MB0037 - International Business Management Assignment Set-1

MB0037 – International Business
Management
Assignment Set- 1
1a. How has liberalizing trade helped international

business?
Answer: The Benefits of Trade Liberalization
Policies that make an economy open to trade and investment with

the rest of the world are needed for sustained economic growth. The
evidence on this is clear. No country in recent decades has achieved
economic success, in terms of substantial increases in living
standards for its people, without being open to the rest of the world.
In contrast, trade opening (along with opening to foreign direct
investment) has been an important element in the economic
success of East Asia, where the average import tariff has fallen from
30 percent to 10 percent over the past 20 years.
Opening up their economies to the global economy has been

essential in enabling many developing countries to develop
competitive advantages in the manufacture of certain products. In
these countries, defined by the World Bank as the "new globalizers,"
the number of people in absolute poverty declined by over 120
million (14 percent) between 1993 and 1998.
There is considerable evidence that more outward-oriented

countries tend consistently to grow faster than ones that are inward-
looking. Indeed, one finding is that the benefits of trade
liberalization can exceed the costs by more than a factor of 10.
Countries that have opened their economies in recent years,
including India, Vietnam, and Uganda, have experienced faster
growth and more poverty reduction. On average, those developing
countries that lowered tariffs sharply in the 1980s grew more
quickly in the 1990s than those that did not.
Freeing trade frequently benefits the poor especially. Developing

countries can ill-afford the large implicit subsidies, often channeled
to narrow privileged interests that trade protection provides.
Moreover, the increased growth that results from free trade itself
tends to increase the incomes of the poor in roughly the same
proportion as those of the population as a whole. New jobs are
created for unskilled workers, raising them into the middle class.
Overall, inequality among countries has been on the decline since
MB0037 – International Business Management -1-

1990, reflecting more rapid economic growth in developing
countries, in part the result of trade liberalization.
The potential gains from eliminating remaining trade barriers are

considerable. Estimate of the gains from eliminating all barriers to
merchandise trade range from US$250 billion to US$680 billion per
year. About two-thirds of these gains would accrue to industrial
countries. But the amount accruing to developing countries would
still be more than twice the level of aid they currently receive.
Moreover, developing countries would gain more from global trade
liberalization as a percentage of their GDP than industrial countries,
because their economies are more highly protected and because
they face higher barriers.
Although there are benefits from improved access to other

countries’ markets, countries benefit most from liberalizing their
own markets. The main benefits for industrial countries would come
from the liberalization of their agricultural markets. Developing
countries would gain about equally from liberalization of
manufacturing and agriculture. The group of low-income countries,
however, would gain most from agricultural liberalization in
industrial countries because of the greater relative importance of
agriculture in their economies.
1b. What are the merits and demerits of international trade?
Answer: Advantages and Disadvantages of International

Trade
Advantages to consider:
• Enhance your domestic competitiveness

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

• You may need to wait for long-term gains
• Hire staff to launch international trading
• Modify your product or packaging
• Develop new promotional material
• Incur added administrative costs

• Dedicate personnel for traveling
• Wait long for payments
• Apply for additional financing
• Deal with special licenses and regulations
2. Discuss the impact of culture on International Business.
Answer: The following can be looked as the various aspects of the

cultural dichotomies.
Table 2.1
In this new millennium, few executives can afford to turn a blind eye
to global business opportunities. Japanese auto-executives monitor
carefully what their European and Korean competitors are up to in
getting a bigger slice of the Chinese auto-market. Executives of
Hollywood movie studios need to weigh the appeal of an expensive
movie in Europe and Asia as much as in the US before a firm
commitment. The globalizing wind has broadened the mindsets of
executives, extended the geographical reach of firms, and nudged
international business (IB) research into some new trajectories. One
such new trajectory is the concern with national culture. Whereas
traditional IB research has been concerned with economic/ legal
issues and organizational forms and structures, the importance of
national culture – broadly defined as values, beliefs, norms, and
behavioural patterns of a national group – has become increasingly
important in the last two decades, largely as a result of the classic
work of Hofstede (1980). National culture has been shown to impact
on major business activities, from capital structure (Chui et al.,
2002) to group performance (Gibson, 1999).
The purpose of this Unit is to provide a state-of-the-art review of

several recent advances in culture and IB research, with an eye
toward productive avenues for future research. It is not our purpose
to be comprehensive; our goal is to spotlight a few highly promising
areas for leapfrogging the field in an increasingly boundary-less
business world. We first review the issues surrounding cultural

convergence and divergence, and the processes underlying cultural
changes. We then examine novel constructs for characterizing
cultures, and how to enhance the precision of cultural models by
pinpointing when the effects of culture are important. Finally, we
examine the usefulness of experimental methods, which are rarely
employed in the field of culture and IB. A schematic summary of our
coverage is given in Table 2.1, which suggests that the topics
reviewed are loosely related, and that their juxtaposition in the
present paper represents our attempt to highlight their importance
rather than their coherence as elements of an integrative
framework.
1. Cultural change, convergence and divergence in an era of

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

Globalization refers to a ‘growing economic interdependence among
countries, as reflected in the increased cross-border flow of three
types of entities: goods and services, capital, and know-how’
(Govindarajan and Gupta, 2001, 4). Few spoke of ‘world economy’
25 years ago, and the prevalent term was ‘international trade’
(Drucker, 1995). However today, international trade has culminated
in the emergence of a global economy, consisting of flows of
information, technology, money, and people, and is conducted via
government international organizations such as the North American
Free Trade Agreement (NAFTA) and the European Community;
global organizations such as the International Organization for
Standardization (ISO); multinational companies (MNCs); and cross –
border alliances in the form of joint ventures, international mergers,
and acquisitions. These inter – relationships have enhanced
participation in the world economy, and have become a key to
domestic economic growth and prosperity (Drucker, 1995, 153).

Yet, globalization is not without its misgivings and discontents
(Sassan, 1998). A vivid image associated with the G8 summits is the
fervent protests against globalization in many parts of the world, as
shown in television and reported in the popular media. Strong
opposition to globalization usually originates from developing
countries that have been hurt by the destabilizing effects of
globalization, but in recent times we have also seen heated debates
in Western economies triggered by significant loss of professional
jobs as a result of off shoring to low – wage countries. Indeed,
workers in manufacturing and farming in advanced economies are
becoming increasingly wary of globalization, as their income
continues to decline significantly. In parallel to the angry protests
against globalization, the flow of goods, services, and investments
across national borders has continued to fall after the rapid gains of
the 1990s. Furthermore, the creation of regional trade blocs, such
as NAFTA, the European Union, and the Association of Southeast
Asian Nations, have stimulated discussions about creating other
trade zones involving countries in South Asia, Africa, and other parts
of the world. Although it is often assumed that countries belonging
to the World Trade Organization (WTO) have embraced
globalization, the fact is that the world is only partially globalized, at
best (Schaeffer, 2003). Many parts of Central Asia and Eastern
Europe, including the former republics of the Soviet Union, parts of
Latin America, Africa, and parts of South Asia, have been sceptical
of globalization (Greider, 1997). In fact, less than 10% of the world’s
population is fully globalized (i.e., being active participants in the
consumption of global products and services) (Schaeffer, 2003).
Therefore, it is imperative that we analyze the issues of cultural
convergence and divergence in this partially globalized world.
‘Universal culture’ often refers to the assumptions, values, and

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

origin, also contributes to a convergence of consumption patterns

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

The broad ideological framework of a country, corporation, or
situation is the most important determinant of the cultural identity
that people develop in a given locale (Triandis, 1994). The ‘melting
pot’ ideology suggests that each cultural group loses some of its
dominant characteristics in order to become the mainstream: this is
assimilation, or what Triandis (1994) calls subtractive
multiculturalism.
In contrast, when people from a cultural group add appropriate skills

and characteristics of other groups, it may be called integration, or
additive multiculturalism. Both of these processes are essential for
cultural convergence to proceed. However, if there is a significant
history of conflict between the cultural groups, it is hard to initiate
these processes, as in the case of Israelis and Palestinians. In
general, although there has been some research on the typology of

animosity against other nations (e.g., Jung et al., 2002), we do not
know much about how emotional antagonism against other cultural
groups affects trade patterns and intercultural cooperation in a
business context. The issues of cultural identity and emotional
reactions to other cultural groups in an IB context constitute a
significant gap in our research effort in this area.
4. Implications of convergence and divergence issues

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

exhibit strong tendencies toward cultural convergence, as is found
in Western countries, there are countries that will reject
globalization, not only because of its adverse economic impacts
(Greider, 1997) but also because globalization tends to introduce
distortions (in their view) in profound cultural syndromes that
characterize their national character.
Furthermore, reactions to globalization may take other forms.

Bhagat et al. (2003) have recently argued that adaptation is another
approach that could characterize the tendencies of some cultures in
the face of mounting pressures to globalize. Other approaches are
rejection, creative synthesis, and innovation (Bhagat et al., 2003).
These different approaches highlight once again the complex
dynamics that underlie cultural convergence and divergence in a
partially globalized world. Also, in discussing issues of convergence
and divergence, it is necessary to recognize that the shift in values
is not always from Western society to others, but can result in the
change of Western cultural values as well. For example, the

emphasis on quality and teamwork in the West is partly a result of
the popularity of Japanese management two decades ago.
Scholars of IB should recognize that the issue of convergence and

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

In the previous section, we make the point that, through the process
of globalization, cultures influence each other and change, but
whether or not these changes will bring about cultural convergence
is yet to be seen. In this section, we delineate a general model that
describes and explains the complex processes underlying cultural
changes. As explained before, IB is both an agent and a recipient of
cultural change, and for international business to flourish it is
important to understand its complex, reciprocal relationships with
cultural change.
In line with the view of Hofstede (2001) that culture changes very
slowly, culture has been treated as a relatively stable characteristic,
reflecting a shared knowledge structure that attenuates variability
in values, behavioral norms, and patterns of behaviours (Erez and
Earley, 1993). Cultural stability helps to reduce ambiguity, and leads
to more control over expected behavioural outcomes (Weick and
Quinn, 1999; Leana and Barry, 2000). For instance, most existing
models of culture and work behaviour assume cultural stability and
emphasize the fit between a given culture and certain managerial
and motivational practices (Erez and Earley, 1993). High fit means
high adaptation of managerial practices to a given culture and,
therefore, high effectiveness. The assumption of cultural stability is
valid as long as there are no environmental changes that precipitate
adaptation and cultural change. Yet, the end of the 20th century and
the beginning of the new millennium have been characterized by
turbulent political and economical changes, which instigate cultural
changes. In line with this argument, Lewin and Kim (2004), in their
comprehensive chapter on adaptation and selection in strategy and
change, distinguished between theories driven by the underlying

assumption that adaptation is the mechanism to cope with change,
and theories driven by the underlying assumption of selection and
the survival of the fittest, suggesting that ineffective forms of
organization disappear, and new forms emerge. However, although
organizational changes as a reaction to environmental changes
have been subjected to considerable conceptual analyses, the issue
of cultural change at the national level has rarely been addressed.
There are relatively few theories of culture that pertain to the

dynamic aspect of culture. One exception is the eco-cultural model
by Berry et al. (2002), which views culture as evolving adaptations
to ecological and socio-political influences, and views individual
psychological characteristics in a population as adaptive to their
cultural context, as well as to the broader ecological and socio-
political influences. Similarly, Kitayama (2002) proposes a system
view to understanding the dynamic nature of culture, as opposed to
the entity view that sees culture as a static entity. This system view
suggests that each person’s psychological processes are organized
through the active effort to coordinate one’s behaviours with the
pertinent cultural systems of practices and public meanings. Yet,
concurrently, many aspects of the psychological systems develop
rather flexibly as they are attuned to the surrounding socio-cultural
environment, and are likely to be configured in different ways
across different socio-cultural groups.
These adaptive views of culture are supported by empirical

evidence. For example, Van de Vliert et al. (1999) identified
curvilinear relationships between temperature, masculinity and
domestic political violence across 53 countries. Their findings
showed that masculinity and domestic violence are higher in
moderately warm countries than in countries with extreme
temperatures. Inglehart and Baker (2000) examined cultural change
as reflected by changes in basic values in three waves of the World
Values Surveys, which included 65 societies and 75% of the world’s
population. Their analysis showed that economic development was
associated with shifts away from traditional norms and values
toward values that are increasingly rational, tolerant, trusting, and
participatory. However, the data also showed that the broad cultural
heritage of a society, whether it is Protestant, Roman Catholic,
Orthodox, Confucian, or Communist, leaves an enduring imprint on
traditional values despite the forces of modernization.
The process of globalization described before has introduced the

most significant change in IB, with its effects filtering down to the
national, organizational, group and individual levels. Reciprocally,
changes at micro-levels of culture, when shared by the members of
the society, culminate into macro level phenomena and change the
macro-levels of culture. In the absence of research models that can
shed light on this complex process of cultural change, Erez and Gati

(2004) proposed that the general model of multi-level analysis
(Klein and Kozlowski, 2000) could be adopted for understanding the
dynamics of culture and cultural change.
6. The dynamics of culture as a multi-level, multi-layer

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

levels of culture.
Given the dominance of Western MNCs, the values that dominate

the global context are often based on a free market economy,
democracy, acceptance and tolerance of diversity, respect of
freedom of choice, individual rights, and openness to change (Gupta
and Govindarajan, 2000).
MB0037 – International Business Management - 10 -

Below the global level are nested organizations and networks at the
national level with their local cultures varying from one nation or
network to another. Further down are local organizations, and
although all of them share some common values of their national
culture, they vary in their local organizational cultures, which are
also shaped by the type of industry that they represent, the type of
ownership, the values of the founders, etc. Within each organization
are sub-units and groups that share the common national and
organizational culture, but that differ from each other in their unit
culture on the basis of the differences in their functions (e.g., R&D
vs manufacturing), their leaders’ values, and the professional and
educational level of their members. At the bottom of this structure
are individuals who through the process of socialization acquire the
cultural values transmitted to them from higher levels of culture.
Individuals who belong to the same group share the same values
that differentiate them from other groups and create a group – level
culture through a bottom-up process of aggregation of shared
values. For example, employees of an R&D unit are selected into the
unit because of their creative cognitive style and professional
expertise. Their leader also typically facilitates the display of these
personal characteristics because they are crucial for developing
innovative products. Thus, all members of this unit share similar
core values, which differentiate them from other organizational
units. Groups that share similar values create the organizational
culture through a process of aggregation, and local organizations
that share similar values create the national culture that is different
from other national cultures.
Both top-down and bottom-up processes reflect the dynamic nature

of culture, and explain how culture at different levels is being
shaped and reshaped by changes that occur at other levels, either
above it through top-down processes or below it through bottom-up
processes. Similarly, changes at each level affect lower levels
through a top-down process, and upper levels through a bottom-up
process of aggregation. The changes in national cultures observed
by Inglehart and Baker (2000) could serve as an example for top-
down effects of economic growth, enhanced by globalization, on a
cultural shift from traditional values to modernization. However, in
line with Schein (1992), the deep basic assumptions still reflect the
traditional values shaped by the broad cultural heritage of a society.
Global organizations and networks are being formed by having

local-level organizations join the global arena. That means that
there is a continuous reciprocal process of shaping and reshaping
organizations at both levels. For example, multinational companies
that operate in the global market develop common rules and
cultural values that enable them to create a synergy between the
various regions, and different parts of the multinational company.

These global rules and values filter down to the local organizations
that constitute the global company, and, over time, they shape the
local organizations. Reciprocally, having local organizations join a
global company may introduce changes into the global company
because of its need to function effectively across different cultural
boarders. A study by Erez-Rein et al. (2004) demonstrated how a
multinational company that acquired an Israeli company that
develops and produces medical instruments changed the
organizational culture of the acquired company. The study identified
a cultural gap between the two companies, with the Israeli company
being higher on the cultural dimension of innovation and lower on
the cultural dimension of attention to detail and conformity to rules
and standards as compared with the acquiring company. The latter
insisted on sending the Israeli managers to intensive courses in Six –
Sigma, which is an advanced method of quality improvement, and a
managerial philosophy that encompasses all organizational
functions. Upon returning to their company, these managers
introduced quality improvement work methods and procedures to
the local company, and caused behavioural changes, followed by
the internalization of quality – oriented values. Thus, a top-down
process of training and education led to changes in work behaviour
and work values. Sharing common behaviours and values by all
employees of the local company then shaped the organizational
culture through bottom–up processes. The case of cultural change
via international acquisitions demonstrated the two building blocks
of our dynamic model of culture: the multi-level structure explains
how a lower-level culture is being shaped by top-down effects, and
that the cultural layer that changes first is the most external layer of
behaviour. In the long run, bottom – up processes of shared
behaviours and norms shape the local organizational culture.
7. Factors that facilitate cultural change

Culture itself influences the level of resistance or acceptance of
change. Harzing and Hofstede (1996) proposed that certain cultural
values facilitate change, whereas others hinder it. The values of low
power distance, low uncertainty avoidance, and individualism
facilitate change. Change threatens stability, and introduces
uncertainty, and resistance to change will therefore be higher in
cultures of high rather than low uncertainty avoidance (Steensma et
al., 2000). Change also threatens the power structure, and therefore
will be avoided in high power distance cultures. Finally, change
breaks the existing harmony, which is highly valued in collectivistic
cultures, and therefore will not be easily accepted by collectivists
(Levine and Norenzayan, 1999).
A recent study by Erez and Gati (2004) examined the effects of

three factors on the change process and its outcomes:
• the cultural value of individualism – collectivism;

• the reward structure and its congruence with the underlying
cultural values; and
• the degree of ambiguity in the reward structure.
The change process examined was a shift from choosing to work

alone to a behavioural choice of working as part of a team, and vice
versa. Working alone is more prevalent in individualistic cultures,
whereas working in teams dominates the collectivistic ones.
8. Understanding when culture matters: increasing the

precision of cultural models
Beyond exploring new cultural constructs and the dynamic nature of
culture, we also argue for the importance of examining contingency
factors that enhance or mitigate the effect of national culture.
Consider the following scenario. A senior human resource manager
in a multinational firm is charged with implementing an integrative
training program in several of the firm’s subsidiaries around the
globe. Over the term of her career, the manager has been educated
about differences in national culture and is sensitive to intercultural
opportunities and challenges. At the same time, she understands
the strategic need to create a unified global program that serves to
further integrate the firm’s basic processes, creating efficiencies
and synergies across the remote sites. She approaches the
implementation with trepidation. A key challenge is to determine
whether the program should be implemented in the same manner in
each subsidiary or modified according to the local culture at each
site.
3a. Explain the brief structure of WTO.
Answer: Structure of World Trade Organization (WTO)

The WTO’s overriding objective is to help trade flow smoothly,
freely, fairly and predictably.
It does this by:

• Administering trade agreements
• Acting as a forum for trade negotiations
• Settling trade disputes
• Reviewing national trade policies
• Assisting developing countries in trade policy issues, through
technical assistance and training programs
• Cooperating with other international organizations
Structure
The WTO has nearly 150 members, accounting for over 97% of
world trade. Around 30 others are negotiating membership.
Decisions are made by the entire membership. This is typically by

consensus. A majority vote is also possible but it has never been

used in the WTO, and was extremely rare under the WTO’s
predecessor, GATT. The WTO’s agreements have been ratified in all
members’ parliaments.
The WTO’s top level decision-making body is the Ministerial

Conference which meets at least once every two years.
Below this is the General Council (normally ambassadors and heads

of delegation in Geneva, but sometimes officials sent from
members’ capitals) which meets several times a year in the Geneva
headquarters. The General Council also meets as the Trade Policy
Review Body and the Dispute Settlement Body.
At the next level, the Goods Council, Services Council and

Intellectual Property (TRIPS) Council report to the General Council.
Numerous specialized committees, working groups and working

parties deal with the individual agreements and other areas such as
the environment, development, membership applications and
regional trade agreements.
Secretariat
The WTO Secretariat, based in Geneva, has around 600 staff and is
headed by a director-general. Its annual budget is roughly 160
million Swiss francs. It does not have branch offices outside Geneva.
Since decisions are taken by the members themselves, the
Secretariat does not have the decision-making role that other
international bureaucracies are given with. The Secretariat’s main
duties are to supply technical support for the various councils and
committees and the ministerial conferences, to provide technical
assistance for developing countries, to analyze world trade, and to
explain WTO affairs to the public and media.
The Secretariat also provides some forms of legal assistance in the

dispute settlement process and advises governments wishing to
become members of the WTO.

Figure 3.1: Structure of WTO
The WTO is ‘member-driven’, with decisions taken by consensus

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

organizations such as the World Bank and International Monetary
Fund. In the WTO, power is not delegated to a board of directors or
the organization’s head.
When WTO rules impose disciplines on countries’ policies, that is the

outcome of negotiations among WTO members, the rules are
enforced by the members themselves under agreed procedures that
they negotiated, including the possibility of trade sanctions. But
those sanctions are imposed by member countries, and authorized
by the membership as a whole. This is quite different from other

agencies whose bureaucracies can, for example, influence a
country’s policy by threatening to withhold credit.
Reaching decisions by consensus among some 150 members can be

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

So, the WTO belongs to its members. The countries make their
decisions through various councils and committees, whose
membership consists of all WTO members. Topmost is the
ministerial conference which has to meet at least once every two
years. The Ministerial Conference can take decisions on all matters
under any of the multilateral trade agreements.
Second level: General Council in three guises

Day-to-day work in between the ministerial conferences is handled
by three bodies:
• The General Council
• The Dispute Settlement Body
• The Trade Policy Review Body
All three are in fact the same – the Agreement Establishing the WTO
states they are all the General Council, although they meet under
different terms of reference. Again, all three consist of all WTO
members. They report to the Ministerial Conference.
The General Council acts on behalf of the Ministerial Conference on

all WTO affairs. It meets as the Dispute Settlement Body and the
Trade Policy Review Body to oversee procedures for settling
disputes between members and to analyze members’ trade policies.
Third level: councils for each broad area of trade, and more
back to top
Three more councils, each handling a different broad area of trade,
report to the General Council:
• The Council for Trade in Goods (Goods Council)
• The Council for Trade in Services (Services Council)
• The Council for Trade – Related Aspects of Intellectual
Property Rights (TRIPS Council)
As their names indicate, the three are responsible for the workings
of the WTO agreements dealing with their respective areas of trade.

Again they consist of all WTO members. These three also have the
subsidiary bodies.
Six other bodies report to the General Council. The scope of their
coverage is smaller, so they are “committees”. But they still consist
of all WTO members. They cover issues such as trade and
development, the environment, regional trading arrangements, and
administrative issues. The Singapore Ministerial Conference in
December 1996 decided to create new working groups to look at
investment and competition policy, transparency in government
procurement, and trade facilitation.
Two more subsidiary bodies dealing with the plural-lateral

agreements (which are not signed by all WTO members) keep the
General Council informed of their activities regularly.
Fourth level: down to the nitty-gritty

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

domestic regulations, GATS rules and specific commitments.
At the General Council level, the Dispute Settlement Body also has
two subsidiaries: the dispute settlement “panels” of experts
appointed to adjudicate on unresolved disputes, and the Appellate
Body that deals with appeals.
Heads of Delegations and other boards: the need for

informality
Important breakthroughs are rarely made in formal meetings of
these bodies, least of all in the higher level councils. Since decisions
are made by consensus, without voting, informal consultations
within the WTO play a vital role in bringing a vastly diverse
membership round to an agreement.
One step away from the formal meetings is informal meetings that
still include the full membership, such as those of the Heads of
Delegations (HOD). More difficult issues have to be thrashed out in
smaller groups. A common recent practice is for the chairperson of a
negotiating group to attempt to forge a compromise by holding
consultations with delegations individually, in twos or threes, or in
groups of 20 – 30 of the most interested delegations.

These smaller meetings have to be handled sensitively. The key is
to ensure that everyone is kept informed about what is going on
(the process must be “transparent”) even if they are not in a
particular consultation or meeting, and that they have an
opportunity to participate or provide input (it must be “inclusive”).
One term has become controversial, but more among some outside
observers than among delegations. The “Green Room” is a phrase
taken from the informal name of the director-general’s conference
room. It is used to refer to meetings of 20 – 40 delegations, usually
at the level of heads of delegations. These meetings can take place
elsewhere, such as at Ministerial Conferences, and can be called by
the minister chairing the conference as well as the director-general.
Similar smaller group consultations can be organized by the chairs
of committees negotiating individual subjects, although the term
Green Room is not usually used for these.
In the past delegations have sometimes felt that Green Room

meetings could lead to compromises being struck behind their
backs. So, extra efforts are made to ensure that the process is
handled correctly, with regular reports back to the full membership.
The way countries now negotiate has helped somewhat. In order to

increase their bargaining power, countries have formed coalitions. In
some subjects such as agriculture virtually all countries are
members of at least one coalition – and in many cases, several
coalitions. This means that all countries can be represented in the
process if the coordinators and other key players are present. The
coordinators also take responsibility for both “transparency” and
“inclusiveness” by keeping their coalitions informed and by taking
the positions negotiated within their alliances.
In the end, decisions have to be taken by all members and by

consensus. The membership as a whole would resist attempts to
impose the will of a small group. No one has been able to find an
alternative way of achieving consensus on difficult issues, because
it is virtually impossible for members to change their positions
voluntarily in meetings of the full membership.
Market access negotiations also involve small groups, but for a
completely different reason. The final outcome is a multilateral
package of individual countries’ commitments, but those
commitments are the result of numerous bilateral, informal
bargaining sessions, which depend on individual countries’ interests.
(Examples include the traditional tariff negotiations, and market
access talks in services.)

So, informal consultations in various forms play a vital role in
allowing consensus to be reached, but they do not appear in
organization charts, precisely because they are informal.
They are not separate from the formal meetings, however. They are
necessary for making formal decisions in the councils and
committees. Nor are the formal meetings unimportant. They are the
forums for exchanging views, putting countries’ positions on the
record, and ultimately for confirming decisions. The art of achieving
agreement among all WTO members is to strike an appropriate
balance, so that a breakthrough achieved among only a few
countries can be acceptable to the rest of the membership.
3b. Highlight the drawbacks of GATT.
Answer: Given its provisional nature and limited field of action, the
success of GATT in promoting and securing the liberalization of
much of world trade over 47 years is incontestable. Continual
reductions in tariffs alone helped spur very high rates of world trade
growth – around 8 per cent a year on average during the 1950s and
1960s. And the momentum of trade liberalization helped ensure that
trade growth consistently out-paced production growth throughout
the GATT era. The rush of new members during the Uruguay Round
demonstrated that the multilateral trading system, as then
represented by GATT, was recognized as an anchor for development
and an instrument of economic and trade reform.
The limited achievement of the Tokyo Round, outside the tariff

reduction results, was a sign of difficult times to come. GATT’s
success in reducing tariffs to such a low level, combined with a
series of economic recessions in the 1970s and early 1980s, drove
governments to devise other forms of protection for sectors facing
increased overseas competition. High rates of unemployment and
constant factory closures led governments in Europe and North
America to seek bilateral market-sharing arrangements with
competitors and to embark on a subsidies race to maintain their
holds on agricultural trade. Both these changes undermined the
credibility and effectiveness of GATT.
Apart from the deterioration in the trade policy environment, it also

became apparent by the early 1980s that the General Agreement
was no longer as relevant to the realities of world trade as it had
been in the 1940s. For a start, world trade had become far more
complex and important than 40 years before: the globalization of
the world economy was underway, international investment was
exploding and trade in services – not covered by the rules of GATT –
was of major interest to more and more countries and, at the same
time, closely tied to further increases in world merchandise trade. In
other respects, the GATT had been found wanting: for instance, with

respect to agriculture where loopholes in the multilateral system
were heavily exploited – and efforts at liberalizing agricultural trade
met with little success – and in the textiles and clothing sector
where an exception to the normal disciplines of GATT was
negotiated in the form of the Multi-fibre Arrangement. Even the
institutional structure of GATT and its dispute settlement system
were giving cause for concern.
Together, these and other factors convinced GATT members that a

new effort to reinforce and extend the multilateral system should be
attempted. That effort resulted in the Uruguay Round.
4a. Give a short note on the regional economic integration.
Answer: Regional Economic Integration

Regional integration can take many forms, and nowhere is this more
evident than in the vastly different integration processes taking
place in the regions of Europe and East Asia. The subject of this
paper is regional integration as it has developed in East Asia with a
focus on the drivers of that integration. While the paper is not
intended as a direct comparison of integration in East Asia and
Europe, it will include some comparisons between the two regions.
Integration in East Asia has progressed very slowly and is still in an
early stage despite that the process has continued for decades. In
fact, it could be said that the process began centuries ago – even as
far back as the 15th century. By comparison, European integration
has progressed steadily and has gradually deepened over the last
50 years to reach an advanced stage today with a common currency
and well-developed regional institutions. Thus, the speed of
progression and the level of integration attained in the two regions
are quite dissimilar.
In addition to these differences, the drivers behind the integration

process in each region are different. In Europe, the origins of
integration have been institutional in nature, and the development
of institutions has been prominent throughout the process. Thus,
regional institutions have been the driving force behind integration
in Europe. In East Asia, the development of regional institutions has
also occurred; however, progress in this area has been slow and the
few existing institutions are fairly weak and ineffective.
Nevertheless, regional integration is taking place in East Asia, but
the driving force is the market rather than policy or institutions.
Corporations and the production networks they have established are
driving integration in East Asia.
4b. Mention the benefits of WTO.
Answer: Ten Benefits of WTO
1. The system helps to keep the peace

2. The system allows disputes to be handled constructively
3. A system based on rules rather than power makes life easier
for all
4. Freer trade cuts the cost of living
5. It gives consumers more choice and a broader range of
qualities to choose from
6. Trade raises incomes
7. Trade stimulates economic growth and that can be good news
for employment
8. The basic principles make the system economically more
efficient, and they cut costs
9. The system shields governments from narrow interests
10. The system encourages good government
5a. Explain five-element product wave model.
Answer: The Five-Element Product Wave
As shown in Figure 5 The wave model employs design engineering,

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

upgrade. Process engineering activity shadows that of design
engineering, as system changes will be contemplated and made to
facilitate the changes made in the product or service. Product
marketing also has activity level spikes that closely match
engineering design activity, lagged somewhat for product
introduction. Production has one activity peak that results from

demand management and production planning through master
production scheduling.
Finally, the EOL curve peaks at each redesign. The last wave begins
shortly before original production ceases and ends when the
product is no longer manufactured or supported by the EOL
Company or division. The EOL element requires that a decision be
made about the preceding version at each major redesign: continue
production, make a short-term run of spares, keep blueprints active
so that parts can be made as ordered, enter into a manufacturing
and support agreement with another entity, or discontinue
production.
For the sake of parsimony, Figure 5 shows only a two-product model

("A" and "B" versions). In reality, there may be hundreds of
significant redesigns. The wave effect comes from the fact that the
process repeats for the successful firm, forming swells in design
engineering, process engineering, product marketing, and
manufacturing curves before the final crest at EOL activity.
The five-element product wave, or FPW, uses trigger points, rather

than time, as the horizon over which the element curves vary.
Changes in magnitude, represented by the vertical axis, result from
differing activity levels within the five elements. Simple changes in
levels of dollar or unit product sales, in and of themselves, do not
necessarily determine the trigger points. Rather, the varying activity
levels are a direct result of product introductions and redesigns that,
from the outset, must take into account company strategy, core
capabilities, and the state of the competitive environment. For
example, a product with strong sales may be redesigned in a
preemptive strike against competitors, further distancing that
product from the competition, such as with Caterpillar’s innovative
high-drive bulldozers.
That the five-element wave is grounded in reality becomes apparent

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

knowledge is simply being applied faster, it is apparent that firms
are increasing the speed with which they bring their products to
market. The effect of this is a compression of the design

engineering, process engineering, production, and product
marketing elements of the wave model. (The EOL curve may remain
unchanged because accelerated introductions do not necessarily
affect EOL efforts.) The five-element wave clearly shows the
inefficiency of traditional "over-the-wall" systems as speed to
market increases. As the elements compress, more and more
information is thrown over the wall. Recipients find themselves with
less and less time to take action. Taken to the extreme, in-baskets,
phone lines, conference rooms, desks, and floors are soon
gridlocked and littered with unanswered correspondence and things
to do. Forget quality; production itself grinds to a halt.
The solution is to maximize the advantage of the relationships

within the five-element wave and work in concurrent teams, as
illustrated in Figure 6. That way, responsibility is shared throughout
the system. Members from each discipline optimize the system. The
method tears down barriers between departments and speeds the
introduction process, thus decreasing costs. The focal point
becomes the customer, rather than the task. The system is totally
interactive and bound together. Each element is connected to all of
the others and is focused on the customer
What is the recent experience with teams? There is evidence that

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

The strength of the five-element product wave is the fact that it
illuminates critical decision points in the life of a product or service.
The interrelationships of the elements clearly illustrate the benefit of
working product introductions, design changes, and end-of-life
decisions in teams. This is particularly true in today’s rapidly
compressing environment of speeding products to market.
Furthermore, the model is flexible and may be expanded or
contracted to include those functional areas relevant to the
production team. Thus, whether a given firm’s product is a service
or a manufactured good, the five-element wave is a powerful tool
that can be deployed to accelerate effective decision making in
markets demanding ever-increasing levels of speed and agility.
5b. What do you mean by globalization?
Answer: Economic "globalization" is a historical process, the result

of human innovation and technological progress. It refers to the
increasing integration of economies around the world, particularly
through trade and financial flows. The term sometimes also refers to
the movement of people (labor) and knowledge (technology) across
international borders. There are also broader cultural, political and
environmental dimensions of globalization that are not covered
here.
At its most basic, there is nothing mysterious about globalization.

The term has come into common usage since the 1980s, reflecting
technological advances that have made it easier and quicker to
complete international transactions – both trade and financial flows.
It refers to an extension beyond national borders of the same
market forces that have operated for centuries at all levels of
human economic activity – village markets, urban industries, or
financial centers.
Markets promote efficiency through competition and the division of

labor – the specialization that allows people and economies to focus
on what they do best. Global markets offer greater opportunity for
people to tap into more and larger markets around the world. It
means that they can have access to more capital flows, technology,
cheaper imports, and larger export markets. But markets do not
necessarily ensure that the benefits of increased efficiency are
shared by all. Countries must be prepared to embrace the policies
needed, and in the case of the poorest countries may need the
support of the international community as they do so.
6. Give some examples of companies doing international

business and discuss how they have they have managed
their business in the international markets.

Answer: A PERSPECTIVE OF THE NORTHEN ISLAND SOFTWARE
COMPANIES, RAPD M–UP
Within six months of announcing it would invest $4.5 million to
establish its new software development center in Northern Ireland,
IMR was up and running with more than one-third its target staff.
"The fast start-up of the Belfast facility reaffirms our confidence to

locate in Northern Ireland," said Sanan. "The success to date in
building a quality work force has surpassed our expectations and
opens up new ambitions for our interests in Northern Ireland."
According to Arthur "Bro" McFerran, president of IMR (NI) Ltd., the

company is hiring 12 to 18 programmers a month in Northern
Ireland and is well on its way to meeting its staffing goal of 300 by
1999. McFerran credited Northern Ireland’s Training & Employment
Agency (T&EA) with helping place the company’s staffing on the fast
track.
"The T&EA not only has helped us to identify and recruit qualified
software graduates from Northern Ireland’s universities, it is also
assisting us with a unique initiative to bring additional sources of
high quality talent to the company," McFerran said.
Innovation In Training
Impressed by the number and quality of information technology
graduates from the region’s universities, IMR recognized an
untapped resource in the well-educated, versatile graduates of
other fields in Northern Ireland. Working with the T&EA, IMR
developed "IMR Academy," an intensive
20-week training program at the Belfast Institute of Further and
Higher Education, to expand the skills of qualified applicants who
are not computer software graduates, but who are equally well-
educated in other disciplines and who have demonstrated aptitude
for learning computer software programming.
Tom Scott of the T&EA said IMR applicants are assessed throughout
the program and those who successfully complete the course are
awarded a National Computing Certificate and full-time employment
with IMR. Approximately 40 trainees have already participated in
the program.
"IMR is extremely pleased with the T&EAs ability to design and

deliver a training program customized to our needs, and one that is
delivering us an impressive pool of incremental programming
talent," McFerran said.
Smart And Available

"The recent software investments by IMR and other companies
provide a new opportunity for Northern Ireland’s computer

graduates," McFerrin said. Recruitment research by IMR indicates
that traditionally, nearly half of the region’s computer graduates
have been forced to seek jobs outside Northern Ireland due to the
lack of available information technology positions.
Now IT graduates have the chance to find good jobs in Northern

Ireland, and graduates from other fields can take advantage of the
IMR Academy training program to get a head start on a career in the
growing software sector.
McFerrin said. Recruitment research by IMR indicates that

traditionally, nearly half of the region’s computer graduates have
been forced to seek jobs outside Northern Ireland due to the lack of
available information technology positions.
Competitive Advantage
Northern Ireland recently has attracted information technology –
based investments from other multinational companies such as BT,
Fujitsu, Liberty Mutual Group, Seagate Technology, STB Systems
and UniComp. These companies cite Northern Ireland’s work force
and favorable cost base in their decisions to locate in the region.
"The availability of high-quality graduates combined with the

region’s competitive operating costs and attractive incentives made
Northern Ireland the best possible location for STB," said Richard W.
Cooke, STB’s director of engineering operations.
With salaries and fringe costs for well trained software engineers in
Northern Ireland approximately 50 percent lower than costs for US
engineers, and low employee turnover and favorable rates for office
space, the overall annual per capita operational costs to develop
high quality software can be significantly less compared with these
same costs in the United States.
Typical starting salaries for IT graduates in Northern Ireland are

$22,000 to $25,000 annually. At less than three percent annually,
Northern Ireland’s employee turnover rate is a fraction of the rates
typically experienced in other parts of Europe and the United States.
Annual costs per square foot for office space, exclusive of property
taxes and service charges, range from as low as $5 per square foot
in some development areas, to approximately $14 in Belfast. These
costs can be as much as 50 percent lower than office space costs in
other European cities.

MB0037 – International Business
Management
Assignment Set- 2
1. Evaluate the monetary system and currency markets in

international business management.
Asnwer: The exchange rate regimes adopted by countries in

today’s international monetary and financial system, and the
system itself, are profoundly different from those envisaged at the
1944 meeting at Bretton Woods establishing the IMF and the World
Bank. In the Bretton Woods system:
• exchange rates were fixed but adjustable. This system aimed

both to avoid the undue volatility thought to characterize
floating exchange rates and to prevent competitive
depreciations, while permitting enough flexibility to adjust to
fundamental disequilibrium under international supervision;
• private capital flows were expected to play only a limited role

in financing payments imbalances, and widespread use of
controls would prevent instability in such flows;
• temporary official financing of payments imbalances, mainly

through the IMF, would smooth the adjustment process and
avoid unduly sharp correction of current account imbalances,
with their repercussions on trade flows, output, and
employment.
In the current system, exchange rates among the major currencies

(principally the U.S. dollar, the euro, and Japanese yen) fluctuate in
response to market forces, with short-run volatility and occasional
large medium-run swings. Some medium-sized industrial countries
also have market – determined floating rate regimes, while others
have adopted harder pegs, including some European countries
outside the euro area. Developing and transition economies have a
wide variety of exchange rate arrangements, with a tendency for
many but by no means all countries to move toward increased
exchange rate flexibility.
This variety of exchange rate regimes exists in an environment with

the following characteristics:
• partly for efficiency reasons, and also because of the limited

effectiveness of capital controls, industrial countries have
generally abandoned such controls and emerging market

economies have gradually moved away from them. The
growth of international capital flows and globalization of
financial markets has also been spurred by the revolution in
telecommunications and information technology, which has
dramatically lowered transaction costs in financial markets
and further promoted the liberalization and deregulation of
international financial transactions;
• international private capital flows finance substantial current

account imbalances, but the changes in these flows appear
also sometimes to be a cause of macroeconomic disturbances
or an important channel through which they are transmitted
to the international system;
• developing and transition countries have been increasingly

drawn into the integrating world economy, in terms of both
their trade in goods and services and of financial transactions.
Lessons from the recent crises in emerging markets are that for
such countries with important linkages to global capital markets, the
requirements for sustaining pegged exchange rate regimes have
become more demanding as a result of the increased mobility of
capital. Therefore, regimes that allow substantial exchange rate
flexibility are probably desirable unless the exchange rate is firmly
fixed through a currency board, unification with another currency, or
the adoption of another currency as the domestic currency
(dollarization).
Flexible exchange rates among the major industrial country

currencies seem likely to remain a key feature of the system. The
launch of the euro in January 1999 marked a new phase in the
evolution of the system, but the European Central Bank has a clear
mandate to focus monetary policy on the domestic objective of price
stability rather than on the exchange rate. Many medium-sized
industrial countries, and developing and transition economies, in an
environment of increasing capital market integration, may also
continue to maintain market-determined floating rates, although
more countries could may adopt harder pegs over the longer term.
Thus, prospects are that:
• exchange rates among the euro, the yen, and the dollar are
likely to continue to exhibit volatility, and schemes to reduce
volatility are neither likely to be adopted, nor to be desirable
as they prevent monetary policy from being devoted
consistently to domestic stabilization objectives;
• several of the transition countries of central and eastern

Europe, especially those preparing for membership in the
European Union, are likely to seek to establish over time the

policy disciplines and institutional structures required to make
possible the eventual adoption of the euro.
The approach taken by the IMF continues to be to advise member

countries on the implications of adopting different exchange rate
regimes, to consider the choice of regime to be a matter for each
country to decide and to provide policy advice that is consistent
with the maintenance of the chosen regime
Q.2 a. Mention the different entry strategies to enter

international markets.
Answer: Entry Strategies

With rare exceptions, products just don’t emerge in foreign markets
overnight – a firm has to build up a market over time. Several
strategies, which differ in aggressiveness, risk, and the amount of
control that the firm is able to maintain, are available:
• Exporting is a relatively low risk strategy in which few

investments are made in the new country. A drawback is that,
because the firm makes few if any marketing investments in
the new country, market share may be below potential.
Further, the firm, by not operating in the country, learns less
about the market (What do consumers really want? Which
kinds of advertising campaigns are most successful? What are
the most effective methods of distribution?) If an importer is
willing to do a good job of marketing, this arrangement may
represent a "win-win" situation, but it may be more difficult for
the firm to enter on its own later if it decides that larger
profits can be made within the country.
• Licensing and franchising are also low exposure methods of

entry – you allow someone else to use your trademarks and
accumulated expertise. Your partner puts up the money and
assumes the risk. Problems here involve the fact that you are
training a potential competitor and that you have little control
over how the business is operated. For example, American
fast food restaurants have found that foreign franchisees
often fail to maintain American standards of cleanliness.
Similarly, a foreign manufacturer may use lower quality
ingredients in manufacturing a brand based on premium
contents in the home country.
• Contract manufacturing involves having someone else

manufacture products while you take on some of the
marketing efforts yourself. This saves investment, but again
you may be training a competitor.

• Direct entry strategies, where the firm either acquires a firm
or builds operations "from scratch" involve the highest
exposure, but also the greatest opportunities for profits. The
firm gains more knowledge about the local market and
maintains greater control, but now has a huge investment. In
some countries, the government may expropriate assets
without compensation, so direct investment entails an
additional risk. A variation involves a joint venture, where a
local firm puts up some of the money and knowledge about
the local market.
b. How has E-commerce helped in international marketing?

(6 marks)
Sol.
Electronic Commerce
1. Prospects for electronic commerce
Electronic commerce – usually in the form of sales, promotion, or

support through the Internet – is a hot topic at the moment,
evidenced by the high market capitalization of firms involved in this
kind of business. Growth rates have been considerable over the last
two years and are expected to persist, at least to some extent, for
at least the next several years. Yet, it should be recognized that so
far, sales over the Internet account for only a small portion of sales –
especially outside the U.S.
2. Obstacles to diffusion
Obstacles to the diffusion of Internet trade come both from enduring

sources and temporary roadblocks which may be overcome as
consumer attitudes change and technology is improved. Currently,
Internet connections are slower than desired so that downloading
pictures and other information may take longer than consumers are
willing to wait. "Glitches" in online ordering systems may also
frustrate consumers, who are unable to place their orders at a given
time or have difficulty navigating through a malfunctioning site. The
lack of non-English language sites in some areas may also be off-
putting to consumers, and registering domain names in some
countries is difficult. Further, shipping small packages across
countries may be inefficient due to high local postage rates and
inefficiencies in customs processing. Most of these obstacles may be
overcome within next few years.
Other obstacles may, however, have considerably greater staying

power. First, there are legal problems, as several different countries
may seek to impose their jurisdiction on advertising and laws of
product assortment and business practices. Further, the
maintenance of databases, which are essential to delivering on the

promises of e-commerce, may conflict with the privacy rules of
some countries – this is currently a hot issue of contention between
the United States and the European Union. Finally, there are issues
of taxation and collection. While the Clinton Administration has
sought to get the WTO to go along with a three year tax
"moratorium" on Internet purchases much like the one observed in
the U.S., strong opposition is expected. A great attraction of e-
commerce in Europe is that people may order from other countries
and thus evade local sales taxes, which can be prohibitive (e.g.,
25% in Denmark and 16% in Germany). Some firms will ship to
customers in neighbouring countries without collecting sales taxes
or duties, with the responsibility of paying falling on the consumer.
Although most consumers who order and do not arrange to pay for
these taxes get away with it, fines for those caught through random
checks can be severe.
3. Locus of the site
Some firms have chosen to maintain a global site, with reference

only to local sales or support offices; others, in contrast, have
unique sites for each country. In some cases, global sites will
hyperlink surfers to a country or region relevant to the site. Note
that some confusion exists since many sites outside the U.S.
maintain the ".com" designation rather than their countries’
respective suffix (e.g., ".de" for Germany, ".se" for Sweden, and
".au" for Australia). Some firms have experienced problems getting
their banks to accept credit card charges in more than one
currency, and thus it may be difficult to indicate precise prices in
more than one denomination (one site based in Britain offered its
American customers to be as accurate as possible, based on current
exchange rates, although the charge could be off "by a few
pennies.")
4. Lifecycle stages across the World
It has been suggested that Europe runs some five years behind the
U.S. in electronic commerce, but some sources dispute this,
suggesting that lack of success among American retailers may have
other origins, such as inadequate adaptation (for example, some
British users are put off by American English). There are, however,
some factors which cause most countries run behind. Even in
Europe, Internet access penetration rates are lower than they are in
the U.S., and the slower speed associated with downloading Asian
characters is discouraging. In some countries, credit card
penetration is lower, and even in European countries with high
penetration rates, consumers are reluctant to use them. Further, the
fact that consumers in most countries have to pay a per minute
phone charge discourages the essential casual and relaxed

browsing common in the U.S. so long as unlimited cable or
hardwired access is not offered.
3a. Explain Bill of Lading and Letters of credit.
Answer: A bill of lading (sometimes referred to as a BOL,or B/L)

is a document issued by a carrier to a shipper, acknowledging that
specified goods have been received on board as cargo for
conveyance to a named place for delivery to the consignee who is
usually identified. A thorough bill of lading involves the use of at
least two different modes of transport from road, rail, air, and sea.
The term derives from the verb "to lade" which means to load a
cargo onto a ship or other form of transportation.
A bill of lading can be used as a traded object. The standard short

form bill of lading is evidence of the contract of carriage of goods
and it serves a number of purposes:
• It is evidence that a valid contract of carriage, or a chartering
contract, exists, and it may incorporate the full terms of the
contract between the consignor and the carrier by reference
(i.e. the short form simply refers to the main contract as an
existing document, whereas the long form of a bill of lading
(connaissement intégral) issued by the carrier sets out all the
terms of the contract of carriage);
• It is a receipt signed by the carrier confirming whether goods

matching the contract description have been received in good
condition (a bill will be described as clean if the goods have
been received on board in apparent good condition and
stowed ready for transport); and
• It is also a document of transfer, being freely transferable but

not a negotiable instrument in the legal sense, i.e. it governs
all the legal aspects of physical carriage, and, like a cheque or
other negotiable instrument, it may be endorsed affecting
ownership of the goods actually being carried. This matches
everyday experience in that the contract a person might make
with a commercial carrier like FedEx for mostly airway parcels,
is separate from any contract for the sale of the goods to be
carried; however, it binds the carrier to its terms,
irrespectively of who the actual holder of the B/L, and owner
of the goods, may be at a specific moment.
• A standard, commercial letter of credit is a document issued

mostly by a financial institution, used primarily in trade
finance, which usually provides an irrevocable payment
undertaking.

• The letter of credit can also be source of payment for a
transaction, meaning that redeeming the letter of credit will
pay an exporter. Letters of credit are used primarily in
international trade transactions of significant value, for deals
between a supplier in one country and a customer in another.
They are also used in the land development process to ensure
that approved public facilities (streets, sidewalks, storm water
ponds, etc.) will be built. The parties to a letter of credit are
usually a beneficiary who is to receive the money, the
issuing bank of whom the applicant is a client, and the
advising bank of whom the beneficiary is a client. Almost all
letters of credit are irrevocable, i.e., cannot be amended or
canceled without prior agreement of the beneficiary, the
issuing bank and the confirming bank, if any. In executing a
transaction, letters of credit incorporate functions common to
giros and Traveler's cheques. Typically, the documents a
beneficiary has to present in order to receive payment include
a commercial invoice, bill of lading, and documents proving
the shipment was insured against loss or damage in transit.
However, the list and form of documents is open to
imagination and negotiation and might contain requirements
to present documents issued by a neutral third party
evidencing the quality of the goods shipped, or their place of
origin.
3 b. What is UNCITRAL and what it does? (2 marks)
Answer: The United Nations Commission on International Trade

Law (UNCITRAL) was established by the General Assembly in
1966 (Resolution 2205(XXI) of 17 December 1966). In
establishing the Commission, the General Assembly recognized that
disparities in national laws governing international trade created
obstacles to the flow of trade, and it regarded the Commission as
the vehicle by which the United Nations could play a more active
role in reducing or removing these obstacles.
Mandate
The General Assembly gave the Commission the general mandate to

further the progressive harmonization and unification of the law of
international trade. The Commission has since come to be the core
legal body of the United Nations system in the field of international
trade law.
4. Explain the importance of STP in international markets.
Answer: The importance of STP

Segmentation is the cornerstone of marketing – almost all
marketing efforts in some way relate to decisions on who to serve or
how to implement positioning through the different parts of the
marketing mix. For example, one’s distribution strategy should
consider where one’s target market is most likely to buy the
product, and a promotional strategy should consider the target’s
media habits and which kinds of messages will be most persuasive.
Although it is often tempting, when observing large markets, to try
to be "all things to all people," this is a dangerous strategy because
the firm may lose its distinctive appeal to its chosen segments.
In terms of the "big picture," members of a segment should

generally be as similar as possible to each other on a relevant
dimension (e.g., preference for quality vs. low price) and as different
as possible from members of other segments. That is, members
should respond in similar ways to various treatments (such as
discounts or high service) so that common campaigns can be aimed
at segment members, but in order to justify a different treatment of
other segments, their members should have their own unique
response behaviour.
5a. Write a short note on branding and trademarks. (6

marks)
Answer: Branding and trademarks

Brand is the personality that identifies a product, service or
company (name, term, sign, symbol, or design, or combination of
them) and how it relates to key constituencies: Customers, Staff,
Partners, Investors etc.
Some people distinguish the psychological aspect, brand

associations like thoughts, feelings, perceptions, images,
experiences, beliefs, attitudes, and so on that become linked to the
brand, of a brand from the experiential aspect.
The experiential aspect consists of the sum of all points of contact

with the brand and is known as the brand experience. The
psychological aspect, sometimes referred to as the brand image, is
a symbolic construct created within the minds of people and
consists of all the information and expectations associated with a
product or service
A trademark or trade mark or trade-mark is a distinctive sign or

indicator used by an individual, business organization, or other legal
entity to identify that the products or services toconsumers with
which the trademark appears originate from a unique source, and to
distinguish its products or services from those of other entities.
A trademark is designated by the following symbols:

 ™ (for an unregistered trade mark, that is, a mark used to
promote or brand goods)
 ℠ (for an unregistered service mark, that is, a mark used to

promote or brand services)
 ® (for a registered trademark)
A trademark is typically a name, word, phrase, logo, symbol, design,

image, or a combination of these elements. There is also a range
of non-conventional trademarks comprising marks which do not fall
into these standard categories, such as those based on color, smell,
or sound.
The owner of a registered trademark may commence legal

proceedings for trademark infringement to prevent unauthorized
use of that trademark. However, registration is not required. The
owner of a common law trademark may also file suit, but an
unregistered mark may be protectable only within the geographical
area within which it has been used or in geographical areas into
which it may be reasonably expected to expand.
5b. What are the features of exchange and currency

markets?
Answer: The exchange rate regimes adopted by countries in today’s

international monetary and financial system, and the system itself,
are profoundly different from those envisaged at the 1944 meeting
at Bretton Woods establishing the IMF and the World Bank. In the
Bretton Woods system:
• exchange rates were fixed but adjustable. This system aimed

both to avoid the undue volatility thought to characterize
floating exchange rates and to prevent competitive
depreciations, while permitting enough flexibility to adjust to
fundamental disequilibrium under international supervision;
• private capital flows were expected to play only a limited role

in financing payments imbalances, and widespread use of
controls would prevent instability in such flows;
• temporary official financing of payments imbalances, mainly

through the IMF, would smooth the adjustment process and
avoid unduly sharp correction of current account imbalances,
with their repercussions on trade flows, output, and
employment.
In the current system, exchange rates among the major currencies

(principally the U.S. dollar, the euro, and Japanese yen) fluctuate in

response to market forces, with short-run volatility and occasional
large medium-run swings. Some medium-sized industrial countries
also have market – determined floating rate regimes, while others
have adopted harder pegs, including some European countries
outside the euro area. Developing and transition economies have a
wide variety of exchange rate arrangements, with a tendency for
many but by no means all countries to move toward increased
exchange rate flexibility.
This variety of exchange rate regimes exists in an environment with

the following characteristics:
• partly for efficiency reasons, and also because of the limited

effectiveness of capital controls, industrial countries have
generally abandoned such controls and emerging market
economies have gradually moved away from them. The
growth of international capital flows and globalization of
financial markets has also been spurred by the revolution in
telecommunications and information technology, which has
dramatically lowered transaction costs in financial markets
and further promoted the liberalization and deregulation of
international financial transactions;
• international private capital flows finance substantial current

account imbalances, but the changes in these flows appear
also sometimes to be a cause of macroeconomic disturbances
or an important channel through which they are transmitted
to the international system;
• developing and transition countries have been increasingly

drawn into the integrating world economy, in terms of both
their trade in goods and services and of financial transactions.
Lessons from the recent crises in emerging markets are that for
such countries with important linkages to global capital markets, the
requirements for sustaining pegged exchange rate regimes have
become more demanding as a result of the increased mobility of
capital. Therefore, regimes that allow substantial exchange rate
flexibility are probably desirable unless the exchange rate is firmly
fixed through a currency board, unification with another currency, or
the adoption of another currency as the domestic currency
(dollarization).
Flexible exchange rates among the major industrial country

currencies seem likely to remain a key feature of the system. The
launch of the euro in January 1999 marked a new phase in the
evolution of the system, but the European Central Bank has a clear
mandate to focus monetary policy on the domestic objective of price
stability rather than on the exchange rate. Many medium-sized

industrial countries, and developing and transition economies, in an
environment of increasing capital market integration, may also
continue to maintain market-determined floating rates, although
more countries could may adopt harder pegs over the longer term.
Thus, prospects are that:
• exchange rates among the euro, the yen, and the dollar are
likely to continue to exhibit volatility, and schemes to reduce
volatility are neither likely to be adopted, nor to be desirable
as they prevent monetary policy from being devoted
consistently to domestic stabilization objectives;
• several of the transition countries of central and eastern

Europe, especially those preparing for membership in the
European Union, are likely to seek to establish over time the
policy disciplines and institutional structures required to make
possible the eventual adoption of the euro.
The approach taken by the IMF continues to be to advise member

countries on the implications of adopting different exchange rate
regimes, to consider the choice of regime to be a matter for each
country to decide and to provide policy advice that is consistent
with the maintenance of the chosen regime
6. Discuss the various International product and pricing

decisions.
Answer:
Product decisions
In decisions on producing or providing products and services in the
international market it is essential that the production of the
product or service is well planned and coordinated, both within and
with other functional area of the firm, particularly marketing. For
example, in horticulture, it is essential that any supplier or any of his
"out grower" (sub-contractor) can supply what he says he can. This
is especially vital when contracts for supply are finalized, as failure
to supply could incur large penalties. The main elements to consider
are the production process itself, specifications, culture, the physical
product, packaging, labelling, branding, warranty and service.
International Pricing In New Open-Economy Models

Recent developments in open-economy macroeconomics have
progressed under the paradigm of nominal price rigidities, where
monetary disturbances are the main source of fluctuations.
Following developments in closed-economy models, new open-
economy models have combined price rigidities and market
imperfections in a fully micro founded inter-temporal general
equilibrium setup. This framework has been used extensively to
study the properties of the international transmission of shocks, as

well as the welfare implications of alternative monetary and
exchange rate policies.
Imperfect competition is a key feature of the new open-economy

framework. Because agents have some degree of monopoly power
instead of being price takers, this framework allows the explicit
analysis of pricing decisions. The two polar cases for pricing
decisions are producer-currency pricing and local-currency pricing.
The first case is the traditional approach, which assumes that prices
are preset in the currency of the seller. In this case, prices of
imported goods change proportionally with unexpected changes in
the nominal exchange rate, and the law of one price always holds.’
In contrast, under the assumption of local-currency pricing, prices
are preset in the buyer’s currency. Here, unexpected movements in
the nominal exchange rate do not affect the price of imported goods
and lead to short-run deviations from the law of one price.
Empirical evidence using disaggregated data suggests that

international markets for tradable goods remain highly segmented
and that deviations in the law of one price are large, persistent, and
highly correlated with movements in the nominal exchange rate,
even for highly tradable goods. Moreover, there is strong evidence
that the large and persistent movements that characterize the
behaviour of real exchange rates at the aggregate level are largely
accounted for by deviations in the law of one price for tradable
goods.
In this article I make use of a simplified version of a two-country

model where the two markets are segmented, allowing firms to
price discriminate across countries, and where prices are preset in
the consumer’s currency. This model generates movements in the
real exchange rate in response to unexpected monetary shocks,
which are a result of the failure of the law of one price for tradable
goods. I then compare this model to a version in which prices are
preset in the producer’s currency and examine the implications of
these two alternative price-setting regimes for several key issues.
The price-setting regime determines the currency of denomination

of imported goods and the extent to which changes in exchange
rates affect the relative price of imported to domestic goods and the
international allocation of goods in the short run. That is, different
pricing regimes imply different roles for the exchange rate in the
international transmission of monetary disturbances. As we shall
see, this assumption has very striking implications for several
important questions, namely real exchange rate variability, the
linkage between macroeconomic volatility and international trade,
and the welfare effects of alternative exchange rate regimes,
among others.

While generating deviations from the law of one price that are
absent from models assuming producer-currency pricing, the
assumption of local-currency pricing still leaves important features
of the data unexplained. The key role of this assumption in the
properties of open-economy models suggests that it is necessary to
keep exploring the implications of alternative pricing structures in
open-economy models.

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MB0037 – International Business

1a. How has liberalizing trade helped international

Answer: The Benefits of Trade Liberalization

Policies that make an economy open to trade and investment with

Opening up their economies to the global economy has been

There is considerable evidence that more outward-oriented

Freeing trade frequently benefits the poor especially. Developing

MB0037 – International Business Management -1-

The potential gains from eliminating remaining trade barriers are

Although there are benefits from improved access to other

1b. What are the merits and demerits of international trade?

Answer: Advantages and Disadvantages of International

• Enhance your domestic competitiveness

Disadvantages to keep in mind:

MB0037 – International Business Management -2-

2. Discuss the impact of culture on International Business.

Answer: The following can be looked as the various aspects of the

The purpose of this Unit is to provide a state-of-the-art review of

MB0037 – International Business Management -3-

1. Cultural change, convergence and divergence in an era of

2. Evolution of partial globalization

MB0037 – International Business Management -4-

‘Universal culture’ often refers to the assumptions, values, and

Popular culture, again mostly Western European and American in

MB0037 – International Business Management -5-

3. Role of multiculturalism and cultural identity

In contrast, when people from a cultural group add appropriate skills

MB0037 – International Business Management -6-

4. Implications of convergence and divergence issues

IB scholars need to understand that although some countries might

Furthermore, reactions to globalization may take other forms.

MB0037 – International Business Management -7-

Scholars of IB should recognize that the issue of convergence and

5. Processes of cultural changes

MB0037 – International Business Management -8-

There are relatively few theories of culture that pertain to the

These adaptive views of culture are supported by empirical

The process of globalization described before has introduced the

MB0037 – International Business Management -9-

6. The dynamics of culture as a multi-level, multi-layer

Figure 2.1: The dynamic of top-down–bottom-up processes across

Given the dominance of Western MNCs, the values that dominate

MB0037 – International Business Management - 10 -

Both top-down and bottom-up processes reflect the dynamic nature

Global organizations and networks are being formed by having

MB0037 – International Business Management - 11 -

7. Factors that facilitate cultural change

A recent study by Erez and Gati (2004) examined the effects of

MB0037 – International Business Management - 12 -

The change process examined was a shift from choosing to work

8. Understanding when culture matters: increasing the

3a. Explain the brief structure of WTO.

Answer: Structure of World Trade Organization (WTO)

It does this by:

Decisions are made by the entire membership. This is typically by

MB0037 – International Business Management - 13 -

The WTO’s top level decision-making body is the Ministerial

Below this is the General Council (normally ambassadors and heads

At the next level, the Goods Council, Services Council and

Numerous specialized committees, working groups and working

The Secretariat also provides some forms of legal assistance in the

MB0037 – International Business Management - 14 -