DRIVE- FALL 2013

PROGRAM/SEMESTER- MBADS (SEM 4/SEM 6) / MBAN2 / MBAFLEX (SEM 4) / PGDIB (SEM 2)

SUBJECT CODE & NAME- IB0017

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Q1. What are the different types of economic systems? Why is economic environment important to analyze. Explain
with examples.
(Economic systems, Importance of Economic environment-4 marks)10 marks
Answer.
Economic systems
There are three types of economic systems: capitalist, socialist, and mixed. This classification is based on the dominant
method of resource allocation: market allocation, command or central plan allocation, and mixed allocation, respectively.
Market Allocation
A market allocation system is one that relies on consumers to allocate resources. Consumers "write" the economic plan by
deciding what will be produced by whom. The market system is economic democracy-citizens have the right to vote with
their pocketbooks for the goods of their choice. The role of the state in a market economy is to promote competition and
ensure consumer protection. The United States, most Western European countries, and Japan the triad countries that
account for three quarters of gross world product are examples of predominantly market economy. The clear superiority
of the market allocation system in delivering the goods and services that people need and want has led to its adoption in
many formerly socialist countries.
Command Allocation
In a command allocation system, the state has broad powers to serve the public interest. These include deciding which
products to make and how to make them. Consumers are free to spend their money on what is available, but state planners
make decisions about what is produced and, therefore, what is available. Because demand exceeds supply, the elements of
the marketing mix are not used as strategic variables. There is little reliance on product differentiation, advertising, and

promotion; the government to cut out "exploitation" by intermediaries handles distribution. Three of the most populous
countries in the world China, the former USSR and India relied on command allocation systems for decades. All three
countries are now engaged in economic reforms directed at shifting to market allocation systems. The prediction made by
India's Jawaharlal Nehru nearly a half century ago regarding the imminent demise of capitalism has been refuted. Market
reforms and nascent capitalism in many parts of the world are creating opportunities for large-scale investments by global
companies. Indeed, Coca-cola returned to Indian in 1994, two decades after being forces out by the government.
Mixed System
There are, in reality, no pure market or command allocation systems among the world's economies. All market systems
have a command sector and all command systems have a market sector; in other words, they are "mixed". In a market
economy, the command allocation sector is the proportion of Gross Domestic Product (GDP).
Importance of Economic environment :
With the growing importance of international business, it is becoming important for all the businessmen who want to set up
a global business, to analyze the international business scenario and then take any steps further. The businessmen, who fail
to do so, are more likely to fail in their businesses.

Q2. Discuss the process of international negotiation. Elaborate on any 2 different styles of negotiating.
(Process-6 marks, styles of negotiating-4 marks)10 marks
Answer.
Process of International Negotiations
let us understand the Process of International Negotiations

Figure illustrates the process involved in international

negotiations.

Let us read about the different phases that international negotiations must pass through:
Preparation
The preparation stage includes the following:

Finding out whether the negotiation is possible between two parties, and is the company able to fulfil all the needs

of the other company.

Preparing a proper agenda and sending the right team to represent the company.
Adapting to the environment, communication style, agreement form of the other team.
Understanding the cultural norms of the company or person with whom negotiation has to take place.
Understanding the whole business, clearly writing out pros, cons and risks, possible outcomes of negotiations,
analyzing what the parties really intend to do.

Exchanging information and offer

The exchanging information and offer stage includes the following:

Exchanging job related information.

Getting to know each other in better terms.
Offering the deal first.

Persuasion
The persuasion stage includes the following:

Trying to get the other party to agree to a position.

Using a number of tactics to persuade the party. The tactics are further classified into verbal and nonverbal types.
They can be a promise, threat, suggestion, warning, normal appeal, punishment, rewards and others.

Concession and agreement

The concession and agreement stage includes the following:

Concession requires that each party reduces some of its demands so that it is convenient for the other party.
Agreement is the contract that is signed by both the parties stating that they agree to each others demands.

Styles of Negotiation
Figure illustrates the different approaches to negotiate

.
Competitive style (I win-You lose)
The negotiators follow this style when their own needs are given higher priority than of the opponent. It is of no concern
that the other party suffers and loses. Competition is critical when it is certain that the deal is not negotiable and
compliance is needed immediately.
Collaborative style (I win-You win)
Collaborative styles are usually confused with the compromising style. The tagline I win- U win is about ensuring that
the needs of both parties are met and each of the party is valued by the other. These negotiators are keen on their and their
opponents needs being met at the same time. They are willing to spend time and energy in finding innovative solutions,
with an assumption that there would be more value to share out later on.
Collaborative style is very time consuming and must be dealt with the authorities at the appropriate level.

Compromising (I win and lose some-You win and lose some)

The compromising style is used when there is a deal between people who trust each other. In this case, both the parties win
and lose some, with the guarantee that whatever they win and lose are the right things and won t affect them in future. The
negotiator who begins with a more ambitious opening position wins the compromise.
Accommodating (I lose-You win)
Accommodating style is the opposite of competing style of negotiation. Here the negotiators use the strategy that the best
way to win people is to fulfil all their requirements. They provide not only their products and services but also share their
information without a second thought. These negotiators have very good relations with their counter parts. The competitive
negotiators consider the generosity of these kinds of negotiators as a sign of weakness and try to take advantage of them.
Avoiding (I lose- you lose)
The negotiators who follow the avoiding style of negotiation are usually referred as passive aggressive. These people do
not like clashes. Rather than speaking directly and solving the issue, they try to take revenge without
their opponent being informed. People do not consider such negotiators for making their deals. They prefer non-avoiding
types to invest their marketing money and share their best ideas. Such negotiators are favored only when the value of
investing time to resolve the clash outweighs the advantages or if the issue under negotiation is very critical to both parties.
Cross cultural negotiations
Dr. Nancy Adler is a professor of International Management who conducts workshops on leadership.
American style of negotiation
The Americans follow the competitive style of negotiation and begin with an unrealistic offer. They showcase a more
confident, energetic and broad minded approach. They focus on areas of disagreement, rather than areas of commonality.
African style of negotiation
The African negotiators respect relationships, elders and the structure of the local society. Negotiation happens within
social networks that are based on given roles.
Japanese style of negotiation
The Japanese focus on group goals, interdependence, and hierarchical orientation. They are very polite, emphasize on
establishing relationships, and less on literal meanings of words used in negotiation.
European style of negotiation
The European styles vary based on the region, nationality, language spoken and other factors. For example, the French are
quite aggressive, use threats, warnings to achieve their goals. However, the Germans and British are comparatively less
aggressive in nature.
Latin American style of negotiation
Responsibility is given more priority than schedules and task accomplishment. Negotiations are done using networks.
Relationships are emphasized and open ruptures are avoided.

Q3. Evaluate various elements involved in a contract.

(Essential elements of valid contract) 10 marks
Answer.

Elements of a Valid Contract

Now that you have learnt about the types of contracts, let us read about the elements that comprise a valid contract.
Every contract is governed by the Law of Contract. It is a legal requisite that connects two or more people and is
enforceable by law. An agreement is enforceable by law only when it fulfills certain conditions. When these conditions are
broken or violated, there are remedial actions that can be taken. The elements of an agreement are:

Offer
Acceptance
Rules of communication
Consideration
Lawful object
Free consent
Performance of contracts
Discharge of contracts

Offer
An offer is a suggestion or proposal by an offeror to give or do something. When the offer is accepted by the offeree, it is
considered as an agreement. It must be obvious and may be implicit by conduct. It determines whether an agreement exists
between the two parties. The offer is a statement of the conditions which is binding by the offeror. An offer is a declaration
of the conditions on which the offeror is prepared to be bound.
Acceptance

When the offeree, to whom the offer is made, signifies his agreement, the proposal is considered accepted. The

following are the rules of acceptance:

Postal acceptance rule For convenience, if the offer is accepted by post, the contract will exist from the time the
acceptance is being posted. Under Indian Laws the acceptance will be the date of receipt of the post. Under the

English Law the acceptance will be the date of posting the acceptance letter.
Rejection, death or lapse of time When the offeree does not accept the terms of the offer, an offer is terminated.
While making an offer, an offeror specifies the validity of the contract. If the offeree fails to admit the offer within
this specific period, then the offer will be viewed as terminated. Generally the death or the incapacity of the offeror

terminates the offer.

Counter offers If the offeree rejects the offer, the offer would be destroyed and cannot be accepted in the future
time. A mere reexamination of terms of an offer is not a counter offer and it leaves the offer undamaged.

Rules of communication
The offer and acceptance must be clearly communicated to the other party. Similarly, the absolute acceptance must be
communicated to the offerer.
Consideration
Every contract has two parts promise and consideration for the promise. A consideration is something of value given in
exchange for the promise of the other party in the contract. For example, a buyer (promisor) pays a certain amount of
money to the shopkeeper (the promise) in exchange for goods. Therefore, the price in exchange for goods is the
consideration.
Lawful object

The objective of the agreement should be lawful. Any act prohibited by law will not be valid and such agreements are not
treated as a valid contract. For example, ABC rents out his house for a business related to manufacture of weapons.
Without a valid licence, this activity is unlawful. Therefore, such agreement is not a valid contract.
Free consent
Parties of a contract must give their consent. Mere consent is not enough. Consent of parties has to be free and should not
be affected by the following:

Coercion
Undue influence
Fraud
Misrepresentation
Mistake

Performance of contracts
Performance refers to the completion of a deal according to the conditions given in the contract. For example, you want to
buy a car at your local dealer's clearance sale. Your dealer, Mr. XYZ, offers to sell you the car if you pay him Rs.95,000.
After bargaining, you purchase the car at a bargain price of Rs. 94,995 and you sign for it. A contract has been accepted.
Mr. XYZ, your car dealer, will deliver the car and then you pay him the balance due. The dealers deliverance of the car
and your payment of Rs. 94,995 are the performance of the contract.
Discharge of contracts
A contract comes to an end when all the tasks and obligations that arise due to the contract are no longer considered
necessary. All rights existed will now no longer exist when a contract is discharged or ended.
Remedies for breach of contract
A breach of contract occurs when a party to the contract does not complete the obligation with the expected outcome. For
example, if a trader does not supply a service or commodity as agreed, it results to breach of a contract.

Q4. Write short notes on:

a) Corporate governance
b)Articles of Association
(Meaning and objectives of corporate governance-5 marks, eaning and contents of AoA-5 marks) 10 marks
Answer.
Corporate Governance
Corporate governance refers to the mechanism to control the managers of a company. This is necessary to ensure they fulfil
the legal requirements of their job profile to meet the objectives for the company. Governance rests solely with the board of
directors. The following are the main objectives of corporate governance:

Provide guidelines to enable the company to function profitably and ethically.

Regulate and maintain standardized procedures to enable good and honest business practices.

Protect the interests of the shareholders and other stakeholders like creditors.
Ensure compliance of statutory filings and reporting.
Ensure periodic audit and accounting.
Provide guidelines for fair remuneration to management, Board of Directors and company's employees.

Important constituents of corporate governance

To have a good corporate governance mechanism in place, it is important to understand the role of key constituents
affecting the corporate governance. The three key constituents affecting the corporate governance of a company are the
board of directors, the management and the shareholders.
Articles of association
Articles of association (AoA) are the second most important document after MoA. AoA lays down the rules and regulations
for managing the operations within a company.
The AoA is the second most important document after MoA. The AoA lays down the rules and regulations to manage the
operations in a company. The purpose of the AoA is to define the duties, rights and powers of the board of directors and the
management of the company in order facilitate the achievement of objects as stated in the MoA. It is mandatory for a
private company to register its AoA with the registrar. The articles of a private company contain various mandatory
regulations.
A private limited company with share capital must do the following:

Restrict the rights to transfer its shares.

Limit the maximum number of members to 50.
Prohibit invitation to public to subscribe for any of its shares or debentures.
Prohibit invitation or acceptance of deposits from persons other than its members, directors or their relatives.

Q5. Elaborate on the roles of:

a)WTO
b)EXIM bank of India
(Functions of WTO-5 marks, Functions of EXIM bank-5 marks) 10 marks
Answer.
WTO
The WTO is the only global international organization dealing with the rules of trade between nations. At its heart are the
WTO agreements, negotiated and signed by the bulk of the world's trading nations and ratified in their parliaments. The
goal is to help producers of goods and services, exporters, and importers conduct their business.
Most of the WTO agreements are the result of the 1986-94 Uruguay Round negotiations, signed at the Marrakesh
ministerial meeting in April 1994. There are about 60 agreements and decisions totaling 550 pages.
Negotiations since then have produced additional legal texts such as the Information Technology Agreement, services and
accession protocols. New negotiations were launched at the Doha Ministerial Conference in November 2001. The WTO
agreements deal with: agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial

standards and product safety, food sanitation regulations, intellectual property, and much more. But a number of simple,
fundamental principles run throughout all of these documents. These principles are the foundation of the multilateral
trading system. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant
someone a special favour and you have to do the same for all other WTO members.
The WTO agreements allow countries to introduce changes gradually, through progressive liberalization. Developing
countries are usually given longer to fulfil their obligations. In the WTO, when countries agree to open their markets for
goods or services, they bind their commitments. For goods, these bindings amount to ceilings on customs tariff rates.
Sometimes countries tax imports at rates that are lower than the bound rates. The WTO is sometimes described as a free
trade institution, but that is not entirely accurate. The system does allow tariffs and, in limited circumstances, other forms
of protection. More accurately, it is a system of rules dedicated to open, fair and undistorted competition. The WTO system
contributes to development.
EXIM bank of India
The Exim Bank, a legal apex financial institution was set up by an act of the Indian Parliament in September 1981. This act
was called the Export and Import Bank of India Act, 1981. It was started in 1982 and is owned by the Government of India.
This bank was started to finance, facilitate and promote India's international trade.The Exim Bank of India was set up to
financially assist exporters. The following are the objectives of the Exim Bank:

Exim Bank gives financial assistance to exporters and importers. It also functions as a principle financial

institution to coordinate businesses engaged in financing and promoting the countrys international trade.
Exim plays a major role in partnering Indian industries, mainly the small and medium ventures in their
globalization efforts. A broad range of products and services are offered at all phases of the business cycle, starting
from import of technology and export product development to export production, pre-shipment and post-shipment,
export marketing and overseas investment.

The Exim Policy or Foreign Trade Policy is a set of guidelines by the Directorate General of Foreign Trade (DGFT)
regarding the import and export of goods in India. The trade policy of India, which is also referred to as the EXIM Policy
of the Indian Government, is guided by the Exim Bank of India. It is regulated by the Foreign Trade Development and
Regulation Act, 1992.
The objective of the Foreign Trade Development and Regulation Act is to provide the development and regulation of
foreign trade by facilitating imports and augmenting exports from India. For example, United Phosphorus in Mumbai
received financial support from Exim Bank of India to acquire Advanta, a financial services company in the U.S.s

Q6. What is international taxation and what are its principles? Analyze global taxation environment.
(International taxation-3 marks, Principles-3marks)10 marks
Answer.

International Taxation
International taxation is a term that deals with international tax treaties and methods to resolve tax conflicts involving
cross-border countries transactions. There are three vital elements of any taxable transaction that includes:
Tax subject: It is a term used to identify the taxpayer who has a tax liability to pay off.
Tax object: It is a term used to identity the components of the tax liability.
Connecting factor: There must be a connecting factor between the State tax authorities and individual/business taxpayer
without which a State authority cannot impose its taxing procedures. A different countries follow different tax procedures
binding to its own legal systems and has to define its own connecting factors to compute tax liabilities with respective to
tax accounting rules being followed in their countries.
Principles of International Taxation
There are two key principles of international taxation:
Residence based taxation: An individual taxpayer has to pay his/her taxes based on its worldwide income in the country of
his/her residence.
Source based taxation: A company has to pay its taxes in the source country where it has its business establishments and a
source of income is available from those establishments.

A double taxation issues will be in limelight provided that companies have been taxed both in the country of
residence and source. The country of residence has the sole rights to exempt a company from double taxation

either by:
Exemption of taxable income in the country of residence or
Extending credit facilities for taxes to be paid in the country of source.

Current international taxation practices have its own limitations due to globalization and liberalization policies around the
world. The challenges include that companies are becoming globalized and taxation polices are within national frontiers
unable to address the issues in cross border transactions. There are three ways to respond to this situation like:

Isolation approach
Synchronization approach
Integration approach

Isolation approach: This kind of approach is not feasible in todays globalised word because no country will be willing to
isolate itself from the principles of international taxation and its reforms happening worldwide.
Synchronization approach: In this approach, the government wont be playing a pivotal role in framing the tax policies in
accordance to its social, cultural and economical aspects of its own country because it emphasizes on the common global
tax code rule which will be monitored under the supervision of a global tax authority worldwide.
Integration approach

This is the right approach to meet the challenges of globalization and liberalization policies in today s world
because the government plays a pivotal role in designing their own tax systems and procedures in accordance to

international tax considerations.

It helps to intensify the co-operation level among cross- border trade taking place in different parts of the world.
It helps to facilitate information flow to meet up those challenges by putting in place the best transparent systems
and best practices followed in the international taxation polices worldwide.

And also proper mechanism in place to resolve any disputes arising out of it.

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