International Business Question Paper

3rd Sem
INTERNATIONAL BUSINESS M.Com
HC09: INTERNATIONAL BUSINESS

1. Course Description:
This course provides the coverage of international marketing, international trade, international global
sourcing, international business environment, multinational corporations and India in the global setting.
2. Course Objectives:
This specialization course on International Business is designed to equip the student with policy and
practice skills related to international business. Upon completing this course, the student will be able to
understand the intricacies of running business across the political territories. He/She would also get an
insight in to the policy environment in India regarding the international business.
3. Pedagogy:
The course would be taught under LTP method. The lecture sessions are designed to be interactive with
the student expected to come prepared with basic reading suggested before every session. The tutorial
sessions are basically group exercises with each designated group handling a prescribed module for
presentation and interaction, in a three-way interactive process. It basically involves preparing field
reports and presenting them for plenary discussions.
4. Course Contents:
Module 1: Introduction: International Marketing-Trends in International Trade-Reasons for Going
International-Global Sourcing and Production Sharing-International Orientations Internationalization
Stages and Orientations-Growing Economic Power of Developing Countries-International Business
Decision-Case Studies.
Module 2: International Business Environment: Trading Environment-Commodity Agreements-

Castes-State Trading-Trading Blocks and Growing Intra-Regional Trade- Other Regional Groupings-
SAARC- GATT/WTO and Trade Liberalization-The Uruguay Round Evaluation-UNCTAI.
Module 3: Multinational Corporations: Definition-Organizational Structures-Dominance of MNC’s-

Recent Trends-Code of Conduct-Multinationals in India-Case Studies
Module 4: India in the Global Setting: India an Emerging Market-India in the Global Trade-
Liberalization and Integration with Global Economy-Obstacles in Globalization-Factors Favouring
Globalization-Globalization Strategies. Trade Policy and Regulation in India: Trade Strategies-Trade
Strategy of India-Export-Import Policy-Regulation and Promotion of Foreign Trade in India-Case
studies.
Module 1: Introduction:
International business -
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Comprises all commercial transactions (private and governmental, sales, investments, logistics, and
transportation) that take place between two or more regions, countries and nations beyond their
political boundaries.
International marketing -
Is simply the application of marketing principles to more than one country? However, there is a
crossover between what is commonly expressed as international marketing and global marketing,
which is a similar term.
An international market is defined geographically as a market outside the international borders of a

company's country of citizenship. A company, to the extent that it is a legally distinct entity from its
owners like a corporation, is usually a citizen of the country where it is organized.
Trends in International Trade

Current trends are towards the increasing foreign trade and interdependence of firms, markets and
countries. Intense competition among countries, industries, and firms on a global level is a recent
development owed to the confluence of several major trends. Among these trends are:
1) Forced Dynamism:
International trade is forced to succumb to trends that shape the global political, cultural, and
economic environment. International trade is a complex topic, because the environment it operates in
is constantly changing. First, businesses are constantly pushing the frontiers of economic growth,
technology, culture, and politics which also change the surrounding global society and global economic
context. Secondly, factors external to international trade (e.g., developments in science and
information technology) are constantly forcing international trade to change how they operate.
2) Cooperation among Countries:

Countries cooperate with each other in thousands of ways through international organisations, treaties,
and consultations. Such cooperation generally encourages the globalization of business by eliminating
restrictions on it and by outlining frameworks that reduce uncertainties about what companies will and
will not be allowed to do. Countries cooperate:
i) To gain reciprocal advantages,
ii) To attack problems they cannot solve alone, and
iii) To deal with concerns that lie outside anyone’s territory.
3) Liberalization of Cross-border Movements:

Every country restricts the movement across its borders of goods and services as well as of the
resources, such as workers and capital, to produce them. Such restrictions make international trade
cumbersome; further, because the restrictions may change at any time, the ability to sustain
international trade is always uncertain.
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4) Transfer of Technology:
Technology transfer is the process by which commercial technology is disseminated. This will take the
form of a technology transfer transaction, which may or may not be a legally binding contract, but
which will involve the communication, by the transferor, of the relevant knowledge to the recipient.
5) Growth in Emerging Markets:

The growth of emerging markets (e.g., India, China, Brazil, and other parts of Asia and South America
especially) has impacted international trade in every way. The emerging markets have simultaneously
increased the potential size and worth of current major international trade while also facilitating the
emergence of a whole new generation of innovative companies.
7 Most Influential Factors Affecting Foreign Trade

1) Impact of Inflation:
If a country’s inflation rate increases relative to the countries with which it trades, its current account
will be expected to decrease, other things being equal. Consumers and corporations in that country will
most likely purchases more goods overseas (due to high local inflations), while the country’s exports to
other countries will decline.
2) Impact of National Income:

If a country’s income level (national income) increases by a higher percentage than those of other
countries, its current account is expected to decrease, other things being equal. As the real income
level (adjusted for inflation) rises, so does consumption of goods. A percentage of that increase in
consumption will most likely reflect an increased demand for foreign goods.
3) Impact of Government Policies:

A country’s government can have a major effect on its balance of trade due to its policies on
subsidizing exporters, restrictions on imports, or lack of enforcement on piracy.
4) Subsidies for Exporters:

Some governments offer subsidies to their domestic firms, so that those firms can produce products at
a lower cost than their global competitors. Thus, the demand for the exports produced by those firms is
higher as a result of subsidies.
Many firms in China commonly receive free loans or free land from the government. These firms incur
a lower cost of operations and are able to price their products lower as a result, which enables them to
capture a larger share of the global market.
5) Restrictions on Imports:
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If a country’s government imposes a tax on imported goods (often referred to as a tariff), the prices of
foreign goods to consumers are effectively increased. Tariffs imposed by the U.S. government are on
average lower than those imposed by other governments. Some industries, however, are more highly
protected by tariffs than others.
6) Lack of Restrictions on Piracy:

In some cases, a government can affect international trade flows by its lack of restrictions on piracy. In
China, piracy is very common; individuals (called pirates) manufacture CDs and DVDs that look almost
exactly like the original product produced in the United States and other countries.
7) Impact of Exchange Rates:

Each country’s currency is valued in terms of other currencies through the use of exchange rates, so
that currencies can be exchanged to facilitate international transactions.
Reasons for Going International

i. Domestic markets are saturated and there is pressure to raise sales and profits. Most
companies have very ambitious sales and profit targets. If such figures have to be realized, companies
have to move out of their domestic markets.
ii. Domestic markets are small. Companies which have ambitions to become big will have to look for
bigger markets outside their boundaries.
iii. Domestic markets are growing slowly. Most companies are no longer content to grow
incrementally. If such companies have to achieve high growth rates, they have to obtain some of their
sales from international markets.
iv. In some industries like advertising, customers want their suppliers to have international presence so
that suppliers can contribute in most of the markets where the buyer is operating. For instance, a
multinational will choose an advertising agency which has a presence in all the markets where the
multinational is selling its product.
v. Some companies will have to move out of their domestic markets when their competitors have done
so, if they want to maintain their market share. If the competitor is allowed to pursue its international
growth alone, the competitor is likely to plough back some of the earnings from its international
operations to the domestic market, making it difficult for the companies which refrained from pursuing
international markets, to focus on the domestic market.
vi. Developed markets have high cost structures and companies may move their operations to regions
and countries where costs of production are lower. Once a company starts operating in a geographical
region, it becomes easier and profitable to market their products in that area.
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vii. Countries and regions are at different stages of development, and their growth rates and potential
are different. Companies do not like to concentrate all their efforts in limited regions and want to
spread out their risk. Such companies will look for markets which are likely to behave differently from
their existing ones in terms of economic parameters like growth rate, size, affluence of customers,
stage of market development, etc.
viii. Even if a company decides to concentrate on its domestic market, it will not be allowed to pursue
its goals unhindered. Multinational companies will enter its market and make a dent in its market share
and profit. The company has no choice but to enter foreign markets to maintain its market share and
growth.
ix. Companies are realizing that it is no longer an option to stay put in one’s domestic market. The
ability to compete successfully in domestic markets will depend upon their ability to match the
resources and competencies of multinational companies, with whom they have to compete in their
domestic markets.
Global Sourcing: Pros and Cons of Global Sourcing

Global sourcing is a procurement strategy that aims to take advantage of global efficiencies for the
delivery of goods and services. For MNCs, it has become a strategic sourcing in today’s competitive
setting.
In reality, global sourcing is a centralized procurement strategy of a multinational company, wherein a

central procurement department seeks the economies of scale through corporate wide standardization
and benchmarking.
Advantages of Global Sourcing:

The global sourcing philosophy has following advantages:
(i) Low cost manufacturing
(ii) Tapping skills and resources that are not available in the home nation
(iii) Seeking the benefit of alternate suppliers
(iv) Utilizing an efficient supply chain management systems
(v) Learning global business skills
(vi) Meeting competition prudently and efficiently
Disadvantages of Global Sourcing:

Disadvantages of global sourcing philosophy are as follows:
(i) No exposure of international culture, traditions and beliefs
(ii) Hidden costs related to different time zones and languages
(iii) Financial and political risks associated with emerging economies
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(iv) Risk of losing intellectual properties, patents and copyrights

(v) Long lead times
(vi) Labor problems and labor related issues
(vii) Unnecessary shutdowns and supply interruptions
(viii) Difficulty in supervision
(ix) Difficulty of monitoring goods and services quality
The following are the special problems or difficulties of foreign trade:

(i) Distance:
Usually, international trade involves long distances. Distance between various countries is a great
difficulty in an International trade. Due to long distances, it becomes difficult to establish close
relationship between the buyers and the sellers.
(ii) Diversity of Languages:

Different languages are spoken and written in different countries of the world. The difference of
language creates another problem in the international trade. It becomes difficult to understand the
language of traders in other countries. All correspondence has to be done in foreign language.
(iii) Transport and Communications:

Long distances in international trade create difficulties of proper and quick transport and
communication. Both of these involve considerable delay as well as cost. The high cost of transport is a
great hindrance in international-trade.
(iv) Risk and Uncertainty:

International trade is subject to greater risk and uncertainties as compared to home trade. As the
goods have to be transported to long distances, they are exposed to many risks. Goods in transit
overseas are susceptible to the perils of the sea. These risks may be covered through marine
insurance, but this involves extra cost in foreign trade transactions.
(v) Lack of information about International Traders:

In international trade, since there is no direct and close relationship between the buyers and the
sellers, the seller has to take special steps to verify the creditworthiness of the buyer. It is difficult to
obtain information regarding creditworthiness, business standing and financial position of persons living
in foreign countries.
(vi) Import and Export Restrictions:

Every country has its own laws, customs and import and export regulations. Exporters and importers
have to fulfil all the custom formalities as well as follow rules controlling exports and imports.
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(vii) Difficulties in Payments:

International trade involves the exchange of currencies because the currency of one country is not the
legal tender in the other country. Exchange rates are determined for different currencies for this
purpose. But exchange rates go on fluctuating.
Moreover there is a wide gap between the time when the goods are despatched and the time when the
goods are received and paid for. Thus, there is a greater risk of bad debts also in foreign trade.
Remittances of money for payments in foreign trade are time-consuming and expensive. Hence,
payments in foreign trade create complications.
(viii) Various Documents to be used:

Foreign trade involves the preparation of a large number of documents both by the importer as well as
the exporter. These documents may be required either under law or under customs of trade of the two
countries.
(ix) Study of Foreign Markets:

Every foreign market has its own characteristics. It has own requirements, customs, traditions, weights
and measures, marketing methods, etc. An extensive study of foreign markets is required to be
successful in foreign trade, which may not be possessed by an ordinary trader.
6 Important Ways in Which Technology is Facilitating International Business:

1) Telecommunications:
This is the most obvious dimension of the technological environment facing international business. Now
people are using cellular phones, beepers and other telecommunications service, giving a way to
international growth. As a result, growth in the wireless technology business worldwide has been rapid
and the future promises even more. This growth is welcome as business, domestic or global, cannot
prosper without an efficient telephone system. Technologies such as 3G, MMS of NOKIA have fostered
closely knit global business.
2) Transportation:
Technology In addition to developments in computers and telecommunications, several major
innovations in transportation have occurred since World War II. In economic terms, the most important
are probably the development of commercial jet aircraft and super freighters and the introduction of
containerization, which simplifies transhipment from one mode of transport to another. While the
advent of commercial jet has reduced the travel time of businessmen, containerization has lowered the
costs of shipping goods over long distances.
3) Globalization of Production:
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Technological breakthroughs have facilitated globalization of production. A worldwide communications

network has become essential for any MNC. Texas Instruments (TI), the US electronics firm, For
example, has nearly 50 plants in 19 countries. A satellite based communications system allows TI to
coordinate on a global scale; its production planning, cost accounting, financial planning, marketing,
customer service and human resource.
4) Globalization of Markets:
Along with the globalization of production, technological innovations have facilitated the inter-
nationalization of markets. As stated earlier, containerization has made it more economical to transport
goods over long distances, thereby creating global markets. Low-cost global communications networks
such as the World Wide Web are helping to create electronic global market places.
5) E-Commerce:
The Internet and the access gained to the World Wide Web have revolutionized international marketing
practices. Firms ranging from a few employees to large multinationals have realized the potential of
marketing globally online and so have developed the facility to buy and sell their products and services
online to the world.
6) Technology Transfer:
Technology transfer is a process that permits the flow of technology from a source to a receiver. The
source in this case is the owner or holder of the knowledge, while the recipient is the beneficiary of
such knowledge. The source could be an individual, a company, or a country.
International Orientations
A separate orientation program offered by most colleges and universities for incoming foreign students.
Third culture kids who hold a domestic passport are sometimes invited to attend. This orientation
usually takes place before the normal first-year students’ orientation which is much larger. “I.O.” as it
is commonly referred to, provides a smaller, intimate group to interact and get to know the campus
and each other before the main influx of students and often teaches foreign students about cultural
differences in their country of study as well as discussing visa and immigration issues.
Once the candidates are selected for the required job, they have to be fitted as per the qualifications.
Placement is said to be the process of fitting the selected person at the right job or place, i.e. fitting
square pegs in square holes and round pegs in round holes. Once he is fitted into the job, he is given
the activities he has to perform and also told about his duties. The freshly appointed candidates are
then given orientation in order to familiarize and introduce the company to him. Generally the
information given during the orientation programme includes-
 Employee’s layout
 Type of organizational structure
 Departmental goals
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 Organizational layout
 General rules and regulations
 Standing Orders
 Grievance system or procedure
In short, during Orientation employees are made aware about the mission and vision of the
organization, the nature of operation of the organization, policies and programmes of the organization.
The main aim of conducting Orientation is to build up confidence, morale and trust of the employee in
the new organization, so that he becomes a productive and an efficient employee of the organization
and contributes to the organizational success.
The nature of Orientation program varies with the organizational size, i.e., smaller the organization the
more informal is the Orientation and larger the organization more formalized is the Orientation
programme.
Proper Placement of employees will lower the chances of employee’s absenteeism. The employees will
be more satisfied and contended with their work.
Factors that Determine Economic Growth and Development of a Country
(i) Supply of Natural Resources:

The quantity and quality of natural resources play a vital role in the economic development of a
country. Important natural resources are land, minerals and oil resources, water, forests, climate, etc.
The quality of natural resources available in a country puts a limit on the level of output of goods which
can be attained.
(ii) Capital Formation:

Labour is combined with capital to produce goods and services. Workers need machines, tools and
factories to work. In fact the use of capital makes workers more productive. Setting up of more
factories equipped with machines and tools which raise the productive capacity of the economy.
Therefore, in the opinion of many economists, capital formation is the very core of economic
development. Whatever the type of economic system, without capital accumulation the process of
economic growth cannot be accelerated.
(iii) Technological Progress and Economic Growth:

Another important factor in economic growth is progress in technology, Use of advanced techniques in
production or progress in technology brings about a significant increase in per capita output.
Technological advance refers to the discovery of new and better ways of doing things or an
improvement in the old ways.
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Sometimes technological advances result in an increase in available supplies of natural resources. But
more generally technological advance results in increasing the productivity or effectiveness with which
natural resources, capital and labour are used and worked to produce goods. As a result of
technological advance it becomes possible to produce more output with same resources or the same
amount of product with less resource.
(iv) The Growth of Population:
The growth of population is another factor which determines the rate of economic growth. The growing
population increases the level of output by increasing the number of working population or labour force
provided all are absorbed in productive employment.
We saw above that according to estimates of Denison, increase in the quantity of labour contributed to
the extent of 32 per cent to economic growth of output in the USA during 1929-1982. Moreover, the
increase in population leads to the increase in demand for goods.
Factors that Influence the Economic Development of a Country

A) Economic Factors in Economic Development:
1) Capital Formation:
The strategic role of capital in raising the level of production has traditionally been acknowledged in
economics. It is now universally admitted that a country which wants to accelerate the pace of growth,
has m choice but to save a high ratio-of its income, with the objective of raising the level of
investment.
2) Natural Resources:
The principal factor affecting the development of an economy is the natural resources. Among the
natural resources, the land area and the quality of the soil, forest wealth, good river system, minerals
and oil-resources, good and bracing climate, etc., are included. For economic growth, the existence of
natural resources in abundance is essential.
3) Marketable Surplus of Agriculture:

Increase in agricultural production accompanied by a rise in productivity is important from the point of
view of the development of a country. But what is more important is that the marketable surplus of
agriculture increases. The term ‘marketable surplus’ refers to the excess of output in the agricultural
sector over and above what is required to allow the rural population to subsist.
4) Conditions in Foreign Trade:

The classical theory of trade has been used by economists for a long time to argue that trade between
nations is always beneficial to them. In the existing context, the theory suggests that the presently less
developed countries should specialize in production of primary products as they have comparative cost
advantage in their production.
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5) Economic System:
The economic system and the historical setting of a country also decide the development prospects to a
great extent. There was a time when a country could have a laissez faire economy and yet face no
difficulty in making economic progress. In today’s entirely different world situation, a country would
find it difficult to grow along the England’s path of development.
B) Non-Economic Factors in Economic Development:

1) Human Resources:
Human resources are an important factor in economic development. Man provides labour power for
production and if in a country labour is efficient and skilled, its capacity to contribute to growth will
decidedly be high. The productivity of illiterate, unskilled, disease ridden and superstitious people is
generally low and they do not provide any hope to developmental work in a country.
2) Technical Know-How and General Education:

It has never been, doubted that the level of technical know-how has a direct bearing on the pace of
development. As the scientific and technological knowledge advances, man discovers more and more
sophisticated techniques of production which steadily raise the productivity levels.
3) Political Freedom:
Looking to the world history of modern times one learns that the processes of development and under-
development are interlinked and it is wrong to view them in isolation. We all know that the under-
development of India, Pakistan, Bangladesh, Sri Lanka, Malaysia, Kenya and a few other countries,
which were in the past British colonies, was linked with the development of England. England recklessly
exploited them and appropriated a large portion of their economic surplus.
4) Social Organisation:
Mass participation in development programs is a pre-condition for accelerating the growth process.
However, people show interest in the development activity only when they feel that the fruits of growth
will be fairly distributed.
5) Corruption:
Corruption is rampant in developing countries at various levels and it operates as a negative factor in
their growth process. Until and unless these countries root-out corruption in their administrative
system, it is most natural that the capitalists, traders and other powerful economic classes will continue
to exploit national resources in their personal interests.
6) Desire to Develop:
Development activity is not a mechanical process. The pace of economic growth in any country
depends to a great extent on people’s desire to develop. If in some country level of consciousness is
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low and the general mass of people has accepted poverty as its fate, then there will be little hope for
development.
4 Types of International Business

1. Exporting:
Exporting is often the first choice when manufacturers decide to expand abroad. Simply stating,
exporting means selling abroad, either directly to target customers or indirectly by retaining foreign
sales agents or/and distributors.
2. Licensing:
Licensing is another way to expand one’s operations internationally. In case of international licensing,
there is an agreement whereby a firm, called licensor, grants a foreign firm the right to use intangible
(intellectual) property for a specific period of time, usually in return for a royalty.
3. Franchising:
Closely related to licensing is franchising. Franchising is an option in which a parent company grants
another company/firm the right to do business in a prescribed manner. Franchising differs from
licensing in the sense that it usually requires the franchisee to follow much stricter guidelines in
running the business than does licensing.
4. Foreign Direct Investment (FDI):

Foreign direct investment refers to operations in one country that ire controlled by entities in a foreign
country. In a sense, this FDI means building new facilities in other country. In India, a foreign direct
investment means acquiring control by more than 74% of the operation. This limit was 50% till the
financial year 2001-2002.
Risks in International Business

1. Foreign exchange rate risk 2. Interest rate risk
3. Credit risk 4. Legal risk 5. Liquidity risk
6. Settlement risk 7. Political risk
Module 2: International Business Environment:

Trading Environment in IB:
(1) Immobility of Factors:
The degree of immobility of factors like labour and capital is generally greater between countries than
within a country. Immigration laws, citizenship, qualifications, etc. often restrict the international
mobility of labour.
(2) Heterogeneous Markets:
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In the international economy, world markets lack homogeneity on account of differences in climate,
language, preferences, habit, customs, weights and measures, etc. The behaviour of international
buyers in each case would, therefore, be different.
(3) Different National Groups:

International trade takes place between differently cohered groups. The socio-economic environment
differs greatly among different nations.
(4) Different Political Units:

International trade is a phenomenon which occurs amongst different political units.
(5) Different National Policies and Government Intervention:

Economic and political policies differ from one country to another. Policies pertaining to trade,
commerce, export and import, taxation, etc., also differ widely among countries though they are more
or less uniform within the country. Tariff policy, import quota system, subsidies and other controls
adopted by governments interfere with the course of normal trade between one country and another.
(6) Different Currencies:

Another notable feature of international trade is that it involves the use of different types of currencies.
So, each country has its own policy in regard to exchange rates and foreign exchange.
Commodity Agreements:
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Objectives, Functions and Defents in the State Trading Corporation of India

In India, the State Trading Corporation (STC) was set up in May 1956 as an entirely state- owned
organisation. Its basic aim is to stimulate India's foreign trade, by enlarging the scope of Indian
exports and facilitating essential imports.
Objectives of STC:
Following are the important objectives of State Trading Corporation:
1. To enlarge exports,
2. To facilitate trade (imports) in specific commodities,
3. To augment the revenue of the State,
4. To bring about greater economic equality,
5. To regulate trade (imports and exports) in certain commodities, and
6. To regulate and overcome difficulties of trade with communist countries.
Functions of STC:
To fulfil the objectives as stated above, STC has the following functions to carry out:
1. Improving overall trade, domestic as well as international.
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2. Augmenting the national resources of the country for promoting trade.

3. Undertaking of trading generally with State trading countries and private foreign traders too.
4. Exploring of new markets for traditional export items and developing exports of new items.
5. Stabilisation of price and traditional distribution by importing at the Government's instance any
commodity in short supply.
6. Handling of such internal trade as promotes foreign trade.
7. Ensuring the quantity and quality of various commodities to foreign buyers at competitive rates.
8. Assisting in the settlement of trade disputes between exporters and importers in different countries
wherever, India is directly concerned.
9. Implementation of all trade agreements entered into by the Government of India with other nations.
In practice, however, the STC in India has currently acted:

1. As a direct trader in mineral ores.
2. As a servicing agent for bringing together importers and exporters in the world market, assisting
them in implementing their contracts and solving their disputes.
3. As a distributing agent to the Government in various commodities like cement and fertilizers.
4. As an agency for promoting new lines of trade such as exports of shoes, handicrafts, woollen fabrics,
etc.
It is thus, claimed that the STC has succeeded in diversifying and supplementing India's foreign trade
It has all striven wherever, possible in securing better terms of trade and economies in handling
imports and distribution of essential raw materials.
Defects of STC:
It is disheartening to note that the State Trading Corporation has the following defects in its working as
found by the Economist Intelligence Unit (EIU) London and by other critics:
1. It is generally, observed that deliveries from STC side have been constantly behind schedule.
2. STC is found to be extremely slow in taking decisions and actions.
3. STC could not work fruitfully with buyers and producers to solve the technical problems involved in
foreign trade.
4. STC lacks a business point of view. Its activities are governed by bureaucratic attitudes and
systems.
5. Periodic changes in staff of STC seem to have affected the efficiency and continuity of functions.
6. STC has been crowned with failure in executing foreign orders fully and carefully, e.g., Russian shoe
order in the fecent past.
Trading Blocs:
Intergovernmental agreement, where regional barriers to trade, (tariffs and non- tariff barriers) are
reduced or eliminated among the participating states. A regional trading bloc is a group of countries
within a geographical region that protect themselves from imports from non-members
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Trading Blocs and growing intra-regional Trade

An important trend in international trade has been the growth of intra-regional trade. Intra-regional
trade has been fostered by the economic integration schemes or trading blocs.
Some people view world trade as consisting broadly of intra-regional trade and inter regional trade.
There is also talk of regionalization Vs globalization of world trade.
The share of intra-regional trade in the total world trade increased in the 1980s in Western Europe,
North America and Asia. In other words, trade within the region grew substantially faster than world
trade. In 1990, intra regional trade in goods accounted for 61% of total trade in goods of the European
Community, 41% for Asia and 35% for North America. Over 60% of the trade of the Pacific rim nations
stays within the area.
Regional integration schemes tend to increase intra-regional trade. For example, trade between the 12
members of the EC increased from about 40% in 1960 to 60% in 1990. Intra-regional trade increased
in the EFTA and ASEAN.
Economic integration is a general term, which covers several kinds of arrangements by which two or
more countries agree to draw their economies closer together. All of the arrangements have one
common feature â€“the use of tariffs to discriminate against goods produced by countries, which are
not parties to the agreement. All tariffs discriminate against foreign products. The key feature of the
various agreements for integration is that tariffs are used to discriminate among different countries.
This kind of discrimination is achieved by according preferential treatment to the goods produced by
the other member countries.
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Regional Economic Groupings of International marketing

The post second world war period has been a growing interest in integrating national economies at
regional levels, though the efforts have often floundered due to political differences and unforeseen
economic hurdles. The motivation for regional economic integration arises out of the realization of the
limitations imposed by national frontiers and the expected benefits of a wider market consisting of
several national economies in terms of increased trade, investment and economic efficiency.
Forms of Economic Groupings:
Forms of economic groupings are diverse, involving different levels of economic integration. Economic
literature generally envisages four types of economic groupings:
1. Free Trade Area
2. Customs Union
3. Common Market
4. Economic union
The progression is from free trade area to economic union, each stage representing a higher degree of
economic integration. The elements to be integrated in various forms can be seen from the matrix
given below:
Free Trade Area (FTA)

FTA consists of a number of countries within which trade is free in the sense that customs duties are
not levied at the frontier on trade but, in practice, it is limited to specified products with specified
exceptions. Exceptions arise out of the typical national needs of protecting specific sectors from
international competition.
Customs Union:
Like FTA, there are no internal tariff barriers on intra-union trade. But, in addition, the member’s
countries give up their individual tariff schedules and erect a common external tariff barrier for trade
with non-union members.
A customs union is like a single nation, not only in internal trade, but also in presenting a common
front to the rest of the world with its common external tariff.
Common Market:
Common market is the succeeding stage of economic integration. In addition to the characteristics of a
customs union, a common market also allows free movement of labor and capital within the member
countries. A common market goes beyond a customs union because it seeks to standardize all
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Government regulations affecting trade. The European Economic Community is the most successful
experiment, so far, as a common market.
SAARC (The South Asian Association for Regional Co-operation)

The South Asian Association for Regional Co-operation (SAARC) is an organisation of South Asian
nations, which was established on 8 December 1985 when the government of Bangladesh, Bhutan,
India, Maldives, Nepal, Pakistan and Sri Lanka formally adopted its charter providing for the promotion
of economic and social progress, cultural development within the South Asia region and also for
friendship and cooperation with other developing countries.
It is dedicated to economic, technological, social and cultural development emphasising collective self-
reliance. In terms of population, its sphere of influence is the largest of any regional organisation:
almost 1.5 billion combined population of its member states. In April 2007, Afghanistan became its
eighth member.
Objectives of SAARC:
The objectives of SAARC, as defined in its charter, are as follows:
i. Promote the welfare of the peoples of South Asia and improve their quality of life;
ii. Accelerate economic growth, social progress and cultural development in the region by providing all
individuals the opportunity to live in dignity and realise their full potential;
iii. Promote and strengthen collective self-reliance among the countries of South Asia;
iv. Contribute to mutual trust, understanding and appreciation of one another’s problems;
v. Promote active collaboration and mutual assistance in the economic, social, cultural, technical and
scientific fields;
vi. Strengthen co-operation with other developing countries;
vii. Strengthen co-operation among themselves in international forms on matters of common interest;
and
viii. Cooperate with international and regional organisation with similar aims and purposes.
SAARC Preferential Trading Arrangements (SAFTA):

SAPTA which came into operations in’1995 heralds a new chapter of economic co-operation among the
SAARC countries. IT concretises the first step towards creation of a trade bloc in the South Asian
Region. Under the SAPTA mechanism, the SAARC countries, to begin with, have identified 226 items for
exchange on tariff concessions ranging from 10 per cent to 100 per cent.
SAPTA to SAFTA:
The South Asian Free Trade Area (SAFTA) agreement came into force from July 1, 2006. With this, the
earlier SAPTA established in 1995 had paved the way to SAFTA. The South Asian developed countries
are well endowed with labour and natural resources.
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GATT: General Agreement on Tariffs and Trade

Origin of GATT:
Inspired by the success of agreement for international monetary co-operation as reflected in the
formation of the IMF, similar co-operation as reflected in international trade also was desired by many
trading nations for expansion of world trade.
It was thought that for healthy world trade, attempt must be made to relax the existing trade
restrictions, such as tariffs.
Objectives of GATT:
By reducing tariff barriers and eliminating discrimination in international trade, the GATT
aims at:
1. Expansion of international trade,
2. Increase of world production by ensuring full employment in the participating nations,
3. Development and full utilisation of world resources, and
4. Raising standard of living of the world community as a whole.
As such, the rules adopted by GATT are based on the following fundamental principles:
1. Trade should be conducted in a non-discriminatory way;
2. The use of quantitative restrictions should be condemned; and
3. Disagreements should be resolved through consultations.
GATT permits such restrictions only for:

(i) Safeguarding exchange reserves when a country has balance of payments difficulties.
(ii) Restricting imports that would harm domestic price supports and production control programmes of
a country.
GATT also lays down that state trading should be non-discriminatory. However, the formation of
customs unions or free trade areas are allowed by the General Agreement provided their purpose is to
facilitate trade between the constituent territories and not to raise barriers to the trade of other
member nations.
(iii) Underdeveloped countries to further their economic development under procedures approved by
GATT.
The Basic Principles of the GATT:

1. Most-Favoured-Nation (MFN) Treatment:
This is the fundamental principle of the GATT and it is not a coincidence that it appears in Article 1 of
the GATT 1947. It states that each contracting party to the GATT is required to provide to all other
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contracting parties the same conditions of trade as the most favourable terms it extends to any one of
them, i.e., each contracting party is required to treat all contracting parties in the same way that it
treats its “most-favoured nation”.
2. Reciprocity:
GATT advocates the principles of “rights” and “obligations”. Each contracting party has a right, e.g.
access to markets of other trading partners on a MFN basis but also an obligation to reciprocate with
trade concessions on a MFN basis. In a way, this is closely associated with the MFN principle.
3. Transparency:
Fundamental to a transparent system of trade is the need to harmonize the system of import
protection, so that barriers on trade can be reduced through the process of negotiations. The GATT
therefore, limited the use of quotas, except in some specific sector such, as agriculture and advocated
import regimes that are based on “tariff-only”.
In addition, the GATT and now the WTO, required many notifications from contracting parties on their
agricultural and trade policies so that these can be examined by other parties to ensure that they are
GATT/WTO compatible.
4. Tariff Binding and Reduction:

When GATT was established, tariffs were the main form of trade protection and negotiations in the
early years focused primarily upon tariff binding and reduction. The text of the 1947, GATT lays out the
obligations on the contracting parties in this regard.
World Trade Organization (WTO):

The Uruguay round of GATT (1986-93) gave birth to World Trade Organization. The members of GATT
singed on an agreement of Uruguay round in April 1994 in Morocco for establishing a new organization
named WTO.
It was officially constituted on January 1, 1995 which took the place of GATT as an effective formal,
organization. GATT was an informal organization which regulated world trade since 1948.
Objectives:
The important objectives of WTO are:
1. To improve the standard of living of people in the member countries.
2. To ensure full employment and broad increase in effective demand.
3. To enlarge production and trade of goods.
4. To increase the trade of services.
5. To ensure optimum utilization of world resources.
6. To protect the environment.
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7. To accept the concept of sustainable development.

Objectives of the WTO:
The purposes and objectives of the WTO are spelled out in the preamble to the Marrakesh Agreement.
In a nutshell, these are:
1. To ensure the reduction of tariffs and other barriers to trade.
2. To eliminate discriminatory treatment in international trade relations.
3. To facilitate higher standards of living, full employment, a growing volume of real income and
effective demand, and an increase in production and trade in goods and services of the member
nations.
4. To make positive effect, which ensures developing countries, especially the least developed secure a
level of share in the growth of international trade that reflects the needs of their economic
development.
5. To facilitate the optimal use of the world’s resources for sustainable development.
6. To promote an integrated, more viable and durable trading system incorporating all the resolutions
of the Uruguay Round’s multilateral trade negotiations.
Above all, to ensure that linkages trade policies, environmental policies with sustainable growth and
development are taken care of by the member countries in evolving a new economic order.
Functions:
The main functions of WTO are discussed below:
1. To implement rules and provisions related to trade policy review mechanism.
2. To provide a platform to member countries to decide future strategies related to trade and tariff.
3. To provide facilities for implementation, administration and operation of multilateral and bilateral
agreements of the world trade.
4. To administer the rules and processes related to dispute settlement.
5. To ensure the optimum use of world resources.
6. To assist international organizations such as, IMF and IBRD for establishing coherence in Universal
Economic Policy determination
Functions of the WTO:

The WTO consisting a multi-faced normative framework: comprising institutional substantive and
implementation aspects.
The major functions of the WTO are as follows:
1. To lay-down a substantive code of conduct aiming at reducing trade barriers including tariffs and
eliminating discrimination in international trade relations.
2. To provide the institutional framework for the administration of the substantive code which
encompasses a spectrum of norms governing the conduct of member countries in the arena of global
trade.
3. To provide an integrated structure of the administration, thus, to facilitate the implementation,
administration and fulfillment of the objectives of the WTO Agreement and other Multilateral Trade
Agreements.
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4. To ensure the implementation of the substantive code.

5. To act as a forum for the negotiation of further trade liberalisation.
6. To cooperate with the IMF and WB and its associates for establishing a coherence in trade policy-
making.
7. To settle the trade-related disputes.
Trade Liberalisation
Definition
Trade liberalization involves removing barriers to trade between different countries and encouraging
free trade.
Trade liberalization involves:
 Reducing tariffs
 Reducing/eliminating quotas
 Reducing non-tariff barriers.
Non-tariff barriers are factors that make trade difficult and expensive. For example, having specific
regulations on making goods can give an unfair advantage to domestic producers. Harmonizing
environmental and safety legislation makes it easier for international trade.
Advantages of Trade Liberalization

 Comparative advantage. Trade liberalization allows countries to specialize in producing the
goods and services where they have a comparative advantage (produce at lowest opportunity
cost). This enables a net gain in economic welfare.
 Lower prices. The removal of tariff barriers can lead to lower prices for consumers. E.g.
removing food tariffs in West would help reduce the global price of agricultural commodities.
This would be particularly a benefit for countries who are importers of food.
 Increased competition. Trade liberalization means firms will face greater competition from
abroad. This should act as a spur to increase efficiency and cut costs, or it may act as an
incentive for an economy to shift resources into new industries where they can maintain a
competitive advantage. For example, trade liberalization has been a factor in encouraging the
UK to concentrate less on manufacturing and more on the service sector.
 Economies of scale. Trade liberalization enables greater specialization. Economies concentrate
on producing particular goods. This can enable big efficiency savings from economies of scale.
 Inward investment. If a country liberalizes its trade, it will make the country more attractive
for inward investment. For example, former Soviet countries who liberalize trade will attract
foreign multinationals who can produce and sell closer to these new emerging markets. Inward
investment leads to capital inflows but also helps the economy through diffusion of more
technology, management techniques and knowledge.
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Problems of Trade Liberalization

 Structural unemployment. Trade liberalization often leads to a shift in the balance of an
economy. Some industries grow, some decline. Therefore, there may often be structural
unemployment from certain industries closing. Trade liberalization can often be painful in the
short run, as some industries and some workers suffer from the decline in uncompetitive firms.
Though net economic welfare improves, it can be difficult to compensate those workers who
lose out to international competition.
 Environmental costs. Trade liberalization could lead to greater exploitation of the
environment, e.g. greater production of raw materials, trading toxic waste to countries with
lower environmental laws.
 Infant-industry argument. Trade liberalization may be damaging for developing economies
who cannot compete against free trade. The infant industry argument suggests that trade
protection is justified to help developing economies diversify and develop new industries. Most
economies had a period of trade protectionism. It is unfair to insist that developing economies
cannot use some tariff protectionism. Because of this argument, some argue that trade
liberalization often benefits developed countries more than developing countries.
The Uruguay Round

It took seven and a half years, almost twice the original schedule. By the end, 123 countries were
taking part. It covered almost all trade, from toothbrushes to pleasure boats, from banking to
telecommunications, from the genes of wild rice to AIDS treatments. It was quite simply the largest
trade negotiation ever, and most probably the largest negotiation of any kind in history.
At times it seemed doomed to fail. But in the end, the Uruguay Round brought about the biggest
reform of the world’s trading system since GATT was created at the end of the Second World War. And
yet, despite its troubled progress, the Uruguay Round did see some early results. Within only two
years, participants had agreed on a package of cuts in import duties on tropical products — which are
mainly exported by developing countries. They had also revised the rules for settling disputes, with
some measures implemented on the spot. And they called for regular reports on GATT members’ trade
policies, a move considered important for making trade regimes transparent around the world.
The post-Uruguay Round built-in agenda

Many of the Uruguay Round agreements set timetables for future work. Part of this “built-in agenda”
started almost immediately. In some areas, it included new or further negotiations. In other areas, it
included assessments or reviews of the situation at specified times. Some negotiations were quickly
completed, notably in basic telecommunications, financial services. (Member governments also swiftly
agreed a deal for freer trade in information technology products, an issue outside the “built-in
agenda”.)
The agenda originally built into the Uruguay Round agreements has seen additions and modifications. A
number of items are now part of the Doha Agenda, some of them updated.
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There were well over 30 items in the original built-in agenda. This is a selection of highlights:
1996
 Maritime services: market access negotiations to end (30 June 1996, suspended to 2000, now
part of Doha Development Agenda)
 Services and environment: deadline for working party report (ministerial conference, December
1996)
 Government procurement of services: negotiations start
1997
 Basic telecoms: negotiations end (15 February)
 Financial services: negotiations end (30 December)
 Intellectual property, creating a multilateral system of notification and registration of
geographical indications for wines: negotiations start, now part of Doha Development Agenda
1998
 Textiles and clothing: new phase begins 1 January
 Services (emergency safeguards): results of negotiations on emergency safeguards to take
effect (by 1 January 1998, deadline now March 2004)
 Rules of origin: Work programme on harmonization of rules of origin to be completed (20 July
1998)
 Government procurement: further negotiations start, for improving rules and procedures (by
end of 1998)
 Dispute settlement: full review of rules and procedures (to start by end of 1998)
1999
 Intellectual property: certain exceptions to patentability and protection of plant varieties: review
starts
2000
 Agriculture: negotiations start, now part of Doha Development Agenda
 Services: new round of negotiations start, now part of Doha Development Agenda
 Tariff bindings: review of definition of “principle supplier” having negotiating rights under GATT
Art 28 on modifying bindings
 Intellectual property: first of two-yearly reviews of the implementation of the agreement
2002
 Textiles and clothing: new phase begins 1 January
2005
 Textiles and clothing: full integration into GATT and agreement expires 1 January
United Nations Conference on Trade and Development (UNCTAD)

Established in 1964, the United Nations Conference on Trade and Development (UNCTAD) aims at the
development-friendly integration of developing countries into the world economy.
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UNCTAD is the focal point within the United Nations for the integrated treatment of trade and
development and the inter related issues in the areas of finance, technology, investment and
sustainable development. At present 193 countries are members in UNCTAD.
The organization works to fulfill this mandate by carrying out three key functions:
i. It functions as a forum for inter-governmental deliberations, supported by discussions with experts
and exchanges of experience, aimed at consensus building.
ii. It undertakes research, policy analysis and data collection for the debates of government
representatives and experts.
iii. It provides technical assistance tailored to the specific requirements of developing countries, with
special attention to the needs of the least developed countries and of economies in transition. When
appropriate, UNCTAD cooperates with other organizations and donor countries in the delivery of
technical assistance.
Overview of the Main Activities:

(a) Trade and Commodities:
i. Commodity Diversification and Development:
Promotes the diversification of production and trade structures. Helps Governments to formulate and
implement diversification policies and encourages enterprises to adapt their business strategies and
become more competitive in the world market.
ii. Competition and Consumer Policies:

Provides analysis and capacity building in competition and consumer protection laws and policies in
developing countries. Publishes regular updates of a Model Law on Competition.
iii. Trade Negotiations and Commercial Diplomacy:

Assists developing countries in all aspects of their trade negotiations.
iv. Trade Analysis and Information System (TRAINS):

Comprehensive computer-based information system on trade control measures that uses Uncial’s
database. The CD-ROM version includes 119 countries.
v. Trade and Environment:

Assesses the trade and development impact of environmental requirements and relevant multilateral
agreements and provides capacity-building activities to help developing countries participate in and
derive benefits from international negotiations on these matters.
(b) Investment and Enterprise Development:

i. International Investment and Technology Arrangements:
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Helps developing countries to participate more actively in international investment rule making at the
bilateral, regional and multilateral levels. These arrangements include the organization of capacity-
building seminars and regional symposium and the preparation of a series of issues papers.
ii. Investment Policy Reviews:

Intended to familiarize Governments and the private sector with the investment environment and
policies of a given country. Reviews have been carried out in a number of countries, including Ecuador,
Egypt, Ethiopia, Mauritius, Peru, Uganda and Uzbekistan.
iii. Investment Guides and Capacity Building for the LDCs:

Some of the countries involved are Bangladesh, Ethiopia, Mali, Mozambique and Uganda.
iv. Empretec:
Promotes entrepreneurship and the development of small and medium- sized enterprises. Empretec
programmes have been initiated in 27 countries, assisting more than 70,000 entrepreneurs through
local market-driven business support centres.
(c) Macroeconomic Policies, Debt and Development Financing:

i. Policy Analysis and Research:
On issues concerning global economic interdependence, the international monetary and financial
system and macroeconomic and development policy challenges.
ii. Technical and Advisory Support:

To the G24 group of developing countries (the Intergovernmental Group of 24) in the World Bank and
the International Monetary Fund; advisory services to developing countries for debt rescheduling
negotiations under the Paris Club.
iii. DMFAS Programme:

Computer-based debt management and financial analysis system (DMFAS) specially designed to help
countries manage their external debt. Started in 1982 and now installed in 62 countries.
(d) Technology and Logistics:

i. ASYCUDA Programme:
Integrated customs system that speeds up customs clearance procedures and helps Governments to
reform and modernize their customs procedures and management. Installed in over 80 countries,
ASYCUDA has become the internationally accepted standard for customs automation.
ii. ACIS Programme:

Computerized cargo tracking system installed in 20 developing countries of Africa and Asia.
iii. E-Tourism Initiative:
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Linking sustainable tourism and Information and communication technologies (ICTs) for development,
UNCTAD has developed this Initiative to help developing countries’ destinations to become more
autonomous by taking charge of their own tourism promotion by using ICT tools.
iv. Technology:
Services the United Nations (UN) Commission on Science and Technology for Development and
administers the Science and Technology for Development Network, carries out case studies on best
practices in transfer of technology; undertakes Science, Technology and Innovation Policy Reviews for
interested countries, as well as capacity-building activities.
v. Train for Trade Programme:

Builds training networks and organizes training in all areas of international trade to enable developing
countries to increase their competitiveness. Currently developing distance learning programmes
focusing on the Less Developed Countries (LDCs).
Module 3: Multinational Corporations:

Meaning of Multinational Companies (MNCs):
A multinational company is one which is incorporated in one country (called the home
country); but whose operations extend beyond the home country and which carries on
business in other countries (called the host countries) in addition to the home country.
It must be emphasized that the headquarters of a multinational company are located in the
home country.
Neil H. Jacoby defines a multinational company as follows:

“A multinational corporation owns and manages business in two or more countries.”
Features of Multinational Corporations (MNCs):

Following are the salient features of MNCs:
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(i) Huge Assets and Turnover:

Because of operations on a global basis, MNCs have huge physical and financial assets. This
also results in huge turnover (sales) of MNCs. In fact, in terms of assets and turnover, many
MNCs are bigger than national economies of several countries.
(ii) International Operations Through a Network of Branches:

MNCs have production and marketing operations in several countries; operating through a
network of branches, subsidiaries and affiliates in host countries.
(iii) Unity of Control:

MNCs are characterized by unity of control. MNCs control business activities of their branches
in foreign countries through head office located in the home country. Managements of
branches operate within the policy framework of the parent corporation.
(iv) Mighty Economic Power:

MNCs are powerful economic entities. They keep on adding to their economic power through
constant mergers and acquisitions of companies, in host countries.
(v) Advanced and Sophisticated Technology:

Generally, a MNC has at its command advanced and sophisticated technology. It employs
capital intensive technology in manufacturing and marketing.
(vi) Professional Management:

A MNC employs professionally trained managers to handle huge funds, advanced technology
and international business operations.
(vii)Aggressive Advertising and Marketing:

MNCs spend huge sums of money on advertising and marketing to secure international
business. This is, perhaps, the biggest strategy of success of MNCs. Because of this strategy,
they are able to sell whatever products/services, they produce/generate.
(viii) Better Quality of Products:

A MNC has to compete on the world level. It, therefore, has to pay special attention to the
quality of its products.
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Advantages and Limitations of MNCs:

Advantages of MNCs from the Viewpoint of Host Country:
We propose to examine the advantages and limitations of MNCs from the viewpoint of the
host country. In fact, advantages of MNCs make for the case in favour of MNCs; while
limitations of MNCs become the case against MNCs.
(i) Employment Generation:

MNCs create large scale employment opportunities in host countries. This is a big advantage
of MNCs for countries; where there is a lot of unemployment.
(ii) Automatic Inflow of Foreign Capital:

MNCs bring in much needed capital for the rapid development of developing countries. In fact,
with the entry of MNCs, inflow of foreign capital is automatic. As a result of the entry of
MNCs, India e.g. has attracted foreign investment with several million dollars.
(iii) Proper Use of Idle Resources:

Because of their advanced technical knowledge, MNCs are in a position to properly utilise idle
physical and human resources of the host country. This results in an increase in the National
Income of the host country.
(iv) Improvement in Balance of Payment Position:

MNCs help the host countries to increase their exports. As such, they help the host country to
improve upon its Balance of Payment position.
(vi) Technical Development:

MNCs carry the advantages of technical development 10 host countries. In fact, MNCs are a
vehicle for transference of technical development from one country to another. Because of
MNCs poor host countries also begin to develop technically.
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(vii) Managerial Development:

MNCs employ latest management techniques. People employed by MNCs do a lot of research
in management. In a way, they help to professionalize management along latest lines of
management theory and practice. This leads to managerial development in host countries.
(viii) End of Local Monopolies:

The entry of MNCs leads to competition in the host countries. Local monopolies of host
countries either start improving their products or reduce their prices. Thus MNCs put an end
to exploitative practices of local monopolists. As a matter of fact, MNCs compel domestic
companies to improve their efficiency and quality.
In India, many Indian companies acquired ISO-9000 quality certificates, due to fear of
competition posed by MNCs.
(ix) Improvement in Standard of Living:

By providing super quality products and services, MNCs help to improve the standard of living
of people of host countries.
(x) Promotion of international brotherhood and culture:

MNCs integrate economies of various nations with the world economy. Through their
international dealings, MNCs promote international brotherhood and culture; and pave way
for world peace and prosperity.
Limitations of MNCs from the Viewpoint of Host Country:

(i) Danger for Domestic Industries:
MNCs, because of their vast economic power, pose a danger to domestic industries; which are
still in the process of development. Domestic industries cannot face challenges posed by
MNCs. Many domestic industries have to wind up, as a result of threat from MNCs. Thus MNCs
give a setback to the economic growth of host countries.
(ii) Repatriation of Profits:

(Repatriation of profits means sending profits to their country).
MNCs earn huge profits. Repatriation of profits by MNCs adversely affects the foreign
exchange reserves of the host country; which means that a large amount of foreign exchange
goes out of the host country.
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(iii) No Benefit to Poor People:

MNCs produce only those things, which are used by the rich. Therefore, poor people of host
countries do not get, generally, any benefit, out of MNCs.
(iv) Danger to Independence:

Initially MNCs help the Government of the host country, in a number of ways; and then
gradually start interfering in the political affairs of the host country. There is, then, an implicit
danger to the independence of the host country, in the long-run.
(v) Disregard of the National Interests of the Host Country:

MNCs invest in most profitable sectors; and disregard the national goals and priorities of the
host country. They do not care for the development of backward regions; and never care to
solve chronic problems of the host country like unemployment and poverty.
(vi) Misuse of Mighty Status:

MNCs are powerful economic entities. They can afford to bear losses for a long while, in the
hope of earning huge profits-once they have ended local competition and achieved monopoly.
This may be the dirties strategy of MNCs to wipe off local competitors from the host country.
(vii) Careless Exploitation of Natural Resources:

MNCs tend to use the natural resources of the host country carelessly. They cause rapid
depletion of some of the non-renewable natural resources of the host country. In this way,
MNCs cause a permanent damage to the economic development of the host country.
(viii) Selfish Promotion of Alien Culture:

MNCs tend to promote alien culture in host country to sell their products. They make people
forget about their own cultural heritage. In India, e.g. MNCs have created a taste for
synthetic food, soft drinks etc. This promotion of foreign culture by MNCs is injurious to the
health of people also.
(ix) Exploitation of People, in a Systematic Manner:

MNCs join hands with big business houses of host country and emerge as powerful
monopolies. This leads to concentration of economic power only in a few hands. Gradually
these monopolies make it their birth right to exploit poor people and enrich themselves at the
cost of the poor working class.
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Advantages from the Viewpoint of the Home Country:

Some of the advantages of the MNCs from the viewpoint of the home country are:
(i) MNCs usually get raw-materials and labour supplies from host countries at lower prices;
specially when host countries are backward or developing economies.
(ii) MNCs can widen their market for goods by selling in host countries; and increase their
profits. They usually have good earnings by way of dividends earned from operations in host
countries.
(iii) Through operating in many countries and providing quality services, MNCs add to their
international goodwill on which they can capitalize, in the long-run.
Limitations from the Viewpoint of the Home Country:

Some of the limitations of MNCs from the viewpoint of home country may be:
(i) There may be loss of employment in the home country, due to spreading manufacturing
and marketing operations in other countries.
(ii) MNCs face severe problems of managing cultural diversity. This might distract
managements’ attention from main business issues, causing loss to the home country.
(iii) MNCs may face severe competition from bigger MNCs in international markets. Their
attention and finances might be more devoted to wasteful counter and competitive
advertising; resulting in higher marketing costs and lesser profits for the home country.
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8 Types of Organisational Structures: their

Advantages and Disadvantages
These organisational structures are briefly described in the following paragraphs:
1. Line Organisational Structure:
A line organisation has only direct, vertical relationships between different levels in the firm.
There are only line departments-departments directly involved in accomplishing the primary
goal of the organisation. For example, in a typical firm, line departments include production
and marketing. In a line organisation authority follows the chain of command.
Features:
Has only direct vertical relationships between different levels in the firm.
Advantages:
1. Tends to simplify and clarify authority, responsibility and accountability relationships
2. Promotes fast decision making
3. Simple to understand.
Disadvantages:
1. Neglects specialists in planning
2. Overloads key persons.
Some of the advantages of a pure line organisation are:
(i) A line structure tends to simplify and clarify responsibility, authority and accountability
relationships. The levels of responsibility and authority are likely to be precise and
understandable.
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(ii) A line structure promotes fast decision making and flexibility.

(iii) Because line organisations are usually small, managements and employees have greater
closeness.
However, there are some disadvantages also. They are:
(i) As the firm grows larger, line organisation becomes more ineffective.
(ii) Improved speed and flexibility may not offset the lack of specialized knowledge.
(iii) Managers may have to become experts in too many fields.
(iv) There is a tendency to become overly dependent on the few key people who an perform
numerous jobs.
2. Staff or Functional Authority Organisational Structure

The jobs or positions in an organisation can be categorized as:
(i) Line position:

a position in the direct chain of command that is responsible for the achievement of an
organisation’s goals and
(ii) Staff position:

A position intended to provide expertise, advice and support for the line positions.
The line officers or managers have the direct authority (known as line authority) to be
exercised by them to achieve the organisational goals. The staff officers or managers have
staff authority (i.e., authority to advice the line) over the line. This is also known as functional
authority.
An organisation where staff departments have authority over line personnel in narrow areas
of specialization is known as functional authority organisation. Exhibit 10.4 illustrates a staff
or functional authority organisational structure.
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3. Line and Staff Organisational Structure:

Most large organisations belong to this type of organisational structure. These organisations
have direct, vertical relationships between different levels and also specialists responsible for
advising and assisting line managers. Such organisations have both line and staff
departments. Staff departments provide line people with advice and assistance in specialized
areas (for example, quality control advising production department).
Three types of specialized staffs can be identified:

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(i) Advising,
(ii) Service and
(iii) Control.
Some advantages are:

(i) Even through a line and staff structure allows higher flexibility and specialization it may
create conflict between line and staff personnel.
(ii) Line managers may not like staff personnel telling them what to do and how to do it even
though they recognize the specialists’ knowledge and expertise.
(iii) Some staff people have difficulty adjusting to the role, especially when line managers are
reluctant to accept advice.
(iv) Staff people may resent their lack of authority and this may cause line and staff conflict.
Features:
1. Line and staff have direct vertical relationship between different levels.
2. Staff specialists are responsible for advising and assisting line managers/officers in
specialized areas.
3. These types of specialized staff are (a) Advisory, (b) Service, (c) Control e.g.,
(a) Advisory:
Management information system, Operation Research and Quantitative Techniques, Industrial
Engineering, Planning etc
(b) Service:
Maintenance, Purchase, Stores, Finance, Marketing.
(c) Control:
Quality control, Cost control, Auditing etc. Advantages’
(i) Use of expertise of staff specialists.
(ii) Span of control can be increased
(iii) Relieves line authorities of routine and specialized decisions.
(iv) No need for all round executives.
Disadvantages:
(i) Conflict between line and staff may still arise.
(ii) Staff officers may resent their lack of authority.
(iii) Co-ordination between line and staff may become difficult.
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Committee Organisational Structure Features:

(a) Formed for managing certain problems/situations
(b) Are temporary decisions.
4. Divisional Organisational Structure:

In this type of structure, the organisation can have different basis on which departments are
formed. They are:
(i) Function,
(ii) Product,
(iii) Geographic territory,
(iv) Project and
(iv) Combination approach.
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5. Project Organisational Structure:

The line, line and staff and functional authority organisational structures facilitate
establishment and distribution of authority for vertical coordination and control rather than
horizontal relationships. In some projects (complex activity consisting of a number of
interdependent and independent activities) work process may flow horizontally, diagonally,
upwards and downwards. The direction of work flow depends on the distribution of talents
and abilities in the organisation and the need to apply them to the problem that exists. The
cope up with such situations, project organisations and matrix organisations have emerged.
Feature:
Temporary organisation designed to achieve specific results by using teams of specialists from
different functional areas in the organisation.
Importance of Project Organisational Structure:

Project organisational structure is most valuable when:
(i) Work is defined by a specific goal and target date for completion.
(ii) Work is unique and unfamiliar to the organisation.
(iii) Work is complex having independent activities and specialized skills are necessary for
accomplishment.
(iv) Work is critical in terms of possible gains or losses.
(v) Work is not repetitive in nature.
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Characteristics of project organisation:

1. Personnel are assigned to a project from the existing permanent organisation and are
under the direction and control of the project manager.
2. The project manager specifies what effort is needed and when work will be performed
whereas the concerned department manager executes the work using his resources.
3. The project manager gets the needed support from production, quality control, engineering
etc. for completion of the project.
4. The authority over the project team members is shared by project manager and the
respective functional managers in the permanent organisation.
5. The services of the specialists (project team members) are temporarily loaned to the
project manager till the completion of the project.
6. There may be conflict between the project manager and the departmental manager on the
issue of exercising authority over team members.
7. Since authority relationships are overlapping with possibilities of conflicts, informal
relationships between project manager and departmental managers (functional managers)
become more important than formal prescription of authority.
8. Full and free communication is essential among those working on the project.
6. Matrix Organisational Structure:

It is a permanent organisation designed to achieve specific results by using teams of
specialists from different functional areas in the organisation. The matrix organisation is
illustrated in Exhibit 10.8.
Feature:
Superimposes a horizontal set of divisions and reporting relationships onto a hierarchical
functional structure
Advantages:
1. Decentralised decision making.
2. Strong product/project co-ordination.
3. Improved environmental monitoring.
4. Fast response to change.
5. Flexible use of resources.
6. Efficient use of support systems.
Disadvantages:
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1. High administration cost.

2. Potential confusion over authority and responsibility.
3. High prospects of conflict.
4. Overemphasis on group decision making.
5. Excessive focus on internal relations
7. Hybrid Organisational Structure:
Advantages:
1. Alignment of corporate and divisional goals.
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2. Functional expertise and efficiency.

3. Adaptability and flexibility in divisions.
Disadvantages:
1. Conflicts between corporate departments and units.
2. Excessive administration overhead.
3. Slow response to exceptional situations.
The Informal Organisation:
An informal organisation is the set of evolving relationships and patterns of human interaction
within an organisation which are not officially presented. Alongside the formal organisation,
an informal organisation structure exists which consists of informal relationships created not
by officially designated managers but by organisational members at every level. Since
managers cannot avoid these informal relationships, they must be trained to cope with it
The informal organisation has the following characteristics
(i) Its members are joined together to satisfy their personal needs (needs for affiliation,
friendship etc.)
(ii) It is continuously changing:
The informal organisation is dynamic.
(iii) It involves members from various organisational levels.
(iv) It is affected by relationship outside the firm.
(v) It has a pecking order: certain people are assigned greater importance than others by the
informal group.
Even though an informal organisational structure does not have its own formal organisational
chart, it has its own chain of command:
Benefits of Informal Organisation:

(i) Assists in accomplishing the work faster.
(ii) Helps to remove weakness in the formal structure.
(iii) Lengthens the effective span of control.
(iv) Compensation for violations of formal organisational principles.
(v) Provides an additional channel of communication.
(vi) Provides emotional support for employees.
(vii) Encourages better management.
Disadvantages of informal organisation:

(i) May work against the purpose of formal organisation.
(ii) Reduces the degree of predictability and control.
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(iii) Reduces the number of practical alternatives.

(iv) Increases the time required to complete activities
Dominations of MNCs
Anti-corporate advocates criticize multinational corporations for entering countries that have
low human rights or environmental standards. In the world economy facilitated by
multinational corporations, capital will increasingly be able to play workers, communities, and
nations off against one another as they demand tax, regulation and wage concessions while
threatening to move. In other words, increased mobility of multinational corporations benefit
capital while workers and communities lose. Some negative outcomes generated by
multinational corporations include increased inequality, unemployment, and wage stagnation.
The aggressive use of tax avoidance schemes allows multinational corporations to gain
competitive advantages over small and medium-sized enterprises.[40]Organizations such as
the Tax Justice Network criticize governments for allowing multinational organizations to
escape tax since less money can be spent for public services.
The 5 Cons of Multinational Corporations

1. The Market Dominance of Multinational Corporations - The market dominance of
multinational corporations makes it hard for the local small firms to succeed and thrive. For
instance, there are arguments stating that the larger supermarkets squeeze out a notable
margin of the local corner stores that lead to lesser diversity.
2. Consumer’s Expenses - Companies are usually interested at the consumer’s expense. The
multinational companies commonly have the power of monopoly that gives them the chance
of making excess profit.
3. Pushing Local Firms Out Of Business - In the developing economies, these giant
multinationals use the economies of scale for pushing the local firms out of their businesses.
4. Criticized For Using "Slave Labor" - Multinational corporations are being criticized for using
the so-called slave labor wherein the workers are paid with very small wages.
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5. Environment Threat - For the sake of profit, these global companies commonly contribute
to pollution as well as make use of the non-renewable resources that can be a threat to the
environment.
How Multinational Corporations Enter to a Foreign Market

(6 Different Modes of Entry)
1. Indirect Exporting:
Companies can, while going international, use domestically based agents who operate on a
commission basis without taking title to goods, or merchants who sell the products of the
company in international markets (after taking title to the goods). They can also use the
distribution facilities of other firms in the international markets.
2. Direct Exporting:
A company may decide to export its products itself. The company develops overseas contacts,
undertakes marketing research, handles documentation and transportation and decides the
marketing mix Companies can use foreign-based agents or distributors. An agent may agree
to handle the company’s product exclusively, or may handle products of other companies too.
An agent does not take title to the products and works on commission.
3. Licensing:
Under licensing, a foreign licensor provides a local licensee with access to technologies,
patents, trademarks, know-how or brand/company name in exchange for financial or some
other form of compensation. The licensee has exclusive rights to produce and market the
product in the specified area for a limited period. The licensor usually gets royalty or license
fees on the sale of the product.
4. Franchising:
Franchising is a type of licensing agreement where packages of services are offered by the
franchiser to the franchisee in return for a payment. The two types of franchising are product
and trade name franchising, and business format franchising. An example of product and
trade name franchising is Pepsi Cola selling its syrup together with the right to use its
trademark and name, to independent bottlers.
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5. Joint Ventures:
The multinational corporation enters into a joint-venture agreement with a company from the
target country market. Two types of joint venture are Contractual and Equity joint ventures.
In contractual joint ventures, no joint enterprise with a separate identity is formed. Two or
more firms enter into a partnership to share the cost of an investment, the risks and the long-
term profits. The partnership can be formed for completing a project, or for a long term co-
operative effort. In an equity joint venture, a new company is formed in which the foreign and
local companies share ownership and control.
6. Direct Investment:
The company entering the foreign market invests in foreign-based manufacturing facilities.
The company commits maximum amount of capital and managerial efforts in this mode of
entry. The company can acquire a foreign manufacturer or facility, or build a new facility.
Direct investment means that the company has control and significant stake in its operations
in other countries. The complete form of participation in foreign countries is 100 per cent
ownership, which can be established as a start-up, or can be achieved by acquiring local
companies.
Multinational Corporations (MNCS) in India

Origin:
Origin of multinational corporations can be traced in the mercantilist period when some big
companies like the Royal African Co., Hudson’s Bay Co. East India Company etc. diversified
the market of their products in different countries and collected their raw materials from
distant countries in order to meet the requirements of their machines. This type of
multinationals had resulted in the rise of colonialism in various corners of the world.
Again in the post-Second World War period, a good number of colonies under the Imperial
Power had managed to secure self-governance, Side by side USA had also attained the
position of largest industrial power through its giant corporations. These corporations started
to export capital through its various subsidiaries to various developing countries and
accordingly USA has now emerged as the most dominant country exporting capital through its
foreign direct investment (FDI).
Growth of MNCs:
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MNCs are normally a huge industrial organisations extending their operations in industrial and
marketing areas in different countries through a network of their branches in these countries
or through their Majority Owned Foreign Affiliates (MOFAs). MNCs generally operate in a
number of fields and thus they extend business strategy over a large number of products and
also over a number of countries.
At the outset of 1990s, there were about 37,000 TNCs whose tentacles engulfed the
international economy through its 1,70,000 overseas affiliates. These corporations possess a
huge accumulated resources. The revenue earned by 200 top corporations (MNCs) rose
significantly from $ 3,046 billion in 1982 to $ 5,862 billion in 1992.
Reasons for the Growth of MNCs:

The main reasons behind the growth of MNCs include:
(a) Expansion of market territory of these corporations beyond the boundary of the country
due to its international image;
(b) Marketing superiorities arising out of its up-to-date market information system, market
reputation, effective advertisement and sales promotion technique and warehousing facilities;
(c) Financial superiorities over the national firm;
(d) Technological superiorities of the MNCs over the national companies of the
underdeveloped countries; and
(e) Effective product innovations of MNCs due to its superior Research and Development
(R&D) facilities.
Dominations of MNCs over Indian Economy:

At present Multinational Corporations are having a stronghold over the Indian economy. Even
during 1970s, i.e. by two decades ago about 53.7 per cent of the total assets of the giant
sector were controlled by the MNCs. As per the estimates of the Industrial Licensing Policy
Inquiry Committee, in 1966, there were about 112 MNCs operating in India with assets worth
Rs. 10 crore or more.
Out of these companies, 48 were either foreign branches or Indian subsidiaries of foreign
companies. Besides, there were 14 other companies, having heavy loans and equity capital,
which were almost controlled by foreign companies. Thus these 62 companies had nearly Rs.
1,370 crore worth of assets which jointly constituted about 54 per cent of the total assets of
the giant sector operating in India.
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D.S. Swamy was of the opinion that a good number of other companies were also under
foreign domination and some of these companies were depending heavily on international
financial institutions for financial assistance. Thus during the mid-1960s, Western foreign
capital mostly dominated the big business of the country and thereby controlled the apex of
India’s industrial pyramid.
Another important feature of MNCs in India is that they have been raising a major part of
investment resources within the boundary of Indian economy. Sudip Choudhury made a study
on the source of finance of MNCs during the period 1956 to 1975 by taking sample of 50
largest foreign subsidiaries.
The study revealed that out of the total financial resources of these companies only 5.4 per
cent were contributed by foreign sources (equity capital and loans) and the remaining 94.6
per cent were contributed by domestic sources. Another study made by John Martinussen
revealed that amount of capital issues contributed by foreign participation declined from 61.5
per cent all consent of public limited companies in 1976 to only 29.5 per cent in 1980.
Moreover, about 20 TNCs affiliated Companies also reduced their foreign funding. During the
period 1972 to 1983, some of these companies did not obtain any foreign funds. Thus in
reality, the MNCs mostly collect their capital from within the country and repatriate a big
chunk of their profits to their parent countries.
Module 4: India in the Global Setting

THE EMERGING MARKET IN INDIA
India is a diverse country that’s always been open to the rest of the world, and its emerging
marketplace shows the power of a diverse, open economy.
Although only 60 percent of the people are literate, most who have an education understand
English — it’s one of two official languages of the government — making India the largest
English-speaking nation in the world after the United States.
A program of economic liberalization started in 1991 led to rapid growth. India’s large
population and low starting point mean that it can sustain much faster average long-term
growth than most other countries on earth.
THE PROS OF DOING BUSINESS IN INDIA
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India has huge scale growing off of a small economic base. Even small improvements in
income, when multiplied across more than a billion people, add up to big money. That
opportunity is huge, but it’s not the only one:
 Saving big to encourage enterprise: Indians are big savers, so Indians who want to
start businesses have access to local capital — from family members or local banks.
The country’s culture encourages enterprise.
 Improving infrastructure: India has long been hampered by poor infrastructure,
ranging from dirt roads (if roads exist at all) to electrical systems with frequent
blackouts. The infrastructure is improving, though, slowly but surely.
 Serving the bottom of the economic pyramid: Much of India’s population is poor,
but Indian companies have been developing products, services, and packaging to
appeal to people who have little cash and small savings but who want to lead a better
life.
RISKS OF DOING BUSINESS IN INDIA

Although India’s growth and prospects have all the excitement of a big Bollywood movie, the
country has some real challenges that could derail its progress:
 Ethnic tensions: The diversity that is one of India’s strengths is also one of its
weaknesses. Myriad religious and ethnic groups mostly get along, but not always, and
the tensions can get ugly. These tensions have spilled into three wars with Pakistan,
and several assassinations and bombings. Ethnic tensions are constant and not easy to
resolve.
 Petty corruption: India is notorious for its petty corruption, inefficient operations, and
incompetent bureaucracy. On top of governmental snags, almost any commercial
activity involves a chain of inefficiencies.
The hassles are frustrating to Indians and to overseas business people. Unless these issues
are addressed, India’s growth rate will be held back.
 Extreme poverty: India’s population skews young, poor, male, and poorly educated.
The shortage of skilled workers is driving up wages for Indians who do have an
education and leaving everyone else behind. The frustration of these energetic, young
people without jobs or direction may well drag the country down.
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Emerging Markets are nations whose economies are transitioning or have recently
transitioned from heavy state control to economic policies that are more market-oriented.
These countries are often very attractive to outside investors. This is the case of India.
India celebrated its freedom from the British Empire. Mahatma Gandhi was the father of
independence. His economic ideal was a simple India of self-sufficient villages. Pandhit Nehru,
the first prime minister, wanted to industrialize and combine British parliamentary democracy
with Soviet-style central planning. All economists in the world, were advising the Indian
government. And the advice was that they must have a state-led model of industrial growth;
the public sector must occupy what came to be called the commanding heights of the
economy. And that's why steel, coal and machine tools were in the public sector and not in
the private sector. These particular industries are very important as coal leads to electricity,
and steel to transport and machinery. Nehru wanted to apply science and technologies to
solve the great mass poverty that prevailed at the time of independence. He was always
recruiting intellectuals in India on his side in the cause of central planning.
Nehru asked Mahalanobis (a genius statistician) to think about how to plan an economy. The
brilliant Mahalanobis succeeded in expressing the entire Indian economy in a single
mathematical formula. His model was hailed as one of the pioneering mathematical models
for planning a mixed economy. India became the model of economic development for newly
independent nations. The apparent success of communist countries like the Soviet Union and
China seemed to show the way.
Major current trends in foreign trade or India in the Global Trade

1) Forced Dynamism:
International trade is forced to succumb to trends that shape the global political, cultural, and
economic environment. International trade is a complex topic, because the environment it
operates in is constantly changing. First, businesses are constantly pushing the frontiers of
economic growth, technology, culture, and politics which also change the surrounding global
society and global economic context. Secondly, factors external to international trade (e.g.,
developments in science and information technology) are constantly forcing international
trade to change how they operate.
2) Cooperation among Countries:

Countries cooperate with each other in thousands of ways through international organisations,
treaties, and consultations. Such cooperation generally encourages the globalization of
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business by eliminating restrictions on it and by outlining frameworks that reduce

uncertainties about what companies will and will not be allowed to do. Countries cooperate:
i) To gain reciprocal advantages,

ii) To attack problems they cannot solve alone, and
iii) To deal with concerns that lie outside anyone’s territory.
Agreements on a variety of commercially related activities, such as transportation and trade,
allow nations to gain reciprocal advantages. For example, groups of countries have agreed to
allow foreign airlines to land in and fly over their territories, such as Canada’s and Russia’s
agreements commencing in 2001 to allow polar over flights that will save five hours between
New York and Hong Kong.
3) Liberalization of Cross-border Movements:

Every country restricts the movement across its borders of goods and services as well as of
the resources, such as workers and capital, to produce them. Such restrictions make
international trade cumbersome; further, because the restrictions may change at any time,
the ability to sustain international trade is always uncertain. However, governments today
impose fewer restrictions on cross-border movements than they did a decade or two ago,
allowing companies to better take advantage of international opportunities. Governments
have decreased restrictions because they believe that:
i) So-called open economies (having very few international restrictions) will give consumers
better access to a greater variety of goods and services at lower prices,
ii) Producers will become more efficient by competing against foreign companies, and
iii) If they reduce their own restrictions, other countries will do the same.
4) Transfer of Technology:
Technology transfer is the process by which commercial technology is disseminated. This will
take the form of a technology transfer transaction, which may or may not be a legally binding
contract, but which will involve the communication, by the transferor, of the relevant
knowledge to the recipient. It also includes non-commercial technology transfers, such as
those found in international cooperation agreements between developed and developing
states. Such agreements may relate to infrastructure or agricultural development, or to
international; cooperation in the fields of research, education, employment or transport.
5) Growth in Emerging Markets:
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The growth of emerging markets (e.g., India, China, Brazil, and other parts of Asia and South
America especially) has impacted international trade in every way. The emerging markets
have simultaneously increased the potential size and worth of current major international
trade while also facilitating the emergence of a whole new generation of innovative
companies. According to “A special report on innovation in emerging markets” by The
Economist magazine, “The emerging world, long a source of cheap la, now rivals the rich
countries for business innovation”.
Economic liberalization
Economic liberalization (or economic liberalisation) is the lessening of government regulations
and restrictions in an economy in exchange for greater participation by private entities; the
doctrine is associated with classical liberalism. Thus, liberalization in short is "the removal of
controls" in order to encourage economic development.It is also closely associated
with neoliberalism.
Most high-income countries have pursued the path of economic liberalization in recent
decades with the stated goal of maintaining or increasing their competitiveness as business
environments. Liberalization policies include partial or full privatisation of government
institutions and assets, greater labour market flexibility, lower tax rates for businesses, less
restriction on both domestic and foreign capital, open markets, etc.
In developing countries, economic liberalization refers more to liberalization or further

"opening up" of their respective economies to foreign capital and investments. Three of the
fastest growing developing economies today; Brazil, China, and India, have achieved rapid
economic growth in the past several years or decades, in part, from having "liberalized" their
economies to foreign capital.
Potential benefits
The service sector is probably the most liberalized of the sectors. Liberalization offers the
opportunity for the sector to compete internationally, contributing to GDP growth and
generating foreign exchange. As such, service exports are an important part of many
developing countries' growth strategies. India's IT services have become globally competitive
as many companies have outsourced certain administrative functions to countries where costs
are lower.
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Furthermore, if service providers in some developing economies are not competitive enough
to succeed on world markets, overseas companies will be attracted to invest, bringing with
them international best practices and better skills and technologies. The entry of foreign
service providers is not necessarily a negative development and can lead to better services
for domestic consumers, improve the performance and competitiveness of domestic service
providers, as well as simply attract FDI/foreign capital into the country. In fact, some
research suggest a 50% cut in service trade barriers over a five- to ten-year period would
create global gains in economic welfare of around $250 billion per annum.
Economic integration
Economic integration is the unification of economic policies between different states
through the partial or full abolition of tariff and non-tariff restrictions on trade taking place
among them prior to their integration. This is meant in turn to lead to lower prices for
distributors and consumers with the goal of increasing the level of welfare, while leading to an
increase of economic productivity of the states.
The trade stimulation effects intended by means of economic integration are part of the
contemporary economic Theory of the Second Best: where, in theory, the best option is free
trade, with free competition and no trade barriers whatsoever. Free trade is treated as an
idealistic option, and although realized within certain developed states, economic integration
has been thought of as the "second best" option for global trade where barriers to full free
trade exist.
Objective
There are economic as well as political reasons why nations pursue economic integration. The
economic rationale for the increase of trade between member states of economic unions that
it is meant to lead to higher productivity. This is one of the reasons for the global scale
development of economic integration, a phenomenon now realized in continental economic
blocs such as ASEAN, NAFTA, SACN, the European Union, and the Eurasian Economic
Community; and proposed for intercontinental economic blocks, such as the Comprehensive
Economic Partnership for East Asia and the Transatlantic Free Trade Area.
Stages
The degree of economic integration can be categorized into seven stages:[5]
1. Preferential trading area
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2. Free trade area

3. Customs union
4. Common market
5. Economic union
6. Economic and monetary union
7. Complete economic integration
Global economic integration

With economics crisis started in 2008 the global economy has started to realize quite a few
initiatives on regional level. It is unification between the EU and US, expansion of Eurasian
Economic Community (now Eurasia Economic Union) by Armenia and Kyrgyzstan. It is also
the creation of BRICS with the bank of its members, and notably high motivation of creating
competitive economic structures within Shanghai Organization, also creating the bank with
many multi-currency instruments applied. Engine for such fast and dramatic changes was
insufficiency of global capital, while one has to mention obvious large political discrepancies
witnessed in 2014-2015. Global economy has to overcome this by easing the moves of capital
and labor, while this is impossible unless the states will find common point of views in
resolving cultural and politic differences which pushed it so far as of now.
Globalization refers to the increasing global relationships of culture, people, and economic
activity.
Globalization: Arguments For And Against Globalization

Arguments against of Globalization:
1. Gains of Globalisation for Rich at the Cost of Poor:
Under the process of Globalisation, big business has done well despite the slackened
productivity growth. Globalisation has helped the corporate elites to keep wages down, to
skim off a large fraction of the reduced productivity gains, thereby permitting elite incomes
and stock market values to rise rapidly.
2. Source of Repeated Economic Crises:

The new global order has been experiencing increased financial volatility, and from the Third
World debt crisis of the early 1980s to the Mexican breakdown of 1994-95 to the South East
Asian debacle of the 1990s, financial crisis have become more and more threatening and
extensive. With increasing privatisation and deregulation, the discrepancy between the power
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of unregulated financial forces and that of governments and regulatory bodies has been
increasing and the potential for a global breakdown has been steadily enlarging.
3. Globalisation as an Imposed Decision of the Rich:

The critics of Globalisation even go to the extent of describing it as an imposed decision and
not a democratic choice of the people of the world. The process has been business driven, by
business strategies and tactics and for business ends.
4. Unequal Distribution of Benefits:

This undemocratic process, carried out within a democratic facade, has been inconsistent with
the distribution of benefits and costs of globalisation. The fact has been that globalisation has
been working as a tool designed to serve elite interests. Globalisation has also steadily
weakened democracy, partly as a result of unplanned effects, and partly because of the
containment of labour costs and scaling down of the welfare state which enabled the business
minority to establish firm control of the state and reduce its capacity to respond to the
demands of the majority.
5. Strengthened Role of MNCs:

Under the goals of globalisation, the business community, particularly the MNC brotherhood,
has also mounted a powerful effort to dominate governments—either by capture or by limiting
their ability to serve ordinary citizens. By enlarging business profits and weakening labour,
globalisation has shifted the balance of power further towards business. The political parties
in all countries have been getting decisively influenced by business money in elections.
6. Private Profits at the Cost of Social Security:

The efforts of the corporate elite as aided and validated by international financial institutions
and by media support, have been regularly causing social democrats and social activists to
retreat to policies acceptable to the dominant business elite.
7. Increased Protectionism and Neo-colonialism:

The business elites of various states have all also been trying to push for such international
agreements and policy actions by the IMF and World Bank, that can enhance the ability of
democratic politics to act on their behalf for securing their interests.
8. Unduly Increased Role of Big Business:

Most of the agreements and demands of the international financial institutions are invariably
tuned to the policies desired by the corporate elite. The conditions laid down by them often
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gives primacy to budget constraint, the inflation control, in line with the neo-liberal and
corporate agenda.
9. Working Against Democratic Right of the Ordinary Citizens:

Further, the IMF- World Bank actions are often a source of denial of democratic rights to non-
corporate citizens and elected governments. These are mostly subordinated to the rights of
corporate investors—the superior class of global citizens with priority over all others and
beneficiaries of the new MNC Protectionism.
Arguments In Support of Globalization:

The supporters of Globalisation, even while admitting some of its current and possible bad
effects, argue that it is an imperative necessity. It is a natural extension of the prevailing and
continuously increasing global interdependence.
1. The Problems Being Faced Today Are Due to Infant Stage of Globalisation:
Presently, Globalisation appears to be threatening global independence. It appears to be
threatening the sovereign nation- state system, acting as a source of such crisis as the
currency crisis of South East Asian states in 1997, and as a process involving steep social
costs having the potential to threaten the economies of various countries.
2. Inevitability of Globalisation:
Globalisation, the supporters argue, is inevitable. It is the only way and it alone has the
potential to attain sustainable development. It is governable and it can be made more and
more effective through an increase in global level understanding and efforts.
3. Globalisation Essential Under WTO:

Even before the World War II, several institutions and supra national organisations were
created for guiding and regulating international economic relations. Later on, the International
Monetary Fund (IMF) and the World Bank (WB) were designed to act as structures to manage
the finances in a new international political economy, and were part of a new international
order together with the regimes of the General Agreement on Tariffs and Trade (GAIT) and
the United Nations.
4. Defects of Globalisation Products of Selfishness of Some States:

The problems resulting from the WTO and Globalisation have been the result of certain lapses
and attempts being made by some developed countries to hijack WTO and Globalisation in
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their favour. The new global economic regime is still in its childhood. When it becomes mature
and fully developed, it would become a real source of prosperity and development for all.
5. Globalisation is Governable and Dependable:

What is needed is to check parochial designs and efforts of vested interests through concerted
global level campaigns. Globalisation is governable, either through direct conduction and
promotion of free trade policies and deregulation or through pressure on the majority world
from economically powerful hegemony and supra-national organisations and institutions such
as the IMF, the World Bank and the OECD.
4 Global Growth Strategies – Explained!

Global growth strategies can be categorized according to whether the company was relying
for growth on existing or new products in existing or new markets. The result of this would be
to establish four general approaches to growth.
The same framework can be used to examine multinational growth alternatives

except that:
(a) Instead of markets, we will refer to countries, and
(b) Instead of existing or new products, we will refer to a narrow versus a broad international
product mix.
This results in a model that presents four general growth strategies—market concentration,
market extension, product extension and diversification.
1. Market concentration:
Many companies direct single products to one or a few markets. A general food company sells
chewing gum in France, ice-cream in Brazil, and pasta in Italy. None of these businesses is
large enough to justify sales on a global basis. Therefore, market concentration is a logical
strategy if a product can be sold profitably in a limited market.
Another motive for pursuing a strategy of market concentration is the belief that the product
appeals to a fairly homogeneous group in a few countries. Playtex markets its hair care line in
industrialized countries where women’s hair care needs are relatively homogeneous.
2. Market extension:
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The strategy of market extension is suitable for companies with unique product lines that can
appeal to the needs of different customers in different countries. Such a strategy requires a
company to have a competitive advantage that permits it to sell a narrow product line on a
global basis. Coca-Cola and Pepsi are two ideal examples.
These companies enjoy a competitive advantage that allows their product line to be regarded
as superior on a worldwide basis. The Japanese company Honda has successfully pursued a
strategy of market extension by developing inexpensive and reliable motorcycles.
3. Product extension:
This involves selling a broad product mix in a limited number of foreign markets.
This strategy is logical if the multinational firm:
1. Is well entrenched in these markets and views further expansion as risky, and
2. Can achieve economies of scale in advertising and distribution.
Economies of scale in advertising might involve a family brand strategy in which many brands
are advertised under the corporate name. The General Electric Company uses a family brand
advertising strategy in the international market as well as the domestic American market.
4. Diversification:
This is an aggressive growth strategy which involves expansion of both the product mix and
foreign markets. Such a strategy can be employed by companies with sufficient resources to
accomplish fast entry into many markets on a multi-product basis. The strategy also requires
a broader product mix to appeal to many segments in different markets.
A company that is currently pursuing a diversification strategy is Johnson & Johnson. The
company markets a broad range of household and personal care products in foreign markets.
It currently sells in over 40 countries and is expanding its operations by about two countries
every year.
India’s Foreign Trade Policy for International Business

Article # 1. Foreign Trade Policy for International Business:
The foreign trade policy in India is formulated and implemented mainly by the Ministry of
Commerce and Industry, but also in consultation with other concerned ministries, such as
Finance, Agriculture, and Textiles, and the Reserve Bank of India (RBI). The Directorate
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General of Foreign Trade (DGFT) under the Department of Commerce is responsible for the
execution of the foreign trade policy.
India’s foreign trade policy is built around the following two objectives:
i. To double India’s share in global merchandise trade within the next five years
ii. To act as an effective instrument of economic growth by giving a thrust to employment
generation
Article # 2. Export Prohibitions and Restrictions for International Business:

Under the foreign trade policy, export prohibitions are maintained for environmental, food
security, marketing, pricing and domestic supply reasons, and to comply with international
treaties.
Restrictions on exports on account of security concern through multilateral agreements are

contained in the Special Chemicals, Organisms, Materials, and Equipment’s and Technologies
(SCOMET) list. Export restrictions are GATT- compatible and permitted under Articles XIX and
XX (Security Exceptions).
Since the SCOMET list is a negative list, licensing procedure is based on the presumption of
denial.
Article # 3. Import Prohibitions and Restrictions for International Business:

The Indian government is authorized to maintain import prohibitions and restrictions under
section 11 of the Customs Act, 1962, which allows the central government to prohibit imports
and exports of certain goods either absolutely or subject to conditions by notifications in the
Official Gazette.
Article # 4. Policy Measures for Trade Promotion for International Business:

A large number of measures taken to promote trade under the foreign trade policy include
various schemes for duty-free and concessional imports for export production, schemes and
incentives to augment export production, and other export promotion measures to facilitate
marketing.
Schemes for duty-free and concessional imports:

In order to reduce or remove the anti-export bias inherent in the system of indirect taxation
and to encourage exports, several schemes have been evolved allowing exporters to benefit
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from tariff exemptions, especially on imported inputs. Such schemes include drawbacks for
customs duty paid and exemptions from payment of import duty.
Article # 5. Schemes to Augment Export Production for International Business:

Development of export-related infrastructure and enclaves providing an environment
conducive for export production is crucial to sustain export growth. The government has
always supported creation and strengthening of enclaves for export production so as to
‘immunize’ the firms engaged in export production from constraints, such as infrastructural
and administrative, from the rest of the economy.
Article # 6. Other Export Promotion Measures for International Business:

In addition to the tariff concessions and exemptions, the trade policy provides a wide range of
export promotion measures (Table 9.5), such as marketing assistance for export promotion,
incentives to promote services exports, development of industrial clusters for export
potential, promoting export generating employment in rural and semi-urban areas, and giving
recognition to established exporters.
Elements of Trade Policy and Strategy Pursued in India

Two Important Elements of Trade Policy and Strategy pursued in India have been: (i) import
substitution, and (ii) export promotion.
The trade strategy of nation has impact not only on the volume and composition of foreign
trade, but also on the pattern of investment and direction of development, entrepreneurial
and business behaviour, consumption pattern, etc. Since the commencement of planned
development, India followed a strong inward-oriented policy.
Import Substitution:
Import substitution industrialisation (ISI) is a trade and economic policy that advocates
replacing foreign imports, with domestic production. ISI is based on the premise that a
country should attempt to reduce its foreign dependency through the local production of
industrialised products.
Import substitution implies indigenous production of raw materials, intermediate goods and
final consumer and capital goods. Import substitution was the major plank of India’s foreign
trade policy during the early-years of economic planning.
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Later, however, it was realised that large imports of capital goods and equipment would help
the country build up domestic production capacity and help meet the domestic requirements.
The presumption was in-built in the Mahalanobis strategy of heavy- industry-led growth. A
further assumption of the strategy was that once the production capacity within the country
was built up, it would be possible to give up imports to a large extent.
Export Promotion:
The terms ‘export promotion’, ‘outward-orientation’, and ‘export-led growth’ have all been
used interchangeably to describe the policies adopted in the successful developing countries.
Import substitution and export promotion are not competitive, but each requires a different
set of policies to be pursued. Three distinct phases can be seen in India’s approaches and
policy towards exports.
i. The early phase, which lasted up to about 1972-73, was one of extreme export pessimism
with a fear that exports are subject to low growth in demand, high fluctuations in prices and
lead to economic dependency.
ii. The second phase began in 1973 after the first oil crisis and lasted for about ten years. In
this phase, although-it was not explicitly stated, it was recognised that policies of import
substitution by themselves could not bring about viability in India’s BOP.
iii. In the third and more recent phase, exports are being seen as an integral part of industrial
and development- policy. The anti- export bias of the policy has paved way for pro-export
policy.
The policy has emphasised technological upgradation, increase in the size of plants, freer
imports and domestic and international competition for the entire industrial sector as being
essential for export promotion.
Essay on Indian Trade Policy (EXIM Policy)!

The Export-Import Policy (EXIM Policy), announced under the Foreign Trade (Development
and Regulation Act), 1992, would reflect the extent of regulations or liberalization of foreign
trade and indicate the measures for export promotion. Although the EXIM Policy is announced
for a five- year period, announcing a Policy on March 31st of every year, within the broad
frame of the Five Year Policy, for the ensuring year.
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A very important feature of the EXIM policy since 1992 is freedom. Licensing, quantitative
restrictions and other regulatory and discretionary controls have been substantially
eliminated.
Objectives of EXIM Policy:

The principal objectives of this Policy are:
1) To facilitate sustained growth in exports to attain a share of atleast 1 % of global
merchandise trade.
2) To stimulate sustained economic growth by providing access to essential raw materials,
intermediates, components, consumables and capital goods required for augmenting
production and providing services.
3) To enhance the technological strength and efficiency of Indian agriculture, industry and
services, thereby improving their competitive strength while generating new employment
opportunities, and to encourage the attainment of internationally accepted standards of
quality.
4) To provide consumers with good quality goods and services at internationally competitive
prices while at the same time creating a level playing field for the domestic produce.
Trade Regulations
FEMA
The Foreign Exchange Management Act, 1999 has come into effect on June 1, 2000 and has
replaced the Foreign Exchange Regulation Act, 1973 (FERA). FEMA is a civil law. FEMA defines
capital account and current account transactions, while power is delegated on Reserve Bank
of India to regulate capital account transactions. FERA was a criminal law and the act was
very drastic. It provided imprisonment for even a minor offense. Under this Act a person was
presumed guilty unless he proved himself innocent. With liberalization, an urgent need was
felt to remove the drastic measures of FERA and hence a liberal act FEMA was enacted to
replace FERA.
Objectives of FEMA
 Facilitate external trade and payments

 Promote orderly maintenance of the foreign exchange market in India.
 Relax controls on joint ventures, collaborations, subsidiary establishments and the like
both in India by foreigners and abroad by Indians.
The FEMA, is Applicable-
 To the whole of India.

 Any Branch, office and agency, which is situated outside India, but is owned or controlled
by a person resident in India.
 Any contravention of provisions of FEMA, by all those, who are covered under above two
aspects committed outside India.
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FEMA Contains Definition of Certain Terms Which have been Used Throughout The
ACT
 Authorized Person : It includes an authorized dealer, money changer, off-shore banking

unit or any other person for the time being authorized to deal in foreign exchange,
 Capital Account Transaction : It means a transaction which alters the assets or

liabilities outside India of persons resident in India. It also includes transactions that alters
assets or liabilities in India of persons resident outside India.
 Currency : It is an assortment of currency notes, postal notes, postal orders, money

orders, cheques, drafts, travelers cheques, letter of credit, bills of exchange and
promissory notes.
 Currency Notes : It includes cash in the form of coins and bank notes.
 Current Account Transactions : It means a transaction other than capital account

transaction.
 Export : It simply means exporting of any goods or provision of services from India to
any person outside India.
 Financial Transaction : It means making any payment to, or for the credit of any
person, or receiving any payment for, by order or on behalf of any person, or drawing,
issuing or negotiating any bill of exchange or promissory note, or transferring any security
or acknowledging any debt.
 Foreign Currency : It denotes any currency other than the Indian currency.
 Foreign Exchange : Money instruments used to make payments between countries.
 Foreign Security : Any security in the form of shares, stocks, bonds, debentures or any
other instrument denominated or expressed in foreign currency . It is only applicable
where redemption or any form of return such as interest or dividends is payable in Indian
currency.
 Import : It simply defines a process that facilitates bringing of goods or services into
India.
 Indian Currency : Currency expressed in Indian rupee.
 Person : It includes an individual, a Hindu undivided family, a company, a firm, an

association of persons or a body of individuals, whether incorporated or not, every
artificial juridical person and any agency, office or branch owned or controlled by such
person.
 Person Resident in India : He is a person who lives a minimum of 182 days in India
during the preceding financial year.
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 Repatriate to India : It means bringing into India the realized foreign exchange and
selling of such foreign exchange to an authorized person in India.
 Security : It means shares, stocks, bonds and debentures, Government securities,

savings certificates, deposit receipts in respect of deposits of securities and units of the
Unit Trust of India or of any mutual fund and includes certificates of title to securities, but
does not include bills of exchange or promissory notes other than Government promissory
notes or any other instruments which may be notified by the Reserve Bank as security for
the purposes of this Act .
 Service : It means service of any description which is made available to potential users
and includes the provision of facilities in all terms.
 Transfer : It includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other
form of transfer of right, title, possession or lien.
Regulations and Management of Foreign Exchange

Without the permission of Reserve Bank of India no person can:
 Deal or transfer any foreign exchange or foreign security to any unauthorized person
 Make any payment in any manner to any person who resides outside India. No payments
can even be made for the credit of the particular person.
 Receive any payment on behalf of a person residing outside India through an authorized
person.
 Enter into any sort of financial transaction in India to acquire any asset outside India by
any person.
 Acquire, hold, own, possess or transfer any foreign exchange, foreign security or any
immovable property situated outside India.
62 Anil J

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3rd Sem

INTERNATIONAL BUSINESS M.Com

HC09: INTERNATIONAL BUSINESS

Module 2: International Business Environment: Trading Environment-Commodity Agreements-

Module 3: Multinational Corporations: Definition-Organizational Structures-Dominance of MNC’s-

An international market is defined geographically as a market outside the international borders of a

Trends in International Trade

2) Cooperation among Countries:

3) Liberalization of Cross-border Movements:

5) Growth in Emerging Markets:

7 Most Influential Factors Affecting Foreign Trade

2) Impact of National Income:

3) Impact of Government Policies:

4) Subsidies for Exporters:

6) Lack of Restrictions on Piracy:

7) Impact of Exchange Rates:

Reasons for Going International

Global Sourcing: Pros and Cons of Global Sourcing

In reality, global sourcing is a centralized procurement strategy of a multinational company, wherein a

Advantages of Global Sourcing:

Disadvantages of Global Sourcing:

(iv) Risk of losing intellectual properties, patents and copyrights

The following are the special problems or difficulties of foreign trade:

(ii) Diversity of Languages:

(iii) Transport and Communications:

(iv) Risk and Uncertainty:

(v) Lack of information about International Traders:

(vi) Import and Export Restrictions:

(vii) Difficulties in Payments:

(viii) Various Documents to be used:

(ix) Study of Foreign Markets:

6 Important Ways in Which Technology is Facilitating International Business:

Technological breakthroughs have facilitated globalization of production. A worldwide communications

Factors that Determine Economic Growth and Development of a Country

(i) Supply of Natural Resources:

(ii) Capital Formation:

(iii) Technological Progress and Economic Growth:

Factors that Influence the Economic Development of a Country

3) Marketable Surplus of Agriculture:

4) Conditions in Foreign Trade:

B) Non-Economic Factors in Economic Development:

2) Technical Know-How and General Education:

4 Types of International Business

4. Foreign Direct Investment (FDI):

Risks in International Business

Module 2: International Business Environment:

(2) Heterogeneous Markets:

(3) Different National Groups:

(4) Different Political Units:

(5) Different National Policies and Government Intervention:

(6) Different Currencies:

Objectives, Functions and Defents in the State Trading Corporation of India

2. Augmenting the national resources of the country for promoting trade.

In practice, however, the STC in India has currently acted:

Trading Blocs and growing intra-regional Trade

Regional Economic Groupings of International marketing

Free Trade Area (FTA)

SAARC (The South Asian Association for Regional Co-operation)

SAARC Preferential Trading Arrangements (SAFTA):

GATT: General Agreement on Tariffs and Trade

GATT permits such restrictions only for:

The Basic Principles of the GATT:

4. Tariff Binding and Reduction:

World Trade Organization (WTO):