming whether goods matching the contract description have
been received in good condition (a bill will be described as clean if the goods have been received on
board in apparent good condition and stowed ready for transport); and It is also a document of
transfer, being freely transferable but not a negotiable instrument in the legal sense, i.e. it governs
all the legal aspects of physical carriage, and, like a cheque or other negotiable instrument, it may be
endorsed affecting ownership of the goods actually being carried. This matches everyday experience
in that the contract a person might make with a commercial carrier like FedEx for mostly airway
parcels, is separate from any contract for the sale of the goods to be carried; however, it binds the
carrier to its terms, irrespectively of who the actual holder of the B/L, and owner of the goods, may
be at a specific moment. A standard, commercial letter of credit is a document issued mostly by a
financial institution, used primarily in trade finance, which usually provides an irrevocable payment
undertaking.
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•
The letter of credit can also be source of payment for a transaction, meaning that redeeming the
letter of credit will pay an exporter. Letters of credit are used primarily in international trade
transactions of significant value, for deals between a supplier in one country and a customer in
another. They are also used in the land development process to ensure that approved public
facilities (streets, sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are
usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client,
and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable,
i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank
and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions
common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present in
order to receive payment include a commercial invoice, bill of lading, and documents proving the
shipment was insured against loss or damage in transit. However, the list and form of documents is
open to imagination and negotiation and might contain requirements to present documents issued
by a neutral third party evidencing the quality of the goods shipped, or their place of origin.
3 b. What is UNCITRAL and what it does? (2 marks) Answer: The United Nations Commission on
International Trade Law (UNCITRAL) was established by the General Assembly in 1966 (Resolution
2205(XXI) of 17 December 1966). In establishing the Commission, the General Assembly recognized
that disparities in national laws governing international trade created obstacles to the flow of trade,
and it regarded the Commission as the vehicle by which the United Nations could play a more active
role in reducing or removing these obstacles. Mandate The General Assembly gave the Commission
the general mandate to further the progressive harmonization and unification of the law of
international trade. The Commission has since come to be the core legal body of the United Nations
system in the field of international trade law. 4. Explain the importance of STP in international
markets. Answer: The importance of STP
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Segmentation is the cornerstone of marketing – almost all marketing efforts in some way relate to
decisions on who to serve or how to implement positioning through the different parts of the
marketing mix. For example, one’s distribution strategy should consider where one’s target market is
most likely to buy the product, and a promotional strategy should consider the target’s media habits
and which kinds of messages will be most persuasive. Although it is often tempting, when observing
large markets, to try to be "all things to all people," this is a dangerous strategy because the firm
may lose its distinctive appeal to its chosen segments. In terms of the "big picture," members of a
segment should generally be as similar as possible to each other on a relevant dimension (e.g.,
preference for quality vs. low price) and as different as possible from members of other segments.
That is, members should respond in similar ways to various treatments (such as discounts or high
service) so that common campaigns can be aimed at segment members, but in order to justify a
different treatment of other segments, their members should have their own unique response
behaviour. 5a. Write a short note on branding and trademarks. (6 marks) Answer: Branding and
trademarks Brand is the personality that identifies a product, service or company (name, term, sign,
symbol, or design, or combination of them) and how it relates to key constituencies: Customers,
Staff, Partners, Investors etc. Some people distinguish the psychological aspect, brand associations
like thoughts, feelings, perceptions, images, experiences, beliefs, attitudes, and so on that become
linked to the brand, of a brand from the experiential aspect. The experiential aspect consists of the
sum of all points of contact with the brand and is known as the brand experience. The psychological
aspect, sometimes referred to as the brand image, is a symbolic construct created within the minds
of people and consists of all the information and expectations associated with a product or service A
trademark or trade mark or trade-mark is a distinctive sign or indicator used by an individual,
business organization, or other legal entity to identify that the products or services toconsumers
with which the trademark appears originate from a unique source, and to distinguish its products or
services from those of other entities. A trademark is designated by the following symbols:
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™ (for an unregistered trade mark, that is, a mark used to promote or brand goods)
℠ (for an unregistered service mark, that is, a mark used to promote or brand services)

® (for a registered trademark)
A trademark is typically a name, word, phrase, logo, symbol, design, image, or a combination of
these elements. There is also a range of non-conventional trademarks comprising marks which do
not fall into these standard categories, such as those based on color, smell, or sound. The owner of a
registered trademark may commence legal proceedings for trademark infringement to prevent
unauthorized use of that trademark. However, registration is not required. The owner of a common
law trademark may also file suit, but an unregistered mark may be protectable only within the
geographical area within which it has been used or in geographical areas into which it may be
reasonably expected to expand. 5b. What are the features of exchange and currency markets?
Answer: The exchange rate regimes adopted by countries in today’s international monetary and
financial system, and the system itself, are profoundly different from those envisaged at the 1944
meeting at Bretton Woods establishing the IMF and the World Bank. In the Bretton Woods system: •
exchange rates were fixed but adjustable. This system aimed both to avoid the undue volatility
thought to characterize floating exchange rates and to prevent competitive depreciations, while
permitting enough flexibility to adjust to fundamental disequilibrium under international
supervision; private capital flows were expected to play only a limited role in financing payments
imbalances, and widespread use of controls would prevent instability in such flows; temporary
official financing of payments imbalances, mainly through the IMF, would smooth the adjustment
process and avoid unduly sharp correction of current account imbalances, with their repercussions
on trade flows, output, and employment.
In the current system, exchange rates among the major currencies (principally the U.S. dollar, the
euro, and Japanese yen) fluctuate in
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response to market forces, with short-run volatility and occasional large medium-run swings. Some
medium-sized industrial countries also have market – determined floating rate regimes, while others
have adopted harder pegs, including some European countries outside the euro area. Developing
and transition economies have a wide variety of exchange rate arrangements, with a tendency for
many but by no means all countries to move toward increased exchange rate flexibility. This variety
of exchange rate regimes exists in an environment with the following characteristics: • partly for
efficiency reasons, and also because of the limited effectiveness of capital controls, industrial
countries have generally abandoned such controls and emerging market economies have gradually
moved away from them. The growth of international capital flows and globalization of financial
markets has also been spurred by the revolution in telecommunications and information technology,
which has dramatically lowered transaction costs in financial markets and further promoted the
liberalization and deregulation of international financial transactions; international private capital
flows finance substantial current account imbalances, but the changes in these flows appear also
sometimes to be a cause of macroeconomic disturbances or an important channel through which
they are transmitted to the international system; developing and transition countries have been
increasingly drawn into the integrating world economy, in terms of both their trade in goods and
services and of financial transactions.
Lessons from the recent crises in emerging markets are that for such countries with important
linkages to global capital markets, the requirements for sustaining pegged exchange rate regimes
have become more demanding as a result of the increased mobility of capital. Therefore, regimes
that allow substantial exchange rate flexibility are probably desirable unless the exchange rate is
firmly fixed through a currency board, unification with another currency, or the adoption of another
currency as the domestic currency (dollarization). Flexible exchange rates among the major
industrial country currencies seem likely to remain a key feature of the system. The launch of the
euro in January 1999 marked a new phase in the evolution of the system, but the European Central
Bank has a clear mandate to focus monetary policy on the domestic objective of price stability rather
than on the exchange rate. Many medium-sized
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industrial countries, and developing and transition economies, in an environment of increasing
capital market integration, may also continue to maintain market-determined floating rates,
although more countries could may adopt harder pegs over the longer term. Thus, prospects are
that: • exchange rates among the euro, the yen, and the dollar are likely to continue to exhibit
volatility, and schemes to reduce volatility are neither likely to be adopted, nor to be desirable as
they prevent monetary policy from being devoted consistently to domestic stabilization objectives;
several of the transition countries of central and eastern Europe, especially those preparing for
membership in the European Union, are likely to seek to establish over time the policy disciplines
and institutional structures required to make possible the eventual adoption of the euro.
The approach taken by the IMF continues to be to advise member countries on the implications of
adopting different exchange rate regimes, to consider the choice of regime to be a matter for each
country to decide and to provide policy advice that is consistent with the maintenance of the chosen
regime 6. Discuss the various International product and pricing decisions. Answer: Product decisions
In decisions on producing or providing products and services in the international market it is
essential that the production of the product or service is well planned and coordinated, both within
and with other functional area of the firm, particularly marketing. For example, in horticulture, it is
essential that any supplier or any of his "out grower" (sub-contractor) can supply what he says he
can. This is especially vital when contracts for supply are finalized, as failure to supply could incur
large penalties. The main elements to consider are the production process itself, specifications,
culture, the physical product, packaging, labelling, branding, warranty and service. International
Pricing In New Open-Economy Models Recent developments in open-economy macroeconomics
have progressed under the paradigm of nominal price rigidities, where monetary disturbances are
the main source of fluctuations. Following developments in closed-economy models, new
openeconomy models have combined price rigidities and market imperfections in a fully micro
founded inter-temporal general equilibrium setup. This framework has been used extensively to
study the properties of the international transmission of shocks, as
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well as the welfare implications of alternative monetary and exchange rate policies. Imperfect
competition is a key feature of the new open-economy framework. Because agents have some
degree of monopoly power instead of being price takers, this framework allows the explicit analysis
of pricing decisions. The two polar cases for pricing decisions are producer-currency pricing and
local-currency pricing. The first case is the traditional approach, which assumes that prices are preset
in the currency of the seller. In this case, prices of imported goods change proportionally with
unexpected changes in the nominal exchange rate, and the law of one price always holds.’ In
contrast, under the assumption of local-currency pricing, prices are preset in the buyer’s currency.
Here, unexpected movements in the nominal exchange rate do not affect the price of imported
goods and lead to short-run deviations from the law of one price. Empirical evidence using
disaggregated data suggests that international markets for tradable goods remain highly segmented
and that deviations in the law of one price are large, persistent, and highly correlated with
movements in the nominal exchange rate, even for highly tradable goods. Moreover, there is strong
evidence that the large and persistent movements that characterize the behaviour of real exchange
rates at the aggregate level are largely accounted for by deviations in the law of one price for
tradable goods. In this article I make use of a simplified version of a two-country model where the
two markets are segmented, allowing firms to price discriminate across countries, and where prices
are preset in the consumer’s currency. This model generates movements in the real exchange rate in
response to unexpected monetary shocks, which are a result of the failure of the law of one price for
tradable goods. I then compare this model to a version in which prices are preset in the producer’s
currency and examine the implications of these two alternative price-setting regimes for several key
issues. The price-setting regime determines the currency of denomination of imported goods and
the extent to which changes in exchange rates affect the relative price of imported to domestic
goods and the international allocation of goods in the short run. That is, different pricing regimes
imply different roles for the exchange rate in the international transmission of monetary
disturbances. As we shall see, this assumption has very striking implications for several important
questions, namely real exchange rate variability, the linkage between macroeconomic volatility and
international trade, and the welfare effects of alternative exchange rate regimes, among others.
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While generating deviations from the law of one price that are absent from models assuming
producer-currency pricing, the assumption of local-currency pricing still leaves important features of
the data unexplained. The key role of this assumption in the properties of open-economy models
suggests that it is necessary to keep exploring the implications of alternative pricing structures in
open-economy models.
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MB0037 – International Business Management Assignment Set- 1

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

® (for a registered trademark)

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

MB0037 – International Business Management

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