Question 1 The world economy is globalizing at an accelerating pace.

Discuss
this statement and list the benefits of globalization.
Answer 1
Globalization is the process of international integration arising from the interchange of
world views, products, ideas, and other aspects of culture. Put in simple terms,
globalization refers to processes that increase world-wide exchanges of national and
cultural resources. Advances in transportation and telecommunications infrastructure,
including the rise of the telegraph and its posterity the Internet, are major factors in
globalization, generating further interdependence of economic and cultural activities. To
begin with, globalization has contributed to the worlds economy in many valuable ways.
The advances in science and technology have allowed businesses to easily cross over
territorial boundary lines. Accordingly, companies tend to become more creative,
competitive thus raising quality of goods, services and the worlds living standard.
Secondly, several companies from the more developed countries have already venture
to begin foreign operations or branches to take benefit of the low cost of labor in the
poorer countries. This kind of business activity will provide more arrival of cash or asset
funds into the less developed countries. However, one cannot reject the harmful effects
which have resulting from globalization. One crucial social aspect is the risk and danger
of outbreak diseases which can easily be multiply as the mode transportation is easier
and faster in todays advance society. This is evidenced in the recent birds flu disease
which has infected most Asian countries over a short time frame. As large corporations
spend or take over many off shore businesses, a modern form of immigration will also
change which may fake certain power force on the local governments of the less
developed countries. Unemployment rates in the more developed regions like Europe
may also rise as corporations choose to outsource cheaper work force from Asian
countries.
Benefits of globalization:
1. Imported goods are available
2. The country can produce what it produces best and import the rest
3. There is a feeling of an international economy
4. The local industries work hard to compete with international firms
5. Raw material is available
6. The standard of life becomes better
7. More jobs are created
8. There is security from famine, disease, etc as international firms intervene.

Question 2 Discuss the role of demographic environment in international

business.
Answer 2
Demographic factors such as size of the population, population growth rates, age
composition, family size, nature of the family, income levels etc. have very significant
implications for business.
The size of the population is an important determinant of demand for many
products. There are countries with only a few lakh of people on the one hand and those
with hundreds of millions on the other hand. According to a World Development Report
there were 58 countries with a population of less than one million. India has several
multimillion cities.
Poor countries with small population are generally not attractive for business.
However, even such countries may hold out opportunities for some companies. As these
markets may not be of interest for large companies, small firms may find promising
niches in these markets.
Advanced countries, particularly with large population, are generally attractive
markets. The major part of the international trade and foreign investment naturally take
place between these nations. Because of the large potential of these markets,
competition is generally strong in them.
Several high income nations, however, pose a problem for many businesses.
Because of the decline in the birth rates and the consequent fall in the size of the baby
population, the market for baby products has shrunk. This has prompted some
companies to reposition their products (originally introduced as baby products) and to
pay more importance to international business.
The declining birth rate has been a boon to certain industries. For example,
industries such as hotels, airlines and restaurants have benefited from the fact that
young childless couples have more time and income for travel and dining out. Small
families have also similar advantages when compared with large families.
Although birth rates have fallen in many developing countries, the population growth
rates are still very high. This coupled with a steady increase in income drives fast the
growth of the markets of a number of developing economies.
When the population is very large, even if the country is generally poor, there could be a
sizeable market even for those goods and services which are regarded luxuries in these
countries. For example, if just 5% of the Indian population is well to do, absolute number
is larger than the total population of many of the high income economies.
High population growth rate also implies an enormous increase in the labor
supply. When the Western countries experienced industrial revolution, the population
growth was comparatively slow. Labor shortage and rising wages encouraged the
growth of labor intensive methods of production. Capital intensive technologies,
automation, and even rationalization, are opposed by labor and many sociologists,
politicians and economists in developing countries. Cheap labor and a growing market
have encouraged many multinationals to invest in developing countries like India and
China. Many companies in the developed countries have relocated their production
facilities, wholly or partially, in the developing countries to reduce the labor costs. For
example automobile manufacturers of Korea, U.S and Japan are setting up additional
manufacturing units in India for exporting as well as for Indian markets.
The problems of developing countries due to the population explosion also
indicate the enormous scope for several industries. A very significant share of the Indian
population is below the poverty line. Although these people, who do not have a sufficient
income even to meet the bare minimum basic necessities of life, do not come within the

market for a large variety of goods and services , the existence of such a large size of
poor population has a lot of other implications. To solve the basic problems, the
additional number of children to be educated , the additional number of people to be
provided with medical care, water supply etc. during one Five Year Plan are more than
what most nations have done over centuries. While it is a formidable national challenge,
it also indicates enormous business opportunities.

Question 3 Regional integration is helping the countries in growing their trade.

Discuss this statement. Describe in brief the various types of regional
integrations.
Answer 3
Regional integration: Regional integration is the process by which two or more nationstates agree to co-operate and work closely together to achieve peace, stability and
wealth. It results in the creation and diversion of trade. It supports overall growth of the
region, coupled with efficient trading practices. Trade creation increases production and
income and also leads to new entrants in the market and, therefore, results in tougher
competition. The transfer of technology is also faster.
It includes reduction on traffic and prohibitions. It spread goodwill among member
countries and also helps in reducing the chances of conflict.
Types of Regional Integration:
1. Preferential trading agreement: It gives preferential access to certain products from
the participating countries. This can be called as a limited or sector based free trade
area.
2. Free trade area: It includes the reciprocal removal of tariffs on member countries
goods. In an FTA, each member is free within the limits specified by the GATT/WTO
system on deciding the level of external tariffs that will be applied to non members. As
there is flexibility on the interactions with the third countries, the members in an FTA are
free to establish or join other FTAs.
3. Custom union: It is a type of agreement that include determination of the common
external tariff (CET), in addition to the elimination of the internal tariff rates. Generally,
determination of the CET is done through taking an average of all partners before union
tariff levels.
4. Common market: It is where there is free factor mobility capital, investment and
labor in addition to the customs union requirements that determine free flows of goods
and services. This integration requires governments to employ coordinated actions in
order to ensure the equal treatment for all factors in the member countries of the CM.
5. Economic union: It results from the enlargement of a common market with the
additional requirement of the harmonization of economic policies, both monetary and
fiscal. It further involves the creation of an independent regional central bank that has
control over exchange rate policy and inflation rates.

6. Political union: It is a type of agreement which includes the harmonization of

economic and political policies, and so as to become a single state. This kind of
integration necessitates the loss of sovereignty and the creation of domestic institutions
on the international level.

Question 4 Write short note on:

a) Foreign currency derivatives
b) bases of international tax systems
Answer 4
Foreign currency derivatives:
In international finance, derivative instruments imply contracts based on which you can
purchase or sell currency at a future date. The three major types of foreign exchange
(FX) derivatives: forward contracts, futures contracts, and options. They have important
differences, which changes their attractiveness to a specific FX market participant.
FX derivatives are contracts to buy or sell foreign currencies at a future date. The table
summarizes the relevant characteristics of three types of FX derivatives: forward
contracts, futures contracts, and options. Because the types of FX derivatives closely
correspond to the identity of the FX market participant, the table is based on the
derivative type-market participant relationship.
bases of international tax systems:
Tax neutrality To keep the economic efficiency from being affected the international
tax system should remain neutral. For the nationality of the invester or the locality of the
investment not to be influenced, a neutral tax is important. . Such an environment will
allow capital to move from a nation with lesser return to a nation with higher return,
resulting in well allocated resourses that will ensure a high gross world output.
Tax equity The principle of tax equity states that all equally positioned tax players
contribute in the cost of operating the government according to the equal rules. The
concept of equity can be perceived in two ways. It is assert by the first view that the input
of each tax player must be consistent with the amount of public services as received.
The second maintains that the contribution of each tax player must be in terms of their
ability to pay. The ability to pay means the one with greater ability is likely to pay a larger
amount of tax.
Avoidance of double taxation The avoidance of double income asserts that one
must not be taxed twice for the same income. However, double taxation occurs if the
recipient of post-tax income in a foreign country is taxed again. As an alternative, the
requirements of foreign tax credits may be formed in the domestic tax system.

Question 5 Strategic planning involves allocation of resources to firms to fulfil

their long term goals. What are the types of strategic planning? Compare Topdown Vs Bottom-up planning.
Answer 5
Types of strategic planning: Strategic planning process involves allocation of
resources to firms to fulfil their long-term goals. Any business plan can be classified into
three types. They are:
Strategic planning: This planning process is the best among the three business
planning processes. It is a long-term process thatthe business owners utilise to unveil
their business vision and mission. It also determines a gateway for business owners for
achieving their goals. Strategic planning fulfills the mission and the overall goals of the
firm. Whereas, the other two are rather more short-term and are used sometimes without
any relation to the long-term business goals. However these three kinds of planning
work well when used within a strategic plan.
Intermediate planning: This planning process is for six months to two years.
They outline the manner in which the strategic plan is pursued. Intermediate plans are
often used for campaigns with the purpose and goal of supporting the trades long-term
goals.
Short-term planning: This planning process involves planning for few weeks or
at least for a year. It involves detailing out the functioning of a strategic plan on a daily
basis. Resources are allocated for business management and development that takes
place daily within the strategic plan.
Top-down Vs Bottom-up planning:
Top-down planning : Top-down planning is a common strategy that is used for project
planning. It helps maintain the decision making process at the senior level. Goals and
allowances are established at the highest level. Senior-level managers have to be very
specific when laying out expectations because the people following the plan are not
involved in the planning process. It is very important to keep the morale of the
employees high and motivate them to perform the job. Since employees are not included
in any of the decision making processes, they are motivated only through fear or
incentives.
Management must choose techniques to align projects and goals with top-down
planning. Management alone is held responsible for the plans set and the end result.
The benefit of talented employees with prior experience on definite aspects of the project
are not utilised based on the assumption that the management can plan and perform a
project better without the inputs from these employees. Some think that the top-down
planning process is the rightway to make a plan, and that the plan development is not
important. It permits the management to segregate a project into steps, and then break
the work into smaller executable parts of the project. Simultaneously, the work that is
broken down is analysed until all the steps could be studied, due-dates are precisely
assigned, and then parts of the project are given to employees. However, the focus is on
long-term goals and the short-term and uncertain goals can get lost. This approach is
best applicable for small projects.

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

bottom-up planning, an organisation gives its project deeper focus because each
organisation has a huge number of employees involved, and each employee is an expert
in their own area. Team members work side-by-side and contribute during each stage of
the process. Plans are developed at the lowest levels, and then passed on to each of the
subsequent higher levels. Finally, it then reaches the senior management for approval.
Lower-level employees take personal interest in a plan that they are involved in
planning. Employees are more encouraged which in turn improves their morale. Project
managers are responsible for the successful completion of the project. Let us now
consider the key points of top-down and bottom-up planning.

Question 6 Discuss the various payment terms in international trade. Which is

the safest method and why?
Answer 6
Since international trade deals with exchange of goods, there are various ways in which
the payment terms (finance) will be handled.
Bothe seller and trader should be careful about the method of payment as they are at
different locations and transactions happen without face-to-face interaction. There are
four methods of payment for the international transactions. This includes the Cash-inadvance method, Letter of Credit, Documentary collections and the Open Account.
Apparently the most secure methodologies that work for the exporter is not safe for the
importer. For exporters, documentary collection and open account are less secure and
letter of credit and cash in advance are more secure methods. In the same way, with
respect to the importer, the letter of credit and cash in advance are less secure and the
documentary collection and open account are more secure. These terms are explained
as follows.
Cash-in-advance: Cash-in-advance helps in removing the risks of credit by the
exporter. By this method, exporter receives the payment before the transfer of goods.
The options that are available with the cash-in-advance method include wire transfers
and credit cards. This is the least attractive method for many of the buyers as it creates
cash flow problems. The buyers are concerned about the quality/quantity and delivery of
the goods that are not sent if the payment is made in advance.
Letters of credit: The letter of credit is the most secure instrument available for
international traders. This is the commitment made by the bank that the payment will be
made to the exporter if the terms and conditions are met. The terms and conditions of
the payment are explained in the required documents.
Documentary collections: Documentary collection is a transaction in which, the
exporter's bank (remitter bank) sends the documents to the importer's bank (collecting
bank). The document contains information about the payment. The funds are collected
from the importer and paid to the exporter through the banks involved in the collection, in
exchange for the documents.

Open account: The open account transaction involves the shipping and delivery of
goods in advance. The payment is due usually from 30 to 90 days. This is advantageous
for the importer in cash flow and cost terms, but at the same time it is very risky for the
exporters. Buyers from abroad stress on open accounts since the extension of credit
from the seller to the buyer are more common in many countries. Exporters who avoid
extending credit may face loss in the sale because of competitors in the market.