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MB0053 - International Business Management

Q1. The world economy is globalizing at an accelerating pace. Discuss this


statement and list the benefits of globalization
Ans:
Globalisation:
Globalisation is a process where businesses are dealt in markets around the world, apart from
the local and national markets. According to business terminologies, globalisation is defined
as the worldwide trend of businesses expanding beyond their domestic boundaries. It is
advantageous for the economy of countries because it promotes prosperity in the countries
that embrace globalisation
International vs. global business
Most of us assume that international and global business are the same and that any company
that deals with another country for its business is an international or global company. In fact,
there is a considerable difference between the two terms.
International companies Companies that deal with foreign countries for their business are
considered as international companies. They can be exporters or importers who may not have
any investments in any other country, apart from their home country.
Global companies Companies, which invest in other countries for business and also operate
from other countries, are considered as global companies. They have multiple manufacturing
plants across the globe, catering to multiple markets.
Companies can also be differentiated by the kind of competitive strategy they adopt while
dealing internationally. Multinational strategy and global competitive strategy are the two
types of competitive strategy.
Multinational strategy :
Companies adopt this strategy when each countrys market needs to be treated as selfcontained. It can be for the following reasons:
Customers from different countries have different preferences and expectations about a
product or a service.
Competition in each national market is essentially independent of competition in other
national markets, and the set of competitors also differ from country to country.
A companys reputation, customer base, and competitive position in one nation have little
or no bearing on its ability to successfully compete in another nation.
Global competitive strategy Companies adopt this strategy when prices and competitive
conditions across the different country markets are strongly linked and have common
synergies. In a globally competitive industry, a companys business gets affected by the
changing environments in different countries. The same set of competitors may compete
against each other in several countries. In a global scenario, a companys overall competitive
advantage is gauged by the cumulative efforts of its domestic operations and the
international operations worldwide.
Benefits of globalisation
The merits and demerits of globalization are highly debatable. While globalisation creates
employment opportunities in the host countries, it also exploits labour at a very low cost

MB0053 - International Business Management

compared to the home country. Let us consider the benefits and ill-effects of globalisation.
Some of the benefits of globalization are as follows:
1. Promotes foreign trade and liberalization of economies.
2. Increases the living standards of people in several developing countries through capital
investments in developing countries by developed countries.
3. Benefits customers as companies outsource to low wage countries. Outsourcing helps
the companies to be competitive by keeping the cost low, with increased productivity.
4. Promotes better education and jobs.
5. Leads to free flow of information and wide acceptance of foreign products, ideas,
ethics, best practices, and culture.
6. Provides better quality of products, customer services, and standardised delivery
models across countries.
7. Gives better access to finance for corporate and sovereign borrowers.
8. Increases business travel, which in turn leads to a flourishing travel and hospitality
industry across the world.
9. Increases sales as the availability of cutting edge technologies and production
techniques decrease the cost of production.
10. Provides several platforms for international dispute resolutions in business, which
facilitates international trade.
Q2:Hofstede said Culture is more often a source of conflict than of synergy. Discuss this
statement and explain the five cultural dimensions
Ans:
Hofstedes cultural dimensions
According to Dr. Geert Hofstede, Culture is more often a source of conflict than of synergy.
Cultural differences are a trouble and always a disaster. Professor Hofstede carried out a
detailed study of how values in the workplace are influenced by culture. He worked as a
psychologist in IBM from 1967 to 1973. At that time he gathered and analysed data from many
people in several countries. Professor Hofstede established a model using the results of the
study which identifies four dimensions to differentiate cultures. Later, a fifth dimension
called long-term outlook was added.
The following are the five cultural dimensions:
Power Distance Index (PDI) This focuses on the level of equality or inequality between
individuals in a nations society. A country with high power distance ranking depicts that
inequality of power and wealth has been allowed to grow within the society. These societies
follow caste system that does not allow upward mobility of its people. A country with low
power distance ranking depicts a society which de-emphasises the differences between its
peoples power and wealth. In these societies equality and opportunity is stressed for
everyone. Countries with high PDI index are Arab countries, Russia, India and China. Those
with low score are Australia and Japan.
Individualism This dimension focuses on the extent to which the society reinforces
individual or collective achievement and interpersonal relationships. A high individualism
ranking (western countries, Canada, Hungary) depicts that individuality and individual rights
are dominant within the society. Individuals in these societies form a larger number of looser

MB0053 - International Business Management

relationships. A low individualism ranking (Asian and African countries like Indonesia and
Colombia) characterises societies of a more collective nature with close links between
individuals. These cultures support extended families and collectives where everyone takes
responsibility for fellow members of their group.
Masculinity This focuses on the extent to which the society supports or discourages the
traditional masculine-work role model of male achievement, power, and control. A country
with high masculinity ranking (like Japan, Venezuela, Hungary) shows the country experiences
high level of gender differentiation. In these cultures, men dominate the society and power
structure, with women being controlled and dominated by men. A country with low
masculinity ranking (like Norway and Sweden) shows a low level of differentiation and
discrimination between genders women are treated equal to men in all aspects of the
society.

Uncertainty Avoidance Index (UAI) This focuses on the degree of tolerance for
uncertainty and ambiguity within the society. A country with high uncertainty
avoidance ranking shows that the country has low tolerance for uncertainty and
ambiguity. A rule-oriented society that incorporates rules, regulations, laws, and
controls is created to minimize the amount of uncertainty. A country with low
uncertainty avoidance ranking shows that the country has fewer concerns about
ambiguity and uncertainty and has high tolerance for a variety of opinions. A society
which is less rule-oriented, readily agrees to changes, and takes greater risks. Latin
American countries, Germany, Belgium, Japan and Eastern Europe score high on this.
Countries with low UAI score are Sweden, Denmark and China.
Long-Term Orientation (LTO) It describes the range at which a society illustrates a
pragmatic future oriented perspective instead of a conventional historic or short term point
of view. The Asian countries (China, Japan, Honk Kong) score high on this dimension. These
countries have a long term orientation, believe in many truths, accept changes easily, and
have thrift for investment. Cultures recording little on this dimension, trust in absolute truth
are conventional and traditional. They have a small term orientation and a concern for
stability. Many western cultures score considerably low on this dimension.

Q3: Regional integration is helping the countries in growing their trade. Discuss this
statement. Describe in brief the various types of regional integrations
Ans:

Regional Integration
Regional integration can be defined as the unification of countries into a larger whole. It also
reflects a countrys willingness to share or unify into a larger whole. The level of integration
of a country with other countries is determined by what it shares and how it shares. Regional
integration requires some compromise on the part of participating countries. It should aim to
improve the general quality of life for the citizens of those countries
In recent years, we have seen more and more countries moving towards regional integration
to strengthen their ties and relationship with other countries. This tendency towards
integration was activated by the European Union (EU) market integration. This trend has
influenced both developed and developing countries to form customs unions and Free Trade

MB0053 - International Business Management

Areas (FTA). The World Trade Organisation (WTO) terms these agreements of integration as
Regional Trade Agreements (RTA).
Need for integration
Regional integration can be achieved with different approaches. To some extent, each country
and region will find its own way. But typically there are some common ideas/reasons for
achieving regional integration. Some of these are to:
1. Facilitate trade growth.
2. Achieve conducive climates for investment.
3. Surmount the regulatory and administrative barriers to transit zones.
4. Ensure safe and reliable trade routes.
5. Enhance infrastructure physical and institutional.
6. Encourage economic expansion.
Impact of integration
Regional integration results in the creation and diversion of trade. It supports overall growth
of the region, coupled with efficient trading practices. Trade creation increases production
and income and also leads to new entrants in the market and, therefore, results in tougher
competition. The transfer of technology is also faster.Regional integration induces reduction
on tariffs and prohibitions. It spreads goodwill among member countries and also helps in
reducing the chances of conflict.

Types of Integration:
Preferential trading agreement
Preferential trading agreement is a trade pact between countries. It is the weakest type of
economic integration and aims to reduce taxes on few products to the countries who sign the
pact. The tariffs are not abolished completely but are lower than the tariffs charged to
countries not party to the agreement. India is in PTA with countries like Afghanistan, Chile
and South Common Market (MERCOSUR). The introduction of PTA has generated an increase in
the market size and resulted in the availability and variety of new products.
Free trade area :Free Trade Area (FTA) is a type of trade bloc and can be considered as the
second stage of economic integration. It comprises of all countries that are willing to or agree
to reduce preferences, tariffs and quotas on services and goods traded between them.
Countries choose this kind of economic integration if their economic structures are similar. If
countries compete among themselves, they are likely to choose customs union.
The importers must obtain product information from all suppliers within the supply chain in
order to determine the eligibility for a Free Trade Agreement (FTA). After receiving the
supplier documentation, the importer must evaluate the eligibility of the product depending
on the rules pertaining the products. The importers product is qualified individually by the
FTA. The product should have a minimum percentage of local content for it to be qualified.
Custom union: Custom Union is an agreement among two or more countries having already
entered into a free trade agreement to further align their external tariff to help remove
trade barriers. Custom union agreement among negotiating countries may encompass to
reduce or eliminate customs duty on mutual trade. Under customs union agreement,
countries generally impose a common external -tariff (CTF) on imports from non-member

MB0053 - International Business Management

countries. Such common external tariff helps the member countries to reap the benefits of
trade expansion, trade creation and trade diversification. In the absence of common external
tariff, there is a possibility that countries with lower custom duties may become conduits for
members which has higher custom duty. Custom union is third stage in level of economic
integration and is followed only after free trade agreement among participating countries
Common market:Common market is a group formed by countries within a geographical area
to promote duty free trade and free movement of labour and capital among its members.
European community is an example of common market. Common markets levy common
external tariff on imports from non-member countries. A single market is a type of trade bloc,
comprising a free trade area with common policies on product regulation, and freedom of
movement of goods, capital, labour and services, which are known as the four factors of
production. This agreement aims at making the movement of four factors of production
between the member countries easier. The technical, fiscal and physical barriers among the
member countries are eliminated considerably as these barriers hinder the freedom of
movement of the four factors of production. The member countries must come forward to
eliminate these barriers, have a political will and formulate common economic policies.
Q4: Write short note on: a) Foreign currency derivatives b) bases of international tax
systems
Ans:

a) Foreign currency derivatives :Currency derivative is defined as a financial contract


that seeks to swap two currencies at a pre- determined rate. It can also be termed as
the agreement where the value can be determined from the rate of exchange of two
currencies at the spot. The currency derivative trades in markets that correspond to
the spot (cash) market. Hence, the spot market exposures can be enclosed with the
currency derivatives. The main advantage from derivative hedging is the basket of
currency available.
The derivatives can be hedged with other derivatives. In the foreign exchange market
currency derivatives like the currency features, currency options and currency swaps are
usually traded. The standard agreement made in order to buy or sell foreign currencies in
future is termed as currency futures. These are usually traded through organised exchanges.
The authority to buy or sell the foreign currencies in future at a specified rate is provided by
currency option. These will help the businessmen to enhance their foreign exchange dealings.
The agreement undertaken to exchange cash flow streams in one currency for cash flow
streams in another currency in future is provided by currency swaps. These will help to
increase the funds of foreign currency from the cheapest sources.
Some of the risks associated with currency derivatives are:
1. Credit risk takes place, arising from the parties involved in a contract.
2. Market risk occurs due to adverse moves in the overall market.
3. Liquidity risks occur due to the requirement of available counterparties to take the
other side of the trade.

MB0053 - International Business Management

4. Settlement risks similar to the credit risks occur when the parties involved in the
contract fail to provide the currency at the agreed time
5. Operational risks are one of the biggest risks that occur in trading derivatives due to
human error.
6. Legal risks pertain to the counterparties of currency swaps that go into receivership
while the swap is taking place.
B) Bases of international tax system: The bases of international tax system are:
Tax neutrality To keep the economic efficiency from being affected the international tax
system should remain neutral. For the nationality of the investor or the locality of the
investment not to be influenced, a neutral tax is important. . Such an environment will allow
capital to move from a nation with lesser return to a nation with higher return, resulting in
well allocated resources that will ensure a high gross world output..
Tax equity The principle of tax equity states that all equally positioned tax players
contribute in the cost of operating the government according to the equal rules. The concept
of equity can be perceived in two ways. It is assert by the first view that the input of each tax
player must be consistent with the amount of public services as received. The second
maintains that the contribution of each tax player must be in terms of their ability to pay.
The ability to pay means the one with greater ability is likely to pay a larger amount of tax.
Avoidance of double taxation The avoidance of double income asserts that one must not
be taxed twice for the same income. However, double taxation occurs if the recipient of posttax income in a foreign country is taxed again. As an alternative, the requirements of foreign
tax credits may be formed in the domestic tax system.
There also exist some tax laws which prevent the tax through artificial transactions such as
transfer pricing. In addition, the corporate structures will help to reduce the overall tax
burden to the enterprise.

Q5. Strategic planning involves allocation of resources to firms to fulfil their long term
goals. What are the types of strategic planning? Compare Top-down Vs Bottom-up
planning.
Ans:

Strategic Planning
Strategic planning involves the structured efforts of an organization to effectively recognise
its purposes for existing, the direction that the organisation will pursue, and how that
direction will allow the entity to achieve its short-term and long-term goals. Strategic
planning is an important element in all kinds of organisations and is applied by governments,
non-profit agencies, individuals and businesses
A simple approach to strategic planning is as discussed below:
1. The first step is to accurately assess where the entity is today, with respect to its ability
and resources.

MB0053 - International Business Management

2. The second step is to recognise where the organisation would like to reachat some
specificpoint of time in the future, by efficiently setting goals and objectives that it needs to
accomplish.
3. The third and final step engages choosing how to successfully progress from the conditions
of today and methodically work toward those goals in a structured and logical manner.
Types of planning
Strategic planning process involves allocation of resources to firms to fulfil their long-term
goals. Any business plan can be classified into three types. They are:

Strategic planning: This planning process is the best among the three business
planning processes. It is a long-term process that the business owners utilize to unveil
their business vision and mission. It also determines a gateway for business owners
for achieving their goals. Strategic planning fulfills the mission and the overall goals
of the firm. Whereas, the other two are rather more short-term and are used
sometimes without any relation to the long-term business goals. However these three
kinds of planning work well when used within a strategic plan.
Intermediate planning: This planning process is for six months to two years. They outline
the manner in which the strategic plan is pursued. Intermediate plans are often used for
campaigns with the purpose and goal of supporting the trades long-term goals.
Short-term planning: This planning process involves planning for few weeks or at least for
a year. It involves detailing out the functioning of a strategic plan on a daily basis. Resources
are allocated for business management and development that takes place daily within the
strategic plan.
Top-down vs. bottom-up planning
Top-down planning: Top-down planning is a common strategy that is used for project
planning. It helps maintain the decision making process at the senior level. Goals and
allowances are established at the highest level. Senior-level managers have to be very
specific when laying out expectations because the people following the plan are not involved
in the planning process. It is very important to keep the morale of the employees high and
motivate them to perform the job. Since employees are not included in any of the decision
making processes, they are motivated only through fear or incentives.
Management must choose techniques to align projects and goals with top-down planning.
Management alone is held responsible for the plans set and the end result. The benefit of
talented employees with prior experience on definite aspects of the project are not utilized
based on the assumption that the management can plan and perform a project better without
the inputs from these employees. Some think that the top-down planning process is the
rightway to make a plan, and that the plan development is not important. It permits the
management to segregate a project into steps, and then break the work into smaller
executable parts of the project. Simultaneously, the work that is broken down is analyzed
until all the steps could be studied, due-dates are precisely assigned, and then parts of the
project are given to employees. However, the focus is on long-term goals and the short-term
and uncertain goals can get lost. This approach is best applicable for small projects.

MB0053 - International Business Management

Bottom-up planning :Bottom-up planning is commonly referred to as tactics. With bottom-up


planning, an organisation gives its project deeper focus because each organisation has a huge
number of employees involved, and each employee is an expert in their own area. Team
members work side-by-side and contribute during each stage of the process. Plans are
developed at the lowest levels, and then passed on to each of the subsequent higher levels.
Finally, it then reaches the senior management for approval. Lower-level employees take
personal interest in a plan that they are involved in planning. Employees are more
encouraged which in turn improves their morale. Project managers are responsible for the
successful completion of the project. Let us now consider the key points of top-down and
bottom-up planning.
Top-down planning
Top-down planning helps:
1. Determine all the goals at the initial stage of the process.
2. Identify the lack of ground level staff participation.
3. Estimate the inflexibility.
4. Find how management imposes the processes.
5. Determine the lack of motivation.
6. Find whether the staffs feel that their input is valued or not.
Bottom-up planning
Bottom-up planning helps:
1. As there are no long term vision here.
2. Encourage teamwork.
3. Estimate flexibility.
4. Determine whether team motivation is of high level.
5. Identify whether the project is team driven.
6. Find whether the staff feels valued or not.

Q6. Discuss the various payment terms in international trade. Which is the safest
method and why?
Ans:
Payment terms in foreign trade:Since international trade deals with exchange of goods,
there are various ways in which the payment terms (finance) will be handled. Both seller and
trader should be careful about the method of payment as they are at different locations and
transactions happen without face-to-face interaction. There are four methods of payment for
the international transactions. This includes the Cash-in-advance method, Letter of Credit,
Documentary collections and the Open Account.
Cash-in-advance: Cash-in-advance helps in removing the risks of credit by the exporter. By
this method, exporter receives the payment before the transfer of goods. The options that
are available with the cash-in-advance method include wire transfers and credit cards. This is
the least attractive method for many of the buyers as it creates cash flow problems. The
buyers are concerned about the quality/quantity and delivery of the goods that are not sent if
the payment is made in advance.

MB0053 - International Business Management

Letters of credit: The letter of credit is the most secure instrument available for
international traders. This is the commitment made by the bank that the payment will be
made to the exporter if the terms and conditions are met. The terms and conditions of the
payment are explained in the required documents.
Documentary collections: Documentary collection is a transaction in which, the exporter's
bank (remitter bank) sends the documents to the importer's bank (collecting bank). The
document contains information about the payment. The funds are collected from the
importer and paid to the exporter through the banks involved in the collection, in exchange
for the documents.
Open account: The open account transaction involves the shipping and delivery of goods in
advance. The payment is due usually from 30 to 90 days. This is advantageous for the
importer in cash flow and cost terms, but at the same time it is very risky for the exporters.
Buyers from abroad stress on open accounts since the extension of credit from the seller to
the buyer are more common in many countries. Exporters who avoid extending credit may
face loss in the sale because of competitors in the market.
Letter of credit: International Trade is affected by distance, laws, political instability and
lack of familiarity by the transacting parties. Letter of credit assumes significance since it can
be used to mitigate risk. It is a document that is issued by the bank that guarantees payment
to a beneficiary. It is written by the financial institution in favour of the importer of goods to
the seller. In the letter, the bank promises that it will honour the drafts drawn on it if the
seller confirms to the specific conditions that are set forth in the letter of credit.
Safest Method of Payment:
One of the best methods for any business transaction is Letter of Credit (LC) mode, as buyers
bank guarantees payment to seller through sellers bank on presentation of required
documents as per LC. The major advantage of Letter of credit to a supplier is minimizing of
credit risk. In an import and export trade, the geographical distance between importer and
exporter is very far; hence ascertaining credit worthiness of buyer is a major threat. In a
mode of Letter of credit, such risk can be avoided.
Buyer cannot deny payment by raising dispute on quality of goods, as letter of credit terms
and conditions are based on documentation. This is a major advantage of Letter of Credit in
terms of seller point of view. Some of the fraudulent buyers deliberately delays or hold
payments by complaining on quality of goods. In a letter of credit terms of business
transactions, rejection of export payment by raising complaint on quality of goods cannot be
effected.
LC provides a security to exporter which is another advantage of a letter of credit. Based on
such security, the exporter can preplan his further business activities to strengthen his
business world.

MB0053 - International Business Management

In a letter of credit, any dispute in transaction can be settled easily, as LC terms and
conditions are under the guidelines of uniform customs and practice of documentary credit.
This is another advantage of a LC for an exporter. In a letter of credit, all required documents
have been mentioned well in advance of shipment and there is no confusion or
misunderstanding to the importer (buyer) to inform supplier to act in between. This is a good
advantage for a supplier to preplan efficiently which saves time.
Against a Letter of Credit, an exporter can avail pre shipment finance from banks or other
financial institutions. This is another advantage of Letter of credit for a seller. Many banks
extend financial assistance with minimum bank interest, as letter of credit is a safe export
order.
Assurance to receive money in full is another advantage of letter of credit. During my career,
I had bitter experience on some of the transactions that I had short received invoice amount
under a non LC transaction by informing us one of the other reasons by buyer. In a letter of
credit, an exporter can ensure that he receives full amount as per LC which helps seller to
plan future business ideas.

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