CP 102 UNIT 5

Q.1. International Trade.

Ans: International trade is the exchange of capital, goods, and services
across international borders or territories. In most countries, such trade represents a
significant share of gross domestic product (GDP).

International trade, economic transactions that are made between countries. Among the
items commonly traded are consumer goods, such as television sets and clothing; capital
goods, such as machinery; and raw materials and food. Other transactions involve
services, such as travel services and payments for foreign patents (see service industry).
International trade transactions are facilitated by international financial payments, in
which the private banking system and the central banks of the trading nations play
important roles.
International trade and the accompanying financial transactions are generally conducted
for the purpose of providing a nation with commodities it lacks in exchange for those that
it produces in abundance; such transactions, functioning with other economic policies,
tend to improve a nation’s standard of living. Much of the modern history of international
relations concerns efforts to promote freer trade between nations. This article provides a
historical overview of the structure of international trade and of the leading institutions
that were developed to promote such trade.

International trade refers to the exchange of goods and services between the countries. In
simple words, it means the export and import of goods and services. Export means selling
goods and services out of the country, while import means goods and services flowing into
the country.

International trade supports the world economy, where prices or demand and supply are
affected by global events. For instance, the US changing visa policies for the software
employees will impact the Indian software firms. Or, an increase in the cost of labor in
exporting country like China could mean you end paying more for the Chinese goods in the
US.

TYPES OF INTERNATIONAL TRADE

There are three types of international trade: Export Trade, Import Trade and Entrepot
Trade. Export and import trade we have already covered above. Entrepot Trade is a
combination of export and import trade and is also known as Re-export. It means
importing goods from one country and exporting it to another country after adding some
value to it.
For instance, India imports gold from China makes jewelry from it and then exports it to
other countries.
WHAT’S THE NEED FOR AN INTERNATIONAL TRADE?
Countries go for trade internationally, when there are not enough resources or capacity to
meet the domestic demand. So, by importing the needed goods, a country can use
their domestic resources to produce what they are good at. Then, the country can export
the surplus in the international market. Primarily, a nation imports goods and services for
the following reasons:

PRICE
If foreign companies can produce or offer goods and services more cheaply, then it may be
beneficial to go for foreign trade.

QUALITY
If the companies abroad can offer good and services of superior quality. For instance,
Scotch Whiskey from Scotland is considered to be superior. Scotland exports around 37
bottles of Scotch per second.

AVAILABILITY
If it is impossible to produce that product domestically, like a special variety of fruit or a
mineral. For instance, Japan has no natural reserves of oil, and thus, it imports all its oil.
DEMAND
If a demand for a product or services is more in a country than what it can domestically
produce, then it goes for import.

ADVANTAGES OF INTERNATIONAL TRADE

COMPARATIVE ADVANTAGE
It allows countries to specialize in producing only those goods and services, which it is
good at.
ECONOMIES OF SCALE
If a country wants to sell its goods in the international market, it will have to produce
more than what is needed to meet the domestic demand. So, producing higher volume
leads to economies of scale, meaning the cost of producing each item is reduced.
COMPETITION
Selling goods and services in the foreign market also boosts the competition in that
market. In a way, it is good for local suppliers and consumers as well. Suppliers will have
to ensure that their prices and quality is competitive enough to meet the foreign
competition.

TRANSFER OF TECHNOLOGY
International trade often leads to the transfer of technology from a developed nation to
the developing nation. Govt. in the developing nation often lay terms for foreign
companies that involve developing local manufacturing capacities.

MORE JOB CREATION

Increase in international trade also creates job opportunities in both countries. That’s a
major reason why big trading nations like the US, Japa, and South Korea have lower
unemployment rates.
DISADVANTAGES OF INTERNATIONAL TRADE
OVER-DEPENDENCE
Countries or companies involved in the foreign trade are vulnerable to global events. An
unfavorable event may impact the demand of the product, and could even lead to job
losses. For instance, the recent US-China trade war is adversely affecting the Chinese
export industry.
UNFAIR TO NEW COMPANIES
New companies or start-ups who don’t have much resources and experience may find it
difficult to compete against the big foreign firms.

A THREAT TO NATIONAL SECURITY

If a country is over dependant on the imports for strategic industries, then exporters may
force it to take a decision that may not be in the national interest.

PRESSURE ON NATURAL RESOURCES

A country only has limited natural resources. But, if it opens its doors to the foreign
companies, it could drain those natural resources much quicker.

Even though international trade has its own advantage and disadvantages, the advantages
far outweigh the disadvantages. Nowadays, international trade has become a necessity,
but a country must maintain a proper balance between imports and exports to ensure that
the economy stays on the growth track.

Q.2. Balance of Payment (BOP).

Ans: The balance of payments (BOP) is a statement of all transactions made between
entities in one country and the rest of the world over a defined period of time, such as a
quarter or a year.
The balance of payments (BOP), also known as balance of international payments,
summarizes all transactions that a country's individuals, companies and government
bodies complete with individuals, companies and government bodies outside the country.
These transactions consist of imports and exports of goods, services and capital, as well as
transfer payments, such as foreign aid and remittances.
A country's balance of payments and its net international investment position together
constitute its international accounts.
The balance of payments divides transactions in two accounts: the current account and
the capital account. Sometimes the capital account is called the financial account, with a
separate, usually very small, capital account listed separately. The current account
includes transactions in goods, services, investment income and current transfers. The
capital account, broadly defined, includes transactions in financial instruments and central
bank reserves. Narrowly defined, it includes only transactions in financial instruments.
The current account is included in calculations of national output, while the capital
account is not.
The sum of all transactions recorded in the balance of payments must be zero, as long as
the capital account is defined broadly. The reason is that every credit appearing in the
current account has a corresponding debit in the capital account, and vice-versa. If a
country exports an item (a current account credit), it effectively imports foreign capital
when that item is paid for (a capital account debit).
If a country cannot fund its imports through exports of capital, it must do so by running
down its reserves. This situation is often referred to as a balance of payments deficit, using
the narrow definition of the capital account that excludes central bank reserves. In reality,
however, the broadly defined balance of payments must add up to zero by definition. In
practice, statistical discrepancies arise due to the difficulty of accurately counting every
transaction between an economy and the rest of the world.
Balance Of Payment (BOP) is a statement which records all the monetary transactions
made between residents of a country and the rest of the world during any given period.
This statement includes all the transactions made by/to individuals, corporates and the
government and helps in monitoring the flow of funds to develop the economy. When all
the elements are correctly included in the BOP, it should sum up to zero in a perfect
scenario. This means the inflows and outflows of funds should balance out. However, this
does not ideally happen in most cases.
BOP statement of a country indicates whether the country has a surplus or a deficit of
funds i.e when a country’s export is more than its import, its BOP is said to be in surplus.
On the other hand, BOP deficit indicates that a country’s imports are more than its
exports. Tracking the transactions under BOP is something similar to the double entry
system of accounting. This means, all the transaction will have a debit entry and a
corresponding credit entry.

Why balance of payment is vital for a country?

A country’s BOP is vital for the following reasons:

 BOP of a country reveals its financial and economic status.

 BOP statement can be used as an indicator to determine whether the country’s
currency value is appreciating or depreciating.
 BOP statement helps the Government to decide on fiscal and trade policies.
 It provides important information to analyze and understand the economic dealings
of a country with other countries.
By studying its BOP statement and its components closely, one would be able to identify
trends that may be beneficial or harmful to the economy of the county and thus, then take
appropriate measures.

Elements of balance of payment

There are three components of balance of payment viz current account, capital account,
and financial account. The total of the current account must balance with the total of
capital and financial accounts in ideal situations.
Current Account
The current account is used to monitor the inflow and outflow of goods and services
between countries. This account covers all the receipts and payments made with respect
to raw materials and manufactured goods. It also includes receipts from engineering,
tourism, transportation, business services, stocks, and royalties from patents and
copyrights. When all the goods and services are combined, together they make up to a
country’s Balance Of Trade (BOT).
There are various categories of trade and transfers which happen across countries. It
could be visible or invisible trading, unilateral transfers or other payments/receipts.
Trading in goods between countries are referred to as visible items and import/export of
services (banking, information technology etc) are referred to as invisible items.
Unilateral transfers refer to money sent as gifts or donations to residents of foreign
countries. This can also be personal transfers like – money sent by relatives to their
family located in another country.
Capital Account
All capital transactions between the countries are monitored through the capital account.
Capital transactions include the purchase and sale of assets (non-financial) like land and
properties. The capital account also includes the flow of taxes, purchase and sale of fixed
assets etc by migrants moving out/in to a different country. The deficit or surplus in the
current account is managed through the finance from capital account and vice versa.
There are 3 major elements of capital account:

 Loans & borrowings – It includes all types of loans from both the private and public
sectors located in foreign countries.
 Investments – These are funds invested in the corporate stocks by non-residents.
 Foreign exchange reserves – Foreign exchange reserves held by the central bank of a
country to monitor and control the exchange rate does impact the capital account.
 Financial Account
The flow of funds from and to foreign countries through various investments in real
estates, business ventures, foreign direct investments etc is monitored through the
financial account. This account measures the changes in the foreign ownership of
domestic assets and domestic ownership of foreign assets. On analyzing these changes, it
can be understood if the country is selling or acquiring more assets (like gold, stocks,
equity etc).

Q.3. FDI & FII Inflows and Outflows.

Ans: FDI net inflows are the value of inward direct investment made by non-resident
investors in the reporting economy. FDI net outflows are the value of outward direct
investment made by the residents of the reporting economy to external economies.
Inward Direct Investment, also called direct investment in the reporting economy,
includes all liabilities and assets transferred between resident direct investment
enterprises and their direct investors. It also covers transfers of assets and liabilities
between resident and nonresident fellow enterprises, if the ultimate controlling parent is
nonresident.
Outward direct investment, also called direct investment abroad, includes assets and
liabilities transferred between resident direct investors and their direct investment
enterprises. It also covers transfers of assets and liabilities between resident and
nonresident fellow enterprises, if the ultimate controlling parent is resident. Outward
direct investment is also called direct investment abroad.
Foreign direct investment is a category of cross-border investment associated with a
resident in one economy having control or a significant degree of influence on the
management of an enterprise that is resident in another economy. As well as the equity
that gives rise to control or influence, direct investment also includes investment
associated with that relationship, including investment in indirectly influenced or
controlled enterprises, investment in fellow enterprises (enterprises controlled by the
same direct investor), debt (except selected debt), and reverse investment.
Implementation of the Balance of Payments Manual 6th Edition (BPM6) methodology has
brought changes to the definition of direct investment by making it consistent with
the OECD Benchmark Definition of Foreign Direct Investment, notably the recasting in
terms of control and influence, treatment of chains of investment and fellow enterprises,
and presentation on a gross asset and liability basis as well as according to the directional
principle.
Data on FDI flows are presented on net bases (capital transactions' credits less debits
between direct investors and their foreign affiliates). Net decreases in assets or net
increases in liabilities are recorded as credits, while net increases in assets or net
decreases in liabilities are recorded as debits. Hence, FDI flows with a negative sign
indicate that at least one of the components of FDI is negative and not offset by positive
amounts of the remaining components. These are instances of reverse investment or
disinvestment.
Data on FDI net inflows and outflows are based on the sixth edition of the Balance of
Payments Manual (2009) reported by the International Monetary Fund (IMF). Foreign
direct investment data are supplemented by the World Bank staff estimates using data
from the United Nations Conference on Trade and Development (UNCTAD) and official
national sources

WHAT ARE THE DIFFERENCE BETWEEN FDI AND FII?

FDI
Foreign direct investment (FDI) is an investment in a business by an investor from
another country for which the foreign investor has control over the company purchased.
FII
Foreign institutional investors (FIIs) are those institutional investors which invest in the
assets belonging to a different country other than that where these organizations are
based.

Difference Between FDI And FII

 FDI is an investment that a parent company makes in a foreign country. On the

contrary, FII is an investment made by an investor in the markets of a foreign
nation.
 The FDI flows into the primary market, while the FII flows into secondary market.
 While FIIs are short-term investments, the FDI’s are long term investment.
 FII can enter the stock market easily and also withdraw from it easily. But FDI
cannot enter and exit that easily.
 The Foreign Direct Investment is considered to be more stable than Foreign
Institutional Investor.
Both are forms of foreign investment.

FDI (Foreign Direct Investment) is when a foreign company invests in India directly by
setting up a wholly owned subsidiary or getting into a joint venture, and conducting their
business in India.
IBM India is a wholly owned subsidiary of IBM, and is a good example of FDI where a
foreign company has set up a subsidiary in India and is conducting its business through
that company.

FII is when foreign investors(whose purpose is to invest money on behalf of others from
his own country) invest in the shares of a company that is listed in India, or in bonds
offered by an Indian company. So, if a foreign investor buys shares in Infosys then that
qualifies as FII Investment.
In FII, the companies only need to get registered in the stock exchange to make
investments.
It is easy to see why you would prefer FDI to FII investments. FDI investments are more
stable because companies like IBM set up offices, hire employees, and have a long term
plan for the country. IBM can’t just pull out a few million dollars from India overnight,
which is what FII investors do from time to time and that leads to market crashes.

Q.4. Non-Equity Mode (NEM) of Investment.

Ans: Non-equity modes, defined as modes that do not entail equity investment by a
foreign entrant, are becoming increasingly popular among service firms for organizing
overseas ventures/operations. ... The two most commonly employed non-equity
modes by the hotel industry are franchising and management-service contracts (MSC).

Non-equity modes, defined as modes that do not entail equity investment by a foreign
entrant, are becoming increasingly popular among service firms for organizing overseas
ventures/operations. Nonequity modes are especially popular among consumer-services
firms (such as hotel and restaurant firms) as compared to professional-services firms
(such as consulting firms) (Erramilli, 1990). Non-equity modes are essentially contractual
modes, such as leasing, licensing, franchising, and management-service contracts
(Dunning, 1988).
For many service firms desirous of entering foreign markets, an important question
is not how to choose between different equity and non-equity modes but how to choose
between different non-equity modes for organizing their operations in the foreign
markets. While several previous studies have examined the choice between equity and
non-equity modes for manufacturing (e.g., Gatignon and Anderson, 1988; Agarwal, 1994;
Tse, Pan, and Au, 1997; Arora and Fosfuri, 2000; Pang and Tse, 2000) as well as service
firms (e.g., Agarwal and Ramaswami, 1992; Erramilli and Rao, 1993; FladmoeLindquist
and Jacque, 1995; Erramilli, 1996; Contractor and Kundu, 1998a; Contractor and Kundu,
1998b), the extant literature does not offer a theoretically sound-and empirically
corroborated-framework for how service firms could choose between different types of
non-equity modes. The present study attempts to address this issue in the context of the
multinational hotel industry. The reason for choosing this industry is that hotels are
renowned for their use of non-equity modes (Contractor and Kundu, 1998b). In the hotel
industry, non-equity modes account for 65.4% of multinational properties worldwide
(Contractor and Kundu, 1998b). The two most commonly employed non-equity modes by
the hotel industry are franchising and management-service contracts (MSC). Hotel firms
typically do not make any equity investment in either of these modes, although some firms
may combine non-equity arrangements with equity investments (Dunning, 1988).
Although both franchising and MSCs are non-equity modes, there are important
differences between them

NON-EQUITY MODES OF INTERNATIONAL PRODUCTION AND DEVELOPMENT

International production, today, is no longer exclusively about FDI on the one hand and
trade on the other (figure 5). Non-equity modes (NEMs) of international production are of
growing importance, generating over $2 trillion in sales in 2010, much of it in developing
countries. NEMs include contract manufacturing, services outsourcing, contract farming,
franchising, licensing, management contracts and other types of contractual relationships
through which TNCs coordinate activities in their global value chains (GVCs) and influence
the management of host-country firms without owning an equity stake in those firms.

From a development perspective, both NEM partnerships and foreign affiliates (i.e. FDI)
can enable host countries to integrate into GVCs. A key advantage of NEMs is that they are
flexible arrangements with local firms, with a built-in motive for TNCs to invest in the
viability of their partners through dissemination of knowledge, technology and skills. This
offers host economies considerable potential for longterm industrial capacity building
through a number of key channels of development impact such as employment, value
added, export generation and technology acquisition (table 4). On the other hand, by
establishing a local affiliate through FDI, a TNC signals its long-term commitment to a host
economy. Attracting FDI is also the better option for economies with limited existing
productive capacity.

NEMs may be more appropriate than FDI in sensitive situations. In agriculture, for
example, contract farming is more likely to address responsible investment issues –
respect for local rights, livelihoods of farmers and sustainable use of resources – than
large-scale land acquisition.

For developing country policymakers, the rise of NEMs not only creates new opportunities
for productive capacity building and integration into GVCs, there are also new challenges,
as each NEM mode comes with its own set of development impacts and policy
implications.

The TNC “make or buy” decision and NEMs as the “middleground” option
Foremost among the core competencies of a TNC is its ability to coordinate activities
within a global value chain. TNCs can decide to conduct such activities in-house
(internalization) or they can entrust them to other firms (externalization) – a choice
analogous to a “make or buy” decision. Internalization, where it has a cross-border
dimension, results in FDI, whereby the international flows of goods, services, information
and other assets are intra-firm and under full control of the TNC. Externalization results in
either arm’s-length trade, where the TNC exercises no control over other firms or, as an
intermediate “middle-ground” option, in non-equity inter-firm arrangements in which
contractual agreements and relative bargaining power condition the operations and
behaviour of host-country firms. Such “conditioning” can have a material impact on the
conduct of the business, requiring the host-country firm to, for example, invest in
equipment, change processes, adopt new procedures, improve working conditions, or use
specified suppliers.

The ultimate ownership and control configuration of a GVC is the outcome of a set of
strategic choices by the TNC. In a typical value chain, a TNC oversees a sequence of
activities from procurement of inputs, through manufacturing operations to distribution,
sales and aftersales services (figure 6). In addition, firms undertake activities – such as IT
functions or R&D – which support all parts of the value chain (upper parts of figure 6).

In a fully integrated company, activities in all these segments of the value chain are carried
out in-house (internalized), resulting in FDI if the activity takes place overseas. However,
in all segments of the value chain TNCs can opt to externalize activities through various
NEM types. For example, instead of establishing a manufacturing affiliate (i.e. FDI) in a
host country, a TNC can outsource production to a contract manufacturer or permit a local
firm to produce under licence.

The TNC’s ultimate choice between FDI and NEMs (or trade) in any segment of the value
chain is based on its strategy, the relative costs and benefits, the associated risks, and the
feasibility of available options. In some parts of the value chain NEMs can be substitutes
for FDI, in others the two may be complementary.
NEMs are worth more than $2 trillion, mostly in developing countries
Cross-border NEM activity worldwide is estimated to have generated over $2 trillion of
sales in 2010. Of this amount, contract manufacturing and services outsourcing accounted
for $1.1–1.3 trillion, franchising for $330–350 billion, licensing for $340–360 billion, and
management contracts for around $100 billion. Some of the industry breakdowns by
mode are given in table 5.

These estimates are incomplete, including only the most important industries in which
each NEM type is prevalent. The total also excludes other non-equity modes such as
contract farming and concessions, which are significant in developing countries. For
example, contract farming activities by TNCs are spread worldwide, covering over 110
developing and transition economies, spanning a wide range of agricultural commodities
and accounting for a high share of output.

There are large variations in relative size. In the automotive industry, contract
manufacturing accounts for 30 per cent of global exports of automotive components and a
quarter of employment. In contrast, in electronics, contract manufacturing represents a
significant share of trade and employment. In labourintensive industries such as
garments, footwear and toys, contract manufacturing is even more important.

Putting different modes of international production in perspective, cross-border activity

related to selected NEMs of $2 trillion compares with exports of foreign affiliates of TNCs
of some $6 trillion in 2010. However, NEMs are particularly important in developing
countries. In many industries, developing countries account for almost all NEM-related
employment and exports, compared with their share in global FDI stocks of 30 per cent
and in world trade of less than 40 per cent.

NEMs are also growing rapidly. In most cases, the growth of NEMs outpaces that of the
industries in which they operate. This growth is driven by a number of key advantages of
NEMs for TNCs: (1) the relatively low upfront capital expenditures required and the
limited working capital needed for operation; (2) reduced risk exposure; (3) flexibility in
adapting to changes in the business cycle and in demand; and (4) as a basis for
externalizing non-core activities that can often be carried out at lower cost by other
operators.

NEMs generate significant formal employment in developing countries

UNCTAD estimates that worldwide some 18–21 million workers are directly employed in
firms operating under NEM arrangements, most of whom are in contract manufacturing,
services outsourcing and franchising activities (figure 7). Around 80 per cent of NEM-
generated employment is in developing and transition economies. Employment in
contract manufacturing and, to a lesser extent, services outsourcing, is predominantly
based in developing countries. The same applies in other NEMs, although global figures
are not available; in Mozambique, for instance, contract farming has led to some 400,000
smallholders participating in global value chains.

Working conditions in NEMs based on low-cost labour are often a concern, and vary
considerably depending on the mode and the legal, social and economic structures of the
countries in which NEM firms are operating. The factors that influence working conditions
in non-equity modes are the role of governments in defining, communicating and
enforcing labour standards and the sourcing practices of TNCs. The social responsibility of
TNCs has extended beyond their own legal boundaries and has pushed many to increase
their influence over the activities of value chain partners. It is increasingly common for
TNCs, in order to manage risks and protect their brand and image, to influence their NEM
partners through codes of conduct, to promote international labour standards and good
management practices.

An additional concern relates to the relative “footlooseness” of NEMs. The seasonality of

industries, fluctuating demand patterns of TNCs, and the ease with which they can shift
NEM production to other locations can have a strong impact on working conditions in
NEM firms and on stability of employment.
NEMs often make an important contribution to GDP
The impact of NEMs on local value added can be significant. It depends on how NEM
arrangements fit into TNC-governed GVCs and, therefore, on how much value is retained
in the host economy. It also depends on the potential for linkages with other firms and on
their underlying capabilities.

In efficiency seeking NEMs, such as contract manufacturing or services outsourcing, it is

possible for value capture in the host economy to be relatively small compared to the
overall value creation in a GVC, when the scope for local sourcing is limited and goods are
imported, processed and subsequently exported, as is often the case in the electronics
industry, for example. Although value captured as a share of final-product sales price may
be limited, it can nevertheless represent a significant contribution to the local economy,
adding up to 10–15 per cent of GDP in some countries.

Local sourcing and the overall impact on host-country value added increases if the
emergence of contract manufacturing leads to a concentration of production and export
activities (e.g. in clusters or industrial parks). The greater the number of plants and the
more numerous the linkages with TNCs, the greater will be the spillover effects and local
value added. In addition, clustering can reduce the risk of TNCs shifting production to
other locations by increasing switching costs.

NEMs can generate export gains

NEMs are inextricably linked with international trade, shaping global patterns of trade in
many industries. In toys, footwear, garments, and electronics, contract manufacturing
represents more than 50 per cent of global trade (figure 8). NEMs can thus be an
important “route-to-market” for countries aiming at export-led growth, and an important
initial point of access to TNC governed global value chains, before gradually building
independent exporting capabilities. Export gains can be partially offset by higher imports,
reducing net export gains, where local value added is limited, especially in early stages of
NEM development.

NEMs are an important avenue for technology and skills building

NEMs are in essence a transfer of intellectual property to a host-country firm under the
protection of a contract. Licensing involves a TNC granting an NEM partner access to
intellectual property, usually with contractual conditions attached, but often with some
training or skills transfer. International franchising transfers a business model, and
extensive training and support are normally offered to local partners in order to properly
set up the new franchise with wide-ranging implications for technology dissemination.

In some East and South-East Asian economies in particular, but also in Eastern Europe,
Latin America and South Asia, technology and skills acquisition and assimilation by NEM
companies in electronics, garments, pharmaceuticals, ITservices and business process
outsourcing (BPO) have led to their transformation into TNCs and technology leaders in
their own right.

Although technology acquisition and assimilation through NEMs is a widespread

phenomenon, this is not a foregone conclusion, especially at the level of second and third
tier suppliers, where linkages may be insufficient or of low quality. A key factor is the
absorptive capacity of local NEM partners, in the form of their existing skills base, the
availability of workers that can be trained to learn new skills, and the basic prerequisites
to turn acquired skills into new business ventures, including the regulatory framework,
the business environment and access to finance. Another important factor is the relative
bargaining power of TNCs and local NEM partners. Both factors can be influenced by
appropriate policies.

Social and environmental pros and cons of NEMs

Concerns exist that cross-border NEMs in some industries may be a mechanism for TNCs
to circumvent high social and environmental standards in their production network.
Pressure from the international community has pushed TNCs to take greater
responsibility for such standards throughout their global value chains. There is now a
significant body of evidence to suggest that TNCs are likely to use more environmentally
friendly practices than domestic companies in equivalent activities. The extent to which
TNCs guide NEM operations on social and environmental practices depends, first, on their
perception of and exposure to legal liability risks (e.g. reparations in the case of
environmental damages) and business risks (e.g damage to their brand and lower sales);
and, secondly, on the extent to which they can control NEMs. TNCs employ a number of
mechanisms to influence NEM partners, including codes of conduct, factory inspections
and audits, and thirdparty certification schemes.

NEMs can help countries integrate in GVCs and build productive capacity
The immediate contributions to employment, to GDP, to exports and to the local
technology base that NEMs can bring help to provide the resources, skills and access to
global value chains that are prerequisites for long-term industrial capacity building.

A major part of the contribution of NEMs to the build-up of local productive capacity and
long-term prospects for industrial development is through the impact on enterprise
development, as NEMs require local entrepreneurs and domestic investment. Such
domestic investment, and access to local or international financing, is often facilitated by
NEMs, either through explicit measures by TNCs providing support to local NEM partners,
or through the implicit guarantees stemming from the partnership with a major TNC itself.

While the potential contributions of NEMs to long-term development are clear, concerns
are often raised (especially with regard to contract manufacturing and licensing), that
countries relying to a significant extent on NEMs for industrial development risk
remaining locked-in to low-value-added segments of TNCgoverned global value chains
and remaining technology dependent. In such cases, developing economies would run a
further risk of becoming vulnerable to TNCs shifting productive activity to other locations,
as NEMs are more “footloose” than equivalent FDI operations. The related risks of
“dependency” and “footlooseness” must be addressed by embedding NEMs in the overall
development strategies of countries.

The right policies can help maximize NEM development benefits

Policies are instrumental for countries to maximize development benefits and minimize
the risks associated with the integration of domestic firms into NEM networks of TNCs
(table 6). There are four key challenges for policymakers: first, how to integrate NEM
policies into the overall context of national development strategies; second, how to
support the building of domestic productive capacity to ensure the availability of
attractive business partners that can qualify as actors in global value chains; third, how to
promote and facilitate NEMs; and fourth, how to address negative effects of NEMs.

NEM policies appropriately embedded in industrial development strategies will:

1. ensure that efforts to attract NEMs through building domestic productive capacity
and through facilitation and promotion initiatives are directed at the right
industries, value chains and specific activities or segments within value chains;
2. support industrial upgrading in line with a country’s development stage, ensuring
that firms move to higher value-added stages in the value chain, helping local NEM
partners reduce their technology dependency, develop their own brands, or become
NEM originators in their own right.

An important element of industrial development strategies that incorporate NEMs are

measures to prevent and mitigate impacts deriving from the “footlooseness” of some NEM
types, by balancing diversification and specialization. Diversification ensures that
domestic companies are engaged in multiple NEM activities, both within and across
different value chains, and are connected to a broad range of NEM partners. Specialization
in particular value chains improves the competitive edge of local NEM partners within
those chains and can facilitate, in the longer term, upgrading to segments with greater
value capture. In general, measures should aim at maintaining and increasing the
attractiveness of the host country for TNCs and improve the “stickiness” of NEMs by
building up local mass, clusters of suppliers, and the local technology base. Continuous
learning and skills upgrading of domestic entrepreneurs and employees are also
important to ensure domestic firms can move to higher value-added activities should
foreign companies move “low end” production processes to cheaper locations.

Improving the capacity of locals to engage in NEMs has several policy aspects. Proactive
entrepreneurship policies can strengthen the competitiveness of domestic NEM partners
and range from fostering start-ups to promoting business networks. Embedding
entrepreneurship knowledge into formal education systems, combined with vocational
training and the development of specialized NEM-related skills is also important. A mix of
national technology policies can improve local absorptive capacity and create technology
clusters and partnerships. Access to finance for domestic NEM partners can be improved
through policies reducing borrowing costs and the risks associated with lending to SMEs,
or by offering alternatives to traditional bank credits. Facilitation efforts can also include
initiatives to support respect for core labour standards and CSR.

Promoting and facilitating NEM arrangements depends, first, on clear and stable rules
governing the contractual relationships between NEM partners, including transparency
and coherence. This is important, as NEM arrangements are often governed by multiple
laws and regulations. Conducive NEM-specific laws (e.g. franchising laws, rules on
contract farming) and appropriate intellectual property (IP) protection (particularly
relevant for IP-intensive NEMs such as licensing, franchising and often contract
manufacturing) can also help. While the current involvement of investment promotion
agencies in NEM-specific promotion is still limited, they could expand their remit beyond
FDI to promote awareness of NEM opportunities, engage in matchmaking services, and
provide incentives to start-ups.

To address any negative impacts of NEMs, it is important to strengthen the bargaining

power of local NEM partners vis-à-vis TNCs to ensure that contracts are based on a fair
sharing of risks and benefits. The development of industry-specific NEM model contracts
or negotiation guidelines can contribute to achieving this objective. If TNCs engaged in
NEMs acquire dominant positions, they may be able to abuse their market power to the
detriment of their competitors (domestic and foreign) and their own trading partners.
Therefore, policies to promote NEMs need to go hand in hand with policies to safeguard
competition. Other public interest criteria may require attention as well. Protection of
indigenous capacities and traditional activities, that may be crowded out by a rapid
increase in market shares of successful NEMs, is essential.

In the case of contract farming for instance, policies such as these would result in model
contracts or guidelines supporting smallholders in negotiations with TNCs; training on
sustainable farming methods; provision of appropriate technologies and government-led
extension services to improve capacities of contract farmers; and infrastructure
development for improving business opportunities for contract farmers in remote areas. If
contract farming was given more pride of place in government policies, direct investment
in large-scale land acquisitions by TNCs would be less of an issue.

Finally, home-country initiatives and the international community can also play a positive
role. Home-country policies that specifically promote overseas NEMs include the
expansion of national export insurance schemes and political risk insurance to also cover
some types of NEMs. Internationally, while there is no comprehensive legal and policy
framework for fostering NEMs and their development contribution, supportive
international policies range from relevant WTO agreements and – to a limited extent –
IIAs, to soft-law initiatives contributing to harmonizing the rules governing the
relationship between private NEM parties or guiding them in the crafting of NEM
contracts.

Q.5. International Labour Flows.

Ans: A holistic approach is necessary for managing international labour flows from India, argues
Rakkee Thimothy, from the V.V. Giri National Labour Institute in India.

Astute diplomatic interventions by the Indian government have been successful in bringing back
thousands of stranded migrant workers recently from crisis-hit Iraq. As the crisis and the subsequent
evacuation exercises unfold, a similar incident from the recent past returns to our collective
memory—the evacuation of 140,000 Indian migrants from Kuwait, following the Iraqi invasion, in
August 1990.

By no means does this imply that the intervening period provided a perfectly secure and stable
situation for Indian emigrants in the Middle East. They have experienced turbulence of varying
degrees, at times forcing them to return, as in the Libyan crisis of 2011, or creating a looming fear of
losing jobs, as when Saudi Arabia implemented Nitaqat, policy initiatives to promote the employment
of Saudi nationals in the private sector, during 2013.

Despite all these instabilities, migration of workers from India to the Middle East, particularly to the
Persian Gulf, continues unabated. This is not surprising considering that labour migration is
modulated by a variety of factors—demographic, economic and socio-political—at both the sending
and receiving countries.

From the perspective of India, currently undergoing a demographic transition with a high share of
youth not matched with appropriate labour market outcomes, Gulf countries continue to be an
attractive destination. On the other hand, the Gulf countries themselves are undergoing radical
changes that are spurring more stringent immigration policies.

For a major labour sending country like India, efficient administrative and legal structures are vital to
meet the challenges posed by large-scale labour migration to established destinations and the
emerging ones, and to fulfil the requirements of different categories of migrants. But these are sorely
lacking.

While the critical situation that cropped up during the Iraq emergency was tackled adroitly, the fact is
that these aspects engage policy circles only during crises. Government responses to such situations
continue to be piecemeal and rudimentary; there has been no focused attempt to formulate a long-
term policy in terms of strengthening the linkages between migration and development. Here, we
provide a few policy suggestions to improve the migration outcomes of workers from India.

Improving the Database on International Migration

The first prerequisite for a well-crafted migration policy is reliable data for deciphering the trends and
patterns of labour flows. It is an acknowledged fact that government statistics on the stock of Indians
in different countries can at best be considered guesstimates. The data available on international
labour flows pertains only to those migrants who, according to the provisions of the 1983 Emigration
Act, are required to obtain emigration clearance from the Protector of Emigrants.

This is currently required for workers who are not matriculates and are migrating to 17 countries
included in the emigration clearance required list. The available information is thus incomplete and is
of little use for systematic planning, in times of both stability and instability. This differs drastically
from the situation prevailing in countries like the Philippines or Sri Lanka which have systematic data
on both labour outflows and return flows, which in turn facilitates comprehensive migrant services to
cater to the needs of migrants and their families.

Pre-departure Orientation for Migrants

Strongly orienting the prospective migrant regarding the prospects and risks involved in working
abroad, this programme is recognised as one of the most effective means to address migrant
workers’ problems in the destination countries and to help them adapt efficiently to unfamiliar working
conditions in a new socio-cultural and religious environment. India is one of the few major labour
sending countries where pre-departure orientation is not compulsory.

Although there are isolated interventions at regional levels, what is lacking is a serious commitment at
the national level to empower migrant workers by providing critical information and preparing them to
meet contingencies at the destination. International experience suggests that such interventions are
more effective when all stakeholders in the migration process—the government, international
institutions, recruitment agencies, employers, trade unions and migrant associations—become
partners in the effort.

Financing Migration
A critical vulnerability of migrant workers is their excessive dependence on the recruitment agent–
moneylender nexus to fulfil their dream of migrating overseas for work. A large number of migrants
take loans from money lenders, sell or pawn land/their homes to mobilise money for their journey
abroad and even to get a job offer. Not only does this make migration costly, it also increases the risk
of migrants getting into employment contracts that may not be legally valid or are merely false
promises.

It is important to consider policy options to finance migration, say by providing soft loans to intending
migrants. This would discourage irregular migration and encourage remittance through formal
channels, among other benefits. The reluctance of several migrants to return to India from crisis-
ridden Iraq, perhaps linked to the threat they face from moneylenders back home, is a case in point.

Reintegration
With temporisation of labour flows becoming an indubitable feature of international migration, it is high
time that India focused on issues faced by migrant workers when they return home. A frequent
criticism is that several reintegration packages announced by the government cater to the
requirements of migrants who are capable of making huge investments, sidelining the reintegration
issues faced by poor migrants.

Probably this is one reason why several packages, even those announced in response to specific
 crisis situations (for example, for those who returned following Nitaqat) did not find many takers. This
is diametrically opposed to the situation in countries like the Philippines, where reintegration of every
migrant is well planned, with several facilities being extended even to the migrant’s family to cope
with the process.

Conclusion
India’s contemporary labour migration scenario exhibits weak linkages between migration and
development. One fundamental flaw is the reluctance to bring migrants and their families to the centre
of the debate and provide them a set of services that would help them make informed choices to
make their migration experience rewarding.

India has much to learn from countries like Sri Lanka and the Philippines that have well-conceived
migrant-friendly policies which protect and promote migration. It’s time to learn from our experiences
and adopt proven practices in labour migration, instead of continuing to resort to a piecemeal
approach whenever a crisis unfolds.

Q.6. Labour Migration and Remittances.

Ans: According to the ILO global estimates on migrant workers , in 2017, migrant workers
accounted for 164 million of the world’s approximately 258 million international
migrants. Migrant workers contribute to growth and development in their countries of
destination, while countries of origin greatly benefit from their remittances and the skills
acquired during their migration experience. Yet, the migration process implies complex
challenges in terms of governance, migrant workers' protection, migration and
development linkages, and international cooperation. The ILO works to forge policies to
maximize the benefits of labour migration for all those involved.

IOM’s Vision
IOM strives to protect migrant workers and to optimize the benefits of labour migration
for both the country of origin and destination as well as for the migrants themselves.
IOM’s Objectives
In its labour migration programming, IOM builds capacity in labour migration
management by:
 offering policy and technical advice to national governments;
 supporting the development of policies, legislation and administrative structures that
promote efficient, effective and transparent labour migration flows;
 assisting governments to promote safe labour migration practices for their nationals;
 facilitating the recruitment of workers, including pre-departure training and embarkation
preparedness;
 promoting the integration of labour migrants in their new workplace and society.
Principal Beneficiaries
 IOM implements various labour migration programmes in 70 countries. The beneficiaries
of these programmes include:
 migrants, their families and their communities;
 local and national governments;
 private sector entities such as employers and industry representatives; and
 regional organizations.
IOM’s Approach
Through its global network of more than 400 offices, IOM is able to bring together
governments, civil society and the private sector to establish labour migration
programmes and mechanisms that balance their various interests, and address migrants’
needs. The IOM approach to international labour migration is to foster the synergies
between labour migration and development, and to promote legal avenues of labour
migration as an alternative to irregular migration. Moreover, IOM aims to facilitate the
development of policies and programmes that are in the interest of migrants and society,
providing effective protection and assistance to labour migrants and their families.
A migrant centred approach to remittances
Facts and figures

 In 2015, worldwide remittance flows are estimated to have exceeded $601 billion.
Of that amount, developing countries are estimated to receive about $441 billion,
nearly three times the amount of official development assistance. The true size of
remittances, including unrecorded flows through formal and informal channels, is
believed to be significantly larger.
 In 2015, the top recipient countries of recorded remittances were India, China, the
Philippines, Mexico, and France. As a share of GDP, however, smaller countries such
as Tajikistan (42 percent), the Kyrgyz Republic (30 percent), Nepal (29 percent),
Tonga (28 percent), and Moldova (26 percent) were the largest recipients.
 High-income countries are the main source of remittances. The United States is by
far the largest, with an estimated $ 56.3 billion in recorded outflows in 2014. Saudi
Arabia ranks as the second largest, followed by Russia, Switzerland, Germany,
United Arab Emirates, and Kuwait. The six Gulf Cooperation Council countries
accounted for $98 billion in outward remittance flows in 2014.
 The cost of remittances is the highest in Sub-Saharan Africa and in the Pacific Island
countries (for example, it costs more than 20 percent to send $200 from Australia to
Vanuatu, and 19 percent from South Africa to Zambia). As of the third quarter of
2015, the average cost worldwide remained close to 8 percent---far above the 3
percent target set in the Sustainable Development Goals.
The ILO’s rights-based approach to remittances
The ILO intervenes on the demand side of financial services. This involves working with
migrant workers and the beneficiaries of remittances to strengthen their capacity to make
informed/ rational choices about the use of remittances and remittance-linked
services. Improved financial education/inclusion can enhance the welfare of low-income
households as well as support enterprises and job creation and is topical for development.

The ILO also intervenes on the supply side of financial services in order to leverage the
use of remittances for income generating activities. This involves working with financial
institutions so that they develop adequate and innovative financial services.

The ILO also works closely with workers’ and employers’ organizations:

- Employers’ organizations encourage entrepreneurship development in low income

countries through the investment of remittances, and provide financial orientation and
access to financial payment facilities in the migrants’ host countries.

- Workers’ organizations provide financial orientation for migrant workers and their
families, both in countries of origin and destination, advocate for more accessible financial
infrastructure, and support the development of adequate financial schemes/services for
migrant workers.

Together with its International Training Centre in Turin, the ILO has developed financial
education training tools and programmes in order to develop the knowledge and skills
that are required for responsible budgeting, including spending, saving, borrowing, and
investing, and has carried out trainings in Benin, Burkina Faso, Cambodia, Ethiopia,
Indonesia, Kenya, Mali, Mauritania, Moldova, Morocco, Myanmar, Philippines, and Senegal.
This done in close collaboration with local authorities and social partners, and in
Singapore, Malaysia, Thailand, France, Spain and Italy with migrant associations. Training
to microfinance institutions is also provided through the course “Making microfinance
work: managing product diversification”.

The ILO has also carried out action research on migrant remittances and microfinance in
various countries (Bangladesh, Mexico, Nepal, Senegal, South Africa) and feasibility
studies on the possibility of using a portion of migrant workers’ remittances to develop
health microinsurance products in origin countries (Mali, Senegal, Comoros).

ILO Instruments
ILO Convention No 97 states that “Each Member for which this Convention is in force
undertakes to permit, taking into account the limits allowed by national laws and
regulations concerning export and import of currency, the transfer of such part of the
earnings and savings of the migrant for employment as the migrant may desire.”

The ILO’s Multilateral Framework on Labour Migration highlights that “the contribution of
labour migration to employment, economic growth, development and the alleviation of
poverty should be recognized and maximized for the benefit of both origin and destination
countries” (Principle 15) –and among the guidelines that may prove valuable in giving
practical effect to the above principle (15.5) providing incentives to promote the
productive investment of remittances in the countries of origin; (15.6.) reducing the costs
of remittance transfers, including by facilitating accessible financial services, reducing
transaction fees, providing tax incentives and promoting greater competition between
financial institutions.

Leaning Outcomes:
Q.1.Explain Global Trade and its Growth. Comment on India’s relative position in
World Trade.
Ans: International trade is the exchange of goods and services between countries. Total
trade equals exports plus imports, and in 2019, world trade value was at $38.96 trillion,
up 10% from 2018. 25% of the goods traded are machines and technology like electrical
machinery, computers, nuclear reactor, boilers, and scientific and precision instruments.
Automobiles, including cars, trucks, and buses, contributed 9%, and mineral fuels like oil,
gas, coal, and refined products accounted for 14.4%. Commodities like plastics, iron,
organic chemicals, pharmaceuticals, and diamonds added up to 13.2%.
International trade accounts for about 27% of the global economy, and until the 2008
financial crisis, world trade grew 1.9 times faster than economic growth. Until 2017, trade
grew more slowly than the global economy.
Four Reasons Why Global Trade Slowed
There are four reasons for the recent slowdown. First, the Soviet Union collapsed in the
1990s. That allowed countries like Poland, the Czech Republic, and East Germany to catch
up as they rejoined the global economy. Second, China joined the World Trade
Organization in 2001. These two events super-charged growth. But after 15 years, their
contributions have stabilized.
Third, the 2008 financial crisis slowed trade and growth. Many companies became more
cautious. Consumers were less likely to spend. Part of that is because they’d grown older.
They had to rebuild their retirement savings. Younger people faced high unemployment
rates. They had a hard time getting their career started. That meant they weren't as likely
to marry and buy homes. Many of them also had large school loans to pay off.
Fourth, countries implemented more protectionist measures. In 2015, governments
quietly added 539 trade restrictions. These included tariffs, government subsidies to
domestic industries, and anti-dumping legislation.
Advantages of International Trade
Exports create jobs and boost economic growth, as well as give domestic companies more
experience in producing for foreign markets. Over time, companies gain a competitive
advantage in global trade, and research shows that exporters are more productive than
companies that focus on domestic trade.
Imports allow foreign competition to reduce prices for consumers and gives shoppers a
wider variety of goods and services—like tropical and out-of-season fruits and
vegetables.
Disadvantages of International Trade
The only way to boost exports is to make trade easier overall. Governments do this by
reducing tariffs and other blocks to imports. That reduces jobs in domestic industries that
can't compete on a global scale, as well as leads to job outsourcing, which is when
companies relocate call centers, technology offices, and manufacturing to countries with a
lower cost of living.
Countries with traditional economies could lose their local farming base as developed
economies subsidize their agribusiness. Both the U.S. and European Union do this, which
undercuts the prices of the local farmers.
U.S. International Trade
In 2018, U.S. exports were $2.5 trillion, which added 12% to gross domestic product and
created 12 million jobs. Most of the U.S. economy is produced for internal consumption
and doesn't get exported. Services also make up a large portion of the economy, and those
are more difficult to export. GDP components are in four major categories: personal
consumption, business investment, government spending, and net exports.
Despite everything it produces, the U.S. imports more than it exports. In 2018, imports
were $3.1 trillion—most of which were capital goods (computers) and consumer
goods (cell phones). Domestic shale oil production has also reduced imports of oil and
petroleum products. Even though Americans benefit from imports, they are subtracted
from GDP.
Trade Deficit
The United States has a trade deficit. In 2018, international trade subtracted $621 billion
from GDP. Data on America’s import and export components show that goods and services
purchased by the nation outweigh those which it sells on the global marketplace.
The deficit has increased despite the trade war initiated by President Donald Trump in
March 2018. Trump's protectionist measures included a 25% tariff on steel imports and a
10% tariff on aluminum. China, the European Union, Mexico, and Canada announced
retaliatory tariffs, hurting U.S. exports, and a deal was reached to remove the tariffs in May
2019. The tariffs depressed the stock market, and analysts worried that Trump started
a trade war that would hurt international trade to the point of devastation.
U.S. Trade Agreements
Countries that want to increase international trade aim to negotiate free trade
agreements. The North American Free Trade Agreement (NAFTA) is between the United
States, Canada, and Mexico, and is the world's largest free trade area. It eliminates all
tariffs between the three countries, tripling trade to $1.2 trillion. When you consider
its history and purpose, NAFTA's advantages far outweigh its disadvantages. On
November 30, 2018, U.S., Mexican, and Canadian leaders signed the United States-Mexico-
Canada Agreement, which changed NAFTA in six areas.
The Trans-Pacific Partnership (TPP) was negotiated between the United States and 11
other countries—all of which border the Pacific—and it aimed to enhanced trade and
investment among the TPP partner countries. The countries involved were Australia,
Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and
Vietnam. The TPP included new trade requirements addressing the compatibility of
regulations and support of small businesses. The Asian-Pacific Economic
Cooperation supported it, but on January 23, 2017, President Trump signed an executive
order to withdraw from the TPP. On March 8, 2018, the other 11 TPP countries signed a
modified agreement without the United States.
The Transatlantic Trade and Investment Partnership would have linked the United States
and the EU, the world's largest economies, and it would have controlled more than one-
third of the world's total economic output. The biggest obstacle is agribusiness in the
countries, as both trading partners have large subsidies for their food industries. The EU
also prohibits genetically modified organisms as food and restricts antibiotics and
hormones in animals raised for food. President Trump's trade war has complicated
negotiations on this agreement.
The United States has many other regional trade agreements and bilateral trade
agreements with specific countries, and it also participated in the most
important multilateral trade agreement, the General Agreement on Tariffs and
Trade (GATT). Although the GATT is technically defunct, its provisions live on in
the World Trade Organization.

A long-awaited recovery in global trade is underway in 2017, according to the

International Monetary Fund (IMF), though risks remain that could break the momentum.
Specifically, international trade is expected to grow 3.8 percent this year and 3.9 percent
in 2018, up from 2.2 percent in 2016.1 While the trend is positive, the figures still fall short
of the 6 percent average growth experienced from 1960 to the eve of the global financial
crisis in 2007.2
The IMF’s World Economic Outlook projects the following trends for this year:3

 4 percent growth in imports in developed countries (up from 2.4 percent in 2016)
 4.5 percent growth in imports in emerging and developing countries (up from 1.9
percent)
 3.5 percent growth in exports from developed countries (up from 2.1 percent)
  3.6 percent growth in exports from emerging and developing countries (up from 2.5
percent)
This international trade growth accompanies a similar trend in global economic growth,
which the Outlook projects at 3.5 percent in 2017, up from 3.1 percent last year, and rising
to 3.6 percent in 2018. “Acceleration will be broad-based across advanced, emerging and
low-income economies, building on gains we have seen in both manufacturing and trade,”
according to IMF Economic Counsellor Maurice Obstfeld. Economic growth in the U.S. is
projected in the Outlook at 2.3 percent in 2017, then 2.5 percent in 2018, compared to 1.6
percent in 2016.4

Driving Continued Growth in International Trade

The Outlook set the stage for trade policy discussions during the IMF and World Bank’s
Spring Meetings in April 2017 – an annual event attended by finance ministers and central
bankers from around the world. Their final statement from the meetings emphasized risks
that should be addressed to sustain growth in international trade.

Among those risks are measures designed to protect domestic markets and jobs, which
have proliferated around the world as globalization and digital innovation have
accelerated, according to the Outlook. For example, “The share of G20 imports affected by
trade-restrictive measures put in place since the global financial crisis continues to rise
gradually, reaching 6.5 percent as of November 2016,” according to Making Trade an
Engine of Growth for All, a report from the IMF, World Bank and World Trade Organization.5

Focus on Services and Digital International Trade

The Outlook includes a range of policy prescriptions designed to continue advancing trade
in today’s politically uncertain environment. To prevent global trade barriers, the report
recommends a revived commitment to the multilateral system of transparent, rules-based
trade; domestic policies that share the gains from trade more widely; and communications
strategies that better explain the benefits of trade to skeptical audiences. Those benefits
include reductions in consumer prices, increases in productivity and many others,
according to the report.

The report’s recommendations for driving trade growth focus on the services sector and
on digital trade, a broad category covering companies selling goods and providing services
digitally. Services account for about a quarter of global trade, the report says, and global
commercial services imports grew at about 5 percent a year during 2010–15, compared to
1 percent growth for merchandise trade. “Sectors such as services as well as digital trade
represent areas where further trade reform can make particularly large contributions to
global growth,” the report says. However, “despite the overall importance of services in
the economy, services trade remains hampered by substantial policy barriers.”

Digital innovation represents a particular challenge. In terms of digital trade, “innovation

in digital technology and other services has helped to reshape the trade landscape and
spurred the development of global value chains,” the report says. At the same time,
though, trade policymakers have emphasized that it is often technological innovation –
and not trade – that presents the greatest risk to job growth. “While it has brought
enormous benefits to societies, we have found that technology has been the major factor
behind the relative decline of lower- and middle-skilled workers’ incomes in recent years,
with trade contributing to a much lesser extent,” said IMF Managing Director Christine
Lagarde.6 She promised further study to measure the digital economy and its impact.7

Finance ministers and central bankers at the Spring Meetings incorporated many of these
recommendations into their final communiqué from the Meetings. “It is important to
ensure that everyone has the opportunity to benefit from global economic integration and
technological progress,” the communiqué says. “We will implement domestic policies that
develop an adaptable and skilled workforce [and] assist those adversely affected.”8

2nd Part

India's economy to be world's 2nd fastest growing at 6%

China with a 6.1 per cent growth rate for 2019 reclaims the title of the world's
fastest growing economy by being ahead of India by just 0.1 per cent.

Despite growing uncertainties on global growth, the World Trade Organization (WTO) has
moved up its forecast on the growth in volume of global trade from 1.3% in 2016 to 2.4%
in 2017 with the range expected to vary from 1.8% to 3.6%. What is even better is that the
multilateral organization expects the trade recovery to continue in 2018 with the growth
rates moving up further in the 2.1% to 4% range.

The large margins of the growth forecast in trade is because rising inflation can lead to
tightening of monetary and fiscal policies and slow down GDP growth across major
markets and also because of the growing wave of economic nationalism that has curtailed
globalization efforts in recent times. A factor that may push growth to the upside is the
recovery in emerging market economies. But then a reason for worry is the substantially
weakening of the linkages between global trade and global growth with the ratio even
falling below 1:1 level for the first time since the turn of the century.

The 1.3% growth in global trade volume in 2016 was because of the stagnating imports
into developing even as that into developed countries touched 2%. Export growth of both
segments remained stuck a little above one percent. Geographically most of the demand
for imports rose from Europe and Asia. However, the growth in trade in dollar terms tells
a different story. Numbers here show that global exports of goods fell by 3.3% in 2016
while global exports of services largely stagnated. But the future is brighter as global GDP
growth at market exchange rates is expected to go up from 2.3% in 2016 to 2.7% in 2017
and 2.8% in 2018.
Prospects of India’s trade recovery in 2017 is relatively better given that it has been able
to withstand the global slump relatively far better than its peers. Numbers on the
merchandize export show that India’s exports declined by 1.3% in 2016 to $264 billion. In
comparison the exports of Asean countries declined by 1.7%, that of Asian countries by
3.7% and that of China by a still more substantial 7.7%. Other Bric countries also
registered notable falls. While Brazil’s exports fell by 3.1% in 2016 that of Russia fell by a
humungous 17.5%. However, though India retained its global share of 1.7% of
merchandise exports in 2016, even while that of China shrunk from 13.8% to 13.25%,
India’s global ranking in merchandize exports dipped from 19th position in 2015 to the
20th position in 2016 with UAE overtaking India.

In the case of commercial services, India’s record is even more exemplary. India’s
commercial services exports rose by 3.5% to $ 161 billion in 2016 even as the global
exports rose by a measly 0.1% and that of Asia rose by 0.9%. China’s commercial services
exports were badly hit in 2016 with the outflows declining by 4.3% to $207 billion. Across
nations India’s exemplary performance in commercial service exports was surpassed only
by a few developed economies like Japan and Ireland whose growth rates were a more
buoyant 6.5% and 8.8% respectively. However, despite that India maintained its 8th rank
among the top global exporters of commercial services.

Given India’s relatively better export performance in 2016, it is very likely that the
country would gain more substantially as global trade picks up in 2017 and 2018.

Q.2. Objectives and Features of India’s Commercial Policy.

Ans: Objectives of India Export-Import Exim Policy
A new export and import policy were framed in 1992 which was effective till 1997. Since
then new changes have been made in the policy to achieving the following objectives:
1. To enhance the level of exports;
2. To improve the balance of payment;
3. To improve the balance of trade;
4. To enhance the reverse of foreign exchange;
5. To allow import of technology and equipment’s which may help in establishing new
industrial enterprises, produce new products and adopt a new process for higher
production levels.
6. To ensure the availability of goods for the domestic consumption and to allow exports
so that the producers get a fair price;
7. To allow import of certain goods as listed in the Open General Licence;
8. To allow for hassle free exports and imports;
9. Reducing the interface between the exporters and Director General of Foreign Trade
by reducing the number export documents;
10. Establishing Advance Licencing System for imports of goods needed for
manufacturing various goods for export;
11. Removal of the provisions to proceed realization;
 12. Establishing of Export oriented units and Export Processing Zones specifically for
goods meant to be produced for exports only;
13. To accelerate the country’s transition to a globally oriented vibrant economy to
deriving maximum benefits from expanding global market opportunities;
14. To enhance the technological strength and efficiency of Indian agriculture, industry,
and services there by improving their competitive strength while generating new
employment opportunities. It encourages the attainment of internationally accepted
standards of quality of Indian exports; and
15. To provide consumers with good quality products at reasonable prices through
regulated imports of such products.

Salient Features of the New Export & Import Policy

Govt. of India introduced a series of trade reforms since July 1991 as part of economic
liberalisation.
The aim of the new policy was to promote exports and to remove restrictions on imports.
The following are the salient features of the new export, import policy:
1. Increase in number of Export Items:
The Govt. has identified many new products for exports. They are fish and fish
preparations, agricultural products and marine products etc. These products are import-
light and hence pressure on foreign exchange was relieved.
2. Special Economic Zones:
For promotion of exports, special economic zones (SEZ) have been established. SEZ units
are deemed to be foreign territory for the purpose of trade operations and tariffs. The
main objective of the SEZ units is to provide a congenial atmosphere for exports. Indian
banks were pre-mitted to establish off share banking units in SEZ. These units will attract
foreign direct investments (FDI’s) and would be free from cash reserve ratio (CRR) and
statutory liquidity ratio (SLR).
3. Role of Public Sector Agencies:
Certain exports are controlled by Public sector agencies like State Trading Corporations
(STC), Mineral and Metal Trading Corporation (MMTC). Now these are asked to compete
with other exporters. Foreigners have been permitted to set up trading houses for export
purposes.
4. Restriction Free Export Policy:
Restrictions on exports have been reduced to minimum according to new policy. Export
restrictions have been imposed on a few sensitive commodities taking the domestic
demand and supply factors into consideration. Export duties are now not considered as
source of revenue generation but a means of increasing the competitiveness of domestic
exporters in the international market.
5. Liberalisation of Export-Oriented Import:
Import licenses were removed from most of the items. Provisions were made to levy low
custom duties an imports which were used as inputs for production of export goods.
Imports were linked to the availability of foreign exchange generated through exports.
Import duties were gradually reduced and the objective was to equal the same with other
countries of the world. The restrictions laid on import of all items were removed to
conform to the WTO norms and these were put under Open General License (OGL) list.
This process liberalized imports and simplified export-import procedures.
6. Convertibility of Rupee:
To increase exports, the rupee was made partly convertible on current account. In 1994-
95 budget rupee was made fully convertible.
7. Devaluation of Rupee:
Generally speaking, devaluation of rupee means lowering the value of rupee in terms of
foreign currencies. Devaluation makes domestic goods cheaper in the foreign market. To
cover the balance of payment difficulty. Govt. of India devalued rupee in June 1991 by
23%. This helped in encouraging exports.
Some of the objectives of foreign trade policy of India are as follows:
Trade propels economic growth and national development. The primary purpose is not
the mere earning of foreign exchange, but the stimulation of greater economic activity.
The foreign trade policy of India is based on two major objectives, they are as follows
1) To double the percentage share of global merchandise trade within the next five years.
2) To act as an effective instrument of economic growth by giving a thrust to employment
generation.
Agriculture and industry has shown remarkable resilience and dynamism in contributing
to a healthy growth in exports. In the last five years the exports witnessed robust growth
to reach a level of US$ 168 billion in 2008-09 from US$ 63 billion in 2003-04. Our share of
global merchandise trade was 0.83% in 2003; it rose to 1.45% in 2008 as per WTO
estimates. Our share of global commercial services export was 1.4% in 2003; it rose to
2.8% in 2008. India’s total share in goods and services trade was 0.92% in 2003; it
increased to 1.64% in 2008. On the employment front, studies have suggested that nearly
14 million jobs were created directly or indirectly as a result of augmented exports in the
last five years.
The short term objective of the policy is to arrest and reverse the declining trend of
exports and to provide additional support especially to those sectors which have been hit
badly by recession in the developed world. The policy is empowered with objective of
achieving an annual export growth of 15% with an annual export target of US$ 200 billion
by March 2011. In the remaining three years of this Foreign Trade Policy i.e. upto 2014,
the country should be able to come back on the high export growth path of around 25%
per annum. By 2014, policy expects to double India’s exports of goods and services.
The long term objective of policy for the Government is to double India’s share in global
trade by 2020. In order to meet these objectives, the Government would follow a mix of
policy measures including fiscal incentives, institutional changes, procedural
rationalization, and enhanced market access across the world and diversification of export
markets. Improvement in infrastructure related to exports; bringing down transaction
costs, and providing full refund of all indirect taxes and levies, would be the three pillars,
which will support us to achieve this target. Endeavour will be made to see that the Goods
and Services Tax rebates all indirect taxes and levies on exports.

Q.3. Balance of Trade Vs Balance of Payment.

Ans: After the implementation of globalization policy, world has become a small village
and now every contry freely transacts with the other countries of the world. In this context,
two statements are prepared to keep a record of the transactions made by the country
internationally; they are Balance of Trade (BOT) and Balance of Payments (BOP).
The balance of payment keeps a track of transaction in goods, services, and assets
between the country’s residents, with the rest of the world.

On the other hand, the balance of exports and import of the product and services is termed
as Balance of Trade.

The scope of BOP is greater than BOT, or you can also say that Balance of Trade is a major
section of Balance of Payment. Let’s understand the difference between Balance of Trade
and Balance of Payment in the article given below

BASIS FOR BALANCE OF

BALANCE OF TRADE
COMPARISON PAYMENT

Meaning Balance of Trade is a Balance of Payment is a

statement that captures statement that keeps track
 BASIS FOR BALANCE OF
BALANCE OF TRADE
COMPARISON PAYMENT

the country's export and of all economic transactions

import of goods with the done by the country with the
remaining world. remaining world.

Records Transactions related to Transactions related to both

goods only. goods and services are
recorded.

Capital Transfers Are not included in the Are included in Balance of

Balance of Trade. Payment.

Which is better? It gives a partial view of It gives a clear view of the

the country's economic economic position of the
status. country.

Result It can be Favorable, Both the receipts and

Unfavorable or balanced. payment sides tallies.

Component It is a component of Current Account and Capital

Current Account of Account.
Balance of Payment.
Q.4. Basic Components of Balance of Payments.
Ans: Component # 1. Current Account:
This part of the balance of payments is regarded as the most important, as it shows a
nation’s trading strength. If payments are greater than receipts, there is a deficit which is
undesirable.
This account is subdivided, as shown in Table 21.1, into:
1. Visible Trade — trade in goods
2. Invisible Trade — trade in services.
A — Visible Trade:
The money earned from Indian exports of goods (e.g., cars sold to Nepal) is credited
(added) to this account, whilst payments for imported goods (e.g., American aircraft sold
in India) are debited. The difference between the totals is known as the Balance of Trade.
B — Invisible Trade:
The income earned from the sale of Indian services abroad is known as an invisible export,
e.g., an insurance premium paid by a British ship-owner to an Indian broker. When Indian
residents spend money on foreign services, e.g., a week’s accommodation in London, they
are creating invisible imports, because payment is going out of India.
The main invisibles are as follows:
1. Government expenditure:
Government expenditure on embassies, contributions to IMF or ADB and other
international bodies, military bases/forces abroad, and overseas aid. All these create a
substantial deficit.
2. Interest, profits and dividends:
The earnings from loans, companies and shares, respectively, earn substantial surpluses
for the Indian economy.
3. Other financial services:
The earnings of solicitors, brokers, merchants and pensioners also contribute benefits to
the invisible account.
4. Transport:
The earnings on passenger carrier by sea and air are two major items.
5. Tourism:
This covers the expenditure of travellers abroad.
6. Private transfers:
Individuals transfer money to other countries. Most industrialised nations contain
migrants who remit fluids to relatives in their family of origin.
A + B — Current Account Balance:
The balance of trade (visible) and net invisibles are added, as in Table 21.1, to give, the
current account balance. The net figure may be plus or minus. A deficit (-) on the current
account is a warning that the nation is spending more than it is earning, in the short run.
Component # 2. Capital Account:
C — Investment:
This account includes investment and other capital movements. Outflows create deficits (-
) and inflows give surpluses (+) in the account. For instance, if an Indian trader purchases
a new shop in London, this is an outflow of capital. Conversely, if Toyota (Japan) builds a
showroom in Bangalore, then there is a capital inflow.
Expenditure on portfolio (paper) assets is also included in this selection of the accounts.
Thus, if an Indian citizen buys shares in McDonald’s or General Motors (USA) this counts
as a capital outflow.
The investment can also be distinguished between private and public sector. Private
sector investment tends to be in buildings and paper assets held for a long period of time.
Public investment, on the other hand, consists of low interest loans to underdeveloped
nations (i.e., aid) where the aim is not always profitability.
Capital flows may be short-term or long term. The short-term ones tend to be unpre-
dictable and volatile. They feature the shifting of very liquid assets (i.e., ‘hot’ money)
between nations to gain the advantage of favourable interest-rate differentials.
In the short run, net inward investment benefits the balance of payments accounts
because official financing is not needed — reserves can be accumulated and borrowing
repaid. However, in the long run, it may be harmful. The profits, interest and dividends
from the investment are remitted abroad and become invisible imports, thus weakening
the current account.
D — Balancing Item:
This is an accounting device to cover errors and omissions. A balancing figure is added to
— or subtracted from — the combined balances of the current and capital accounts. The
balance of payments accounts always balance because the current and capital account
totals together equal the official financing undertaken. As the latter figure is more accurate
than the varied data in the other two accounts, the balancing item is calculated from it and
is used to make the two totals the same. It is a net figure.
Component # 3. Official Financing:
The Balance for Official Financing (which used to be termed Total Currency Flow) shows
the balance of monetary movements into and out of the country. A positive figure reveals a
net inflow of funds into a country. Alternatively, a net outflow is represented by a negative
figure.
When there is a negative figure, the amount has to be paid for either by:
(a) borrowing from other central banks and international organisations, or
(b) using up reserves which have been saved over the years, or
(c) borrowing and withdrawing reserves.
When the balance for official financing is positive, then loans can be repaid and reserves
replenished. Governments do sometimes borrow even when the balance for official
financing is positive; this is in order to build up reserves for the future.
The fact that the amount of official financing equals the balance for official financing
ensures that the balance of payments always balances.
So, through official financing, the account as a whole is brought into exact balance (Fig.
21.1). This is why it is said that the balance of payments always balances.
A country has a balance of payments problem when a section of its accounts are in regular
deficit or surplus. Deficit problems are more serious than surplus ones, as surpluses
usually result from successful international trading, whilst deficits indicate failure.
Persistent imbalances indicate that the balance of payments is in fundamental
disequilibrium. This usually requires the government to undertake remedial measures.
OR
The Balance of Payments 'BOP' is an account of all transactions between one country and
all other countries--transactions that are measured in terms of receipts and payments.
From the U.S. perspective, a receipt represents any dollars flowing into the country or any
transaction that require the exchange of foreign currency into dollars. A payment
represents dollars flowing out of the country or any transaction that requires the
conversion of dollars into some other currency. The three main components of the
Balance of Payments are:
1. The Current Account including Merchandise (Exports Imports), Investment
income (rents, profits, interest)
2. The Capital Account measuring Foreign investment in the U.S. and U.S.investment
abroad, and
3. The Balancing Account allowing for changes in official reserve assets (SDR's, Gold,
other payments)
U.S. Exports are any goods or services produced in the U.S. and sold to other countries in
the international market. U.S. Imports are goods or services produced by other countries
and bought by individuals in the United States An increase in U.S. receipts (i.e., increased
U.S. exports, investment income inflows, or more foreign investment in the U.S.) will lead
to increased demand for dollars and an increased supply of foreign currency on foreign
exchange markets (individuals and businesses are selling foreign currency and buying
dollars). This increased demand will lead to a stronger dollar relative to other currencies.
An increase in U.S. payments (i.e., U.S. imports, investment income outflows, or more U.S.
investment abroad) will lead to an increase in the supply of dollars and thus a weaker
dollar relative to foreign currencies.

Q.5. Explain Export House. Trading House and Star Trading House.
Ans: Export as a business is growing across multiple sectors. There are always a number
of countries which are under developing stages and a lot of material to these countries
goes from developed nations. At the same time, agriculture and other such produce is
exported from developing nations to developed nations. In short, there is always import
and export happening. At such junctures, Export houses play an important role.
Export house is mostly home-based organization, located in the manufacturer’s country,
which is involved in the export of products that the manufacturer has produced. These
export houses carry out most of the export-related activities overseas, via their own
agents and distributors who are in place in the country where the product is being
exported.
In most cases, Export houses are used by manufacturers when the manufacturers do not
want their own export team in place, or when having an in-house team is much more
costlier rather then hiring someone from outside – such as an export house. Because of the
very nature of this business, export houses are specially focused on the export market and
know the ins and outs of this industry very well. This is why, in many cases, export houses
are preferred over in-house export teams.
Functions of Export house
The following are 6 major functions which export houses are expected to carry out in the
market.
1) Representation
The first function is to represent the parent manufacturing company in the market where
the product is being exported. In overseas market, the manufacturing company might not
have any sales presence or market presence. The export house takes care of all that via
representing itself as the main contact point for the manufacturer.
2) Competitive and market intelligence
An export house not only carries out sales work or representations for the manufacturer,
gathering market intelligence, competitive intelligence and the work of other competitors
in the market is also a task carried out by the export house. This flow of information
happens naturally via agents or distributors to the export house. However, it is important
that the flow of information also reaches the manufacturer so that he is able to make
decisions and change strategies as per the market.
3) Procedures and documentation
In the export business, there are many procedures and documentation involved. Export is
the interaction point of 2 different countries with 2 different laws and procedures. As a
result, both laws and both procedures have to be followed by exports. In fact, more then
focus on export, many exporters complain that their core focus is on documentation so
that the export is not rejected or any problems do not arise in the target country.
Also, export happens in large containers and the volume is huge. Thus, any export house
which is improper with its document handling or procedure handling will not receive
many orders from manufacturers.
4) Market penetration
In sectors like Pharmaceuticals and chemicals, export houses are chosen on the basis of
their market penetration in the target country. Each export house has a setup of agents
and distributors. The more the market coverage of an export house, the more will be the
market penetration. Hence, ensuring that they are present widely in the target country is a
service which has to be provided by the export house.
5) Manpower for Order management
Collecting orders, ensuring the papers are in place, arranging finance or taking care of
credit, shipping, docking and undocking, labour and law issues – There are many things
which take place in a single order when export is ordered. It runs like a well oiled machine
and for this you require huge manpower. This manpower is provided by the export house
in each stage of the export.
6) Arbitration, Finance and credit
There are a few types of payments and handling which are used in export. In handling,
One is FOB origin means seller is liable only till material is shipped. FOB destination
means seller is liable till buyer receives the goods. In such cases, there is huge financial
implications, arbitrations and credit terms involved. Such risks are borne by the Export
houses in many cases.
Advantages of using Export houses
Export houses are most important in the following conditions

 Lack of resources – When the parent company has a lack of resources which
includes manpower, finance or know how to establish in the new country, then it will
most likely use Export houses to do its work.
 Small-scale operations – If a large company wants to set up small-scale operations in
a new country, then instead of training and recruiting a local team in the target
country, it can simply outsource the task to an experienced export house in the target
country.
 Expertise – Many time, even if the manufacturer has an in-house team overseas, still
export houses might be used because of their expertise in this segment. This is very
true for products which are highly technical in nature or which are controlled
substances.
 Marketing – Manufacturers who are product oriented and don’t have the willingness
or the desire to market themselves in a new territory might outsource the work to
export houses so that they can in turn expand.
Disadvantages of using Export houses

 The manufacturer is not in contact with target market – A major problem with
using export houses is that the manufacturer himself is not in touch with the
target markets. As a result, he lacks the on-field knowledge which the export houses
have.
  Future trends cannot be observed – A manufacturer can notice trends taking place.
And even though he might be getting truckloads of information from the export
house, the export house might fail to notice the actual change in trend or it may not
have as keen eyes for products as the manufacturer. Thus, the manufacturer may
miss out on opportunities.
 Huge adaptation curve for the manufacturer – If the manufacturer gets used to
the export house, and then decides to launch his own in-house team, there will be a
huge adaptation curve for the in-house team. This is because the in-house team will
have to start brand new with fresh distributors and agents.
Thus, the plan to expand by using an export house comes with its own advantages and
disadvantages. Company should have a look at their own resources and then decide
whether it wants to launch an in-house team or outsource to an export house. A small
company will get huge benefits if it outsources. On the other hand, a larger organization
will get a lot of intel and info about the overseas markets and hence it should export with
an in-house team.
Export/Trading/Star Trading/Super Star Trading Houses have been accorded special
status. When exporters achieve the specified level of exports over a period, they may be
recognized as EH/TH/STH/SSTH. Exports made both in free foreign exchange and in
Indian rupees shall be taken into account for recognition. The objective of this scheme is
to recognize them as the respective houses” with a view to building marketing
infrastructure and expertise required for export promotion. The exporters, registered
with FlEO or EPC are, eligible for this purpose. The export performance criteria may be
based on either f.o.b. value of exports or net foreign exchange earnings.

Star Export House Benefits

Star export house is an Indian exporter who has excelled in international trade and
successfully achieved certain minimum amount of export performance in two out of three
financial years. To obtain star export house status, the exporter involved in export of
goods or service must have a valid import export code (IE Code). On being recognised as
a star export house, the exporter enjoys various benefits and privileges as under:

1. Authorisation and customs clearance for both imports and exports may be allowed
on self-declaration basis.
2. Exemption from furnishing of bank guarantee for Schemes under Foreign Trade
Promotion, unless specified otherwise.
3. Input-output norms maybe fixed on priority within 60 days by the Norms
Committee.
4. Exemption from compulsory negotiation of documents through banks. Remittance
or receipts, should however be received through banking channels.
5. Two star and above export houses are permitted to establish export warehouses as
per Department of Revenue guidelines.
6. Three star and above export houses are permitted to get benefits of Accredited
Clients Programme, as per the guidelines of Central Board of Excise and Customs.
 7. Status holders would be entitled to preferential and priority treatment while
handling of consignments by concerned agencies.
8. Status holders are eligible to export freely exportable items on free of cost basis for
export promotion subject to an annual limit of Rs.10 lakhs or 2% of average annual
export realisation during preceding three licensing years, whichever is higher.
9. Exporters involved in manufacturing would be eligible to self-certify their goods as
origination from India.
What is a Trading House?
A trading house is a business that specializes in facilitating transactions between a home
country and foreign countries. A trading house is an exporter, importer and also a trader
that purchases and sells products for other businesses. Trading houses provide a service
for businesses that want international trade experts to receive or deliver goods or
services.
A trading house may also refer to a firm that buys and sells both commodity futures and
physical commodities on behalf of customers and for their own accounts. Prominent
commodity trading houses include Cargill, Vitol and Glencore.
Understanding Trading Houses
A trading house serves as an intermediary. It might purchase t-shirts wholesale from
China, then sell them to a retailer in the United States. The U.S. retailer would still
receive wholesale pricing, but the price would be slightly higher than if the retailer
purchased directly from the Chinese company. The trading house must mark up the price
of the goods it sells to cover its costs and earn a profit. However, the t-shirt retailer avoids
the hassles of importing. The retailer also may be able to simplify its operations by dealing
with one or two trading houses to get its inventory instead of dealing directly with
numerous wholesalers.
Small businesses that use a trading house can benefit from its expertise and insight into
international markets they operate in as well as getting access to vendor
financing through direct loans and trade credits.
KEY TAKEAWAYS

 Trading houses are intermediaries used by manufacturers to facilitate trade in a

foreign location. Within the context of commodity trading, trading houses refer to
firms that buy and sell large-scale futures for profits and on behalf of their clients.
 They offer a variety of services, from serving as agents for the manufacturer in the
foreign market to easing the import-export process through connections with local
liaisons.
Trading House Advantages
Economies of Scale: A trading house typically has a large portfolio of clients that
provide economies of scale benefits. For example, a large trading house can use its
significant buying power to receive discounts from manufacturers and suppliers. A trading
house can also reduce transportation costs if it ships to customers in large quantities.
International Foothold: Trading houses have an extensive network of contacts in
international markets that help them secure favorable deals and find new customers. They
may also have staff working in foreign offices to work with customs officials and manage
legal issues to ensure smooth operation of the business.
Currency Management: Because a trading house is continually importing and exporting
products, they have expertise in managing currency risk. Trading houses use risk
management techniques, such as hedging, to avoid getting exposed to adverse currency
fluctuations. For example, a trading house that has a future payment in euros may use a
currency forward contract to lock in the current EUR/USD exchange rate.
Example of Trading houses
Japan is scarce in resources, whether it is food or natural resources, and imports most of
them through five trading houses known as sōgō shōsha. The trading houses were
developed in Japan during the Meiji Restoration period to bolster its economy during a
period of rebuilding. They also helped prop up the country's economy after its defeat and
devastation in the Second World War. The role of sōgō shōshas is not confined to a specific
sector of Japan's economy. They import goods and services across multiple industries vital
to the nation's economy, from automobiles to infrastructure to clothing. The five biggest
sōgō shōshas are Mitsubishi Corp, Mitsui & Co. Ltd., Sumitomo Corp., Itochu Corp. and
Marubeni Corp.
A trading house is defined as a certain type of business entity. It is a corporation that
offers its sales, services and international trading expertise in a variety of ways and in
various forms to those who need or seek them.

Identification
A trading house is involved in the import, export or trading between third countries in
products that are manufactured by other companies. Trading companies also buy and
sell products, goods and services for their own accounts. They are also purchasing agents
that supply foreign countries with commodities. Trading houses work on commission.

Significance
Trading houses play a very important role for manufacturers and foreign countries in
moving goods. They have a significant place in the global economy and they provide
strong competition on both domestic and international markets.

Benefits
Trading houses find a market, buyers and sellers and they also negotiate terms of a
transaction. They also handle paperwork involved, protect their clients from all export
related risks, provide promotional services and follow up on deals. Trading houses are
efficient, tailor their services to those who need them and manage risk on all levels.

Q.6. Impact Of Globalization on Indian Economy.

Ans: What is Globalization?

Globalization is the free movement of people, goods, and services across
boundaries. This movement is managed in a unified and integrated manner.
Further, it can be seen as a scheme to open the global economy as well as the
associated growth in trade (global). Hence, when the countries that were previously
shut to foreign investment and trade have now burned down barriers.

Considering a precise definition, countries that abide by the rules and regulations
set by WTO (World Trade Organization) are part of globalization. These
procedures include oversees trade conditions among countries. Apart from this,
there are other organizations such as the UN and different arbitration bodies
available for supervision. Under this, non-discriminatory policies of trade are also
enclosed.

Indian Economy Reacts to Globalization

When we talk about globalization and the Indian economy, one name strikes our
mind, that is, Dr. Manmohan Singh. He was the finance minister in the 1990s when
globalization was fully implemented and experienced in India. He was the front
man who framed the economic liberalization proposal. Since then, the nation has
gradually moved ahead to become one of the supreme economic leaders in the
world.

Below mentioned are some of the quick reactions which were felt after the
introduction of globalization:

 After 1991, the rise in GDP that dropped to 13% in 1991 -92 extended
momentum in the following five years (1992-2001). Moreover, the annual
average rate of growth in GDP was recorded to be 6.1%.
 Furthermore, export growth skyrocketed to 20% in 1993-94. For 1994-95, the
figures were recorded to be 18.4 per cent. Export growth statistics in recent years
have been very impressive.

Benefits of Globalization Impacting India

Rise in Employment: With the opening of SEZs or Special Economic Zones, the
availability of new jobs has been quite effective. Furthermore, Export Processing
Zones or EPZs are also established employing thousands of people. Another factor
is cheap labour in India. This has motivated big firms in the west to outsource work
to companies present in this region. All these factors are causing more
employment.

Surge in Compensation: After the outburst of globalization, the compensation

levels have stayed higher. These figures are impressive as compared to what
domestic companies might have presented. Why? The level of knowledge and skill
brought by foreign companies is obviously advanced. This has ultimately resulted
in modification of the management structure.

Improved Standard of Living and Better Purchasing Power: Wealth generation

across Indian cities has enhanced since globalization has fully hit the nation. You
can notice an improvement in the purchasing power for individuals, especially
those working under foreign organizations. Further, domestic organizations are
motivated to present higher rewards to their employees. Therefore, a number of
cities are experiencing better standards of living together with business
development.

Disadvantages of Globalization in India

If we are discussing globalization and the Indian economy, then talking about
the negative effects is also important. The informal sector is purposely not listed in
the labor legislation. For example, informal workers aren’t the subject considering
the 1948 Factories Act. This scheme covers vital factors such as common working
conditions, safety, and health, the ban on child labor, working hours etc. Also,
globalization has caused poor health, disgraceful working conditions, as well as
bondage, happening in different parts of the country.

OR
Effect of Globalization on Indian Economy:-
Globalization has both positive and negative effects on Indian economy. These are as follow.
Positive effects of globalization on Indian economy: -
These are as highlight the positive effect of globalization policy on Indian economy:-
Increase in Foreign Trade: - As a result of foreign trade policies adopted in the wake of globalization, India’s share in the
world trade has gone up.
Table 1.
India’s Share in the World trade.
Year India’s percentage share in world trade
1990-91 0.53
1995-96 0.60
 2005-6 1.00
2007-08 1.64
2008-09 1.64
2009-10 1.78
2014-15 1.96
Source: economy survey, 2014-15.

Above table shows that as a result of globalization of India’s foreign trade there has been some increase in India’s share
in world trade. In 1990-91 India’s share in world trade was 0.53 percent. In 1995-96 it rose to 0.60% in 2009-10 increase
to 1.78 and in 2010-11 it farther increased to 1.96 percent. Share of India’s GDP has been constantly rising. In 1990-91 it
was 6 percent of GDP that rose to 23.39 percent in 2014-15.

Increase in Foreign investment: - As a consequence of globalization in forging investment policy 1991, our govt. started
encouraging the entry of foreign investment; there has been a considerable increase in foreign direct investment as well
as foreign portfolio investment.

Increase in Foreign Exchange Reserves: _ as a result of globalization of Indian. In the year 1991, foreign exchange
reserves of India amounted to Rs 4,388 crore which in April, 2012 increased to Rs. 15,24,328 crore (US $ 293.14 billion).
Thus, there has been an increase of 347 times in foreign exchange reserves of India.

Increase in Foreign Collaborations: - Globalization has promoted collaboration of foreign companies with many Indian
companies. These collaboration agreements can be technical. Financial or both.

Expansion of Market: - globalization has expanded the size of market, it has permitted Indian business unit to expand
their business in the whole world. Now multinational corporations, have no national boundaries. Indian companies like
Infosys, Tata consultancy, Wipro, Tata Steel, reliance etc, are doing their business in many countries of the world.

Technological Development: - globalization has promoted the technical collaboration of foreign companies. This
collaboration enabled the inflow of modern advanced and superior foreign technology in India. Now Indian business
units use this modern technology. It has resulted technological development of Indian business units.

Brand Development: - Globalization has promoted the use of branded goods. Now not only durable goods are branded
but products like garments, Juices, Snacks, food grains etc. are also branded. Brand development has led to quality
improvement.

Development of Capital Market: - Globalization has helped in Indian capital market development now many foreign
investors invest in Indian capital market recently there has been substantial increase in inflow of foreign direct
investment and portfolio investment.

Increase IN Employment: - As a result of Globalization foreign companies are establishing their production and trading
units in India. It has increased employment opportunities for Indian. E.g. many Indian’s are employed in foreign
insurance companies, mobile companies etc.

Reduction in brain Drain: - as a result of globalization, many multinational corporations have set up their business units
in India. These MNCs provide attractive salary package and good working conditions to efficient, Skilled Indian get good
employment opportunities in India. It has resulted in reduction in brain- drain.

Negative Effect of Globalization: - following observation highlight the negative effect of globalization policy on the
Indian economy:-
Loss of Domestic industries: - as a result of Globalization foreign competition has increased in India. Because of better
quality and low cost of foreign goods, many Indian industrial units have failed to face competition and have been closed.
Problem of Unemployment: - as a result of globalization foreign companies or even some Indian companies use capital
intensive technology. With the increasing use of capital intensive technology the employment opportunities are reduced
and increase the problem of unemployment in Indian economy.

Exploitation of Labour: - Globalization is exploiting unskilled workers by giving lower wages, less job security long
working hours and worse working condition.

Increase in Inequalities: - globalization has benefited MNCs and big industrial units but small and cottage industries are
adversely hit by it. It has increased inequalities in India.

Bad Effect on Culture and Value System: - Many global companies sell such products as distort our culture and value
system. The vulgar advertisements shown by some MNCs pollute the thinking of young generation in India.

CONCLUSION
On the basis of above study we can say that globalization is not a free lunch as an outward looking. It is a mixed bag of
success and failures. Having gone through positive and negative effect of globalization of we can say that it is not equally
beneficial for all countries of the world. So we need a policy of globalization which is beneficial, creates opportunities
with the objective of growth, employment and equity and raise the welfare of all people throughout the world.
Government should adopt measures to ensure fair globalization policy.
Q.7. Explain in detail FII in India.
Ans: What Is a Foreign Institutional Investor (FII)?
A foreign institutional investor (FII) is an investor or investment fund registered in a
country outside of the one in which it is investing. Institutional investors most notably
include hedge funds, insurance companies, pension funds, and mutual funds. The term is
used most commonly in India and refers to outside companies investing in the financial
markets of India.

Foreign Institutional Investors (FII) in India

Countries with the highest volume of foreign institutional investments are those that have
developing economies. These types of economies provide investors with higher growth
potential than in mature economies. This is why these investors are most commonly found
in India, all of which must register with the Securities and Exchange Board of India to
participate in the market.

Example of a Foreign Institutional Investor (FII)

If, for example, a mutual fund in the United States sees an investment opportunity in an
Indian-based company, it can purchase the equity on the Indian public exchange and take
a long position in a high-growth stock. This also benefits domestic private investors who
may not be able to register with the Securities and Exchange Board of India. Instead, they
can invest in the mutual fund and take part in the high growth potential.
Regulations for Investing in Indian Companies
All FIIs are allowed to invest in India's primary and secondary capital markets only
through the country's portfolio investment scheme (PIS). This scheme allows FIIs to
purchase shares and debentures of Indian companies on the normal public exchanges in
India.
However, there are many regulations included in the scheme. There is a ceiling for all FIIs
that states the max investment amount can only be 24% of the paid-up capital of the
Indian company receiving the investment. The max investment can be increased above
24% through board approval and the passing of a special resolution. The ceiling is
reduced to 20% of the paid-up capital for investments in public sector banks.
The Reserve Bank of India monitors daily compliance with these ceilings for all foreign
institutional investments. It checks compliance by implementing cutoff points 2% below
the max investment amounts. This gives it a chance to caution the Indian company
receiving the investment before allowing the final 2% to be invested.
Definition of 'Fiis'

Definition: Foreign institutional investors (FIIs) are those institutional investors which
invest in the assets belonging to a different country other than that where these
organizations are based.

Description: Foreign institutional investors play a very important role in any economy.
These are the big companies such as investment banks, mutual funds etc, who invest
considerable amount of money in the Indian markets. With the buying of securities by
these big players, markets trend to move upward and vice-versa. They exert strong
influence on the total inflows coming into the economy.

Market regulator SEBI has over 1450 foreign institutional investors registered with it. The
FIIs are considered as both a trigger and a catalyst for the market performance by
encouraging investment from all classes of investors which further leads to growth in
financial market trends under a self-organized system.

Also See: Domestic Institutional Investors, SEBI, Mutual Funds, Hedge Funds, Banks,
Insurance Companies, BSE, NSE, Capital Market Segment, Capital Inflows

Foreign institutional investors are entities which are established or incorporated outside
India and make a proposal for investment in India. These proposals are basically made by
the foreign institutional investors on behalf of the sub-accounts, which may include
foreign corporates, individuals, funds etc.
In order to act as a banker to the foreign institutional investors the reserve bank of India
(RBI) has enrolled banks that are authorized to deal with them. The biggest source
through which foreign institutional investors invest in the issuance of participatory notes
(p- notes) which are also called as offshore derivatives.

Foreign Institutional Investors(FII) in India

Countries with the highest volume of foreign institutional investments are those that have
developing economies. These types of economies provide investors with higher growth
potential than in mature economies. This is why these investors are most commonly found
in India, all of which must register with the Securities and Exchange Board of India to
participate in the market.

Regulations for investing in Indian companies

All foreign institutional investors are allowed to invest in India’s primary or secondary
capital market only through the company portfolio investment scheme (PIS) these
schemes are allowed the foreign institutional investors to purchase shares and debentures
of Indians companies on the normal public exchanges in India.
For eg- United States mutual fund sees an opportunity of investment in Indian based
company so it can purchase the equity on the Indian public exchange and take a long
position in a high growth stock. This thing also helps the domestic private investors who
may not be able to register with the securities and exchange board of India (SEBI)
Be that as it may, there are numerous directions incorporated into the plan. There is a roof
for all FIIs that expresses the maximum speculation sum must be 24% of the paid-up
capital of the Indian organization getting the venture. The maximum speculation can be
expanded above 24% through board endorsement and the death of an extraordinary goal.
The roof is decreased to 20% of the paid-up capital for interests out in the open segment
banks.

The advantages and disadvantages of FII

Advantages

Enhanced flow of capital

It increases the growth rate of the investment whereby development project, economic
and social infrastructure is built in which it boost the production and employment and
income of the country.

Managing uncertainty and control

It helps in promoting a hedging instrument and also improve the competition in a financial
market also an alignment of assets which helps in stabilizing the market.

Improved corporate governance

The foreign institutional investors build professional bodies like a financial analyst who
through their contribution to better understanding and improves the firm’s operation and
corporate governance and solve the problem of an agent.

Disadvantages

Since foreign institutional investors are controlled by investors which cause sudden
outflow from markets leading to a shortage of funds.

Inflation
Huge inflow of foreign institutional investors funds creates high demand for the rupee and
whereby pumping huge amount of money by the RBI into the market. This creates excess
liquidity creating inflation.

Adverse impact on exports

With Foreign institutional investors inflows leading to an appreciation of the currency,
exports become expensive which ultimately leads to lower demand and hence shortfall in
the export of goods and reduce the competitiveness.

These are certain myths about the FII

 It never unlisted the entities and only participate in stock and exchange
 It invests during initial allotment of shares but cannot invest at the time of
allotment
  It does not generally influence the management of enterprise and is mostly
interested in capital gains and monetary price differences, unlike FDIs who invest
directly in technology & management.

Foreign institutional investors in India

Yes, foreign institutional investors can invest in Indian companies in stock and debenture.
They have to trade through the portfolio investment scheme for investing in the primary
and secondary capital market in India. According to the regulations of reserve bank of
India (RBI), the overall investment for foreign institutional investors is only 24% of the
paid up capital of the Indian companies. In the case of public sectors the limit is 20% paid
up capital but if the board and general bodies approve and passes a special resolution then
investment can be raised up to 24% for the particular segment.

How can a FII invest in India

There are so many entities which are want to invest in Indian capital market under the
foreign institutional investor’s routs. So these markets want to invest as FIIs or as sub-
accounts. These are the following points.

 Mutual funds, Investment trust, asset management company, nominee company,

overseas pension funds bank, institutional portfolio manager, university funds,
endowments, charitable trusts, foundations, charitable societies, a trustee or
power of attorney holder incorporated or established outside India intending to
make proprietary investments are all examples of investments which can be
termed as foreign institutional investments.
 Sub account- basically sub-account is an underlying fund on whose behalf the FIIs
invests. Private companies, public companies, partnerships firms, pension funds,
investment trust, and individuals are the following entities which are eligible to
be registered as sub-accounts.
 A Foreign Institutional Investor is required to get itself registered and for this
purpose, it is required to obtain a certificate from SEBI (SECURITY AND
EXCHANGE BOARD OF INDIA) for dealing in securities. The certificate is granted
by SEBI after it has taken into account the following criteria;
 An Applicant track record which includes its own record, financial soundness,
competences, experience, general reputation, and fairness.
 The applicant must take permission to make foreign investment in India as a
foreign institutional investor under the provision of foreign exchange regulation
act, 1973 by the reserve bank of India.
 Applicant is regulated by a foreign regulated authority.
 Applicant must be a fit and proper person.
 Certificate which is granted to the applicant is in the interest of the growth of the
securities market
 Applicant must be an international and multilateral organization or an agency or
a foreign central ban
Conditions and restrictions with regard to investment
These are the following condition and restriction placed on the investment done by the
foreign institutional investors.

 Securities in both primary and secondary markets places a debenture, shares, and
warrant of companies either they are listed or unlisted or to be listed in the stock
exchange.
 Scheme of units which is floated by domestic mutual funds including the trust o0f
India either they are listed or unlisted
 Commercial paper
 Security receipt
 Securities dated by the government
 Derivatives trades on a recognized stock exchange
While giving the permission of investment, SEBI set prescribed conditions which may be
compulsory with respect to the maximum amount which can be invested in the debt
securities by foreign institutional investors on their account and on sub-account. An
investment made in securities which are issued by the assets reconstruction companies or
those companies who are under the Securitiny and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.

Prohibition of FII
FIIs looking to invest in equity which is issued by an Assets reconstruction company and is
not permitted under the SEBI rules, 1995. Foreign institutional investors are investing in
any company which engaged in following activities:

 NIDHI COMPANY
 TRADING IN TRANSFERABLE DEVELOPMENT RIGHTS
 CONSTRUCTION OF BUSINESS
 REAL ESTATE BUSINESS
 AGRICULTURAL ACTIVITIES

Salient features of FII

 FIIs including mutual funds, pension funds, investment trust, banks, asset
management companies, Nominee Company, incorporated/institutional portfolio
manager or their power of attorney holder (providing discretionary and non-
discretionary portfolio management services) would be welcomed to make
investments under the new guidelines. Investment in all securities traded on the
primary and secondary markets including the equity and other
securities/instruments of companies which are listed/to be listed on the stock
exchanges in India including the OTC Exchange of India is permitted.
  A foreign institutional investor is required to take initial permission from the
SEBI for entering a market. A foreign institutional investor is having affiliated or
subsidiary shall have to take separate registration with SEBI.
 An Foreign institutional Investor shall have to take various permissions under the
Foreign Exchange Regulation Act, 1973 from the Reserve Bank of India because of
the existence of foreign exchange controls in force. The registration shall be done
under the single window approach.
 SEBI registration holds their registration for maximum five years along with the
RBI general permission under the FERA, it is also valid for five years and both
shall be renewed every after five periods in the future.
 The Foreign institutional investors will have the capacity to move, purchase and
acknowledge capital gains on speculations on ventures made through the first
corpus exchanged to India under the FERA consent. It might likewise buy in or
take off rights offering of offers, contribute on all perceived stock trades through
an assigned bank office and would have the capacity to designate a residential
caretaker for the authority of the speculation.
 There is a limitation on the volume of investment and it should be minimum or
maximum for the purpose of entry of foreign institutional investors in the
primary market or secondary market and also lock in the period of outline for the
objective of such investment made by the FIIs.
CONCLUSION
Foreign institutional investors main aim is to make the proposal for investment in India
which must register with the SEBI (SECURITY AND EXCHANGE BOARD OF INDIA) to
participate in the market. Basically, these are the outside entities which are established in
India. They are generally investing in Indian companies in stock and debenture under the
rules and regulation of different companies.

Advantages of FII’s

 FII’s will enhance the flow of capital into the country

 These investors generally prefer equity over debt. So this will also help maintain and
even improve the capital structures of the companies they are investing in.
 They have a positive effect on the competition in the financial markets
 FII help with the financial innovation of capital markets
 These institutions are professionally managed by asset managers and analysts. They
generally improve the capital markets of the country.

Disadvantages of FII’s

 The demand for the local currency (rupee) increases. This can cause severe inflation in
the economy.
 These FII’s drive the fortune of big companies in which they invest. But their buying
and selling of securities have a huge impact on the stock market. The smaller
companies are taken along for the ride.
 Sometimes these FII’s seek only short-term returns. When they pull their
investments banks can face a shortage of funds.

FDI vs FII
Let us clarify, both FDI and FII are forms of foreign investment in a country. However, they
are starkly different in nature, target, and consequences. Let us study the differences
between the two to understand them better.
Firstly FDI is a direct investment made in one particular business or company. The aim is to
get a controlling interest in the business. FII, on the other hand, are funds which are invested
in the foreign financial market.
There are many regulations and rules with respect to FDI. In fact, there are some industries
like nuclear energy, agriculture etc. where there can be no foreign direct investment. But FII
has fewer barriers for entry or exit from the market.
FDI is not only transfer of funds or capital. There is a transfer of technology, R&D, know-how,
strategies, technical knowledge, and many other such aspects. In the case of FII,
only the transfer of funds is there.